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Michael Bondi

Thank you, Ken. Before getting into the detailed results, I would like to first summarize this past quarter for you.
Overall, our GAAP results were significantly better sequentially than our first quarter of fiscal 2025. While this reflects some meaningful operational improvements, it is primarily due to the fact that the first quarter included several large non-cash charges and write downs, which did not repeat in this more recent quarter.
The T&W segment continues to perform well, and our satellite and space communication segment reported significantly improved results on both its top and bottom lines. While we are encouraged by the results, we believe the transformation plan that Ken described will be key to achieving further improvements.
Now, let's turn to the key metrics for this past quarter. Consolidated net sales were $126.6 million compared to $134.2 million a year ago and $115.8 million in Q1 of fiscal 2025. Net sales in both segments were lower this past quarter relative to the prior year period.
Compared to last year, nets sales in our satellite and space segment during Q2 reflected lower net sales of our Troposcatter Solutions, all set in part by higher net sales of our SATCOM solutions and satellite ground infrastructure solutions. As discussed in our prior earnings call, in fiscal 2024, within our Troposcatter product line, our next generation Troposcatter contracts with the US Marine Corps and Army were in full swing with respect to procurement and manufacturing.
Today, these contracts have significantly progressed, allowing us to begin invoicing and collecting on the unbuilt receivables that we had built up in fiscal 2024. Collectively, these two programs accounted for approximately $11 million of the quarter over quarter reduction in net sales.
During Q2 of last year, we also had a large sale of Tropo gear to an international customer, which did not repeat this quarter, and which accounted for approximately $7 million of the decrease in that sales. As for offsetting increases in that sales during the more recent quarter as compared to last year, satellite in space experienced an uptick in equipment sales to the US Army during the period. For example, under the VSAT III IDIQ contract, as well as from the delivery on an equipment order previously received under the US Army GFSR contract when it was not under protest.
Net sales in the satellite and space segment were $73.7 million in the second quarter, a 25% sequential increase, driven primarily by higher sales of SATCOM solutions to the US Army. Importantly, our operational improvement initiatives have shown appreciable progress, as reflected in our segment margins, which also increased sequentially.
Net sales in the T&W segment were $52.9 million, a decrease of 5% from the prior year and a decrease of 7% from last quarter. This is primarily due to the repositioning to sell our 5G and related location-based solutions internationally and the timing of our performance on statewide NG911 and call handling contracts. Specifically, compared to last year, our T&W results reflect lower net sales of our location-based solutions and next gen 911 services while set in part by higher sales of our call handling solutions.
Consolidated (technical difficulty) long-term contracts within our T&W segment in prior periods which were not expected to repeat this quarter. Our consolidated book to build ratio, a measure defined as bookings divided by net sales for the three months end of January 31, 2025, was 0.63 and was roughly the same ratio for each of our segments.
Comtech's consolidated gross margins for the quarter were 26.7% compared to 32.2% in the second quarter of fiscal '24. Gross profit in the more recent quarter significantly improved from the 12.5% reported in the immediately preceding quarter, due in part to an $11.4 million non-cash charge in the first quarter of fiscal 2025 in the S&S segment related to the write down of inventory.
Consolidated operating loss was $10.3 million in the second quarter compared to operating income of $3 million in the prior year period. Operating loss in the more recent quarter significantly improved from the $129.2 million operating loss reported in the immediately preceding quarter, due in large part to a $79.6 million non-cash charge in the first quarter of fiscal 2025 in the S&S segment related to the impairment of goodwill.
As explained in more detail and reconciled in our Form 10-Q for the quarter, we utilize a non-GAAP measure that we refer to as adjusted EBITDA. Consolidated adjusted EBITDA was $2.9 million in the second quarter compared to adjusted EBITDA of $15.1 million in the prior year period.
Adjusted EBITDA in the more recent quarter significantly improved from the adjusted EBITDA loss of $19.4 million in the immediately preceding quarter, due in large part to a $17.4 million non-cash charge in the first quarter of fiscal 2025 in the S&S segment, related to fully reserving for an unbilled receivable.
Turning to the balance sheet, as Ken highlighted in his remarks, we amended our credit facility and subordinated credit facility to, among other things, waive all the faults, specifically the net leverage ratio and fixed charge coverage ratio; suspend testing of these covenants until October 31, 2025; reduce the interest rate on the term loan by 470 basis points and on the revolver loan 215 basis points; reduce the minimum quarterly average liquidity requirement from $20 million to $17.5 million; and allow for the new $40 million dollar capital infusion in the form of subordinated debt from existing holders of our convertible preferred stock and subordinated debt.
Of the subordinated debt proceeds received $27.3 million and $9.1 million, respectively, net of fees and closing costs were immediately used to pre-pay without penalty a portion of the term loan and revolver loan outstanding under the credit facility, with $3.2 million of the revolver loan repayment representing a permanent reduction in commitment related to the revolver loan. Through the combination of reduced debt balances and lower interest rates, we anticipate saving approximately $5 million in near-term cash interest expense related to the credit facility.
As of March 10, 2025, our qualified cash and cash equivalents were $21.5 million. Total outstanding borrowings under the credit facility were $168 million of which $23.4 million was drawn on the revolver. Total outstanding borrowings under the subordinated credit facility excluding accreted interest was $65 million. And available sources of liquidity approximated $27.4 million, consisting of both qualified cash and cash equivalents, as well as the remaining portion of the committed revolver.
As for our consolidated unbilled receivables, we were successful this past quarter in lowering such investments in working capital, decreasing them from $112 million as of October 31, 2024, to $86 million as of January 31, 2025. With respect to cash flows during the three months end of January 31, 2025, we had roughly break-even operating cash flows. Cash flows during the more recent period were approximately $20 million better than our first quarter of fiscal 2025. The operating cash flow for the quarter includes close to $6 million in aggregate of cash payments for restructuring, costs including severance, CEO transition costs, and proxy solicitation costs.
Now let me turn the call over to Daniel. Daniel?

Daniel Gizinski

Thanks, Mike. First, I want to underscore Ken's comments about organizational improvement. Simplifying the segment structure is a top priority. Our employees have embraced the clear lines of accountability that the new structure enabled. There's a direct connection between the S&S segments progress on margin margins and our operational improvements, 10%-plus reduction of segment staff and product rationalization.
Alongside these organizational changes, we've addressed policies and processes to ensure that purchasing and inventory management are well coordinated and subject to appropriate reviews. Our plan is having a positive effect. Regarding product rationalization, we are migrating customers to modern products and discontinuing products with negative or no gross margin. Those discontinued products represented less than 10% of S&S revenue over the trailing 12 months. The wind down of our steerable antenna business is also being finalized.
A separate initiative underway in the S&S segment has been to adjust our go-to-market process. As a result, we have seen early success in negotiating more favorable contract terms, leading to better management of working capital in the future as we cycle out older contracts from backlog.
We continue to monitor the ongoing stop work related to our next generation Troposcatter contract in support of the US Marine Corps. And while we do not have any material updates relative to our previous disclosures and SEC filings, we anticipate learning more in the near future.
In closing, our S&S segment delivered meaningful top and bottom-line improvements in Q2. These improvements resulted directly from a shift in corporate culture and accountability that has reinvigorated the organization. I've seen tremendous efforts by our employees to take ownership of their projects and be accountable for performance at a local level. These operational improvements benefit not only our financial performance, but our customer satisfaction and confidence. We recognize there is more to do, and we'll continue to drive good decision making, cost reduction, and rationalization throughout the organization.
I'll now turn it over to Jeff to discuss our terrestrial and wireless segment. Jeff?

Jeffery Robertson

Thanks, Daniel. Overall, our terrestrial and wireless performances met our expectations for Q2. Given that public safety and career technologies entail long sale cycles, large backlogs, and multi-year contracts comparisons of our T&W bookings can fluctuate from quarter to quarter.
As a reminder, T&W has three divisions. First, CLT. This division focuses on wireless carrier's network solutions related to location, emergency notification, and messaging. CLT's 5G cloud-based location services are really gaining traction with global wireless carriers.
Second, SST. This is our largest in terms of revenue. This serves as the core of next generation 911 networks. We currently support 11 states and multiple regions in the United States, with plans to expand to additional states and regions soon. Third, CST or Solacom, the fastest growing division, serves local dispatch centers with hosted and local applications for managing emergency responses.
In our SST division, we were recently notified of a next gen 911 related award. And in contract negotiations with the state in the southeastern part of the United States, an estimated to be worth north of $25 million over five years. With such a broad network of mission critical customers, we're developing a plan to leverage our nationwide scale to reduce significant network expenses by interconnecting various jurisdictions and offering new customers enhanced redundancy options to adjacent regions and data centers. Along with our development efforts, this focuses on bringing more core next gen 911 technologies in-house, reducing our reliance on third parties and improving our gross margins across existing and new customers.
In our CLT division, we booked one of a series of anticipated purchase orders with Vodafone, beginning in the United Kingdom. We are currently negotiating the statement of work, which will likely expand beyond this initial region, potentially adding 30 plus more with this global wireless carrier over time.
This award directly relates to our new location-based solutions developed for our major US carriers, which we have focused on selling internationally. We expect other UK-based wireless carrier orders as they work to meet regulatorily regulatory requirements around location technologies.
In Q2, we also saw significant interest from major Canadian wireless carriers, which we're hopeful will translate into orders booked into the future. Our CLT division also recently secured a unique application using our location-based technologies to serve Polaris for continued support of their motorcycles and off-road vehicles. This award represents a five-year contract valued at approximately $8 million.
As for CST Solacom, it continues to be our fastest growing segment. Our CST division is diligently developing our next generation secure cloud-based 911 call handling platform, which, when launched, is expected to grow our competitive position, not only in North America, but also globally for emergency response. As for other updates in CST, the US Navy support contract has been extended, and an entire eastern Canadian province has initiated a significant change order, and our partner in Australia, Telstra, has awarded us a substantial technology refresh order, all of which we believe bodes well for our call handling business.
With that, I'll turn it back to Ken for some final comments.

Kenneth Traub

Thank you, Jeff. I want to close with a brief summary. The performance in the second quarter of '25 reflects the initial impact of our transformation plan. To recap, the elements of our transformation plan are, number one, earning the trust of all key stakeholders with transparency, accountability, and delivering on our promises; number two, improving operational discipline and reducing the cost structure; third, supporting the growth and development of successful high margin business initiatives; fourth, conducting a broad review of strategic alternatives; fifth, strengthening the capital structure; and finally, sixth, promoting a corporate culture that is centered on taking pride in our transformation, resulting in enhanced employee morale and productivity.
We are delighted that we have already succeeded in strengthening the capital structure with the recently announced capital infusion, coupled with the amendments to the credit agreement. And we do believe this is a validation of the trust and confidence our lenders and creditors have in the merits and early results of our transformation plan.
Operator, please open the call to questions.

Question and Answer Session

Operator

(Operator Instructions) Greg Burns, Sidoti & Company.

Gregory Burns

Good afternoon. Can you just talk about maybe the progress you're making in terms of cost optimization in the satellite business? How far along are you in that process? Is it all reflected in this quarter's results? Or is there more to be gained in coming quarters?

Kenneth Traub

I'm going to start, Greg, and then I'll turn it over to Daniel for some more specifics. So it's a continuous process. So we announced the transformation plan on January 13. Now there was some work that was taking place before that to start reducing the cost structure, but this is an ongoing process. And we are -- it's not just about reducing cost, it's about being more efficient in how we operate and being more targeted in the business that we choose to take on and what we choose not to take on.
Historically, this company has taken on very low margin, and frankly, in some cases, negative gross margin business. We need to be better at assessing what our cost is going into a job, pricing it appropriately, and taking it on. So it's not just about reducing cost. It's an element of it, but it's about running the business more efficiently and targeting business opportunities where we can justify appropriate gross margins.
Daniel, you want to add anything to that?

Daniel Gizinski

Absolutely. So I think a couple of points worth mentioning here. First, as Ken mentioned, this process is ongoing and something that we'll continue to thoughtfully evaluate. I would say, certainly, many of the cost reduction efforts that have already been deployed were accomplished during our second quarter. And so there's a partial benefit that's reflected there for some of those. But the product rationalization process and the efforts to move into some higher margin areas are kind of a continuing ongoing effort. We are in the process today still of working through some of the committed backlog on existing products and existing contracts that we are, you know, have some additional time to perform under as well.

Gregory Burns

Okay thanks and then maybe in terms of looking forward and targeting maybe some higher margin business. You announced that the $26 million order with L3 for A3M modems. Can you just maybe talk about some of these higher margin programs that you've been doing development work for over the last maybe a year or two that are now potentially going into production this year? What should we think of looking forward in terms of opportunities for growth in some of these areas where you've been doing development work?

Kenneth Traub

Again, I'll start, and Daniel can add if he likes. So we're not going to comment on gross margins on any particular job. I assume you can appreciate that. But the company's aggregate gross margins have been weighted down by -- in the incorporation of, frankly, inappropriate jobs. And we are going to be more selective.
So when you see our gross margin going forward, we are hoping that it will improve partly as a result of improved product mix. We are deliberately not going to accept jobs going forward as the company's done in the past that are very low thin or even negative gross margins. So that in and of itself is going to improve the mix.
The other thing I'll add to that is we are going to do a better job of leveraging our differentiated and proprietary technologies and providing improved service to our customers that enable us to solve our customer problems better and where we can deserve better gross margins than what the company charged for similar programs in the past. But as we provide a better, more differentiated solution, we do deserve improved gross margins.
Daniel, if you want to add to that.

Daniel Gizinski

Can I -- I think I agree with those points. On A3M specifically, certainly, we're very pleased to see a program that we've worked through the development phase over the past several years, beginning to transition into production contract awards. I think it reflects the continued level of confidence from both our end users within the US DOD and other partners, as well as with our direct customer and L3Harris. We're continuing to focus on delivering differentiated capabilities that offer meaningful understandable customer value that allows us to capture meaningful margins.

Gregory Burns

Okay, and then just lastly, on the cash flow and you're working through some of your own build receivables. What do you think -- or what is your outlook for the cash flow in the second half of the year? Do you expect to be cash flow positive?

Kenneth Traub

We're not giving the projections. But Mike, maybe you can give them some color on that.

Michael Bondi

Yeah, I was just going to say we're probably not going to give any specific guidance on that, Greg. But in terms of our trajectory on the unbilled, we are working through, as you can see, each quarter chipping away at the growth we had experienced last year. I think that coupled with our cost reduction initiatives, a focus on being mindful of our CapEx requirements. We are certainly having a view that we're trying to improve our cash position with profitable business going forward. So our expectation is we'll continue to do better, but we still have some more work to do.

Gregory Burns

All right. Thank you.

Operator

(Operator Instructions) Griffin Boss, B. Riley Securities.

Griffin Boss

Hi, good afternoon. Thanks for taking my questions. I'd like to drill down into some of the questions Greg just asked there with maybe a little bit more pointed question. I'm curious just with the deliberate decision to not accept low margin, bookings or business, which I appreciate. Is there any color you can provide in terms of what you believe could be a sustainable margin profile for space and satellite and T&W in general, not thinking into specific programs on a go-forward basis, assuming this S&S gets back to normal operations post restructuring, that historically was maybe a 10% EBITDA business, T&W maybe 20% just generalizing? Perhaps any more color on kind of a go-forward basis with these new bookings profile that you're targeting.

Kenneth Traub

We're not giving guidance. So we do aim to improve the gross margins through better cost discipline, better product mix, and improved product positioning that enable us to justify better gross margins by delivering better value to our customers. We're not in a position to give you specific numbers on what that gross margin is at this time.

Griffin Boss

Okay, understood. So just shifting gear, related to the unfavorable ruling after what I believe was the fifth protest by the incumbent on GFSR. I appreciate this news occurred today. But just curious, is there anything Comtech can do to re-protest this yourselves? And even if so, if there is something you could do related to GFSR, is that something that you even want to spend time on at this time given the low margin profile of that contract?

Kenneth Traub

Good question, and we are considering it. As you know that we were alerted today of the GEO's decision. We are going to consider our options in light of their decision on the protest. There is room for us to respond, but as you also observed that the margin is very low there as well. So we are considering our options.
Daniel, do you want to provide any further color on that?

Daniel Gizinski

I think I agree with the summary. It's relatively fresh news at this point. There are a number of options available to us that we're in the process of evaluating and assessing at this point.

Griffin Boss

Okay, fair enough, thanks for that. And then maybe one more if I could just more broadly on TNW, maybe for Ken or for Jeff. Just curious if you had any commentary around -- the FCC released their kind of meeting agenda for their meeting later in March. And it really highlighted their commitment to ensure NG911 resilience and accessibility. Just curious if there was anything on that front that maybe you wanted to comment on? Or anything in that that surprised you or improves your confidence in that part of the business going forward?

Kenneth Traub

Jeff, you want to take that question?

Jeffery Robertson

Sure. Yeah, Griffin, thank you for the question. Yeah, we were anticipating the FCC's agenda coming out. There's really two key things that are exciting for us. One, there's a focus on location accuracy. And since we are the key supplier to wireless carriers for location accuracy, it really helps our business and gives us some opportunity there within the carriers themselves. They specifically call it the Z axis, which is the floor someone's on when they dial emergency, so that's also something we do and offer to wireless cares.
But the second part to your point is they also talked about next gen 911 resiliency in the agenda. And it's kind of what I talked about in my prepared comments is as we interconnect the networks, adding additional resiliency to the network, is something we're looking at doing. And the FCC is just kind of enhancing that mandate and looking for. vendors to comment on. So we will be preparing some replies and comments for them and some recommendations along that. But we're already kind of doing that and anticipated their move there. But both, we thought were very favorable for our business at T&W.

Griffin Boss

Great, thanks for that color, Jeff. And thanks everyone for taking my questions. Appreciate it.

Operator

It appears that we have no further questions at this time. I will turn the program back over to Mr. Ken Traub for any additional or closing remarks.

Kenneth Traub

Thank you, operator. For those of you who are attending the SATSHOW in DC this week, we hope you find a chance to stop by our booth and meet some of the contact team members. We really look forward to speaking with you all on our next earnings call for fiscal Q3. Thank you all very much and have a good evening.

Operator

Thank you. This concludes today's program. Thank you for your participation. You may disconnect at any time.