Aug 04, 2011

MDA Sales Remain Strong Even as Key Initiatives Stumble

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PARIS — Space hardware and services provider MDA Corp. of Canada reported double-digit increases in revenue and operating profit for the six months ending June 30 but said flagship programs in Earth observation and telecommunications are encountering delays.

The company for the first time expressed doubt about whether its pioneering effort with partner Intelsat General Corp. of Washington to refuel satellites in orbit would be able to close its business case given the tepid reception it has received from the U.S. government.

Richmond, British Columbia-based MDA said it had set aside, for now, an effort to make a billion-dollar acquisition in the United States to give its space business improved access to the U.S. government market because no suitable matches could be found. Instead, it will return part of its large cash stockpile to shareholders while seeking smaller U.S. acquisition targets.

In a July 29 conference call with investors, MDA said its core businesses of providing communications satellite components and radar satellite Earth observation services continue to do well. MDA reported that revenue for the six months ending June 30 was 401.4 million Canadian dollars ($411 million), up 28 percent from the same period a year ago. Operating profit, at 55.6 million Canadian dollars, was up 22 percent.

MDA Chief Executive Daniel E. Friedmann had said since the company sold its property-information business in January that the cash would be used to make what he called a “transformational” acquisition in the United States. If no such deal materialized by July, he said, part of the cash would be returned to shareholders.

With no deal in sight, MDA will be repurchasing 500 million Canadian dollars in its own stock. MDA Chief Financial Officer Anil Wirasekara said during the conference call that the share repurchase would still leave MDA with enough cash to fund its existing operations and make an acquisition.

Friedmann said that even if a U.S. target materialized, it would not be easy for MDA to conclude a deal given the uncertainties about future U.S. government spending. This uncertainty, at the U.S. Defense Department and other U.S. government agencies, “is in our view too large to perform a transaction of that magnitude in the near future,” Friedmann said.

While MDA’s overall business is doing well, the company is confronting obstacles in several business lines.

The Canadian military’s exit from Afghanistan will cut in half MDA’s annual $100 million in business providing allied governments a service to patrol Afghanistan with unmanned aerial vehicles. Australia remains a core customer, but there is no immediate prospect of replacing the Canadian business, which ended in July.

MDA’s breakthrough contract in telecommunications satellites with the Ukrainian government, meanwhile, is in jeopardy because Ukraine has been unable to secure regulatory rights to the radio frequencies the satellite is intended to use. The Ukrainian business is MDA’s first major award as a prime contractor for a commercial telecommunications satellite. Backed by Export Development Canada, the export-credit agency, the contract was valued at $254 million including the satellite’s construction, launch and insurance.

The Ukrainian government has paused, and then restarted, the program several times. “It’s off right now,” Friedmann said, adding that only 10 to 15 percent of the work has been completed. The delays, he said, will make it difficult for MDA to respect the terms of the original contract. The satellite will not be launched before late 2013 at the earliest, he said.

In Earth observation, the Canadian government’s next-generation Radarsat program, the Radarsat Constellation Mission (RCM), has been slowed by the government’s inability to fund development except in small slices parceled out one at a time.

MDA, which is RCM’s prime contractor, has received just 19 million Canadian dollars for work related to hardware procurement, Friedmann said.

The RCM design phase is continuing until January 2012. If the construction contract is signed by then, the program will remain on track. If not, RCM-dedicated personnel at MDA will be moved to other programs. “I’m not going to carry them” in the RCM program without full procurement, Friedmann said. “We’ll restructure, and we’ll move them to other programs, which would have a significant impact” on RCM’s schedule and budget.

Moving MDA engineers from RCM to commercial programs would be more profitable for the company, Friedmann said: “We can make more money because the government projects are the least profitable.”

With the Canadian government still undecided about what direction to take in space exploration, MDA’s robotics division — which has already used its space shuttle and space station expertise to diversify into medical robotics — is facing a crisis.

Friedmann said the problem has nothing to do with the retirement of the U.S. space shuttle, for which the company has been preparing for years. The issue, he said, is that there is no work for the robotics team without a Canadian government strategy on how to proceed, and without a commercial business that could take up the slack.

MDA thought it had found such a program in early 2011 with the announcement, with Intelsat General, of the Space Infrastructure Services satellite refueling project. Using MDA-developed technology, this service would launch an unmanned vehicle to approach satellites low on fuel but otherwise in good health.

Intelsat had agreed to be the anchor customer for the venture, committing up to $280 million for the mission’s first series of operations as early as 2015 to refuel several Intelsat spacecraft. MDA had agreed to invest about $50 million of its resources each year into the program over four years.

But the hoped-for interest from the U.S. government, particularly the Defense Department, has not materialized, Friedmann said. The commercial market remains a possibility, but without a firm government customer, the program may never get off the ground.

Intelsat General and MDA have responded to a NASA solicitation for projects that include in-orbit servicing, but it remains unclear whether MDA, as a Canadian company, will be allowed to bid for the work.

“You had to be a U.S. company to bid for the NASA proposal,” Friedmann said.

“We bid from our U.S. [subsidiary] company. We bid with a U.S. partner. We bid with all-U.S. content. We obeyed every rule. We’re a very good U.S. citizen on this. But we still carry a different passport.”

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