Com Dev Hurt by Cost Growth on Two Government Programs

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PARIS — Satellite-component builder Com Dev International Ltd. of Canada will report lower revenue, gross-profit margin and net income for the three months ending Oct. 31 because of sharply higher costs in two Canadian government firm fixed-price contracts, Com Dev officials said Nov. 30.

In a hastily arranged conference call to explain what happened, Com Dev officials said they discovered the issue the week of Nov. 24 in the course of their annual review of each division’s activities.

In this case, Com Dev Canada, which handles most of the company’s Canadian government work, was found to be likely to incur 4.3 million Canadian dollars ($4.1 million) in unplanned costs to complete work on two programs that are already in the hardware-testing phase.

Company officials said they may try to recoup some of the costs with the Canadian government customer, but they did not offer investors any hope that this would occur.

The stock market’s reaction to the news was immediate. Com Dev stock, traded on the Toronto Stock Exchange, fell 8.6 percent in Nov. 30 trading.

Com Dev Chief Executive John Keating made no attempt to whitewash the issue, saying company management was as surprised to hear the news a week earlier as the market was Nov. 30.

“We’re immensely troubled by this,” said Keating, who also said the president of Com Dev Canada has been replaced by Com Dev veteran Dave Lizius. “This was an enormous disappointment to everyone, including ourselves. How was it that [the cost to complete the two programs in question] was underestimated? We take this very seriously. We can’t afford to be surprising ourselves, and surprising the marketplace, with issues like this.”

Com Dev Canada handles work on optical and radar satellite systems. Com Dev officials declined to identify the two programs whose estimated completion costs rose unexpectedly during the year-end review. One of these programs will remain profitable, while the other is now expected to be a money-loser for Com Dev if the company cannot win compensation from the Canadian government.

Com Dev Chief Financial Officer Gary Calhoun said the affected programs have nothing to do with Com Dev’smicrosatellite development effort or its related Automatic Identification System (AIS) space-based maritime surveillance initiative.

Just hours after Com Dev announced its revenue and profit shortfall, the Cambridge, Ont.-based company reported that the government of Southern Ontario had agreed to invest 5.2 million Canadian dollars in Com Dev’smicrosatellite technology. The inaugural mission for Com Dev’smicrosatellite product line will be for its exactEarth subsidiary, which is commercializing the company’s AIS technology and plans a small constellation of satellites to monitor global maritime traffic.

Following the increased costs in the two programs — and adding in a foreign-exchange-related loss of 1.5 million Canadian dollars in the quarter — Com Dev expects to show a gross profit margin of 25 percent, down from an expected 30 percent, when it reports its final fourth-quarter results. Net income will be less than 1 million Canadian dollars, down 75 percent from expectations, on revenue of about 57 million Canadian dollars.

Keating said Com Dev Canada accounts for 20 percent of Com Dev’s total revenue. The impact of the revised cost estimates is so large because the problem was not discovered until both programs had completed design work and entered hardware testing. Company officials said during the call that the two programs are technically complex. Managers without long-term experience in space development, they said, simply missed the warning signs of cost increases to come.

Both of the affected programs are expected to be completed in 2010.

Keating said Com Dev’s commercial and U.S.-based divisions are both performing well, and that Com Dev expects to report a 14 percent increase in revenue for the year ending Oct. 31 compared to the previous year, only slightly down from the company’s previous estimate of 15 percent. He said that for 2010, Com Dev is confident of increasing revenue by 10 percent given the current order backlog.