Comtech Telecommunications Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2013. Comparisons are with the corresponding 2012 periods. Financial statements are unaudited. Comtech designs and sells communications equipment, systems and services through telecommunications transmission, RF microwave amplifiers, and mobile data communications segments.
Financial performance
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $69.9 million, down 30.0% from $99.8 million | $235.4 million, down 24.6% from $312.3 million |
| Gross profit / margin | $31.4 million / 44.9%, versus $41.7 million / 41.8% | $105.5 million / 44.8%, versus $134.4 million / 43.0% |
| Operating income / margin | $5.4 million / 7.7%, versus $10.6 million / 10.6% | $24.7 million / 10.5%, versus $37.0 million / 11.8% |
| Net income | $2.9 million, versus $6.1 million | $12.7 million, versus $24.5 million |
| Diluted EPS | $0.17, versus $0.29 | $0.69, versus $1.04 |
| Operating cash flow | $15.7 million for the nine months, versus $17.2 million |
For the nine months, capital expenditures were $4.0 million; operating cash flow less capital expenditures was approximately $11.7 million. Cash and cash equivalents were $342.2 million at April 30, down from $367.9 million at July 31, 2012. Total liabilities were $272.1 million, including $200.0 million of 3.0% convertible notes. This implies cash net of the notes of approximately $142.2 million. The $100 million revolving facility had no borrowings; $1.9 million of standby letters of credit were outstanding.
Changes and business drivers
- Quarterly sales fell across the business, most sharply in mobile data communications (down 64.8%) and RF microwave amplifiers (down 42.3%); telecommunications transmission sales declined 5.4%.
- For the nine months, mobile data communications sales fell 65.6%, RF microwave amplifiers fell 13.8%, and telecommunications transmission fell 7.5%. The mobile decline reflected reduced U.S. Army MTS/BFT-1 activity and the completed microsatellite product-line wind-down.
- Gross margin improved year over year, mainly because telecommunications transmission represented a larger share of sales and product/service mix changed. Operating margin declined as lower sales reduced operating leverage.
- Nine-month reported operating income included a $3.3 million benefit from remeasuring the Stampede earn-out liability and a $0.6 million microsatellite restructuring charge. The prior-year period included a $5.6 million favorable MTS/BFT-1 pricing adjustment, an $0.8 million earn-out benefit, and $2.6 million of proxy-related professional fees.
- Cash declined principally because of $24.2 million of share repurchases and $14.3 million of dividends, partly offset by operating cash generation. Comtech repurchased 940,293 shares at an average $25.77 during the nine months.
Outlook, risks and contingencies
- Management expected fiscal 2013 consolidated sales and sales in each segment to be significantly below fiscal 2012. It expected fiscal 2013 operating margin of approximately 10% and consolidated gross margin slightly above fiscal 2012.
- Management anticipated fourth-quarter sales and net income significantly above the third quarter, while noting segment-specific variability: RF microwave amplifier sales were expected near the fiscal-year quarterly peak; mobile data communications sales were expected slightly below the third quarter.
- Bookings cited included $20.8 million of funded Year Two BFT-1 sustainment orders, $8.5 million funded toward a satellite earth-station development contract with approximately $29 million potential value, and $6.0 million of troposcatter-system orders for a new international military customer.
- The Army’s two-year BFT-1 sustainment contract was definitized at $22.8 million for Year One and $20.8 million for Year Two, each including $10 million in annual IP-license fees. The IDIQ contract may be terminated, renewed, or funded at the government’s discretion; future work beyond March 31, 2014 was not assured.
- Management identified U.S. sequestration and budget uncertainty, international political and economic conditions, delayed customer spending, government-contract funding and termination risk, and fluctuating order timing as key uncertainties.
- Goodwill was not found impaired, but the RF microwave amplifiers reporting unit remained at risk of failing the impairment test in a future period. Its estimated fair value exceeded carrying value by at least 5%; a further 50-basis-point WACC increase or a carrying-value increase over $5 million would likely trigger a step-one failure. Up to $29.6 million of goodwill could then be exposed to impairment.
- The DCAA’s May 2013 draft audit recommended an $11.819 million BFT-1 contract price adjustment, plus interest. Comtech disputes the finding and says it provided the required pricing data; an adverse final determination could require a refund and materially affect results in the period deemed probable, although the company did not expect a material adverse effect on consolidated financial condition.
- Federal subpoenas and an SEC investigation involving the CEO and other persons were ongoing; Comtech said it was cooperating and did not believe proceedings against the company or CEO were likely. The CEO’s security clearance had been suspended, and organizational realignments were made to maintain eligibility for facility-cleared government contracts.
- The $200 million notes carry a holder put right on May 1, 2014; Comtech said they would be classified as a current liability at July 31, 2013 because holders could require cash repurchase. Management believed existing cash and expected operating cash flow would meet anticipated requirements.
Most important facts for investors to verify
- Whether fourth-quarter bookings converted to revenue and whether fiscal 2013 sales and operating-margin expectations were achieved.
- Funding, renewal, and follow-on awards for BFT-1 sustainment, including the recurring $10 million annual IP-license fee.
- Outcome of the DCAA audit and any resulting refund, interest, or contract-price adjustment.
- Developments in the government investigations and any effect on leadership or security-cleared contract eligibility.
- RF microwave amplifiers performance and the assumptions supporting goodwill recoverability.
- The May 2014 convertible-note put, and the company’s resulting liquidity and capital-allocation decisions.