EMS Closer To Shedding Commercial Space Operations

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EMS Technologies Inc. returned to profitability in 2004 after taking huge losses in 2003, but just barely, as two Montreal-based commercial space units — both divestiture candidates — continue to drag down overall performance.

In a March 15 press release, EMS of Norcross, Ga., said it is reviewing its strategic options for the money-losing Satellite Networks division, including joint ventures and partnerships. The unit makes satellite data communications hub systems and terminals that operate in the Digital Video Broadcast-Return Channel by Satellite (DVB-RCS) transmission standard.

In a conference call with financial analysts March 17, EMS Chief Executive Al Hansen did not specifically use the term sale, but said EMS will act quickly to stop the bleeding and that five companies have expressed interest in the business. Preliminary discussions with some of the interested parties are expected to begin before the end of March, he said.

Satellite Networks was carved out of EMS’s troubled Space & Technology unit — which has been up for sale since July 2003 — in September 2002. At the time, analysts were predicting strong demand for satellite data terminals and related products in Asia and the United States, but the market has been slow to develop.

A December report by the market research firm Northern Sky Research estimates that EMS has captured 50 percent of the market for DVB-RCS hubs and 38 percent of the terminal business. However, the report, “DVB-RCS and DOCSIS: 2nd Edition,” also predicted that the market may not take off until the end of the decade. DOCSIS refers to Data Over Cable Service Interface Specification, a competing data transmission standard.

Satellite Networks lost $3.9 million in 2004 on revenue of $14.2 million. In 2003, the unit lost $2.2 million on revenue of $12.6 million.

“We thought Satellite Networks would break even in 2006, but the recent [Northern Sky] study indicated a slow upturn in the business through 2009,” Hansen said. “Due to the slower build-out, EMS believes it can no longer absorb the losses related to the Satellite Network R&D effort. We are looking for options to eliminate the drain on earnings, and we plan to move very, very fast to stop this drain on losses.”

The Space & Technology division, meanwhile, finished 2004 in the red, but its losses narrowed dramatically due to the modest rebound of the commercial satellite communications industry, Hansen said. The unit, which makes antennas, power systems and other satellite components, lost $4.2 million in 2004, compared to $46.3 million in 2003.

Space & Technology’s rebound will make it easier to sell, Hansen said. “The sale process has taken much longer than expected,” he said. “But the commercial space market has become stronger during this period. … Montreal is becoming a more attractive acquisition opportunity.”

EMS came close to selling the unit in late 2004, “but an unusual set of circumstances concerning government regulations prevented the deal from happening,” Hansen said. “Since then we have been contacted by two companies with strong interest in the unit, and we are in a discussion phase with them.”

The unit, classified as a discontinued operation for accounting purposes, has almost fully recovered from manufacturing problems related to its work for Canada’s Radarsat-2 satellite program, Hansen said. EMS is building the radar antenna for the spacecraft under a subcontract from MacDonald, Dettwiler and Associates of Richmond, British Columbia.

Problems with an unidentified subcontractor led to several delays on the antenna, costing EMS about $15 million on its $110 million contract. But the hardware now is in final testing, and EMS hopes to wrap up its work within two months, Hansen said. The launch of Radarsat-2 now is scheduled for early 2006.

Originally, EMS had hoped to net about $34 million from the Space & Technology division sale, but the most recent discussions indicate that unit will fetch $25 million to $27 million, EMS officials said.

Space & Technology and Satellite Networks are responsible for EMS’s razor-thin profit margin in 2004. Overall, the company earned $200,000 on revenue of $260.4 million, rebounding from a loss of $37.4 million on revenue of $256.2 million in 2003.

The company’s Atlanta-based Defense & Space unit posted a profit of $1.4 million on revenue of $50.1 million in 2004, as it continued to capitalize on Pentagon business. In 2003, Defense & Space posted a profit of $2.2 million on revenue of $49.3 million.

Revenue on many of the unit’s large military programs has been delayed by contract restructuring, said Don Scartz, EMS’s chief financial officer. However, the contract changes should result in increased revenue in the long term, and the company enters 2005 with a record $56 million backlog, he said.

Sales in the Ottawa-based EMS Satcom division slipped from $44.7 million in 2003 to $39.7 million, while profit fell from $3.8 million to $2.2 million. Most of the revenue was recorded in U.S. dollars, so the decline of the U.S. dollar against the Canadian dollar hurt the unit’s performance, Scartz said. However, cost-cutting measures slowed the pace of the decline, he said.

Despite the disappointments experienced in 2004, Hansen remains optimistic about the company’s prospects, projecting revenue to fall between $270 million and $280 million in 2005.