Spar Aerospace Limited Business Information, Profile, and History

Company Perspectives:

Spar had grown over the years into a complex company with a number of lines of business operating in a variety of markets. One of the management team's guiding principles over the past couple of years has been to reduce that complexity&mdashø streamline Spar--so we can focus on fewer, large, core businesses. The result will be a company that is more manageable and better able to grow profitably, while being easier for the investment community to analyse.

That being said, our strategic direction for Spar is two-fold: Number One: Spar will be a profitable, North American provider of Services both to the Aviation and Robotics sectors. Number Two: Spar will provide components and systems that enable bandwidth anywhere, anytime in emerging space and terrestrial communications markets.

History of Spar Aerospace Limited

Spar Aerospace Limited is perhaps better known for what it once was than what it is. Once Canada's largest space contractor, it produced the robotic Canadarm, a centerpiece of that nation's technological achievement, and was a market leader in space robotics. Divestitures have pared Spar down to its Aviation Services division. It maintains the only North American service center for the ubiquitous Lockheed Martin C-130 Hercules transport (there are 1,800 of these planes worldwide). It also services and upgrades Sea King military helicopters and Boeing 737 commercial airliners.

Origins

In the 1950s and 1960s, the Special Products and Applied Research division of de Havilland Aircraft of Canada Limited developed missile components and other advanced aerospace products. Its STEM (Storable Tubular Extendible Member) products dominated the satellite antenna market and its BI-STEM tripod was just being tested.

Management bought the company in 1967 and took it public the next year. Spar soon added X-ray equipment, battery chargers, and urethane structures to its product line. Its first full year in operation as an independent company brought sales of C$5.1 million. Aircraft equipment repair and overhaul was the company's largest product segment, accounting for C$2 million of its sales. Spar had 300 employees at the time.

The year 1969, which saw the first human step onto the surface of the moon, ironically brought Spar serious setbacks. The Nixon administration cut back sharply on military aerospace programs, and Spar's takeover of Levy Industries Limited's York Gears Division produced complications in the form of difficult-to-collect receivables and unprofitable, unfulfilled contracts. Spar lost C$556,000 on sales of C$7.2 million for the year.

Although sales reached C$9.8 million in 1970, the company still posted a loss, of C$371,000. In these years that were so difficult for the industry in general, Spar did find some success in supplying satellite components for the Hughes Aircraft Co. and, through its York Gears subsidiary, gears for the Bell Helicopter Company.

Spar developed the Canadarm robotic control arm in the late 1970s. Spar gave the first one to NASA in 1981. Emblazoned with a maple leaf, the Canadarm caught the world's attention when it began operations on the second flight of the space shuttle Columbia. The program fostered more than national pride: by the 1990s it was bringing in C$20 million a year for maintenance support.

In the mid-1980s, Spar built communications satellites for Hughes Aircraft and Telesat Canada (the Anik-E). The company manufactured Olympus-1 (or L-Sat) satellites in collaboration with Fokker. Its Communications Systems Division also developed equipment for satellite communications for the energy industry.

Some contractors resented Spar's prime contractor status and felt that the company reserved the choicest high technology assignments for itself. Com Dev, Inc., a C$60 million microwave component specialist, unsuccessfully bid against Spar to build the MSat, a Canadian mobile communications satellite. Spar, however, was precariously dependent on these 'golden chains': its government contracts amounted to C$275 million in 1991. At one point, the Canadian space budget was projected to be only C$100 million by 2000, one-fifth of its 1995 level.

Com Dev, MacDonald Dettwiler and Associates (MDA), and Spar did cooperate in the Radarsat International joint venture, formed to market data from the world's most advanced radar satellite. The first one was launched in November 1995. MDA, a Canadian subsidiary of U.S.-based Orbital Science Corporation, beat out Spar for the contract to build Radarstat-2, targeted for launch in 2001. Spar owned an 11 percent interest in MDA and planned to buy the remainder for about C$50 million; however, these negotiations broke off abruptly in July 1992.

Branching Out in the 1990s

Although dependent upon the ups and downs of government procurement, at least Spar was not devoted exclusively to military programs at the end of the Cold War. Half of its revenues came from space communications hardware. Space-related work accounted for 82 percent of the company's revenues; aviation and defense, 13 percent.

Spar wanted to diversify even more. In late 1992, it bought ComStream Corp., a US$30 million San Diego digital communications company, for US$58 million. ComStream was known for its data compression technology and lucrative modem manufacturing business. It had also teamed with the giant Canadian telephone company Satellite Telecommunications Laboratory in a research venture.

In 1992 NASA gave Spar a C$67 million contract for follow-up support for the Canadarm. Follow-up work had brought in C$200 million already. An October launch of the space shuttle Columbia, manned by Canadian astronaut Steve MacLean, also displayed the new Space Vision System, a joint project of Spar and the National Research Council. It was the Canadarm that was used to perform repairs on the Hubble space telescope in 1993.

As impressive as the Canadarm was, the next generation of robot arms in development eclipsed it handily. The vision, sensory, and 'expert' systems of the new 'smart arms' allowed them to perform many complex and delicate tasks virtually unaided by manual input. The Space Station Remote Manipulator System's Special Purpose Dexterous Manipulator was designed to replace space-walking astronauts for many tasks. They were controlled by two Robotic Workstations inside the Space Station. Spar made the systems on the new arms modular so that components could be replaced as technology advanced over their expected 30-year service life.

Another advanced research project involved American Mobile Satellite Corp., Hughes Aircraft Corp., Spar Aerospace, and Telecast Mobile, another Canadian firm, which worked to produce two MSats, or mobile satellites. The system used satellites instead of towers to relay signals. Spar supplied the antennae and transponder. In addition, its Sun Microsystem computer network linked the four firms throughout design, testing, and manufacturing. The MSat program began in the mid-1980s and cost US$500 million. The first, MSat-1, was launched on April 20, 1996. It opened most of Canada's wide-ranging, underdeveloped geography to the possibility of mobile communications.

Spar worked on bringing its robot arm expertise to land-based applications. The company also produced flight data recorders and communications equipment for military clients, for whom it continued to provide maintenance. Not surprisingly, it sought to attract more civilian clients to this division. Communications and space programs accounted for slightly more than 40 percent each of Spar's revenues in 1995, while the Aviation and Defense unit added another 13 percent. ComStream posted a profit of C$10.5 million on revenues of C$250.7 million in 1995.

In 1996 Spar won a C$30 million contract to supply the International Space Station with two robotic workstations for the Mobile Servicing System (MSS). The Canadian Commercial Corp., a government agency, made the award. A launch date of January 1998 was anticipated for the first pieces of the space station, with the MSS to follow in 1999. SED Systems, MDA, IMP, CAE Electronics, and CAL Corp., all Canadian firms, were on board as subcontractors. Japanese and Italian firms also tapped Spar for its robotic expertise in preparing their countries' respective ISS components.

Scaling Back in the Late 1990s

Spar had a horrendous first quarter in 1996. Its share price fell 25 percent and its dividend was eliminated. The results were attributed to poor performance of the new ComStream subsidiary, and critics opined that Spar, so accustomed to government work, was not cut out for the highly competitive communications field. They complained that the management team led by John MacNaughton was too hesitant in making critical decisions. For example, ComStream went for months without a CEO in 1995 and 1996.

Colin D. Watson became president and CEO of Spar in 1996. Watson had previously led the cable television operations of Rogers Communications Inc. He arrived just in time to announce the surprise loss in the first quarter that caused Spar's share price to fall another 50 percent. When Watson took over at Spar, many of ComStream's technical staff were demoralized that the company had not followed through with a promised initial public offering for the unit. It had lost its primary customer, Thomson Consumer Electronics, a maker of satellite television components, when Thomson began making its own chips. After attempts to sell or revive the company through new CEOs and workforce reductions, Spar arranged to sell the unit to Radyne Corp. for US$17 million in cash and promissory notes in August 1998.

Government support for the 'Canada Hand'--$170 million worth--gave Spar some much-needed good news in the spring of 1997. It also won contracts to maintain Sea King helicopters for the armed forces of the United States, Brazil, Malaysia, and others. However, in July, 14 insurance companies sued Spar for US$135 million, alleging that the company's satellite communications system caused a Lockheed Martin satellite launched in 1995 to fail. Spar felt the ground operator deserved some of the blame. Spar settled this case in July 1999 for US$15 million.

After losing C$34 million in 1997, Spar posted a C$31 million profit on sales of C$251 million in 1998. One of 1998's highlights came when the Canadarm completed its 50th mission in space aboard the space shuttle Columbia. The program by that time represented C$500 million in exports. The arm's maintenance and support requirements brought in C$20 million a year.

Such milestones were bittersweet. Watson had sought to make Spar a C$1 billion company by 2000, but the problem of profits prevented that. The Asian financial crisis extinguished enthusiasm in one of Spar's hottest markets. In the face of competition from much larger manufacturers, Spar refocused its production from complete satellites to components such as antennae. It sold off its applied systems business. In the spring of 1999, it also agreed to sell its robotics division, which would leave it with aviation services.

An investment group led by New York-based Crescendo Partners LP, IMP Group Ltd. of Nova Scotia, and Toronto's C.A. Delaney Capital Management Ltd. gained control of the Spar board through its 58 percent share ownership. It soon had most of the company's C$150 million cash paid out in dividends, forsaking any acquisition plans. Watson became vice-chairman to board chairman Eric Rosenfeld.

Many of Spar's high-profile businesses were sold after the ownership shift. MacDonald, Dettwiler and Associates, Ltd. (MDA) bought Spar's robotics business for C$63 million. Spar sold Astro Aerospace Corporation to TRW Inc. for C$30.6 million in December 1998. Aviation Services accounted for C$14.4 million of profits and C$123.1 million of sales in 1998. Space Robotics had profits of C$16.9 million on sales of C$128 million. The Satellite Products Unit was then sold to Electromagnetic Sciences Inc. for C$29.5 million.

In December 1999, Spar announced that it had not been able to sell its aviation services division at an acceptable price. The company retained the unit and planned to pay out more cash to shareholders. The board also continued to entertain offers to buy the remainder of the company.

Principal Competitors:NAPCO International, Inc.; Raytheon Aircraft; Rockwell Collins, Inc.; Honeywell Defense Avionics Systems.

Chronology

• Key Dates:

• 1967: Management buys out De Havilland's Special Products and Applied Research Division.
• 1969: Nixon cuts military aerospace programs.
• 1981: Spar delivers the first Canadarm robotic control arm to NASA.
• 1992: Spar tries hand at telecommunications with purchase of ComStream Corp.
• 1995: Spar-built Radarsat-1 is launched by NASA.
• 1996: Losses mount as ComStream flounders.
• 1998: Spar divests ComStream.
• 1999: New board pays out millions in dividends and sells off all areas of business except Aviation Services.