Comtech Telecommunications Corp. — FY2021 Form 10-K
Reporting period: Fiscal year ended July 31, 2021. The filing also reports unaudited fourth-quarter results. Comtech provides next-generation 911, satellite ground-station, secure tactical communications, and high-performance transmission solutions through its Commercial Solutions and Government Solutions segments.
Key financial results
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $581.7 million | $616.7 million | Down 5.7% |
| Gross profit / margin | $214.0 million / 36.8% | $226.8 million / 36.8% | Profit down $12.8 million; margin unchanged |
| Operating income (loss) | $(68.3) million | $15.2 million | Primarily reflects higher acquisition-plan expenses |
| Net income (loss) | $(73.5) million; $(2.86) per diluted share | $7.0 million; $0.28 per diluted share | Declined to a loss |
| Adjusted EBITDA (non-GAAP) | $76.5 million; 13.2% margin | $77.8 million; 12.6% margin | Down $1.3 million |
| Cash from operating activities | $(40.6) million | $52.8 million | FY2021 includes $70.0 million paid to Gilat; excluding that payment, operating cash flow was $29.4 million |
| Cash and cash equivalents | $30.9 million | $47.9 million | Down $17.0 million |
| Debt outstanding | $201.0 million | $149.5 million | Up $51.5 million |
| Working capital | $83.9 million | $117.4 million | Down $33.5 million |
Fiscal 2021 capital expenditures were $16.0 million. The company reported $15.5 million of net cash used in investing activities and $39.1 million provided by financing activities, including $51.5 million of net borrowings and $10.3 million of cash dividends. Gross margin remained 36.8%; GAAP operating margin was negative 11.7% versus positive 2.5% in FY2020.
In the fourth quarter, net sales were $145.8 million, gross profit was $55.1 million, net income was $7.4 million, and diluted EPS was $0.28.
Business, segments, and changes from the prior year
- Commercial Solutions: Sales were $360.1 million, up 1.8% and 61.9% of consolidated sales. Segment operating income increased to $41.1 million from $34.8 million; Adjusted EBITDA rose to $66.3 million from $61.7 million. Satellite-ground-station sales improved, and public-safety/location sales were slightly higher, partly offset by the loss of AT&T 911 wireless call-routing sales.
- Government Solutions: Sales were $221.5 million, down 15.8% and 38.1% of consolidated sales. Segment operating income fell to $8.4 million from $20.0 million; Adjusted EBITDA declined to $16.3 million from $25.7 million. Lower U.S. Army field-support, advanced VSAT, and other program sales were partly offset by higher space components and antenna sales.
- Orders and backlog: Consolidated book-to-bill was 1.07, compared with backlog of $658.9 million at year-end versus $620.9 million a year earlier. Segment book-to-bill was 1.23 for Commercial Solutions and 0.82 for Government Solutions. Management estimated revenue visibility of about $1.1 billion when backlog and the unfunded value of awarded multi-year contracts are included; potential orders from a new satellite customer are excluded. Backlog may be modified or canceled and is not a guarantee of future revenue.
- Customer concentration: U.S. government sales, including sales through prime contractors, were $201.1 million, or 34.6% of consolidated sales. Verizon accounted for 10.7% of sales.
Outlook, commentary, risks, and unusual items
- FY2022 targets: Net sales of $580 million to $600 million and Adjusted EBITDA of $70 million to $76 million. Management did not provide GAAP operating income, net income, or EPS guidance, or a reconciliation to the non-GAAP target, citing unpredictable costs and the inability to prepare a reconciliation without unreasonable effort.
- Management expected Commercial Solutions sales to increase in FY2022, supported by NG-911 awards and satellite products. It expected Government Solutions sales to decline from FY2021, partly reflecting the U.S. withdrawal from Afghanistan and program changes; management anticipated the first three FY2022 quarters would each be slightly below the $46.6 million of Government Solutions sales in FY2021’s fourth quarter.
- FY2022 targets incorporate COVID-19 effects, supply constraints and delivery timing, new-facility start-up costs, and U.S. government program changes. The company expected supply-chain pressures to ease in the second half of FY2022, but warned that timing remained uncertain. Two new manufacturing facilities were expected to become operational by the end of FY2022 or early FY2023; delays and higher costs remained possible.
- Unusual FY2021 costs: Acquisition-plan expenses were $100.3 million, including $88.3 million related to the terminated Gilat transaction and litigation, with $70.0 million paid in cash. These items drove the GAAP operating and net losses. Management’s non-GAAP measures exclude specified costs; the filing cautions that excluded items may recur and that Adjusted EBITDA is not a substitute for GAAP results.
- Debt and liquidity: The secured credit facility matures October 31, 2023. At year-end, the secured leverage ratio was 2.53x against a 3.75x maximum, and interest-expense coverage was 13.05x against a 3.25x minimum. Management expected covenant compliance but provided no assurance. Contractual obligations included $201.0 million of principal due in FY2023–FY2024 and $56.7 million of undiscounted lease payments.
- Contingencies and governance: The DCAA proposed approximately $2.4 million in retroactive contract adjustments related to legacy TCS audits; Comtech disputed the assessment and had recorded no reserve. A separate export-control matter was closed after a $122,000 payment to BIS. The company settled litigation related to the GD NG-911 acquisition in April 2021. Michael Porcelain was appointed to succeed Fred Kornberg as CEO after a transition expected by year-end 2021; transition-related costs were not finalized.
- Other material risks include COVID-19 and supply-chain disruption, government budget and contract volatility, fixed-price contract cost overruns, dependence on wireless-carrier relationships, export-control compliance, cybersecurity and service continuity, and possible impairment of goodwill or intangible assets. Goodwill was $347.7 million and net intangible assets were $268.7 million; the August 1, 2021 impairment test found no impairment.
Important facts for investors to verify
- Whether FY2022 sales and Adjusted EBITDA targets are achieved, and how actual GAAP results compare after acquisition, restructuring, manufacturing start-up, proxy-solicitation, and CEO-transition costs.
- Conversion of the $658.9 million backlog and awarded multi-year NG-911 contracts into funded orders, recognized revenue, and cash collections, including the effects of cancellations and budget approvals.
- Recovery in Government Solutions bookings and sales, and the pace of new satellite-technology orders from the large new customer.
- Operating cash generation, working-capital trends, debt reduction, and continued compliance with credit-facility covenants ahead of the October 2023 maturity.
- Resolution and financial impact, if any, of the proposed $2.4 million DCAA adjustment, and ongoing exposure to customer indemnification claims and export-control requirements.
- Whether supply constraints, manufacturing-facility transitions, and the 10.7% Verizon sales concentration affect delivery, margins, or customer retention.