Aug 01, 2014

MDA Satellite Exports Feeling the Effects of Canada’s Tough Stance on Russia

Estimated Article Reading Time: 4 min.

PARISMDA Corp. of Canada on July 31 said the Canadian government’s uniquely strong reaction to Russia’s incursion into Ukraine is depriving the company of around 50 million Canadian dollars ($46 million) in annual business building electronics payloads for Russian satellites.

In a conference call with investors, MDA Chief Executive Daniel E. Friedmann said Russian satellite operators now have a three-satellite procurement competition underway, and that given MDA’s history of providing Russian satellite hardware the company would be well-placed to win a piece of this business.

MDA built the payloads for the Express-AM5 satellite, owned by Russian Satellite Communications Co. and now in orbit; and the Express-AM6 satellite scheduled for launch in the coming months.

“Russians need more satellites,” Friedmann said. “But under the current political situation we don’t see a way to sell more equipment to Russia in the foreseeable future — especially from the Canadian perspective.”

Friedmann said Richmond, British Columbia-based MDA had been selling, on average, one satellite-electronics payload to Russian operators per year.

The Canadian government pulled a small maritime surveillance satellite from a Russian launch earlier this year in protest against Russia’s moves in Ukraine. Canadian industry officials said at the time that the large number of Canadians with Ukrainian heritage accounted for the government’s reaction.

The U.S. and European governments, while applying sanctions against targeted Russian military, energy and financial organizations and individuals, have continued to permit the launch of satellites aboard Russian rockets.

MDA had targeted Russia and the nations of the former Soviet Union as a focus of its satellite-export efforts. The company booked a $254 million contract in 2010 with the Ukrainian government for a telecommunications satellite, but the contract has been slowed because the current Ukrainian administration has not made payments for the satellite system’s ground network.

In the conference call, MDA Chief Financial Officer Anil Wirasekara said the company will not be recognizing about 50 million Canadian dollars in revenue from the contract until the situation is clarified. Because Ukraine made advance payments to MDA, the company is continuing work to complete the satellite’s construction and make launch services payments.

“From a cash-flow standpoint this is pretty much neutral” to MDA, Wirasekara said of the Ukrainian satellite contract.

Patent Decision Pending

MDA purchased satellite manufacturer Space Systems/Loral (SSL) of Palo Alto, California, in late 2012 from Loral Space and Communications of New York. Since then, ViaSat Inc. of Carlsbad, California, has won a California District Court jury award against Loral for patent infringement and breach of contract.

Loral has agreed to take charge of the defense, although ViaSat has said it intends to go after SSL as well. ViaSat has also said it would ask the court to issue an injunction preventing SSL from using ViaSat technology in future satellites.

A hearing is scheduled for Aug. 7 on this issue, although it may take weeks after that before the court issues a ruling.

Friedmann said SSL has introduced new procedures in its satellite construction facility that steer clear of all ViaSat-claimed intellectual property in ways that are “cost and schedule neutral” to SSL and its customers.

He conceded that despite these assurances, SSL customers “get nervous about the prospect of an injunction. So although we have a solution for what’s happening with the case right now, the reaction in the marketplace if an injunction were to be granted is unpredictable. We believe the situation can be compensated through monetary means, and this drastic measure is not required.”

Wirasekara said MDA spent about 2.5 million Canadian dollars on the ViaSat lawsuit in the six months ending June 30, with most of the costs incurred since April.

The lawsuit appears to have had little effect on SSL’s success in the market. The company has won five telecommunications satellite orders so far in 2014 — two in Japan and one each in Indonesia, Spain and the United States.

For the six months ending June 30, MDA said its communications division, which is mainly SSL, reported revenue of 735.5 million Canadian dollars, up 11 percent from the same period a year ago.

Friedmann said heavy competition among commercial telecommunications builders is forcing satellite prices down. The market in 2014 also appears to be moving to a preference for smaller satellites, which will force SSL to adjust its production “to make it more aligned to what the market is buying,” Friedmann said.

The $1 billion purchase of SSL gave MDA a large satellite prime contractor and a stronger footing in the United States, where MDA as a Canadian company had limited access to government business.

MDA’s surveillance and intelligence business, conducted mainly with the MDA-built Radarsat Earth observation satellites, is making a similar move.

MDA has purchased a U.S. company with a long history of selling radar and other sensors to the U.S. government in a transaction concluded in July and now being reviewed by U.S. government authorities, notably the Committee on Foreign Investment in the United States.

MDA has declined to name the company beyond saying it has about 170 employees and does $40 million in annual business. Friedmann said the company was “a jewel” that will unlock a large addressable U.S. government market.

To prepare for the purchase, MDA Information Systems of the United States has set up a secure proxy arrangement to meet U.S. Defense Department requirements to wall off subsidiaries of non-U.S. companies from their foreign owners in return for access to the U.S. military market.

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