Comtech Telecommunications Corp. — Form 10-Q Summary
Reporting period: Fiscal 2020 first quarter, the three months ended October 31, 2019. The filing is unaudited; comparisons are with the three months ended October 31, 2018, unless otherwise noted. Comtech reports Commercial Solutions and Government Solutions.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $170.3 million | $160.8 million |
| Gross profit / margin | $63.6 million / 37.3% | $57.8 million / 35.9% |
| Operating income / margin | $9.3 million / 5.4% | $7.3 million / 4.5% |
| Net income | $6.4 million | $3.5 million |
| Diluted EPS | $0.26 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $20.6 million | $18.0 million |
| Operating cash flow | $5.4 million | $(14.1) million |
Revenue grew 5.9%. Commercial Solutions sales increased 20.9% to $94.3 million, while Government Solutions sales declined 8.3% to $76.0 million. Higher Commercial Solutions sales and a more favorable segment mix lifted consolidated gross margin. Adjusted EBITDA was 12.1% of sales, versus 11.2% a year earlier.
Operating cash flow improved by $19.6 million year over year, principally reflecting changes in working-capital timing. Receivables increased to $161.0 million from $145.0 million at July 31, 2019. Cash was $46.9 million; long-term debt under the credit facility was $169.0 million, or approximately $122.1 million of net debt. Current assets were $295.7 million and current liabilities were $151.9 million. The company reported $37.1 million of lease liabilities after adopting the new lease standard.
Changes, business drivers, and unusual items
- Commercial Solutions benefited from acquired NG-911 businesses and stronger public safety and location technology sales. Satellite ground station sales were slightly higher; Heights platform bookings remained strong.
- Government Solutions sales fell mainly because prior-year sales included deliveries of MT-2025 mobile satellite transceivers. High-performance transmission sales increased.
- Backlog was $648.3 million and consolidated book-to-bill was 0.80. Management said the quarter’s bookings did not include the full expected follow-on orders for recently announced opportunities.
- Q1 included $2.4 million of acquisition plan expenses and $0.2 million of estimated contract settlement costs. Management’s adjusted presentation excluded these items and a $0.6 million net discrete tax benefit. Prior-year comparisons included a $3.2 million write-off of deferred financing costs and a $2.4 million discrete tax benefit.
- Comtech adopted lease accounting on August 1, 2019, recognizing operating lease assets and liabilities; management said adoption had no material effect on the financial statements apart from balance-sheet recognition and expanded disclosures.
Outlook, liquidity, and risks
Management raised FY2020 sales guidance to $712–$732 million and Adjusted EBITDA guidance to $99–$103 million, approximately 14% of expected sales. It expects GAAP operating margin near 7.0% (about 7.7% excluding specified costs), interest expense of approximately $7.5 million, and an effective tax rate near 23% for the remaining quarters, excluding discrete items. Q2 sales guidance is $168–$170 million and Adjusted EBITDA guidance is $19–$21 million. Management expects second-half results to exceed first-half results, with Q4 the peak quarter. Targets exclude the pending UHP acquisition and other potential strategic costs.
Management targeted a FY2020 book-to-bill ratio above 1.0 and said it expected Government Solutions sales to be similar to or slightly above FY2019. The company expects consolidated gross margin to be flat to slightly lower than FY2019, reflecting mix, including growth in lower-margin Heights sales. Management said cash, operating cash generation, and available credit should be sufficient for anticipated requirements.
Subsequent to quarter-end, Comtech agreed to acquire UHP Networks and a sister company for approximately $40 million, including an expected $5 million in Comtech shares, with a potential earn-out of up to $10 million. Closing was expected late in the second half of FY2020; the acquisition was not included in guidance. The company also cited a U.S. Army support contract with a $98.6 million ceiling, funded to date at $24.4 million, and a teaming partner’s 10-year, $325 million Marine Corps IDIQ award, for which Comtech expected to negotiate a subcontract. The IDIQ ceiling is not Comtech revenue or a guaranteed order.
Credit-facility covenants included maximum secured leverage of 3.75x and minimum interest coverage of 3.25x. At October 31, secured leverage was 1.75x and interest coverage was 13.07x. The facility matures October 31, 2023, is secured by substantially all company and guarantor assets, and restricts certain activities, including dividends and acquisitions. Interest-rate changes affect borrowing costs; management estimated a hypothetical 10% rate change would alter annual interest expense by about $0.6 million.
Key uncertainties include variable government funding and order timing, contract execution and cost estimates, customer procurement changes, acquisition closing and integration, and the ongoing repositioning of public safety offerings. A legacy TCS 911 customer lawsuit concerned alleged system redundancies and a demand for repayment of more than $14 million; the parties had reached an agreement in principle, but settlement terms were still being negotiated. OFAC and Commerce export-control reviews remained unresolved; no accrual was recorded for a potential export penalty. The filing also identifies uncertain tax positions of $7.8 million. Goodwill was not impaired in the annual test, but future weaker performance or a sustained stock-price decline could prompt impairment testing.
Important facts for investors to verify
- Whether bookings improve from the 0.80 book-to-bill level and support management’s backlog and FY2020 targets.
- Whether the U.S. Army contract receives expected funding and whether Comtech secures and receives orders under the Marine Corps opportunity.
- UHP acquisition closing, final funding mix, potential earn-out, and any effect on guidance, debt, or covenant headroom.
- Progress and final cost of the TCS 911 customer settlement, and outcomes of the OFAC and export-control matters.
- Receivables and working-capital conversion, given the quarter’s increase in accounts receivable and the dependence of cash flow on shipment, billing, and payment timing.
- Use of non-GAAP Adjusted EBITDA and other adjusted results alongside GAAP results; company definitions may not be comparable with other issuers.