Comtech Telecommunications Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2011. Financial statements are unaudited. Comtech designs and sells communications equipment, systems and services through telecommunications transmission, mobile data communications, and RF microwave amplifiers segments.
Financial performance
| Metric | Three months ended Apr. 30, 2011 | Three months ended Apr. 30, 2010 | Nine months ended Apr. 30, 2011 | Nine months ended Apr. 30, 2010 |
|---|---|---|---|---|
| Net sales | $131.1 million | $216.3 million | $472.1 million | $521.3 million |
| Gross profit / margin | $57.0 million / 43.5% | $74.8 million / 34.6% | $182.1 million / 38.6% | $188.1 million / 36.1% |
| Operating income / margin | $21.9 million / 16.7% | $36.0 million / 16.6% | $87.3 million / 18.5% | $78.4 million / 15.0% |
| Net income | $14.3 million | $21.8 million | $56.0 million | $47.2 million |
| Diluted EPS | $0.47 | $0.67 | $1.79 | $1.48 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $68.9 million | $82.5 million |
- Quarterly sales fell 39.4% year over year, primarily because mobile data communications sales declined 66.0%; telecommunications transmission sales rose 10.4%, while RF microwave amplifiers sales fell 10.1%.
- Nine-month sales declined 9.4%. Telecommunications transmission sales increased 7.5%, but mobile data communications fell 16.1% and RF microwave amplifiers fell 20.1%.
- Quarterly gross margin improved substantially, mainly due to a more favorable segment sales mix and improved mobile data communications margins. Nine-month gross margin also increased.
- Nine-month operating income included a $12.5 million net merger termination fee after Comtech and CPI International ended their merger agreement. Excluding that fee, nine-month operating income declined $3.6 million year over year.
Balance sheet, liquidity and capital allocation
- At April 30, 2011, cash and cash equivalents were $588.9 million, versus $607.6 million at July 31, 2010. Total current assets were $761.1 million and current liabilities $90.3 million.
- Total liabilities were $305.6 million, including $200.0 million of 3.0% convertible senior notes. The notes are unsecured, mature in 2029 absent earlier redemption or repurchase, and holders may require cash repurchase in 2014, 2019 or 2024. Their estimated fair value was $212.5 million.
- The $150 million unsecured revolving facility expires January 31, 2014. The filing reports $1.5 million of standby letters of credit outstanding and no commercial letters of credit; it does not clearly state a funded borrowing balance. The facility requires at least $100 million of unrestricted cash and includes financial covenants. Management said it expected to meet the covenants for the foreseeable future.
- Nine-month operating cash flow was $68.9 million. Investing activities used $7.7 million, and financing activities used $79.9 million, including $68.1 million for share repurchases and $13.6 million of dividends paid. Cash decreased by $18.7 million.
- Comtech repurchased 2.37 million shares for $68.1 million at an average $28.77 per share, with $32 million remaining under its authorization at quarter-end. The board targeted annual dividends of $1.00 per share; a further $0.25 dividend was declared for payment in August 2011, subject to board approval of future dividends.
Outlook, management commentary and key risks
- Management expected fiscal 2011 sales to be significantly below fiscal 2010 sales of $778.2 million, but fiscal 2011 operating income to be comparable to fiscal 2010, partly reflecting the merger termination fee. The company reported $196.2 million of backlog at April 30, 2011.
- Management expected fourth-quarter fiscal 2011 sales to be significantly below the prior-year quarter and fiscal 2012 sales and operating income to be substantially below fiscal 2011, excluding acquisitions. Future MTS and BFT-1 sales and related operating income were expected to decline materially.
- MTS and BFT-1 represented $198.7 million, or 42.1%, of nine-month consolidated sales. These U.S. Army IDIQ contracts do not require the Army to place further orders. The MTS contract period ended July 12, 2011; BFT-1 runs through March 31, 2012. Comtech was not selected for BFT-2, and the Army canceled the MTS III solicitation as it considers a combined JBC-P platform.
- Comtech received $51.7 million of BFT-1 orders in April 2011, but pricing for satellite bandwidth and network services remained subject to negotiation and audit. The Army was also considering buying satellite capacity directly, which could make Comtech’s intellectual-property fee discussions important to future revenue.
- The Defense Contract Audit Agency planned a post-award audit of BFT-1. A price adjustment could require reimbursement to the U.S. government, potentially with interest, and could materially affect results and financial condition.
- Management cited government budget pressure, delayed customer orders, volatile global conditions and contract timing as sources of sales and earnings volatility. Cost-reduction measures were underway across all segments; costs incurred to date were not material.
- The RF microwave amplifiers segment had lower sales and operating income. Although the August 2010 goodwill review found no impairment, management warned that continued underperformance could impair some or all of its $29.6 million of segment goodwill.
- The IRS was auditing fiscal 2007 and 2008 tax returns. A preliminary agreement on domestic production deductions caused no material prior-period adjustment, but other audit outcomes could be material. The ITAR compliance review was closed without fines or penalties. Comtech said the patent litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Progress and financial terms of Army negotiations, the BFT-1 audit, and any future MTS/BFT orders or JBC-P transition awards.
- Whether fiscal 2011 operating income meets management’s outlook and how much reflects the one-time $12.5 million termination fee.
- Conversion of reported backlog into revenue and cash, including delivery timing for delayed MTS hardware orders.
- Cash deployment for acquisitions, remaining repurchases and dividends, while maintaining the credit facility’s cash and covenant requirements.
- Performance of RF microwave amplifiers and any indicators requiring a goodwill impairment review.