Comtech Telecommunications(US:CMTL)2022-03-09 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company reported a $21.9 million net loss for the quarter due to decreased sales and one-time expenses, despite positive operating cash flow Condensed Consolidated Balance Sheets Total assets remained stable at $994.9 million, while liabilities decreased due to debt reduction, offset by $101.9 million in new convertible preferred stock Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Jan 31, 2022 | July 31, 2021 | | :--- | :--- | :--- | | Total Assets | $994,854 | $993,111 | | Cash and cash equivalents | $30,918 | $30,861 | | Inventories, net | $90,274 | $80,358 | | Goodwill | $347,692 | $347,698 | | Total Liabilities | $425,123 | $492,392 | | Non-current portion of long-term debt | $114,500 | $201,000 | | Convertible preferred stock | $101,867 | $— | | Total stockholders' equity | $467,864 | $500,719 | Condensed Consolidated Statements of Operations The company reported a $21.9 million net loss for the quarter, driven by a 25.4% decline in net sales and significant one-time transition and solicitation costs Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Jan 31, 2022 | Three Months Ended Jan 31, 2021 | | :--- | :--- | :--- | | Net sales | $120,381 | $161,292 | | Gross profit | $45,858 | $55,680 | | CEO transition costs | $13,554 | $— | | Proxy solicitation costs | $9,086 | $— | | Operating (loss) income | $(24,590) | $5,402 | | Net (loss) income | $(21,874) | $4,205 | | Net (loss) income per diluted share | $(0.89) | $0.17 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly improved to $9.6 million for the six-month period, despite increased investing activities and debt repayment from preferred stock proceeds Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Jan 31, 2022 | Six Months Ended Jan 31, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $9,551 | $(63,372) | | Net cash used in investing activities | $(8,811) | $(4,436) | | Net cash (used in) provided by financing activities | $(683) | $50,864 | | Net increase (decrease) in cash | $57 | $(16,944) | Notes to Condensed Consolidated Financial Statements Key notes include $13.6 million in CEO transition costs, the $100 million convertible preferred stock issuance, segment revenue details, and successful goodwill impairment testing - On December 31, 2021, Michael D. Porcelain was appointed CEO. The company incurred $13.6 million in CEO transition costs during the quarter, with $10.3 million for severance and the remainder for a technology advisory role31 - In October 2021, the company issued 100,000 shares of Series A Convertible Preferred Stock for $100 million. The stock carries a 6.5% dividend and is classified as temporary equity on the balance sheet170173179 - The company's annual goodwill impairment test on August 1, 2021, concluded no impairment, with reporting units exceeding carrying values by at least 22.7% and 94.1%157159 Revenue by Segment (Three Months Ended Jan 31, 2022, in thousands) | Segment | Revenue | | :--- | :--- | | Commercial Solutions | $81,277 | | Government Solutions | $39,104 | | Total | $120,381 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 25.4% decline in Q2 net sales to segment-specific factors and lowered fiscal 2022 guidance due to the Russia/Ukraine conflict and supply chain issues Business Outlook for Fiscal 2022 The company lowered its fiscal 2022 financial targets due to the Russia/Ukraine conflict, which impacted sales, and ongoing global supply chain constraints Revised Fiscal 2022 Financial Targets | Metric | Previous Target | Revised Target | | :--- | :--- | :--- | | Consolidated Net Sales | $580.0M - $600.0M | ~$520.0M | | Adjusted EBITDA | $70.0M - $76.0M | ~$50.0M | - The Russia/Ukraine military conflict is directly impacting the sales pipeline, causing a pause in procurement as customers shift spending to war-fighting equipment, delaying large expected orders for COMET™ troposcatter systems for Ukraine246250 - The company faces significant supply chain constraints, including component shortages, quality issues, and inflation, with freight costs in some cases doubling251 - Fiscal 2022 capital expenditures are expected to be approximately $30.0 million, focused on building out cloud networks for NG-911 contracts and establishing new manufacturing facilities in Arizona and the UK256 Comparison of Results of Operations Consolidated net sales declined 25.4% to $120.4 million due to decreases in both Commercial and Government Solutions segments, despite an improved gross profit margin of 38.1% Net Sales by Segment (Three Months Ended Jan 31) | Segment | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Commercial Solutions | $81.3 | $87.8 | -7.4% | | Government Solutions | $39.1 | $73.5 | -46.8% | | Consolidated | $120.4 | $161.3 | -25.4% | - Gross profit margin increased from 34.5% to 38.1% year-over-year for the quarter, primarily due to a favorable product mix and a $2.5 million benefit from a reduction in a warranty accrual279 - The Q2 FY22 GAAP operating loss of $24.6 million was driven by $13.6 million in CEO transition costs and $9.1 million in proxy solicitation costs, with adjusted operating income at $0.1 million excluding these items300 Adjusted EBITDA by Segment (Three Months Ended Jan 31) | Segment | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Commercial Solutions | $12.5 | $16.2 | | Government Solutions | $1.6 | $6.6 | | Consolidated | $9.8 | $18.1 | Liquidity and Capital Resources The company held $30.9 million in cash, generated $9.6 million from operations, and used $100 million in preferred stock proceeds to repay $86.5 million in debt - The company's cash and cash equivalents stood at $30.9 million as of January 31, 2022405 - In October 2021, the company received $100.0 million in proceeds from the issuance of Convertible Preferred Stock407 - The outstanding balance on the Credit Facility was $114.5 million as of January 31, 2022, with the facility maturing in October 2023425 Contractual Cash Obligations (in thousands) | Obligation | Total | Remainder of 2022 | 2023 and 2024 | 2025 and 2026 | After 2026 | | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility (principal & interest) | $119,677 | $1,500 | $118,177 | $— | $— | | Lease obligations | $69,307 | $5,990 | $18,950 | $15,127 | $29,240 | | Total | $188,984 | $7,490 | $137,127 | $15,127 | $29,240 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate Credit Facility, with a 10% change impacting annual interest expense by $0.2 million - The company is subject to interest rate risk from its variable-rate Credit Facility, where a hypothetical 10% change in interest rates would alter annual interest expense by approximately $0.2 million461 Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period466 - No material changes were made to the internal control over financial reporting during the most recent fiscal quarter467 PART II. OTHER INFORMATION Legal Proceedings Legal matters include a settled class action related to preferred stock issuance and other routine actions not expected to have a material adverse effect - A putative class action lawsuit related to the convertible preferred stock issuance was settled, with claims dismissed, and remaining obligations are not expected to have a material adverse effect183 - The company is subject to other pending legal actions and indemnification demands in the ordinary course of business, which are not expected to be materially adverse185186 Risk Factors New risk factors include ongoing global supply chain constraints impacting costs and availability, and the Russia/Ukraine conflict disrupting the sales pipeline - Significant global supply chain strain for components is adversely affecting availability, lead times, and cost, potentially impacting revenue and financial results476477479 - The Russia/Ukraine military conflict is a new risk, impacting the sales pipeline as customers pause orders and reallocate funds, with new sales to Russia halted and uncertainty over large potential orders for Ukraine485487488