Sending Positive Signals : Communications: Datron Systems, a Simi Valley maker of high-tech gear, has bounced back from mishaps that hampered its growth.
As Datron Systems Inc.'s stockholders gather today for the company’s annual meeting, they can be glad for one thing: A year has gone by since they last met.
In its fiscal year that ended March 31, Datron’s profit tumbled 46%, to $2.31 million, despite a 32% gain in sales to $59.6 million. The Simi Valley-based maker of satellite antennas, high-frequency radios and other communications gear mainly sold to the Pentagon ran into problems, including cost overruns, last year that sent its profits and stock price into a tailspin.
But David A. Derby, Datron’s president and chief executive, said those snags are now behind them, as evidenced by the recent sharp rebound in Datron’s earnings and stock price.
In Datron’s fiscal first quarter that ended June 30, its net income rose to nearly five times its depressed year-earlier level, to $810,000 from $170,000, while the company’s sales doubled to $16.7 million from $8.39 million.
Derby said that for the full fiscal year ending next March 31, “we expect to post records in every category: sales, new orders and earnings.” Datron’s order backlog was already at a record high, $56 million, as of June 30.
Datron’s stock, which slumped below $4 a share in late 1990, has since more than tripled and traded last week above $15, a record high since the company went public at $8.875 a share in 1985. (It closed Monday at $15 in national over-the-counter trading.)
The stock late last year got an added push when Datron repurchased 310,000 of its shares, or about 12% of the total then outstanding. Even at its current price, the stock is selling for a relatively low eight times the $1.80 to $1.90 a share that Datron should earn this year, said R. Mark Matheson, an analyst at the investment firm Cruttenden & Co. in Newport Beach.
Datron still has work to do, however. Despite the surge in its first-quarter profit, the earnings represented only a nickel for each $1 of sales, well below the 9% profit margin Datron enjoyed in fiscal years 1989 and 1990. Derby claimed that the orders now on Datron’s books indicate that the company’s margins “are returning to better levels.”
The problems that beset Datron last year included the struggle to complete work on several “fixed-price” contracts that, by definition, did not reimburse Datron for its cost overruns. (Nearly all of Datron’s Pentagon contracts are fixed-price, noted Derby, who has been Datron’s chief executive since 1982.)
Also, a Datron contract to supply Loral Corp. with threat emitter systems, which train pilots to avoid enemy radar, was canceled by Loral after Datron did not deliver the systems on time. That forced Datron to take a $1.5-million pretax charge against earnings in the quarter that ended Sept. 30.
And in November, a Pentagon auditing agency contended that Datron failed to provide certain data when it negotiated a $9.6-million contract to supply Navy ship antennas, and recommended that Datron refund $2.7 million. Datron is fighting the claims.
Derby, 49, said those problems have mostly dissipated. Datron has settled with Loral--"we continue to supply equipment to them,” he said--and is suing an unidentified subcontractor that Datron claimed was responsible for the delay in the canceled contract.
Datron’s biggest stockholder, the New York investment firm Shufro, Rose & Ehrman, which owns 19% of the company, also views the problems as “onetime” events, said Bruce D. Smith, one of the firm’s money managers.
“The fundamental aspects of the business were unchanged,” Smith said, adding that his firm shadowed Datron’s own stock-repurchase plan and took advantage of the stock’s drop last year to buy more shares at low prices. “It took a lot of courage, but we did,” he quipped.
The fundamentals driving Datron’s growth are threefold: The company continues booking sizable orders from the Pentagon for its antennas, satellite-tracking equipment and other products; its foreign sales--mainly for high-frequency radios made by its Trans World Communications unit--are growing; and its $10-million acquisition a year ago of Transco Products Inc., a Camarillo maker of microwave switches and antennas, added to Datron’s expansion.
Datron’s high-frequency radios are mostly used by the military and other agencies that want to communicate over the horizon without satellites or wires to transmit their signals. The radios are particularly popular with emerging nations that don’t have elaborate communications infrastructures.
Datron also targets its radios overseas because foreign customers don’t demand that the radios be built according to their specifications, as does the Pentagon, Derby said. The radios sold overseas are built to Datron’s design, and they carry higher profit margins than the equipment that the U.S. government would buy, he said.
“We design them for value rather than compliance” with Pentagon specifications, he said.
Datron also has a head start among its rivals overseas because it’s been building its foreign sales staff for the past five years, while “a lot of its competition is just starting to make that investment,” said Smith of Shufro, Rose & Ehrman.
Transco, meanwhile, kicked in about $17 million of Datron’s $59.6 million in sales for its fiscal year that ended March 31, most of which also come from the Pentagon. Without Transco, Datron’s sales would have fallen 6% from the previous year. Datron bought the company because “Transco was one of those opportunities where they are a strong, well-established player in their market,” Derby said.
Transco’s profit margins are slim, however, and margins on Datron’s other U.S. defense businesses are shrinking in parallel with the drop in overall defense spending. That means Datron’s radio business and other non-U.S. defense lines, despite generating a minority of the firm’s sales, will account for two-thirds of its profit this year, said Cruttenden’s Matheson.
Datron and its supporters also believe that even if the Pentagon is ordering fewer planes, ships and guns, it will need Datron’s products to retrofit its forces with up-to-date communications gear. In May, for instance, Datron was awarded a four-year Navy contract to provide shipboard satellite antennas, a deal worth up to $26 million.
The U.S. military, said Derby, “will continue to supply us with a strong, stable base.”