Comtech Telecommunications Corp. Announces Results for the Second Quarter of Fiscal 2016, Segment Reporting Changes and Updated Fiscal 2016 Revenue and Adjusted EBITDA Guidance
MELVILLE, N.Y.--(BUSINESS WIRE)--
March 10, 2016-- Comtech Telecommunications Corp. (NASDAQ: CMTL) today
reported its operating results for the three and six months ended
January 31, 2016.
Net sales for the three months ended January 31, 2016 were $70.3 million
compared to $81.8 million for the three months ended January 31, 2015.
Net sales for the six months ended January 31, 2016 were $134.4 million
compared to $158.2 million for the six months ended January 31, 2015.
The three- and six-month period-over-period decreases reflect lower net
sales in the Company's telecommunications transmission segment,
partially offset by higher net sales in its RF microwave amplifier and
mobile data communications segments.
GAAP net income was $2.5 million, or $0.15 per diluted share, for the
three months ended January 31, 2016 as compared to $7.6 million, or
$0.46 per diluted share, for the three months ended January 31, 2015.
Excluding $2.3 million of pre-tax expenses related primarily to the
Company's acquisition of TeleCommunication Systems, Inc. ("TCS"), which
closed on February 23, 2016, diluted EPS would have been $0.25. GAAP net
income was $3.9 million, or $0.24 per diluted share, for the six months
ended January 31, 2016 as compared to $12.8 million, or $0.78 per
diluted share, for the six months ended January 31, 2015. Excluding $3.7
million of pre-tax expenses related primarily to the Company's
acquisition of TCS that were incurred during the six months ended
January 31, 2016, diluted EPS would have been $0.39.
The Company also reported that, in light of ongoing difficult business
conditions, its legacy business (which excludes the TCS operations) is
not expected to achieve the same level of annual revenues or Adjusted
EBITDA in fiscal 2016 that it achieved in fiscal 2015. However, the
Company is raising its fiscal 2016 revenue guidance from a prior range
of $300.0 million to $310.0 million to a new range of $435.0 million to
$445.0 million. Additionally, the Company expects that its fiscal 2016
Adjusted EBITDA (a Non-GAAP financial measure defined in the below
table) will range from $52.0 million to $55.0 million, an increase from
its prior fiscal 2016 Adjusted EBITDA guidance, which anticipated
Adjusted EBITDA in the range of $50.0 million to $54.0 million. The
Company's new revenue and Adjusted EBITDA guidance includes anticipated
results of the TCS operations from February 23, 2016 to July 31, 2016.
Although the TCS acquisition will result in some duplicate spending and
inefficiencies that will suppress fiscal 2016 Adjusted EBITDA, the
Company is on track to deliver an annual run-rate of cost synergies of
at least $8.0 million by the end of its fiscal 2016. The Company
believes revenues and Adjusted EBITDA for fiscal 2017 will be
significantly higher than its fiscal 2016 updated guidance.
Given that the TCS acquisition closed on February 23, 2016, it is not
yet practicable to provide diluted earnings per share guidance as the
Company continues to perform an analysis and assessment of the fair
values of assets acquired and liabilities assumed as well as the
accounting treatment related to expected transaction and merger related
expenditures.
In commenting on the Company's performance and fiscal 2016 business
outlook, Dr. Stanton Sloane, President and Chief Executive Officer,
stated, "Despite extremely challenging market conditions and our efforts
associated with acquiring and planning for the integration of TCS, I am
pleased with our second quarter results. We generated significant cash
flows from our operating activities and did not take our eye off the
ball. We believe our business is at a turning point and the future will
be brighter. The TCS acquisition was a significant step in our strategy
of entering complementary markets and expanding our domestic and
international commercial offerings."
In connection with the TCS acquisition, and beginning with its third
quarter of fiscal 2016, the Company has reorganized its business into
two operating segments: commercial solutions and government solutions.
The Company's commercial solutions segment serves commercial customers
(including smaller governments such as state and local governments)
which require advanced technologies to meet their needs. The Company's
government solutions segment serves large government end-users
(including those of foreign countries) which require mission critical
technologies and systems.
Selected Fiscal 2016 Second Quarter Financial Metrics and Other Items
The Company continues to evaluate the impact of the TCS acquisition on
its Business Outlook for Fiscal 2016, including finalizing required
purchase accounting and fair-value estimates of assets and
liabilities. This evaluation is expected to be largely complete by
March 31, 2016 after which time the Company intends to host an
earnings conference call to discuss its Business Outlook and the TCS
acquisition in more detail. The exact date and timing of this
conference call will be provided in a future announcement.
The Company notes that its fiscal 2016 updated financial guidance
reflects only five months of TCS operations as a result of the closing
of the TCS transaction on February 23, 2016. Comtech's third quarter
of fiscal 2016 will reflect approximately two months of operations
while its fourth quarter will reflect a full three months of
operations. At the same time, Comtech's second half of fiscal 2016,
particularly its third quarter, will reflect significant transaction
and merger related expenses. The total amount of transaction and
merger related expenditures is expected to approximate $48.0 million
which includes significant amounts for: (i) change-in-control
payments, (ii) severance, (iii) costs associated with establishing a
new $400.0 million credit facility (the "New Credit Facility") and
(iv) professional fees for financial and legal advisors for both
Comtech and TCS.
The Company's anticipated revenues and Adjusted EBITDA in fiscal 2017
will include a full twelve months of TCS operations and is expected to
be significantly higher than the amounts anticipated in fiscal 2016.
On a pro-forma basis, the combined companies would have had revenues
of approximately $643.5 million and Adjusted EBITDA of $80.4 million
based on the unaudited last trailing twelve month results for Comtech
and unaudited calendar year 2015 results for TCS.
The Company is on track to deliver meaningful cost synergies, which
are expected to approximate an annual run-rate of $8.0 million over
the next several quarters, with $12.0 million of synergies in the
second year after completing the acquisition. Synergies are expected
to be achieved by reductions in duplicate public company costs,
reduced spending on maintaining multiple information technology
systems and obtaining increased operating efficiencies throughout the
combined company.
As of January 31, 2016, the Company had $163.5 million of cash and
cash equivalents before payment of its quarterly dividend of $4.8
million on February 17, 2016 and before completion of the TCS
acquisition. The TCS acquisition has a preliminary aggregate purchase
price for accounting purposes of approximately $340.4 million (also
referred to as the transaction equity value). As of February 23, 2016,
the date the Company closed the acquisition, based on unaudited
financial information, TCS had $61.4 million of cash and cash
equivalents and debt (including accrued interest) of approximately
$144.1 million. As such, the transaction had an enterprise value of
approximately $423.2 million. The Company has funded and expects to
fully fund the acquisition (including $48.0 million of transaction and
merger related expenditures) and to repay the large majority of TCS's
debt by redeploying a significant amount of its combined cash and cash
equivalents, with the remaining funds coming from its New Credit
Facility. On the closing date, the Company, on a pro-forma combined
basis, assuming all transaction costs and TCS's outstanding debt were
paid or assumed, had more than $50.0 million of cash and cash
equivalents and outstanding debt of approximately $361.6 million.
The Company's effective tax rate for both the three and six months
ended January 31, 2016 reflects a discrete tax benefit of
approximately $0.3 million, primarily related to the passage of
legislation that included the retroactive, permanent extension of the
federal research and experimentation credit from December 31, 2014.
Adjusted EBITDA was $9.3 million and $16.8 million for the three and
six months ended January 31, 2016 as compared to $14.9 million and
$28.2 million for the three and six months ended January 31, 2015.
Backlog as of January 31, 2016 was $92.6 million compared to $107.9
million as of October 31, 2015. Total bookings for the three and six
months ended January 31, 2016 were $55.0 million and $109.3 million
compared to $61.9 million and $154.2 million for the three and six
months ended January 31, 2015.
Additional information about the Company's updated fiscal 2016 financial
guidance is included in the Company's second quarter investor
presentation which is located on the Company's website at www.comtechtel.com.
About Comtech
Comtech Telecommunications Corp. designs, develops, produces and markets
innovative products, systems and services for advanced communications
solutions. The Company sells products to a diverse customer base in the
global commercial and government communications markets. The Company
believes it is a leader in most of the market segments that it serves.
Certain information in this press release contains forward-looking
statements, including but not limited to, information relating to the
Company's future performance and financial condition, plans and
objectives of the Company's management and the Company's assumptions
regarding such future performance, financial condition, and plans and
objectives that involve certain significant known and unknown risks and
uncertainties and other factors not under the Company's control which
may cause its actual results, future performance and financial
condition, and achievement of plans and objectives of the Company's
management to be materially different from the results, performance or
other expectations implied by these forward-looking statements. These
factors include, among other things: the possibility that the expected
synergies from the acquisition of TeleCommunication Systems, Inc.
("TCS") will not be fully realized, or will not be realized within the
anticipated time period; the risk that Comtech's and TCS's businesses
will not be integrated successfully; the possibility of disruption from
the merger, making it more difficult to maintain business and
operational relationships or retain key personnel; the nature and timing
of receipt of, and the Company's performance on, new or existing orders
that can cause significant fluctuations in net sales and operating
results; the timing and funding of government contracts; adjustments to
gross profits on long-term contracts; risks associated with
international sales; rapid technological change; evolving industry
standards; new product announcements and enhancements; changing customer
demands; changes in prevailing economic and political conditions;
changes in the price of oil in global markets; changes in foreign
currency exchange rates; risks associated with the Company's legal
proceedings, customer claims for indemnification, and other similar
matters; risks associated with Comtech's obligations under its revolving
credit facility and acquisition debt; risks associated with the
Company's large contracts; and other factors described in this and the
Company's other filings with the Securities and Exchange Commission
("SEC").
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended January 31,
Six months ended January 31,
2016
2015
2016
2015
Net sales
$
70,323,000
81,802,000
134,440,000
158,193,000
Cost of sales
40,885,000
43,927,000
76,800,000
84,993,000
Gross profit
29,438,000
37,875,000
57,640,000
73,200,000
Expenses:
Selling, general and administrative
15,053,000
16,026,000
30,379,000
31,552,000
Research and development
7,663,000
9,666,000
15,603,000
19,685,000
Acquisition plan expenses
2,337,000
—
3,729,000
—
Amortization of intangibles
1,196,000
1,560,000
2,572,000
3,121,000
26,249,000
27,252,000
52,283,000
54,358,000
Operating income
3,189,000
10,623,000
5,357,000
18,842,000
Other expenses (income):
Interest expense
73,000
69,000
148,000
334,000
Interest income and other
(110,000
)
(90,000
)
(222,000
)
(174,000
)
Income before provision for income taxes
3,226,000
10,644,000
5,431,000
18,682,000
Provision for income taxes
750,000
3,059,000
1,516,000
5,872,000
Net income
$
2,476,000
7,585,000
3,915,000
12,810,000
Net income per share:
Basic
$
0.15
0.47
0.24
0.79
Diluted
$
0.15
0.46
0.24
0.78
Weighted average number of common shares outstanding - basic
16,186,000
16,241,000
16,178,000
16,229,000
Weighted average number of common and common equivalent shares
outstanding - diluted
16,205,000
16,505,000
16,201,000
16,510,000
Dividends declared per issued and outstanding common share as of the
applicable dividend record date
$
0.30
0.30
0.60
0.60
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
January 31, 2016
July 31, 2015
Assets
Current assets:
Cash and cash equivalents
$
163,466,000
150,953,000
Accounts receivable, net
53,749,000
69,255,000
Inventories, net
58,424,000
62,068,000
Prepaid expenses and other current assets
5,940,000
7,396,000
Deferred tax asset, net
—
11,084,000
Total current assets
281,579,000
300,756,000
Property, plant and equipment, net
13,839,000
15,370,000
Goodwill
137,354,000
137,354,000
Intangibles with finite lives, net
17,437,000
20,009,000
Deferred tax asset, net, non-current
10,512,000
—
Deferred financing costs, net
759,000
—
Other assets, net
690,000
388,000
Total assets
$
462,170,000
473,877,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
$
18,270,000
15,708,000
Accrued expenses and other current liabilities
30,579,000
29,470,000
Dividends payable
4,848,000
4,839,000
Customer advances and deposits
6,268,000
14,320,000
Total current liabilities
59,965,000
64,337,000
Other liabilities
2,864,000
3,633,000
Income taxes payable
1,469,000
1,573,000
Deferred tax liability, net
—
2,925,000
Total liabilities
64,298,000
72,468,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.10 per share; shares authorized and
unissued 2,000,000
—
—
Common stock, par value $.10 per share; authorized 100,000,000
shares; issued 31,195,457 shares and 31,165,401 shares at January
31, 2016 and July 31, 2015, respectively
3,120,000
3,117,000
Additional paid-in capital
429,361,000
427,083,000
Retained earnings
407,240,000
413,058,000
839,721,000
843,258,000
Less:
Treasury stock, at cost (15,033,317 shares at January 31, 2016 and
July 31, 2015)
(441,849,000
)
(441,849,000
)
Total stockholders' equity
397,872,000
401,409,000
Total liabilities and stockholders' equity
$
462,170,000
473,877,000
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Reconciliation of Non-GAAP Financial Measures to GAAP Financial
Measures
(Unaudited)
Three months ended January 31,
Six months ended January 31,
2016
2015
2016
2015
Reconciliation of GAAP Net Income to Adjusted EBITDA(1):
GAAP net income
$
2,476,000
7,585,000
3,915,000
12,810,000
Income taxes
750,000
3,059,000
1,516,000
5,872,000
Net interest (income) expense and other
(37,000
)
(21,000
)
(74,000
)
160,000
Amortization of stock-based compensation
1,074,000
1,061,000
2,125,000
2,398,000
Depreciation and other amortization
2,662,000
3,182,000
5,568,000
6,351,000
Acquisition plan expenses
2,337,000
—
3,729,000
—
Strategic alternatives analysis expenses
—
—
—
585,000
Adjusted EBITDA
$
9,262,000
14,866,000
16,779,000
28,176,000
Twelve months ended
January 31, 2016
December 31, 2015
Pro forma
Comtech
TCS
Combined
Reconciliation of GAAP Net Income to Adjusted EBITDA(1):
GAAP net income
$
14,350,000
4,253,000
$
18,603,000
Income taxes
6,402,000
1,791,000
8,193,000
Net interest (income) expense and other
(160,000
)
7,948,000
7,788,000
Amortization of stock-based compensation
4,090,000
5,040,000
9,130,000
Depreciation and other amortization
11,953,000
15,939,000
27,892,000
Acquisition plan expenses
3,729,000
—
3,729,000
Strategic alternatives analysis expenses and other
—
5,029,000
5,029,000
Adjusted EBITDA
$
40,364,000
40,000,000
$
80,364,000
(1)
Represents earnings before interest, income taxes, depreciation and
amortization of intangibles (including capitalized software by TCS),
amortization of stock-based compensation, acquisition plan expenses
and strategic alternatives analysis expenses. Adjusted EBITDA is a
non-GAAP operating metric used by management in assessing the
Company's operating results. The Company's definition of Adjusted
EBITDA may differ from the definition of EBITDA used by other
companies and may not be comparable to similarly titled measures
used by other companies. Adjusted EBITDA is also a measure
frequently requested by the Company's investors and analysts. The
Company believes that investors and analysts may use Adjusted
EBITDA, along with other information contained in its SEC filings,
in assessing its ability to generate cash flow and service debt.