Fuzzy U.S. Defense Spending Outlook Stymies Comtech’s Acquisition Plans

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PARIS — Satellite ground equipment manufacturer Comtech Telecommunications Corp. said its attempts to use its cash reserves for a strategic acquisition have been flustered by the fact that companies doing business with the U.S. Department of Defense (DoD) are unable to agree on future earnings prospects.

Melville, N.Y.-based Comtech, as expected, reported sharply lower revenue for the 12 months ending July 31 but reassured investors that recent orders indicate that the company has touched bottom and will begin a rebound in its current fiscal year.

Comtech Chief Executive Fred Kornberg said the U.S. government’s purchases of Comtech hardware, mainly for defense customers, “practically came to a dead stop” earlier this year with the political deadlock in Washington and its mandatory budget cuts. The more recent partial shutdown of the U.S. government has only added to the problem, Kornberg said in an Oct. 4 conference call.

With the loss of two big U.S. Army contracts in 2010 Comtech’s revenue went into a tailspin. But the company has since reduced its costs and refocused on its commercial and international businesses.

The company’s government business “has nowhere to go but up given the virtual paralysis we experienced in fiscal 2013,” Kornberg said. 

In addition, Comtech now believes that continued work on the Army’s satellite-based Blue Force Tracking (BFT-1) contract — some of which ended with the Army’s mid-2010 selection of competitor ViaSat Inc. for the BFT-2 follow-on program — will continue for many years.

Comtech is selling the Army rights to BFT-1 intellectual property for $10 million a year, and is performing BFT-1 engineering services and partial program management that brings in an additional $10 million or so per year.

In the conference call, Kornberg said that while the BFT-1 business has no guarantees beyond the current contract term that ends in March, Comtech has been given unofficial indications from the Army that the contract will continue at least until 2018, and most likely to 2022.

Comtech reported revenue of $319.8 million for the 12 months ending July 31, down nearly 25 percent from the previous year. Besides the BFT-1 and related contract losses, Comtech’s satellite Earth station business fell in the past year as U.S. and international customers withheld their spending.

Comtech has reduced its costs to align spending with the current business climate, but has maintained its research and development (R&D) spending to prepare for better days. R&D was 11.5 percent of revenue in the year ending July 31, compared with 7.1 percent the previous year, Comtech said in an Oct. 3 filing with the U.S. Securities and Exchange Commission (SEC).

Comtech Chief Financial Officer Michael D. Porcelain said the company is forecasting a modest rebound in revenue in the current fiscal year based on firm orders already in its backlog.

The U.S. government, which accounted for 49 percent of Comtech’s revenue in 2012, generated 34.7 percent of revenue in fiscal year 2013. Comtech’s backlog at July 31 stood at $189.7 million, up 23 percent from where it was a year earlier.

Comtech on Oct. 1 sold its Sensor-Enabled Notification System (SENS) business, which provides one-way satellite links to track assets, to mobile satellite data services provider Orbcomm for $2 million. 

SENS uses the Globalstar constellation of low-orbiting satellites, and will broaden Rochelle Park, N.J.-based Orbcomm’s product offering, which now includes terrestrial cellular services as well as Orbcomm’s own satellite constellation.

In its SEC filing, Comtech said its SENS business generated $4.6 million in revenue in the past fiscal year. Comtech will continue to generate SENS royalties from Orbcomm and retains the right to continued use of some of the SENS technology.

As of July 31, Comtech was sitting on about $357 million in cash, and it has told investors it is looking to put that money to work with one or more acquisitions in addition to paying dividends.

Robert G. Rouse, Comtech’s senior vice president for strategy and M&A (mergers and acquisitions), said that in the current U.S. government budget climate, buyers and sellers of companies doing lots of U.S. defense business have been unable to agree on future revenue and profit prospects.

Without a basic consensus on what the future looks like, Rouse said, the consolidation among U.S. defense contractors that logically should occur given the future U.S. defense budget is unlikely to proceed.