Comtech Telecommunications Corp. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended October 31, 2014; comparable period is the three months ended October 31, 2013. The unaudited results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $76.4 million | $83.4 million | Down 8.4% |
| Gross profit / margin | $35.3 million / 46.2% | $36.4 million / 43.6% | Profit down; margin up |
| Operating income / margin | $8.2 million / 10.7% | $10.1 million / 12.1% | Down |
| Net income | $5.2 million | $5.3 million | Down slightly |
| Diluted EPS | $0.32 | $0.28 | Up; prior-period share count included convertible notes |
| Operating cash flow | $(4.7) million | $(1.2) million | Greater cash use |
| Capital expenditures | $0.7 million | $1.0 million | Lower |
Gross margin improved across all three segments, with sales mix also contributing. Operating income included $0.6 million of strategic-alternatives-analysis costs; excluding those costs, management reported operating income of $8.8 million, or 11.5% of sales. The prior-year comparison included a $0.2 million benefit from a contingent earn-out fair-value change.
At October 31, 2014, cash and cash equivalents were $144.5 million, down $10.0 million from July 31. Current assets were $288.7 million and current liabilities $60.3 million. The balance sheet reports no outstanding funded borrowings; the $200 million convertible notes were settled in May 2014. A new, uncommitted, secured $15 million credit facility took effect October 31, 2014, with $1.7 million of standby letters of credit outstanding. Stockholders’ equity was $398.6 million. The company paid $4.8 million in dividends during the quarter and declared a further $0.30 per share dividend payable in February 2015.
Business mix and material changes
- Telecommunications transmission sales were $51.4 million, down 5.5%; lower satellite earth station sales were partly offset by stronger over-the-horizon microwave systems sales.
- RF microwave amplifiers sales were $18.7 million, down 7.4%; operating income increased to $1.1 million from $0.6 million.
- Mobile data communications sales were $6.3 million, down 28.4%, largely because the prior-year quarter included sales of certain SENS technology and products. BFT-1 sustainment accounted for $5.9 million of segment sales.
- International sales were 61.2% of consolidated sales, compared with 57.0%; U.S. government sales were 24.9%, compared with 25.6%.
- Research and development expense rose 17.6% to $10.0 million. Interest expense fell to $0.3 million from $2.0 million, primarily following settlement of the convertible notes.
Outlook, management commentary and risks
Management expects FY2015 consolidated sales and operating income to be only slightly above FY2014 levels, with growth heavily weighted to the second half and Q4 expected to be the peak quarter. Q2 results were expected to be similar to Q1. The company targets FY2015 operating income of approximately 13.0% of sales excluding strategic-alternatives costs, and an effective tax rate of approximately 35%. Fiscal 2015 operating cash flows are expected to be significant but below FY2014, and weighted toward the second half. Capital expenditures are forecast at $5–$7 million.
Management cited strong Q1 bookings, including orders for amplifier systems, additional Army BFT-1 funding, Navy ATIP terminals and satellite earth station equipment. It nevertheless cautioned that falling oil prices, sanctions affecting Russia, uncertain international customer spending, and U.S. government budget and funding uncertainty make the outlook less predictable. Satellite earth station sales are expected to be comparable to FY2014; RF microwave amplifier sales are expected to be significantly higher, while mobile data communications sales are expected to be lower. These expectations depend on anticipated orders, funding, contract performance and shipments.
- Customer and contract exposure: 34.9% of accounts receivable related to a North African country end-customer at October 31, including 34.2% due from one large U.S. prime contractor. Government contracts may be terminated for convenience, and IDIQ contracts do not guarantee purchases.
- Legal matters: The company and its CEO had cooperated with U.S. government investigations and had not been contacted about them since September 2012. Management did not believe either investigation was likely to result in a proceeding, but an adverse outcome could materially affect the business.
- Other exposures: Potential deterioration in defense spending, global economic and political conditions, customer financing, contract estimates, warranty and inventory assumptions, and goodwill impairment could affect results. Management’s August 2014 qualitative goodwill assessment found no likely impairment; it warned that weaker revenue or market conditions could create impairment risk in future periods.
- Strategic review: On December 9, 2014, the board concluded that remaining independent best served the company and shareholders after reviewing alternatives, including a possible sale or merger.
- Liquidity and commitments: Management believes cash and expected operating cash flows are adequate for anticipated requirements. Disclosed net operating-lease cash commitments were $25.2 million; future net cash payments under the Radyne restructuring plan were estimated at approximately $4.8 million. Uncertain tax-position liabilities, including interest, totaled $2.8 million.
Most important facts for investors to verify
- Whether expected second-half orders and shipments materialize, particularly for satellite earth stations, RF amplifiers, over-the-horizon systems and Navy ATIP production.
- Whether Army BFT-1 contract options and incremental funding are exercised; the contracts are terminable and future purchases are not guaranteed.
- Collection and concentration risk in receivables tied to the North African end-customer and its prime contractor.
- Cash conversion and working-capital needs, given Q1 operating cash outflow and management’s expectation that cash generation will be weighted to the second half.
- Potential effects of oil-price weakness, geopolitical developments, sanctions, defense budgets and customer financing on the FY2015 outlook.
- Developments in the government investigations and tax matters, and any changes in goodwill impairment assumptions or assessment.