Comtech Telecommunications Corp. — Form 10-Q Summary
Business context and reporting period. This unaudited report covers the fiscal third quarter and nine months ended April 30, 2019; comparisons are with the periods ended April 30, 2018. Comtech provides communications technology through Commercial Solutions and Government Solutions. Results include only a nominal contribution from Solacom, acquired February 28, and two days from the GD NG-911 business, acquired April 29.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $170.4 million | $147.9 million | $495.4 million | $403.2 million |
| Gross profit | $64.4 million | $62.4 million | $183.4 million | $161.0 million |
| Gross margin | 37.8% | 42.2% | 37.0% | 39.9% |
| Operating income | $11.3 million | $14.0 million | $31.0 million | $19.1 million |
| Net income | $7.6 million | $8.2 million | $18.9 million | $22.3 million |
| Diluted EPS | $0.31 | $0.34 | $0.78 | $0.93 |
| Adjusted EBITDA (non-GAAP) | $24.0 million | $23.5 million | $65.2 million | $47.7 million |
Revenue and margins. Quarterly sales rose 15.2%; nine-month sales rose 22.9%. Government Solutions drove most of the growth: quarterly sales increased 39.6% to $80.8 million and nine-month sales increased 59.4% to $241.1 million. Commercial Solutions sales were nearly flat in the quarter at $89.6 million and increased 1.0% year to date to $254.3 million. Lower consolidated gross margin reflected the larger proportion of lower-margin Government Solutions sales and product-mix effects.
Cash flow, liquidity and debt. Nine-month operating cash flow was $53.8 million, versus $30.6 million; investing cash outflow was $42.3 million, including $25.9 million for Solacom and $10.0 million for the GD NG-911 business; financing cash outflow was $9.9 million. Cash at April 30 was $45.2 million, up from $43.5 million at July 31, 2018. Current assets were $289.2 million and current liabilities $161.7 million. Long-term debt was $173.5 million; total debt including capital leases and other obligations was reported as $175.0 million. The new secured facility allows up to $550 million, matures October 31, 2023, and had $173.5 million drawn. Secured leverage was 1.77x against a 3.75x maximum; interest coverage was 12.46x against a 3.25x minimum. Management said it expected to remain compliant. The MD&A reports Q3 operating cash flow of $40.8 million; the statements provide cash flow for the nine-month period, not the quarter.
Material changes and notable items
- Q3 operating income declined despite higher sales, while Q3 net income and diluted EPS also fell. Adjusted EBITDA increased modestly, but its margin declined to 14.1% from 15.9%.
- Nine-month net income fell despite higher sales and operating income, in part reflecting the prior-year $14.1 million discrete tax benefit from U.S. tax reform. FY2019 also included a $3.2 million financing-cost write-off and a $3.0 million discrete tax benefit.
- Commercial Solutions recorded $6.4 million of estimated contract settlement costs through nine months as it repositioned enterprise technology offerings toward higher-margin solutions. It also incurred $1.4 million in facility exit costs for the Tampa manufacturing consolidation.
- Acquisition plan expenses were $4.6 million year to date. A favorable resolution of legacy TCS intellectual-property litigation generated a $3.2 million benefit.
- Solacom’s preliminary accounting purchase price was $32.9 million. The GD NG-911 business was acquired for a preliminary $10.0 million cash price. Purchase-price allocations remain subject to finalization.
- Consolidated backlog reached a record $747.1 million; Q3 book-to-bill was 1.94. Both segments had quarterly book-to-bill above 1.0. Much of Government Solutions’ Q3 bookings was expected to ship or be performed in FY2020.
Outlook, commentary and risks
Management raised FY2019 targets: consolidated sales of approximately $660 million and Adjusted EBITDA of approximately $90 million, compared with prior sales guidance of $645–$660 million and Adjusted EBITDA guidance of $85–$89 million. It expected Q4 sales of approximately $164.6 million and Adjusted EBITDA of approximately $24.8 million. FY2019 diluted GAAP EPS guidance was $0.88, including approximately $0.10 in Q4; management expected about $2.2 million of additional Q4 acquisition and repositioning costs. FY2019 GAAP operating income was expected to be similar in dollars to FY2018’s $35.1 million, but lower as a percentage of sales. Management expected full-year gross margin below FY2018 and an effective tax rate of approximately 23%, excluding discrete items. Guidance is forward-looking and Adjusted EBITDA is non-GAAP and not reconciled to GAAP in the forward period.
- Management cited strong demand, a solid opportunity pipeline, positive customer response to NG-911 acquisitions, and growth potential in Heights satellite solutions. It also cautioned that Heights currently carries lower margins than traditional satellite modem products.
- Risks include the timing and funding of government orders, contract performance and estimate revisions, customer delays or cancellations, acquisition integration and realization of synergies, and execution of the enterprise technology repositioning. Government contracts may be terminated for convenience; IDIQ contracts do not guarantee purchases.
- A legacy TCS 911 customer demanded approximately $14.6 million in contract refunds after reported network outages and alleged incomplete failover work. Comtech disputed the claim; non-binding mediation began in April. The filing says the outcome could materially affect results, financial position or cash flows.
- Export-compliance matters remain under review by OFAC and the Department of Commerce. Potential penalties are uncertain; no accrual was recorded for the export-enforcement matter described in the filing.
- Additional exposures include customer indemnification claims, uncertain tax positions, interest-rate changes and possible goodwill impairment if business performance or market assumptions deteriorate. The company reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether FY2019 sales, Adjusted EBITDA and EPS guidance was achieved, and how actual GAAP results compare with management’s outlook and non-GAAP adjustments.
- Whether the $747.1 million backlog converts to revenue as expected, particularly given the timing of government awards and funding.
- Acquisition integration, final purchase-price allocations, expected NG-911 contract economics and realization of anticipated benefits.
- Progress and financial effects of the enterprise technology repositioning, including further settlement costs and the effect on revenue and margins.
- Developments in the TCS customer dispute and export-compliance reviews, including any new claims, penalties, insurance coverage or accruals.
- Debt levels, borrowing costs and covenant headroom; the filing states dividends remain subject to facility covenants and Board approval.