Comtech Telecommunications Corp. — FY2012 Form 10-K
Reporting period: Fiscal year ended July 31, 2012; the filing also reports unaudited fourth-quarter results. The company designs and sells communications equipment, systems and services through telecommunications transmission, RF microwave amplifiers and mobile data communications segments. Financial statements were audited, and the auditor issued unqualified opinions on the statements and internal control over financial reporting.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $425.1 million | $612.4 million |
| Gross profit / margin | $183.5 million / 43.2% | $241.0 million / 39.4% |
| Operating income / margin | $51.3 million / 12.1% | $107.8 million / 17.6% |
| Net income | $32.4 million | $67.9 million |
| Diluted EPS | $1.42 | $2.22 |
| Cash provided by operating activities | $53.5 million | $97.4 million |
At July 31, 2012, cash and equivalents were $367.9 million, working capital was $434.2 million, and current assets and current liabilities were $516.9 million and $82.7 million, respectively. Debt included $200.0 million of 3.0% convertible senior notes; the company reported no revolving-loan borrowings and had $1.5 million of standby letters of credit outstanding under its $100 million secured revolver. Fiscal-year cash declined $190.9 million, reflecting substantial share repurchases and dividends as well as lower operating cash generation. Capital expenditures were $6.4 million.
FY2012 included $22.6 million in cash dividends and $217.4 million of share repurchases. The annual targeted dividend was raised to $1.10 per share. Backlog was $153.9 million, up from $145.0 million; management expected most of it to convert to sales in FY2013, but contracts are generally cancellable.
Material changes versus the prior period
- Consolidated sales fell 30.6%; operating income and net income each declined by about 52%. Prior-year operating income included a $12.5 million net merger termination fee. Excluding that fee, FY2011 operating income was approximately $95.3 million; FY2012 operating income was approximately $50.9 million after the adjustments described by management.
- Telecommunications transmission sales fell 9.5% to $210.0 million, principally on lower over-the-horizon microwave and satellite earth station sales. RF microwave amplifiers sales rose 11.4% to $102.5 million. Mobile data communications sales fell 61.0% to $112.6 million, primarily due to reduced U.S. Army MTS/BFT-1 activity.
- Gross margin improved to 43.2% from 39.4%, aided by a more favorable segment and product mix. FY2012 also included an approximately $5.6 million benefit from finalizing pricing for certain prior MTS/BFT-1 orders; without that benefit, management said gross margin would have been 42.7%.
- The company recorded $2.6 million of restructuring charges to wind down microsatellite products, which generated $17.7 million of FY2012 sales. It anticipated about $1.0 million of additional related charges in FY2013. SG&A also included $2.6 million of costs related to a contested proxy solicitation that was later withdrawn.
Fourth-quarter FY2012 sales were $112.8 million, versus $140.3 million in the prior-year quarter; net income was $7.9 million versus $11.9 million, and diluted EPS was $0.38 versus $0.42.
Outlook, risks and contingencies
- Management expected FY2013 sales to be below FY2012, largely because of materially lower mobile data communications revenue. It anticipated growth in telecommunications transmission and RF microwave amplifier sales broadly comparable to FY2012. No clear numerical consolidated revenue forecast was provided.
- Management expected FY2013 consolidated operating margin of 13%–14% and a higher gross margin percentage than FY2012. It expected positive operating cash flow, but did not quantify it; anticipated capital expenditures were $8–$10 million.
- The FY2013 outlook assumed the Army would exercise the option period beginning April 2013 under the BFT-1 sustainment contract. The three-year IDIQ contract has a not-to-exceed value of $80.7 million, but only $17.0 million was initially funded; the Army is not obligated to place additional orders and may terminate the contract. Future revenue is exposed to the Army’s transition to BFT-2.
- A $55.0 million over-the-horizon microwave contract awarded in FY2012 is expected to generate revenue over three years. Execution, timing of orders, and associated working-capital needs are important to the company’s outlook.
- The DCAA had not issued its post-award audit report on the expired BFT-1 contract, which had received approximately $377.0 million in funded orders. A government cost or price adjustment could require repayment with interest and could materially affect results or financial condition. Related Cost Accounting Standards questions also remained unresolved.
- Federal subpoenas and an SEC investigation concerned matters involving the CEO; the CEO’s security clearance was suspended in August 2012. The company said it was cooperating and did not believe proceedings against the CEO or company were likely based on its work to date, but an adverse outcome could be material. The company incurred about $1.0 million of FY2012 costs responding to subpoenas.
- Other risks include U.S. defense-budget reductions or sequestration, government funding delays, customer concentration, contract cancellations and fixed-price cost overruns, international/export controls, cybersecurity threats, and possible impairment of goodwill. The company reported $137.4 million of goodwill and no impairment in its August 2012 annual test; the telecommunications transmission unit’s fair value exceeded book value by only about 7%.
Investor verification priorities
- Track Army option exercise, BFT-2 transition timing, sustainment-contract funding and the resulting mobile-segment revenue and margins.
- Check progress, order timing, cash conversion and working-capital requirements for the $55.0 million telecommunications contract.
- Review DCAA/DCMA audit developments and any potential repayment exposure on the prior BFT-1 contract.
- Monitor the CEO-related investigations and security-clearance status, including any effect on government-contract eligibility or costs.
- Compare FY2013 results with management’s 13%–14% operating-margin outlook and expected segment trends; assess the sustainability of FY2012’s pricing benefit and improved gross margin.
- Assess cash generation after dividends and repurchases, the 2014 noteholder repurchase right, revolver covenants, and the company’s capacity to maintain its dividend and pursue acquisitions.