Business context and reporting period
Comtech Telecommunications Corp. provides secure communications technologies to commercial and government customers through its Commercial Solutions and Government Solutions segments. This summary covers fiscal 2019, the year ended July 31, 2019; the filing also reports the fourth quarter ended on that date.
Fiscal 2019 was the company’s fourth consecutive year of sales growth. Commercial Solutions contributed 53.2% of annual sales and Government Solutions 46.8%. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $671.8 million | $570.6 million |
| Gross profit / gross margin | $247.4 million / 36.8% | $223.9 million / 39.2% |
| Operating income / margin | $41.4 million / 6.2% | $35.1 million / 6.2% |
| Net income | $25.0 million | $29.8 million |
| Diluted EPS | $1.03 | $1.24 |
| Operating cash flow | $68.0 million | $50.3 million |
| Adjusted EBITDA (non-GAAP) | $93.5 million | $78.4 million |
Fiscal fourth-quarter sales were $176.4 million versus $167.4 million a year earlier; gross profit was $64.0 million versus $63.0 million; net income was $6.1 million versus $7.5 million; and diluted EPS was $0.25 versus $0.31.
Annual sales rose 17.7%, while net income fell 15.9%. Gross margin declined 2.4 percentage points, mainly reflecting the increased share of lower-margin Government Solutions sales and product mix. Government Solutions sales increased 39.5% to $314.5 million; Commercial Solutions sales increased 3.5% to $357.3 million.
At July 31, 2019, cash and cash equivalents were $45.6 million, working capital was $135.0 million, and total debt, capital leases and other obligations were $165.8 million. The company generated $68.0 million in operating cash flow and used $44.7 million in investing activities, including $35.9 million net cash paid for acquisitions. Backlog was $683.0 million, with a 1.08 consolidated book-to-bill ratio. The company paid $0.10 per share quarterly dividends and declared the same quarterly amount for November 2019.
Material changes and unusual items
- Government Solutions growth included deliveries under U.S. Army tactical communications orders and higher troposcatter and amplifier sales. The company said $11.7 million of mobile satellite transceiver shipments for the Army’s BFT-2 program were not expected to recur in fiscal 2020.
- Commercial Solutions sales benefited from public-safety and 911 work, while satellite ground-station sales were slightly lower. Heights platform sales and bookings increased. Location-technology sales declined as the company exited or wound down selected offerings.
- Comtech acquired Solacom for an accounting purchase price of $32.9 million and the GD state and local government NG-911 business for a preliminary $10.0 million. Fiscal 2019 revenue contributions from both were nominal. The GD transaction accompanied a five-year state NG-911 contract valued at more than $100 million, which began in fiscal 2020.
- Fiscal 2019 included $6.4 million of estimated contract settlement costs related to the location-technology repositioning, $1.4 million of facility-exit costs, $5.9 million of acquisition-plan expenses, a $3.2 million benefit from a favorable legacy TCS intellectual-property ruling, and a $3.2 million write-off of deferred financing costs. These items affect comparisons and the company’s non-GAAP measures.
- Gross margin and GAAP net income moved differently from Adjusted EBITDA; the company cautions that Adjusted EBITDA is non-GAAP, excludes specified costs, and may not be comparable with similarly named measures at other companies.
Outlook, risks and contingencies
For fiscal 2020, management targeted sales of $710–$730 million, GAAP operating income of approximately 7.0% of sales, and Adjusted EBITDA of $98–$102 million. Management expected year-over-year sales growth in both segments, book-to-bill above 1.0, and a stronger second half, with the first quarter expected to be the weakest. Guidance excluded potential acquisition impacts and certain future strategic costs; management noted results could exceed targets if order flow remained strong.
Key risks include dependence on government budgets and awards, cancellable or modifiable backlog, long sales cycles, fixed-price contract cost overruns, competition and rapid technology change, component availability, customer concentration and wireless-carrier procurement decisions. AT&T had informed Comtech it would move all 911 call-routing solutions to a competitor by April 2020. Verizon represented 9.1% of fiscal 2019 revenue, and its contract can be terminated or repriced.
Contingencies include a September 2019 lawsuit by a legacy TCS 911 customer alleging fraud and failure to provide promised redundancy; Comtech disputes the claims, and potential exposure is uncertain. The filing also describes an OFAC review of historical Sudan-related transactions and a Commerce Department export audit identifying six potentially noncompliant transactions valued at less than $100,000 in aggregate; no accrual was recorded for a possible EAR penalty. Separately, Comtech disclosed that DCAA audits of pre-acquisition TCS periods could result in a proposed refund of approximately $2.4 million; the company disputes the assessment and recorded no reserve. The GD NG-911 seller sought an approximately $2.9 million upward purchase-price adjustment, while Comtech said it believed it was entitled to an approximately $0.9 million reduction.
Management reported that the company was in compliance with its credit covenants at year-end: secured leverage was 1.74x against a 3.75x maximum, and interest coverage was 12.05x against a 3.25x minimum. The $165 million secured credit-facility balance matures October 31, 2023; dividends remain subject to covenant compliance and board approval.
Important facts for investors to verify
- Whether fiscal 2020 sales and Adjusted EBITDA targets were achieved, and how much depended on the timing and profitability of government orders and acquired NG-911 work.
- The revenue and margin effects of AT&T’s planned 911 routing transition, Verizon contract terms, and the company’s location-technology repositioning.
- Backlog conversion, customer funding and cancellation exposure, particularly for multi-year state and local government contracts.
- Resolution and financial impact, if any, of the legacy customer lawsuit, OFAC and export-control reviews, DCAA audit proposal, and GD purchase-price adjustment.
- Debt, covenant headroom, cash generation, acquisition spending, and the sustainability of quarterly dividends.
- Whether acquisition integration and the large goodwill and intangible-asset balances create future impairment risk.