Comtech Telecommunications Corp. — FY2015 Form 10-K
Reporting period: Fiscal year ended July 31, 2015. The filing also reports unaudited fourth-quarter results. Comtech designs and sells communications equipment, systems and services through telecommunications transmission, RF microwave amplifiers and mobile data communications segments.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $307.3 million | $347.2 million | Down 11.5% |
| Gross profit / margin | $138.9 million / 45.2% | $151.4 million / 43.6% | Profit down; margin up |
| Operating income / margin | $34.1 million / 11.1% | $43.9 million / 12.6% | Down 22.4% |
| Net income | $23.2 million | $25.2 million | Down 7.6% |
| Diluted EPS | $1.42 | $1.37 | Up, partly reflecting fewer diluted shares after note settlement |
| Cash from operations | $21.7 million | $34.6 million | Down $12.9 million |
| Cash and cash equivalents | $151.0 million | $154.5 million | Down $3.5 million |
| Working capital | $236.4 million | $224.7 million | Up $11.8 million |
| Backlog | $117.7 million | $133.4 million | Down 11.7% |
At July 31, 2015, the company reported no outstanding indebtedness. Current liabilities were $64.3 million against current assets of $300.8 million. The $15 million uncommitted secured credit facility was due to expire October 31, 2015; $2.9 million of standby letters of credit was outstanding. Operating cash flow declined mainly because of working-capital timing, particularly billings and payments on large over-the-horizon microwave contracts.
Fiscal 2015 fourth-quarter unaudited results: sales of $77.5 million, gross profit of $33.4 million, net income of $5.5 million and diluted EPS of $0.34. The prior-year fourth quarter recorded sales of $89.4 million, gross profit of $39.3 million, net income of $8.0 million and diluted EPS of $0.48.
Material changes versus the prior year
- Telecommunications transmission sales fell 17.9% to $190.0 million, reflecting weaker satellite earth station demand and lower over-the-horizon microwave sales.
- RF microwave amplifiers sales rose 4.7% to $92.1 million; segment operating income increased to $6.8 million from $4.5 million.
- Mobile data communications sales fell 9.0% to $25.2 million. BFT-1 sustainment revenue remained heavily dependent on the U.S. Army, accounting for $23.7 million, or 94% of segment sales.
- Gross margin improved to 45.2%, aided by product mix, better-than-expected performance on two large microwave contracts and a $1.0 million reduction in warranty obligations. However, lower sales and higher R&D spending contributed to lower operating income.
- Operating cash flow decreased, while the company paid $19.4 million in dividends and repurchased 175,735 shares for approximately $5.0 million. The prior year included $70.7 million of share repurchases and repayment of convertible notes.
- The $200 million principal amount of 3.0% convertible senior notes was settled or repurchased in May 2014; no convertible notes remained outstanding at the end of FY2015.
Outlook, management commentary and risks
- Management expected FY2016 consolidated sales and operating income to be similar to FY2015 levels, with operating margin targeted at approximately 11% excluding one-time charges. It expected gross margin to be comparable, R&D expense lower, SG&A slightly higher, and operating cash flow higher. Planned capital expenditures were $6–$8 million.
- The outlook assumed continued significant customer orders, including Heights networking products, U.S. Navy ATIP work, over-the-horizon microwave systems, SuperPower TWTAs and airborne/in-flight connectivity amplifiers. Management anticipated strong microwave bookings but noted that FY2016 sales could be lower and weighted toward the second half.
- Management cited adverse global conditions: constrained government budgets, weaker energy-sector investment, a stronger U.S. dollar reducing overseas customers’ purchasing power, and economic and political uncertainty. International sales were 56.2% of FY2015 revenue; U.S. government sales were 30.6%.
- The North African end-customer represented 13.8% of sales, and a U.S. prime contractor customer represented 13.5%. The filing also reports that 36.3% of accounts receivable was due from one large U.S. prime contractor, predominantly related to the North African customer.
- The Army’s BFT-1 contracts had a combined not-to-exceed value of $71.2 million, but could be terminated and required option exercises and funding. A $10 million annual intellectual-property license fee could cease after March 31, 2017; the Army would then retain a limited right to use the IP without further license fees.
- Management was assessing operations, forming a joint venture of domestic operating subsidiaries, expanding marketing and business development, and planning integration of mobile satellite transceiver activities with the satellite earth station business. A focused acquisition plan was underway; forecast excluded any acquisition.
- Goodwill was not impaired in the August 1, 2015 assessment, but the telecommunications transmission and RF amplifier units had fair value cushions of only 14.0% and 14.2%, respectively. Deteriorating results or changes in reporting structure could trigger impairment.
- Other notable risks include contract cancellation or funding delays, fixed-price cost overruns, international collection and export-license risks, customer concentration, cyberattacks, supplier disruption, and competition or rapid technology change. The company disclosed an early-stage technology-royalty dispute it did not expect to materially affect results, and two government investigations involving the Executive Chairman for which the company had not been contacted since 2012.
Investor verification priorities
- Track bookings, backlog conversion and cash collection, particularly on the large over-the-horizon microwave contracts and the concentrated North African-related receivables.
- Verify FY2016 demand and shipment timing for Heights, SuperPower TWTAs, airborne amplifiers, ATIP and new microwave-system awards against management’s assumptions.
- Monitor Army option exercises, funding and the longer-term replacement of BFT-1, including the potential loss of the $10 million annual license revenue.
- Assess whether the planned organizational integration, expense changes and acquisition strategy improve operating performance without disrupting execution or increasing costs.
- Review goodwill headroom, cash conversion and dividend sustainability; the filing states future dividends remain subject to Board approval.