Comtech Telecommunications Corp. — FY2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended July 31, 2018; FY2018 fourth-quarter figures are also reported. Comtech provides communications products and services through Commercial Solutions (60.5% of annual sales) and Government Solutions (39.5%). The financial statements received an unqualified audit opinion, and the auditor also found internal control over financial reporting effective.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $570.6 million | $550.4 million |
| Gross profit / margin | $223.9 million / 39.2% | $218.2 million / 39.6% |
| Operating income / margin | $35.1 million / 6.2% | $37.0 million / 6.7% |
| Net income | $29.8 million | $15.8 million |
| Diluted EPS | $1.24 | $0.67 |
| Adjusted EBITDA (non-GAAP) | $78.4 million / 13.7% of sales | $70.7 million / 12.8% of sales |
| Cash from operating activities | $50.3 million | $66.9 million |
- FY2018 sales increased 3.7%; Commercial Solutions sales rose 4.3% to $345.1 million and Government Solutions sales rose 2.7% to $225.5 million.
- Fourth-quarter sales were $167.4 million versus $147.8 million a year earlier; gross profit was $63.0 million versus $60.4 million; net income was $7.5 million versus $7.3 million. Diluted EPS was $0.31 in both quarters.
- Cash and cash equivalents were $43.5 million at year-end; working capital was $114.5 million. Backlog reached a record $630.7 million, up from $446.2 million, and the annual book-to-bill ratio was 1.32.
- Debt figures depend on definition: the company reported $168.7 million outstanding under its secured credit facility, before unamortized financing costs, and $167.9 million of total debt, capital leases and other obligations in selected balance-sheet data. It said total indebtedness excluding deferred financing costs declined $29.2 million during the year. Facility maturity is February 2021.
- Credit-facility leverage was 2.19x against a 3.00x maximum; fixed-charge coverage was 2.33x against a 1.25x minimum. The company reported $150 million of revolving capacity, with $48.6 million drawn at year-end.
Material changes and unusual items
- Net income benefited from an $11.8 million discrete tax benefit, primarily from remeasuring deferred tax liabilities after U.S. tax reform. Without discrete items, the FY2018 effective tax rate was 27.0%.
- Operating income decreased despite higher sales and Adjusted EBITDA. FY2017 included a $12.0 million favorable intellectual-property litigation settlement adjustment and other favorable adjustments; FY2018 had $1.7 million of favorable warranty and sales-tax settlements. Management’s comparison excluding these items showed operating income of $33.4 million in FY2018 versus $18.2 million in FY2017.
- Operating cash flow fell year over year, principally because of working-capital timing, including increases in receivables and inventory. The company used $40.1 million in financing activities, including debt repayments and dividends.
Outlook, risks and contingencies
- For FY2019, management targeted sales of $600–$625 million, Adjusted EBITDA of $80–$86 million, book-to-bill above 1.0, and GAAP operating margin above FY2018’s 6.2%. It expected second-half results to exceed first-half results, with the fourth quarter the peak; the first quarter was expected to show operating income slightly above break-even and a slight net loss.
- Management expects Government Solutions sales and operating margins to improve materially, supported by funded and potential government awards. Commercial Solutions outlook includes satellite equipment and wireless-carrier contracts, while management expects FY2019 commercial enterprise and safety/security sales to be similar to FY2018. A further BFT-2-HC order was expected but remained uncertain.
- Key risks include dependence on U.S. government budgets and customer funding, contract cancellation or delay, long sales cycles, customer and wireless-carrier concentration, intense competition and technology change, international-market and export-control exposure, component supply constraints, cybersecurity threats, and fixed-price contract cost overruns. Backlog is not guaranteed revenue and can be modified or canceled.
- Export matters remained unresolved: OFAC was reviewing a previously disclosed Sudan-related transaction, and the Commerce Department was reviewing six potentially noncompliant export transactions valued at less than $100,000 in aggregate. No accrual was recorded for a possible penalty. The Vehicle IP patent case remained on appeal after a district-court noninfringement judgment.
- A settlement with AT&T over legacy 911 call-handling software included 36 credits; the present value was $3.6 million at year-end. Related accrued warranty obligations were $4.7 million.
- Quarterly dividends were $0.10 per share; continuation depends on board approval and debt-covenant compliance. Management said liquidity was sufficient for anticipated needs, but that assessment depends on forecast operating performance.
Important facts for investors to verify
- Whether the record backlog converts to revenue and cash on the timing and margins assumed, particularly for government programs and multiyear carrier contracts.
- Actual FY2019 results against management’s sales, EBITDA and operating-margin targets, including the anticipated seasonal pattern and BFT-2-HC orders.
- Working-capital conversion and debt reduction, covenant headroom, borrowing costs and the February 2021 facility maturity.
- The recurring earnings and cash-flow profile apart from the FY2018 tax benefit and favorable settlements, and the comparability and limitations of Adjusted EBITDA.
- Outcomes of the export reviews and Vehicle IP appeal, plus any effects on penalties, costs, customer relationships or export privileges.
- Customer concentration and contract risks: Verizon represented 10.0% of FY2018 sales, and the U.S. government represented 35.5%.