Comtech Telecommunications Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended April 30, 2012 (fiscal third quarter and year to date), compared with the same periods in 2011. Comtech operates in telecommunications transmission, RF microwave amplifiers, and mobile data communications. Its mobile segment remains heavily dependent on U.S. Army MTS and BFT-1 programs.
Key financial metrics
| Metric | Three months ended April 30, 2012 | Nine months ended April 30, 2012 |
|---|---|---|
| Net sales | $99.8 million, down 23.9% | $312.3 million, down 33.8% |
| Gross profit / margin | $41.7 million / 41.8% | $134.4 million / 43.0% |
| Operating income / margin | $10.6 million / 10.6% | $37.0 million / 11.8% |
| Net income | $6.1 million; diluted EPS $0.29 | $24.5 million; diluted EPS $1.04 |
| Operating cash flow | Not presented separately for the quarter | $17.2 million, versus $68.9 million |
At April 30, cash and cash equivalents were $367.6 million, down $191.2 million from July 31, 2011. Current assets were $540.6 million and current liabilities $82.1 million. Debt comprised $200 million of 3.0% convertible senior notes; there were no revolving borrowings and $1.2 million of standby letters of credit. The notes mature in 2029, but holders may require cash repurchase in 2014, 2019 or 2024. Nine-month investing cash use was $4.5 million, and financing cash use was $203.9 million, including $190.1 million of share repurchases and $17.6 million of dividends.
Material changes versus prior comparable periods
- Third-quarter sales fell mainly because telecommunications transmission sales declined 23.1% and mobile data communications sales declined 48.2%; RF microwave amplifier sales rose 21.6%.
- Year-to-date mobile data communications sales declined 63.0% to $84.5 million. MTS and BFT-1 sales were $64.4 million, versus $198.7 million a year earlier.
- Year-to-date gross margin improved to 43.0% from 38.6%, partly reflecting segment mix and a $5.6 million benefit from finalizing pricing on certain MTS/BFT-1 orders. Excluding that benefit, management reported a 42.0% margin.
- Year-to-date operating income fell to $37.0 million from $87.3 million. The prior-year period included a $12.5 million merger termination fee; the current period included $2.6 million of costs related to a withdrawn proxy solicitation.
- Year-to-date net income declined to $24.5 million from $56.0 million. The 2012 effective tax rate of 22.9% included approximately $3.8 million of discrete tax benefits; management estimated an underlying rate of about 35%.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2012 sales and profits to be materially below fiscal 2011, with mobile-segment sales weakness continuing into fiscal 2013. It forecast fiscal 2012 consolidated operating margin of approximately 12%.
- The new three-year BFT-1 sustainment IDIQ contract has a not-to-exceed value of $80.7 million, but most contract pricing is subject to finalization and downward negotiation. Only $17.0 million was initially funded for the base year. The $10.0 million annual IP license fee is recognized over 12 months; future license fees depend on Army option exercises.
- Management anticipated fourth-quarter sales improvement in mobile data communications and satellite earth station products, while RF amplifier sales were expected to be comparable to the third quarter. A prospective large North African microwave-system award could generate fiscal 2013 revenue, but timing may slip.
- Risks include U.S. and foreign government budget constraints, unpredictable contract funding and orders, customer concentration, contract-estimate and inventory risks, and possible goodwill impairment. The company was evaluating mobile-segment costs as near-term microsatellite bookings and MTS/BFT-1 activity remained uncertain.
- The DCAA was finalizing a post-award audit of the expired BFT-1 contract, which had generated $376.4 million in orders. A potential price adjustment or refund to the U.S. government, with interest, could materially affect results; the audit report was expected by September 2012. The company disputed the government agency’s position on full Cost Accounting Standards coverage.
- Management said available cash and expected operating cash flow should meet anticipated requirements. It continued to target annual dividends of $1.10 per share and had $40.6 million remaining under its $250 million repurchase authorization. A May 2012 patent-case settlement was not material. The filing also disclosed a $3.5 million contingent earn-out liability and approximately $4.3 million of future net cash payments under a legacy restructuring plan.
Important facts for investors to verify
- Progress and final pricing, funding, option periods, and cash collections under the Army sustainment contract, including the bandwidth arrangement and $10.0 million license fee.
- Outcome of the BFT-1 DCAA audit and any related CAS determination, price adjustment, or refund exposure.
- Conversion, holder put rights, and liquidity planning for the $200 million notes, alongside continued buybacks and dividends.
- Whether anticipated fourth-quarter orders and the potential North African award materialize, and how lower military-program revenue affects fiscal 2013.
- Underlying profitability after the $5.6 million contract-pricing benefit, proxy costs, and discrete tax benefits; interim results may not indicate full-year performance.