U.S. Budget Paralysis, Slower Global Orders Ground Comtech Earnings

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PARIS — Satellite ground equipment provider Comtech Telecommunications Group on March 8 said three of its business lines are suffering from “a perfect storm” of effects from the U.S. government’s budget paralysis and a related downturn in international orders that will put pressure on the company’s business for at least the next few months.

In a conference call with investors, officials from Melville, N.Y.-based Comtech did not sugar coat what they agreed was unexpectedly bad news, especially with respect to sales of its satellite Earth station equipment. They urged investors to focus on the company’s dividends and stock buybacks as they wait for the core business to improve.

“The weak economy worldwide, plus sequestration, plus delayed spending by many domestic and international customers” have combined to reduce the immediate prospects for the company’s business, Comtech Chief Executive Fred Kornberg said during the conference call.

Kornberg said Comtech’s 500-watt Ka-band satellite traveling wave tube amplifier, which is embedded in several U.S. and European high-throughput satellites, is expected to book “sizable orders” in the coming months as a key part of a growing segment of the satellite communications sector, both military and commercial.

One big order, with a U.S. prime contractor, to supply over-the-horizon microwave gear to an unnamed government in North Africa, appears to be moving forward but has gone more slowly than expected, apparently because of the Arab Spring turmoil among several governments in the region. With the contract’s second phase now approved between the government in question and the U.S. prime contractor, which is Comtech’s customer, he said to expect a contract by July at the latest.

Similarly, Comtech, which in July 2010 lost a competition to provide the next-generation Blue Force Tracking system (BFT-2) to the U.S. Army, expects the Army to continue to hire Comtech for maintenance work on the first-generation BFT.

The Army has recently signaled to the company that its contract for maintenance work on BFT-1, which expires at the end of March, would be renewed for a year, with terms and conditions yet to be finalized.

How much longer the Army will need Comtech for what is called “sustainment” contract work on BFT-1 depends in part on the speed of the rollout of BFT-2, whose prime contractor is ViaSat Inc. of Carlsbad, Calif.

The longer it takes BFT-2 to be deployed in the field, the better it is for Comtech. Kornberg said that while he would not pretend to know the Army’s BFT-2 thinking, the system appears not to have been installed beyond experimental sites for now.

“We are told that for BFT-1 sustainment, the contract should be around to 2018-2020,” Kornberg said. “We’d love to believe that.”

Comtech’s BFT-1 work, which over the years generated some $377 million in revenue, is the subject of an audit by the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency.

Comtech was first notified of the audit in mid-2011. The company received word last December that a preliminary report by the government auditor concluded that Comtech’s pricing methods under the contract were unacceptable, and that the company would be asked to reimburse $11.8 million plus $2.3 million in interest, according to a March 7 Comtech filing with the U.S. Securities and Exchange Commission (SEC).

Comtech Chief Financial Officer Michael T. Porcelain said during the call that Comtech views these findings as “erroneous and flawed,” and would fight them if the auditors did not reverse them in a final report now being prepared following meetings with Comtech.

Kornberg said the sag in revenue from the company’s satellite Earth station business was a surprise that he explained by a sour economic environment among Comtech’s international customers in Latin America and Europe.

Kornberg said the company has been expecting this business to rebound “for quite awhile, and it hasn’t happened. Will it happen? We don’t know,” he said, adding that orders in the three months ending Jan. 31 were up, which should translate to revenue later this year.

For the six months ending Jan. 31, Comtech reported revenue of $165.5 million, down 22 percent from the same period a year earlier.

Operating earnings were $19.3 million, down 27 percent from a year ago.