COMTECH TELECOMMUNICATIONS CORP quarterly report, Q1 FY2021

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Comtech Telecommunications Corp. — Q1 Fiscal 2021 10-Q

Reporting period: Three months ended October 31, 2020. Comtech provides communications technology to commercial and government customers through its Commercial Solutions and Government Solutions segments. Figures below are in U.S. dollars.

Financial performance and liquidity

MetricQ1 FY2021Q1 FY2020
Net sales$135.2 million$170.3 million
Gross profit / margin$50.2 million / 37.1%$63.6 million / 37.3%
Operating income (loss)$(85.7) million$9.3 million
Net income (loss)$(85.8) million; $(3.39) per diluted share$6.4 million; $0.26 per diluted share
Adjusted EBITDA (non-GAAP)$14.3 million; 10.6% of sales$20.6 million; 12.1% of sales
Cash from operating activities$(74.2) million$5.4 million

The reported operating loss included $91.2 million of acquisition plan expenses, principally the Gilat merger termination and related litigation. Excluding those expenses, management reported non-GAAP operating income of $5.5 million and non-GAAP net income of $3.7 million, or $0.15 per diluted share. These are non-GAAP measures and should be considered alongside GAAP results.

  • Commercial Solutions sales fell 13.3% to $81.8 million; segment Adjusted EBITDA was $14.0 million, versus $16.6 million.
  • Government Solutions sales fell 29.7% to $53.4 million; segment Adjusted EBITDA was $4.3 million, versus $8.2 million.
  • Cash was $32.5 million at quarter-end, down from $47.9 million at July 31, 2020. The company had $217.0 million of debt outstanding, up $67.5 million during the quarter, primarily to fund the Gilat payment. Net operating cash use would have been $4.2 million excluding that $70.0 million payment.
  • Current assets were $274.5 million and current liabilities $169.6 million. The Credit Facility matures October 31, 2023. Secured leverage was 3.31x against a 3.75x maximum; interest coverage was 11.42x against a 3.25x minimum.
  • Backlog was $605.5 million and consolidated book-to-bill was 0.91. Verizon represented 12.5% of quarterly sales.

Material changes and management commentary

  • Sales declined 20.6% year over year, with lower sales in both segments. Gross margin was broadly stable; management cited product mix and COVID-related delays, lower factory utilization, supply-chain disruption, and higher logistics and operating costs.
  • The $70.0 million cash payment to Gilat followed termination of the proposed acquisition. Total acquisition plan expenses were $91.2 million, compared with $2.4 million a year earlier.
  • Management said Q1 sales and Adjusted EBITDA exceeded its expectations, and expected significant positive operating cash flow during the remainder of FY2021.
  • The company expects FY2021 consolidated sales to exceed FY2020, while Adjusted EBITDA is expected to be similar to FY2020. It did not provide GAAP operating income, net income, or EPS guidance, citing unpredictable acquisition expenses and the pandemic.
  • Management anticipated FY2021 sales slightly above FY2020 for Commercial Solutions and similar to or slightly above FY2020 for Government Solutions. It said full-year book-to-bill could exceed 1.0 if momentum continues.
  • A Pennsylvania NG-911 contract was awarded after quarter-end, with a maximum value of $175.1 million, including extension options. The state initially funded $137.4 million; Comtech said it booked $111.6 million in Q2 and expected meaningful revenue contribution beginning in FY2022.

Outlook, risks, contingencies, and unusual items

  • The pending UHP acquisition, at an amended aggregate price of $38.0 million, depended on Russian regulatory approvals for the Moscow-based sister company. Either party could terminate if approvals were not received by December 31, 2020. The acquisition was excluded from FY2021 outlook.
  • Comtech expected about $3.5 million of acquisition plan expenses in Q2 FY2021. A 15-year Chandler, Arizona facility lease and a 10-year U.K. lease support planned capacity expansion; management expected approximately $2.0 million of FY2021 restructuring costs.
  • COVID-19 continued to cause order and production delays, supply disruption, reduced factory utilization, and added costs. The U.K. antenna facility was temporarily closed in early December due to a local case spike, delaying some shipments. Management considered the pandemic’s worst business impact largely behind the company but noted uncertainty remained.
  • GD NG-911 acquisition-related litigation was scheduled for trial in February 2021; the company expected several million dollars of Q2 legal and professional fees. Management did not expect the outcome to materially harm results or financial position.
  • Comtech paid OFAC $894,000 in September 2020 to resolve a previously disclosed investigation and agreed to compliance enhancements. A separate export-control review remained pending; the company identified six potentially noncompliant shipments and said the limitations period had been extended through February 1, 2021.
  • Goodwill was $331.5 million. The August 2020 impairment test found fair value exceeded carrying value by at least 8.4% for Commercial Solutions and 78.0% for Government Solutions. Further deterioration in business conditions, customer spending, or share price could trigger impairment testing and potential charges.
  • Other exposures include customer indemnification claims, uncertain tax positions of $8.5 million, government contract funding and termination risks, and floating-rate debt. The company reported effective disclosure controls and no material change in internal control over financial reporting.

Investor verification priorities

  • Track cash generation and debt repayment after the one-time Gilat payment, and monitor leverage covenant headroom.
  • Reconcile GAAP and non-GAAP results, especially acquisition-related costs, their cash impact, and whether further expenses arise.
  • Confirm UHP’s regulatory outcome and closing or termination, and assess any associated funding, dilution, or transaction costs.
  • Monitor bookings, backlog conversion, segment sales and margins, and revenue timing for the Pennsylvania NG-911 award.
  • Follow the GD NG-911 litigation, export-control review, and any material indemnification or tax developments.
  • Assess whether FY2021 sales and Adjusted EBITDA outlook remains achievable amid COVID-related delays, factory moves, and customer funding variability.