Business context and reporting period
Comtech Telecommunications Corp. filed this unaudited Form 10-Q for the third quarter and nine months of fiscal 2020, ended April 30, 2020. The company provides communications solutions through Commercial Solutions and Government Solutions. Management said the quarter coincided with widespread COVID-19 restrictions, which caused significant order delays and lower sales.
Financial results and liquidity
Three months ended April 30
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $135.1 million | $170.4 million |
| Gross profit / margin | $53.0 million / 39.2% | $64.4 million / 37.8% |
| Operating income (loss) | $(3.1) million | $11.3 million |
| Net income (loss) | $(4.0) million; $(0.16) per diluted share | $7.6 million; $0.31 per diluted share |
| Adjusted EBITDA (non-GAAP) | $12.5 million | $24.0 million |
| Operating cash flow | $7.7 million | Not stated clearly for the quarter in the filing text |
Nine months ended April 30
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $467.0 million | $495.4 million |
| Gross profit / margin | $177.2 million / 37.9% | $183.4 million / 37.0% |
| Operating income | $12.4 million | $31.0 million |
| Net income; diluted EPS | $5.9 million; $0.24 | $18.9 million; $0.78 |
| Adjusted EBITDA (non-GAAP) | $54.3 million | $65.2 million |
| Cash provided by operating activities | $39.0 million | $53.8 million |
At April 30, 2020, cash and cash equivalents were $50.6 million, current assets $290.6 million, current liabilities $173.8 million, and long-term debt $159.4 million. Debt was down from $165.0 million at July 31, 2019. The company reported a 1.93x secured leverage ratio versus a 3.75x maximum and 13.37x interest coverage versus a 3.25x minimum. The existing secured credit facility matures October 31, 2023.
Material changes versus the prior comparable period
- Third-quarter sales fell 20.7%; Commercial Solutions declined 12.6% and Government Solutions declined 29.7%. Management attributed the overall drop chiefly to pandemic-related delays and lower activity, as well as timing of government orders and shipments.
- For the nine-month period, sales decreased 5.7%. Commercial Solutions sales rose 5.7%, while Government Solutions sales fell 17.8%.
- Quarterly GAAP results moved from operating income and net income to an operating and net loss. Nine-month net income declined to $5.9 million from $18.9 million.
- Gross margin improved year over year in both comparison periods, reflecting a greater sales mix from Commercial Solutions, which historically has higher gross margins. However, lower sales and higher intangible amortization weighed on operating results.
- Operating cash flow for the nine months declined to $39.0 million from $53.8 million, primarily due to lower sales and changes in working capital. Cash nevertheless increased $5.1 million from fiscal year-end, after investing and financing outflows.
- Acquisition-plan expenses rose to $6.0 million in the quarter and $14.4 million for nine months, versus $1.7 million and $4.6 million, respectively, in 2019.
Guidance, outlook, risks and unusual items
- Management stopped providing specific fiscal 2020 financial targets, citing uncertainty over customer awards and shipments. It expected fourth-quarter sales, net income and Adjusted EBITDA to be somewhat better than in the third quarter, and anticipated approximately $3.5 million of fourth-quarter acquisition-plan expenses. Management expected fiscal 2020 sales and operating income to be below fiscal 2019.
- Management said the pandemic’s worst business impact was largely behind the company, but warned that a second wave, deteriorating conditions or further customer deferrals could hurt results. It reduced global headcount by approximately 10%, cut salaries, suspended merit increases and reduced discretionary spending.
- Quarterly non-GAAP operating income was $3.3 million and non-GAAP net income $1.2 million, excluding specified acquisition expenses, contract-settlement costs and discrete tax effects. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
- Backlog was $640.7 million, with a substantial portion expected to be recognized over the next 24 months. Backlog is not assured revenue: contracts may be canceled, modified or unfunded, including government and multi-year public-sector work. Third-quarter book-to-bill was 1.02 overall, 0.73 in Commercial Solutions and 1.41 in Government Solutions.
- The proposed Gilat acquisition remained subject to conditions, including Russian regulatory review. The stated consideration was $7.18 cash plus 0.08425 Comtech share per Gilat share; the company expected to finance the transaction partly through an $800 million secured facility. Estimated transaction expenses were approximately $31.7 million. The acquisition could increase debt materially and add integration, financing and amortization risks.
- In June 2020, after quarter-end, Comtech amended its UHP acquisition agreement, reducing the stated aggregate price from $50 million to $38 million; the deal remained subject to customary conditions, including Russian regulatory approval.
- Other items to monitor include potential goodwill or intangible-asset impairment if conditions worsen; uncertain tax benefits of $8.3 million; and export-control reviews. The filing reported no accrual for a possible export-administration penalty related to six transactions and stated that OFAC could take action in a separate sanctions matter. A legacy TCS customer lawsuit was dismissed following an agreement in the quarter without material financial impact.
- The board declared a $0.10-per-share dividend payable August 14, 2020, subject to credit-facility covenants and board approval. The company reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether order intake, shipments and book-to-bill recover from pandemic-driven delays, and whether backlog converts to revenue and cash.
- Whether fourth-quarter results improved as management expected, and how full-year performance compared with fiscal 2019.
- Funding, closing conditions, final terms and regulatory approvals for Gilat and UHP, including the expected debt burden and integration costs.
- Cash generation, working-capital trends, covenant headroom and the terms of any replacement credit facility.
- Potential inventory, goodwill or intangible impairments, tax settlements, export-control penalties and customer indemnification exposures.
- Reconcile reported GAAP performance with management’s non-GAAP adjustments and confirm the recurring nature of costs excluded from those measures.