Harris cuts CapRock staff, takes impairment charge as satcom energy market falls

by

PARIS — Harris Corp. plans further workforce reductions at its CapRock Communications satellite services division in the face of the decline in satellite-bandwidth demand from energy exploration companies as crude-oil prices test multi-year lows, Harris officials said Feb. 2 and Feb. 3.

Melbourne, Florida-based Harris said it is booking a $367 million non-cash impairment charge to reflect CapRock’s reduced business prospects. CapRock’s staff will be cut by 20 percent. Combined with a previous round of layoffs, CapRock ultimately will count 35 percent fewer employees as Harris re-sizes it for long-term profitability.

Once a $400 million annual business, CapRock’s revenue has dropped to slightly less than $300 million and is likely to settle at $250 million, Harris Chief Executive William M. Brown said.

Brown said CapRock is working to capture new business from cruise-ship companies, whose demand for satellite bandwidth growing fast, to offset what may be a long-term problem in the energy sector, which has been central to CapRock’s business.

“Our position in the cruise market is solid,” Brown said during a Feb. 2 conference call with investors. “We have 2.5 years left on our five-year agreement with Carnival, and another five years left with Royal Caribbean following a contract extension” awarded in the three-month period ending Dec. 31.

“It’s really remarkable the amount of bandwidth that’s being consumed by the cruise industry. It is growing very, very quickly,” Brown said adding that the average cruise ship now purchases 35 megabits per second of satellite bandwidth, which is seven times more than demand a few years ago, “with 1 gigabit per second in sight for the largest vessels.”

Brown said the company’s GPS-3 satellite payload appears to have performed well during the first satellite’s thermal-vacuum testing in December. Harris is a subcontractor to Lockheed Martin of Bethesda, Maryland, for the first batch of GPS-3 positioning, navigation and timing satellites. It is a business Harris inherited with the Exelis acquisition.

“It’s a very complicated payload, and the requirements were quite stringent,” Brown said. “Maybe they weren’t fully understood many years ago, when Exelis won it. We have deployed experts into the equipment facility – half a dozen or a dozen very good people.

“I know there has been very good progress made in the last six to nine months,” Brown said. “I think that puts us on a really good trajectory on GPS-3 on the space side… and gives us more confidence with Lockheed that SV-9 and SV-10 should get awarded sometime this fiscal year.”

SV-9 and SV-10 are the ninth and tenth GPS-3 satellites. U.S. Air Force funding for them has been approved but production contracts have not been sealed.

Brown was more cautious in assessing the GPS-3 ground component, the Next Generation Operational Control System (OCX), whose multiple delays and cost overruns have sparked unusually harsh public criticism from GPS’s owner, the U.S. Air Force. Harris is a subcontractor to Aurora, Colorado-based Raytheon for OCX.

Brown referred to “challenges in that program around cyber security protections, which are causing the development timeframe to go quite long. We’re working diligently with Raytheon in their program and getting them back on schedule or at least hold to the schedule they’ve articulated.”

Aided by the Exelis purchase, Harris said its Space and Intelligence business, which includes the GPS work and a host of other business including geospatial intelligence, ground and space-based satellite antennas, reported an 86 percent increase in revenue for the six months ending Dec. 31 compared to the same period a year earlier. Operating profit nearly doubled, to $135 million from $71 million.

The figures do not include a $316 million contract with NASA to provide meteorological payloads on two Joint Polar Satellite System (JPSS) satellites, as the order was booked after the close of the quarter.

The Critical Networks division, which includes CapRock, grew revenue by 33 percent, to $1.1 billion, in the six months ending Dec. 31. But operating earnings were hammered by the CapRock impairment charge and resulted in a loss of $245 million against a $92 million gain a year ago, Harris said in a Feb. 3 filing with the U.S. Securities and Exchange Commission (SEC).

Harris has been a large customer for commercial satellite fleet operators. CapRock’s performance suggests that, notwithstanding optimistic forecasts by some fleet owners, the oil-price decline will sharply reduce energy companies’ appetite for satellite bandwidth.

Brown said Harris, buoyed by the promise that the cruise-ship business will more than compensate for the decline in the energy business, has begun to insist on price cuts for satellite bandwidth.

As of mid-2015 Harris was leasing some 2 gigahertz of C-, Ku-, UHF- and X-band satellite capacity, equivalent to about 56 standard transponders. The company said at the time that, excluding government-funded and reimbursable cost-plus work, it had nearly $800 million in purchase obligations, much of it advance purchases of satellite capacity, covering the period between 2016 and 2020.

In the conference call, Brown said Harris has restructured its satellite bandwidth contracts so that it can offer customers a single price sheet as it contracts increased cruise-ship business.

“Our scale has allowed us to consolidate bandwidth, drive down cost and implement a sales approach of one price over one global system, regardless of market, to further drive efficiency gains,” Brown said. “We’re looking for pricing uniformity… so that we don’t have – for different types of satellites, or different customers or different regions – very different pricing. That’s where we’re heading on the bandwidth deals.”