Comtech Telecommunications Corp. — Q1 Fiscal 2018 Form 10-Q
Reporting period: Three months ended October 31, 2017; balance-sheet amounts are as of October 31, 2017. Comtech provides communications technologies and services through Commercial Solutions and Government Solutions. Results are unaudited.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $121.6 million | $135.8 million |
| Gross profit / margin | $47.7 million / 39.3% | $52.1 million / 38.4% |
| Operating income (loss) | $0.2 million | $(0.7) million |
| Net income (loss) | $(1.7) million | $(2.5) million |
| Diluted loss per share | $(0.07) | $(0.11) |
| Adjusted EBITDA (non-GAAP) | $9.6 million | $10.0 million |
| Cash from operating activities | $6.5 million | $7.8 million |
Cash and cash equivalents were $42.5 million, up from $41.8 million at July 31, 2017. Net cash used in investing activities was $1.1 million and net cash used in financing activities was $4.7 million. Current assets were $241.9 million versus current liabilities of $136.9 million.
Debt under the secured credit facility was $195.8 million before unamortized financing costs; the balance-sheet carrying amount was $191.3 million. Capital lease obligations totaled $3.4 million. The company reported a leverage ratio of 2.83x against a 3.50x maximum and a fixed-charge coverage ratio of 2.03x against a 1.25x minimum. The credit facility matures February 23, 2021.
Changes versus prior-year quarter
- Sales fell 10.5%, primarily because Government Solutions revenue declined 23.7% to $45.5 million; Commercial Solutions revenue was essentially flat at $76.1 million.
- Government Solutions sales were affected by lower over-the-horizon microwave shipments, a strategic shift away from large commodity service contracts, and the absence of $2.5 million in BFT-1 intellectual-property license fees recorded in the prior-year quarter.
- Gross margin improved to 39.3% from 38.4%, reflecting a higher Commercial Solutions mix, favorable product mix, and a $0.7 million benefit from an AT&T warranty settlement.
- Operating results improved from a loss to modest income, helped by lower selling, general and administrative costs and reduced unallocated expenses. Adjusted EBITDA declined modestly.
- Interest expense decreased to $2.6 million from $3.3 million, primarily reflecting lower indebtedness.
Outlook, commentary, and notable items
- Management said Q1 results exceeded expectations. Consolidated book-to-bill was 1.36 and backlog was $490.4 million.
- Management expects fiscal 2018 consolidated sales to increase from fiscal 2017, targets operating income of 4.0%–5.0% of sales, and targets Adjusted EBITDA comparable to fiscal 2017’s $70.7 million and 12.8% margin. Management said EBITDA could exceed that level if order flow remains strong.
- For Q2 FY2018, management expected sales slightly above Q1 but below Q2 FY2017, a GAAP operating and net loss, and Adjusted EBITDA approximately equal to Q1’s $9.6 million. It expected operating and net income in Q3 and Q4, with Q4 substantially the strongest quarter.
- Commercial Solutions received AT&T awards totaling $96.2 million, with $26.0 million initially funded, and an $8.4 million location-application renewal. Commercial segment sales are expected to exceed fiscal 2017.
- Government Solutions backlog was at its highest level since the TCS acquisition. Management expects fiscal 2018 Government Solutions sales below fiscal 2017, citing award timing and the absence of $6.7 million of BFT-1 license fees for the full year.
- AT&T warranty settlement: Comtech agreed to issue credits with a present value of $4.7 million through September 2020 and recorded a $0.7 million benefit to cost of sales.
- Vehicle IP litigation remained on appeal after a district court judgment of noninfringement; the company said legal costs and ultimate resolution could materially affect future results. OFAC was reviewing disclosed transactions involving equipment that may have reached Sudan; potential enforcement action and penalties remained uncertain, although Sudan sanctions were revoked in October 2017.
- The IRS notified the company of an audit of its fiscal 2016 federal return. Potential tax assessments or settlements could adversely affect results. Management estimated a 34.5% fiscal 2018 effective tax rate excluding discrete items and the uncertain effects of potential tax reform.
- The annual goodwill test found no impairment; estimated fair value exceeded carrying value by at least 17.8% for Commercial Solutions and 52.9% for Government Solutions. Future deterioration in business conditions or projected cash flows could lead to impairment.
Key investor verification points
- Track Government Solutions bookings, backlog conversion, contract timing, and the planned shift toward higher-margin niche products.
- Assess whether the $96.2 million AT&T awards and other announced contracts produce expected funding, deliveries, revenue, and margins.
- Monitor quarterly cash generation, working-capital needs, debt repayments, interest-rate exposure, and headroom under tightening leverage covenants.
- Follow the Vehicle IP appeal, OFAC review, IRS audit, and any changes in related accruals, exposures, or outcomes.
- Compare fiscal 2018 operating-margin and Adjusted EBITDA targets with reported GAAP results; Adjusted EBITDA is a non-GAAP measure and management did not provide a quantitative reconciliation of the forward target.