GeoEye Inc. (GEOY) fell the most in seven years after the provider of satellite imagery said a federal agency may scale back a $3.8 billion contract.
Shares of the Herndon, Virginia-based company fell $4.10, or 22 percent, to close at $14.24, in New York trading. It was the biggest decline since Aug. 19, 2004.
The National Geospatial-Intelligence Agency awarded GeoEye the multiyear contract in 2010. The agency proposed exercising a three-month option valued at $39.8 million through November, with the remaining $119 million through August 2013 dependent on agency funding, according to a June 22 company filing with the U.S. Securities and Exchange Commission.
The announcement is a “significant negative for GeoEye, but is not as bad as it could be,” Brian Ruttenbur, an analyst with CRT Capital Group LLC in Stamford, Connecticut, wrote today in a note to clients.
While the contract changes increase “the risk to core imagery revenues over the next year,” the company may still make previous projections depending on how much funding it gets later, Ruttenbur said. He has a fairly valued rating on the company.
GeoEye also sells companies such as Google Inc. satellite imagery for online applications.
GeoEye expects its contract for the EnhancedView satellite program won’t be “significantly affected” because the company has received “positive signals” that Congress will restore funding, Chief Executive Officer Matthew O’Connell said today in a conference call with investors.
The two companies together committed more than $1 billion of private investment to the program based on their 10-year government agreements with the agency.
EnhancedView, which began in September 2010, includes one- year base agreements with nine annual options for renewal, according to Ken White, a spokesman for the National Geospatial- Intelligence Agency.
“We do not openly discuss budget figures, and due to funding shortfalls do not plan to exercise GeoEye’s next option year as contracted,” White said in an e-mail.
While GeoEye’s full-year funding under the program may total $159 million, “there can be no assurances” the agency will exercise both options as proposed, according to the company’s SEC filing.
The agency plans to cancel additional funding for the development and launch of the GeoEye-2 satellite, planned for the first half of 2013, according to the filing. The satellite is part of the contract.
The company still expects to receive $181 million in government funding for the satellite, including $111 million in “the next 30 days,” O’Connell said.
“You don’t pay $181 million for something you don’t intend to use,” he said on the conference call.
GeoEye doesn’t plan to delay the satellite launch and has the ability to offset a drop in revenue by selling capacity to other customers, O’Connell said.
A Senate panel last month recommended restoring about $125 million to the program, which was reduced under President Barack Obama’s budget request for the fiscal year beginning Oct. 1.
Lawmakers on the U.S. Senate Intelligence Committee last year asked the Obama administration to avoid cutting the commercial satellite program, valued at more than $7 billion.
“In this period of extreme fiscal restraint, this partnership represents a creative solution that should be applauded and emulated,” a dozen House and Senate lawmakers wrote in a Nov. 22 letter to Defense Secretary Leon Panetta and National Intelligence Director James Clapper. “We support the EnhancedView program and urge the department and the intelligence community to sustain it.”
Benchmark Co. analyst Josephine Millward downgraded her rating on the company to hold from buy.
GeoEye offered to buy DigitalGlobe on May 4, saying it would create the world’s largest commercial-imagery satellite company and help cope with planned U.S. defense cuts. DigitalGlobe rejected the offer two days later.
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