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Wireless Facilities Learns a Hard Lesson

In the second quarter, for example, WFI missed revenue estimates because of contract delays and took a $1 million charge related to unexpected fees. The company has missed its own guidance figures for three quarters running.

WFI cited out-of-control costs on key contracts near the Gulf Coast and in Latin America. Labor and material costs are ballooning in the hurricane-battered southeastern U.S., where WFI has 60% of its enterprise business; and in Latin America, where managers apparently let project costs spiral out of control.

DeMarco said the hurricanes battering the Gulf Coast had driven up the cost of raw materials and subcontracting labor. What's more, the need to rebuild is so much stronger in other areas that the work on these contracts is likely to be delayed. CFO Deanna Lund said the heaviest hurricane-related costs would take one to two percentage points out of fourth-quarter gross margin.

The problems in WFI's Latin America division, which appeared to be centered on work for Spanish carrier Telefonica (TEF), resulted in adjustments of $3 million, caused by "cost overruns" that occurred when "out of scope and additional work had been performed without formal documentation and formal pricing increases."

Although the spendthrifts in charge of those projects have been shown the door, WFI will lose $15 million in the next couple of quarters as the new managers get up to speed. Reorganization costs will likely reach $1 million in the fourth quarter.

DeMarco said it was "fortunate" the mishap happened in the latter months of the year, as "new contracts in Latin America don't happen until January and February and our backlog is intact contractually." Revenue from the region is likely to see year-on-year growth in the first half of 2006, he said.

In the conference call, DeMarco did his best to address the problems head on and highlight potential growth areas in 2006. In addition, the company can continue leverage growth in operating income by keeping selling, general and administrative costs down.

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