Comtech Telecommunications Corp. — Q3 FY2021 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended April 30, 2021. Financial statements are unaudited. Comtech provides communications technologies and services through Commercial Solutions and Government Solutions.
Financial performance and liquidity
| Metric | Three months ended April 30, 2021 | Nine months ended April 30, 2021 |
|---|---|---|
| Net sales | $139.4 million, up 3.1% year over year | $435.9 million, down 6.7% |
| Gross profit / margin | $53.0 million / 38.0% (39.2% prior year) | $158.9 million / 36.5% (37.9% prior year) |
| Operating income (loss) | $2.4 million (prior-year loss: $3.1 million) | $(78.0) million (prior-year income: $12.4 million) |
| Net income (loss) | $0.8 million (prior-year loss: $4.0 million) | $(80.8) million (prior-year income: $5.9 million) |
| Adjusted EBITDA | $17.7 million (prior year: $12.5 million) | $50.1 million (prior year: $54.3 million) |
Quarterly gross profit was essentially flat despite higher sales; the gross margin declined amid mix changes and COVID-related production and logistics costs. Nine-month GAAP results were heavily affected by $99.8 million of acquisition plan expenses. Excluding specified items, management reported nine-month non-GAAP operating income of $23.9 million and non-GAAP net income of $17.8 million; these are company-defined non-GAAP measures, not substitutes for GAAP results.
- Cash flow: Q3 operating cash flow was $6.8 million, according to management. Nine-month operating cash flow was negative $56.6 million, including a $70.0 million cash payment to terminate the Gilat transaction; excluding that payment, management stated operating cash flow would have been $13.4 million. Nine-month investing cash use was $7.6 million and financing cash provided was $55.5 million.
- Balance sheet at April 30: Cash and equivalents were $39.2 million, down from $47.9 million at July 31, 2020. Current assets were $292.2 million versus current liabilities of $198.7 million. Debt under the senior secured credit facility was $215.0 million; total liabilities were $507.0 million and stockholders’ equity was $491.6 million.
- Debt and liquidity: The facility matures October 31, 2023. Secured leverage was 2.78x against a 3.75x maximum; interest coverage was 13.78x against a 3.25x minimum. Management expected to remain compliant and considered available cash, operating cash flow and facility availability sufficient for anticipated needs.
- Backlog and bookings: Q3 book-to-bill was 0.83 and funded backlog was $636.5 million. Including the unfunded value of multiyear contracts for which management expects future orders, management estimated revenue visibility of approximately $1.1 billion.
Changes versus prior comparable periods
- Q3 sales rose as Commercial Solutions increased 16.7% to $91.4 million, offsetting a 15.5% decline in Government Solutions to $48.0 million. Commercial operating income increased to $9.3 million; Government operating income declined to $0.8 million.
- Nine-month sales declined in both segments: Commercial Solutions fell 2.9% to $261.0 million and Government Solutions fell 11.8% to $174.9 million. Government Solutions’ nine-month Adjusted EBITDA fell to $13.9 million from $20.3 million.
- Nine-month acquisition plan expense rose to $99.8 million from $14.4 million, principally reflecting the Gilat matter. SG&A declined year over year, while nine-month gross margin contracted.
Outlook, management commentary and risks
- Management forecast FY2021 net sales of $580–$590 million and Adjusted EBITDA of $74–$76 million, and expected a strong finish to the fiscal year. It did not provide GAAP earnings guidance or reconcile projected Adjusted EBITDA to GAAP, citing the inability to do so without unreasonable effort.
- The sales outlook was revised to reflect lower anticipated Government Solutions revenue after the U.S. government’s planned Afghanistan withdrawal and other program changes. Management said these changes could weigh on Government Solutions revenue versus FY2020, while modernization funding may be beneficial longer term.
- COVID-19 continued to contribute to order and production delays, reduced factory utilization, higher logistics and operating costs, and longer supply-chain lead times. The U.K. antenna facility had experienced a COVID-related shutdown and lingering effects. Management warned that unavailable parts or anticipated customer orders could affect FY2021 targets.
- Comtech completed its UHP Networks acquisition in March 2021 for a preliminary accounting purchase price of $37.4 million, including contingent earn-out consideration. The acquisition added satellite ground-station technology to Commercial Solutions. Management reported nominal UHP revenue contribution in the period.
- In Q1, Comtech paid Gilat $70.0 million to terminate the proposed merger; the payment was included in acquisition plan expenses and received no financial-statement tax benefit. Comtech said it did not expect significant acquisition plan expenses in Q4.
- At the start of Q4, Comtech signed a multiyear agreement under which a customer may order hundreds of millions of dollars of next-generation satellite earth-station technology; the initial customization order exceeded $13 million. The potential agreement value is not guaranteed revenue.
- Other risks include dependence on government funding and contract timing, customer concentration, long-term contract estimates, potential goodwill or intangible impairment, interest-rate exposure, and indemnification claims. The filing reported no material changes to previously disclosed risk factors. The Gilat-related matter and litigation associated with the GD NG-911 acquisition were described as resolved; the company also reported a $122,000 BIS payment resolving an export-compliance matter.
Important facts for investors to verify
- Whether FY2021 sales and Adjusted EBITDA guidance was achieved, and how management’s non-GAAP measure compares with GAAP results.
- Whether Q4 bookings convert into revenue, particularly the initial $13 million-plus order and the broader customer agreement; monitor book-to-bill and funded backlog separately from unfunded contract potential.
- How Government Solutions sales respond to Afghanistan-related program changes, government funding decisions and modernization opportunities.
- Whether supply-chain constraints, COVID-related operating costs and product mix continue to pressure margins and cash conversion.
- Cash generation, borrowing needs and covenant headroom given $215 million of debt, the $2023 facility maturity and ongoing dividends.
- Final UHP purchase-price allocation, escrow conditions and earn-out milestones, along with the recurring impact of acquisition-related and other excluded expenses.