FRANKFURT, Germany — Satellite ground systems provider Integral Systems on Dec. 8 and 9 asked investors to bear with the company as it works through continued financial control issues that have earned it demerits from the U.S. Defense Department’s audit bureau and caused Integral to hire outside help in putting its house in order.
In a Dec. 9 investor presentation, the Columbia, Md.-based company said it expects revenue, which increased 11 percent in the fiscal year ending Sept. 24, to grow by another 16 percent in 2011 and by 14 percent in 2012, to reach $240 million.
Profitability remains an issue, however, and Integral Chief Executive Paul G. Casner said he is continuing to look at ways to shave operating costs, including further subleases of Integral plant space and reductions in the corporate headquarters staff.
Integral also has suffered by having to pay legal costs for employees who have been subpoenaed as part of a U.S. Securities and Exchange Commission (SEC) investigation into two former Integral employees.
Integral itself is not a party to the ongoing legal dispute. The company settled with the SEC a year ago. But because it is not a defendant, its financial support to employees being subpoenaed is not covered by insurance.
The Defense Contract Audit Agency (DCAA) has determined in an audit that Integral Systems has “internal control deficiencies” in the way it handles cost-plus contracts for the Defense Department, which is Integral’s biggest customer.
In a Dec. 8 conference call with investors, Casner said the DCAA audit findings have not affected any contracts or revenue. But in a Dec. 8 filing with the SEC, Integral said the audit could put into jeopardy the company’s future cost-plus contracts with the Defense Department.
Integral Chief Financial Officer Christopher B. Roberts said during the call that the company has made progress in addressing the financial control issues but was not able to complete the job in fiscal year 2010.
In addition to these issues, Integral in 2010 incurred costs related to its acquisition of CVG-Avtec. Casner said this acquisition took management’s attention away from other aspects of the business and is in part responsible for what he said were disappointing financial results.
“There’s no two ways about it, this has been a tough year and our shareholders have shouldered much of the burden,” Casner said. He said the company would be able in the coming weeks to produce incurred-cost estimates and provisional 2011 billing rates for the DCAA. Once that task is completed, he said, the company should be on “more solid ground with regard to our government contracts.”
Casner said the Satcom Solutions division did not perform to expectations in 2010, in part because of the CVG-Avtec acquisition. He referred to the division’s results as “the elephant in the room” at Integral. Part of the problem, he said, was delayed contract awards and a mix of contracts that, taken together, resulted in lower profitability.
Integral in recent years has been reducing its dependence on the U.S. government as a source of revenue, but in 2010 all U.S. government agencies combined accounted for 72 percent of the company’s business.
Casner said the company in 2011 likely would incur more legal costs associated with the SEC investigation of two former Integral employees, but that these costs would be lower than they were in 2010. He said Integral’s attempts to sublease excess office and plant space in 2010 resulted in an arrangement that will generate $1 million in cash over five years.
But the downside is that the new tenants are paying less than what Integral owes for the lease, causing the company to report a $2.8 million lease-related loss in 2010. Casner referred to Integral’s overextended real estate assets as “a millstone” around the company’s neck.
The good news, Casner said, is that Integral’s backlog increased in 2010, standing at $191 million as of Sept. 24, up 20 percent over a year earlier. That backlog will flow to revenue in 2011 — one reason Integral is confident it can increase revenue by 16 percent in the coming year.
For the year ending Sept. 24, Integral reported an operating loss of about $1.5 million on revenue of $180 million. EBITDA, or earnings before interest, taxes, depreciation and amortization, was $8.2 million, flat compared with 2009.
The integration of CVG-Avtec and the acquisition of assets from Sophia Wireless — the two are now in Integral’s Satcom Solutions division — will be completed early in 2011. For now, Casner said, Integral is not looking for additional acquisitions, but rather to wring further efficiencies from the current operation and maximize the value of the company’s product line.
