Comtech Telecommunications Corp. — Form 10-Q Summary
Reporting period: Second quarter and six months ended January 31, 2021. The company provides communications technologies to commercial and government customers through its Commercial Solutions and Government Solutions segments. Financial statements are unaudited.
Key financial results
| Metric | Three months ended Jan. 31, 2021 | Six months ended Jan. 31, 2021 |
|---|---|---|
| Net sales | $161.3 million; prior year $161.7 million | $296.5 million; prior year $331.9 million, down 10.7% |
| Gross profit / margin | $55.7 million / 34.5%; prior year 37.5% | $105.9 million / 35.7%; prior year 37.4% |
| Operating income (loss) | $5.4 million; prior year $6.2 million | $(80.3) million; prior-year income $15.5 million |
| Net income (loss) | $4.2 million; diluted EPS $0.17 | $(81.6) million; diluted EPS $(3.22) |
| Adjusted EBITDA, non-GAAP | $18.1 million; prior year $21.2 million | $32.3 million; prior year $41.8 million |
| Cash from operating activities | $10.9 million | $(63.4) million; prior year cash provided of $31.3 million |
At January 31, cash and equivalents were $30.9 million, versus $47.9 million at July 31, 2020. Debt under the credit facility was $208.0 million, up from $149.5 million; net debt was approximately $177.1 million. The company had $281.9 million of current assets and $179.7 million of current liabilities. Funded backlog was $660.0 million, up approximately 9% from October 31, 2020. Second-quarter book-to-bill was 1.34.
Material changes and drivers
- Second-quarter consolidated sales were nearly flat year over year, but gross margin fell 3.0 percentage points. Management cited product mix, COVID-related order and production delays, supply-chain disruption, lower factory utilization and higher operating and logistics costs.
- Second-quarter Commercial Solutions sales declined 8.6% to $87.8 million, partly reflecting lower satellite ground-station demand and the cessation of AT&T 911 wireless call-routing sales. Government Solutions sales rose 12.2% to $73.5 million, mainly on order timing and contract performance.
- First-half results included $94.5 million of acquisition-plan expenses, of which $88.3 million related to the terminated Gilat transaction and related litigation, including a $70.0 million cash termination payment. Excluding that payment, first-half operating cash flow would have been $6.6 million. The payment and associated charges drove the reported first-half net loss and operating loss.
- First-half cash use also reflected working-capital movements; accounts receivable increased to $149.9 million from $126.8 million at July 31, 2020. Net borrowings of $58.5 million helped fund the cash outflow and dividends.
Outlook, risks and unusual items
- Management expects fiscal 2021 Adjusted EBITDA to be similar to fiscal 2020’s $77.8 million and expects fiscal 2021 sales in each segment to be similar to its fiscal 2020 level. It anticipates a fiscal 2021 book-to-bill ratio above 1.0 if momentum continues. No GAAP operating-income, net-income or EPS guidance was provided, and management did not reconcile Adjusted EBITDA guidance to GAAP.
- Management reported that second-quarter results exceeded its expectations and said long-term fundamentals remain strong, while noting that COVID-19 continues to cause delays and cost pressure. It expects strong operating cash flows in the remainder of fiscal 2021.
- On March 2, 2021, after quarter-end, Comtech completed its UHP Networks acquisition. The initial approximately $24 million consideration was paid in shares; a further $5 million is conditional, and up to $9 million of earn-out consideration may be payable based on milestones. The company issued 1,026,567 shares at closing.
- Management anticipated approximately $3.4 million of acquisition-plan expenses in the third quarter, with further litigation-related costs possible. It also expected about $2.1 million of fiscal 2021 restructuring costs for operational changes and facility moves. The Chandler, Arizona facility transition and a UK facility closure caused disruption; the UK facility had reopened by the filing date.
- Credit-facility covenants were met at quarter-end: secured leverage was 3.00x against a 3.75x maximum, and interest coverage was 12.45x against a 3.25x minimum. The facility matures October 31, 2023 and is secured by substantially all company and guarantor assets.
- Legal and regulatory exposures include GD NG-911 acquisition-related litigation, with trial scheduled for May 10, 2021; an export-compliance review involving six shipments valued at approximately $230,000, with a tolling agreement extended through April 1, 2021; and customer indemnification claims. Management said the litigation outcome was not expected to materially harm results or financial position, but acknowledged indemnification matters could be material.
- Other risks include government contract funding and termination discretion, customer and order timing, COVID-19 effects, contract-estimate revisions, potential goodwill or intangible impairment, and interest-rate exposure. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether the $660.0 million backlog converts to funded orders and revenue on the expected schedule, particularly the Pennsylvania and South Carolina NG-911 contracts, for which meaningful revenue was expected beginning in fiscal 2022.
- Progress toward the fiscal 2021 Adjusted EBITDA and segment-sales outlook, and the impact of continuing COVID-related disruptions and product mix on margins.
- Cash generation and working-capital collection trends, given the first-half operating cash outflow, higher receivables and increased credit-facility borrowings.
- Final UHP consideration, share issuance and earn-out outcomes, plus integration results and expected intangible amortization.
- Actual litigation, export-review and indemnification outcomes, and any resulting cash costs or liabilities.
- Continued compliance with credit-facility covenants and the effect of debt, lease commitments, dividends and planned restructuring on liquidity.