Comtech in Acquisition Mode Amid Changing Business Mix

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PARIS — Satellite telecommunications ground equipment provider Comtech Telecommunications Corp. on June 8 said a merger or acquisition remains a top priority as it transitions from being heavily focused on U.S. military work to a smaller, albeit more international, company.

In a conference call with investors, Comtech Chief Executive Fred Kornberg said Melville, N.Y.-based Comtech, which had $589 million in cash as of April 30, “has passed on some” acquisition possibilities in recent months as it seeks better prices for prospective target companies.

Kornberg set no deadline for an acquisition, but said the company would consider expanding its existing stock-repurchase program if a suitable acquisition candidate does not emerge in a reasonable time.

“An appropriate acquisition remains high on our to-do list,” Kornberg said. “We remain patient.”

Comtech’s international business in recent months has been hit by the “Arab Spring” pro-democracy movements in numerous Middle Eastern and North African nations — regions where Comtech has several large contracts to sell satellite communications ground gear.

One of those nations is Libya, where business for companies like Comtech has stalled as the United States and other NATO nations aid attempts to remove the regime. Any hope Comtech had for near-term contract work in Libya, he said, “has gone by the boards.”

Kornberg said he expects that once the situation in that region settles, the now-frozen business environment will thaw, permitting Comtech to continue to do substantial business there. He said the company has not lost any business there to competitors.

For the past year, Comtech has been reassessing its business strategy, and adjusting its work force, to cope with the loss of the Blue Force Tracking (BFT)-2 contract with the U.S. Army. Comtech had won the previous BFT-1 business but was ousted for BFT-2 by ViaSat of Carlsbad, Calif.

BFT had been a key revenue source for Comtech along with a separate U.S. Army contract called the Movement Tracking System (MTS).

As of April 30, Comtech had generated $696.4 million of a possible $899.1 million in revenue from the MTS contract, which is expiring in mid-July. The company had booked $339.3 million of a possible $384 million on BFT.

In addition to the loss of BFT-2, Comtech’s future business with the U.S. Army has been compromised by the Army’s decision not to conduct a competition for a second-generation MTS system. The Army is opting instead to merge MTS into the BFT-2 program as part of Joint Battle Command-Platform system.

At issue for Comtech now is what it can negotiate with the Army relative to BFT and MTS “sustainment,” meaning work needed to maintain the systems after the hardware deliveries are completed.

The company was awarded a BFT sustainment contract in April for up to $51.7 million to provide the Army with satellite bandwidth purchased commercially by Comtech, plus network operations and transceiver gear.

Like the rest of the U.S. Defense Department, the Army is weighing whether to purchase satellite capacity directly from commercial satellite fleet operators rather than use intermediaries like Comtech.

In a June 7 filing with the U.S. Securities and Exchange Commission (SEC), Comtech said if the Army goes that route, Comtech will begin charging for network operations and Comtech-owned intellectual property that heretofore has been embedded in the BFT and MTS contracts.

“[I]f it proceeds on that basis, we intend to begin charging [the Army] a separate fee for the use of our intellectual property,” the company said in the SEC filing.

Kornberg said in the conference call that Comtech intellectual property in the BFT and MTS contracts include beam-forming networks, signal wave forms and bandwidth-reduction techniques. He said the Army has asked Comtech to prepare estimates for a contract covering such technology.

Kornberg said he was not overly concerned about a decision announced in mid-May by the Defense Contract Audit Agency to review the BFT contract. A contract of this size and duration, he said, is a likely candidate for such reviews and BFT has not yet been subject to one.

The U.S. Defense Department has invested heavily in new-generation satellite communications systems that are just now being placed into orbit. Kornberg said Comtech should be able to capture the next phase of this investment by supplying ground gear for the satellite systems going into service in the next couple of years.

The company said the market for military satellite communications electronics gear, estimated at $800 million in 2009, is expected to grow by 12 percent per year, on average, reaching $2.6 billion in 2020.

 

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