Integral Looks To Rebound Next Year After Disappointing 2009

by

PARIS — Satellite control systems provider Integral Systems Inc. reported lower revenue, profit and backlog for the year ending Sept. 25 but sought to persuade its shareholders that it has put its management upheaval behind it and is poised for profitable growth in 2010.

In a Dec. 7 conference call and a Dec. 9 filing with the U.S. Securities and Exchange Commission (SEC), Columbia, Md.-based Integral said it has already seen sizable new contract orders, mainly from its principal customer, the U.S. Air Force, in the weeks since its fiscal year closed Sept. 25.

“Believe me, we understand that fiscal 2009 is a year we do not want to repeat,” Integral Chief Financial Officer William M. Bambarger said in the conference call. “We spend every day now looking for ways to ensure that doesn’t occur.”

Similarly, the company expects that several events that had a negative effect on financial performance in 2009 will not recur in 2010. Notable among these is $3.9 million in reserves set aside to protect against possible future audits of its U.S. government contracts that deny reimbursement for Integral costs.

Integral disclosed that on Oct. 23, the Defense Contract Audit Agency (DCAA) informed the company by letter that several million dollars in contract-related charges that Integral had presumed were reimbursable under U.S. government cost-plus contracts would not be reimbursed.

Bambarger said the DCAA has agreed to review its finding and that the company is negotiating to overturn at least part of the decision. In the meantime, it is adding $2.1 million to an existing reserve of $1.8 million to cover future charges on government contracts that may not be reimbursable.

Paul G. Casner, who became Integral’s chief executive following the August resignation of John Higginbotham just a year after arriving at the company, said he is optimistic that the company will “remove the DCAA issues soon.”

Integral also suffered in 2009 from the bankruptcy of one of its customers, forcing the company to set aside $1.1 million in bad-debt reserves. Integral did not name the customer in its SEC filing, but company officials in the past have said the contract work in question was with startup satellite telecommunications operator ProtoStar Ltd. of San Francisco and Bermuda, which entered Chapter 11 reorganization earlier this year.

The U.S. government — mainly the Air Force — has accounted for about 80 percent of Integral’s revenue in recent years. The company is able to count on continued work in 2010 on its two biggest contracts — the Rapid Attack Identification, Detection and Reporting System (RAIDRS), for the U.S. Space Command, and the Command and Control Systems-Consolidated, or CCS-C, business with the Air Force Space and Missile Systems Center.

Bambarger said these two contracts and others have added nearly $100 million to Integral’s backlog since its fiscal year closed.

During the conference call, Casner sought to portray Integral as a company with successful products whose near-term prospects are good even if the U.S. Defense Department budget is cut. He said Higginbotham and Integral’s board of directors had been “moving in opposite directions” and that this accounted for his predecessor’s resignation.

Integral is now focused on reducing its internal costs and has issued a hiring freeze in its corporate operations offices, he said, adding that the company also has “made some changes” in the makeup of the board of directors. Bambarger said Integral has already reduced corporate operations costs by several million dollars per year and that these savings will bolster 2010 financial performance.

Casner said the company’s recent opening of an office in Britain will help expand international sales, which he said should grow to 10-11 percent of total revenue compared to some 8 percent currently.

Integral, which a year ago had promised investors a robust 2009, reported revenue of $159.9 million for the year ending Sept. 25, down from $160.2 million the previous year. Operating income, hurt by high general and administrative expenses and the contract-reimbursement issues, was $25 million, down from $25.1 million in 2008.