INTELSAT S.A. This discussion should be read together with Item 6-Selected Financial Data and our audited consolidated financial statements and notes thereto included in Item 8-Financial Statements and Supplementary Data of this Annual Report. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP, and, unless otherwise indicated, the other financial information contained in this Annual Report has also been prepared in accordance withU.S. GAAP. See "Forward-Looking Statements" and Item 1A-Risk Factors, for a discussion of factors that could cause our future financial condition and results of operations to be different from those discussed below. Certain monetary amounts, percentages and other figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them. Unless otherwise indicated, all references to "dollars" and "$" in this Annual Report are to, and all monetary amounts in this Annual Report are presented in,U.S. dollars. Overview We operate one of the world's largest satellite services businesses, providing a critical layer in the global communications infrastructure. We provide diversified communications services to the world's leading media companies, fixed and wireless telecommunications operators, data networking service providers for enterprise and mobile applications in the air and on the seas, multinational corporations and ISPs. We are also the leading provider of commercial satellite capacity to theU.S. government and other select military organizations and their contractors. Our customers use our global network for a broad range of applications, from global distribution of content for media companies to providing the transmission layer for commercial aeronautical consumer broadband connectivity, to enabling essential network backbones for telecommunications providers in high-growth emerging regions. Our network solutions are a critical component of our customers' infrastructures and business models. Generally, our customers need the specialized connectivity that satellites provide so long as they are in business or pursuing their mission. In recent years, mobility services providers have contracted for services on our fleet that support broadband connections for passengers on commercial flights and cruise ships, connectivity that in some cases is only available through our network. In addition, our satellite neighborhoods provide our media customers with efficient and reliable broadcast distribution that maximizes audience reach, a technical and economic benefit that is difficult for terrestrial services to match. In developing regions, our satellite solutions often provide higher reliability than is available from local terrestrial telecommunications services and allow our customers to reach geographies that they would otherwise be unable to serve. Revenue Revenue Overview We earn revenue primarily by providing services over satellite transponder capacity to our customers. Our customers generally obtain satellite capacity from us by placing an order pursuant to one of several master customer service agreements. The master customer agreements and related service orders under which we sell services specify, among other things, the amount of satellite capacity to be provided, whether service will be non-preemptible or preemptible and the service term. Most services are full time in nature, with service terms ranging from one year to as long as 16 years. Occasional use services used for video applications can be for much shorter periods, including increments of one hour. Our master customer service agreements offer different service types, including transponder services, managed services, and channel, which are all services that are provided on, or used to provide access to, our global network. We refer to these services as on-network services. Our customer agreements also cover services that we procure from third parties and resell, which we refer to as off-network services. These services can include transponder services and other satellite-based transmission services sourced from other operators, often in frequencies not available on our network, and other operational fees related to satellite operations provided on behalf of third-party satellites. 45 -------------------------------------------------------------------------------- The following table describes our primary service types: Service Type Description On-Network Revenues: Transponder Services Commitments by customers to receive service via, or to utilize capacity on, particular designated transponders according to specified technical and commercial terms. Transponder services also include revenues from hosted payload capacity. Transponder services are marketed to each of our primary customer sets as follows: •Network Services: fixed and wireless telecom operators, data network operators, enterprise operators of private data networks, and value-added network operators for fixed and mobile broadband network infrastructure. •Media: broadcasters (for distribution of programming and full time contribution, or gathering, of content), programmers and DTH operators. •Government: civilian and defense organizations, for use in implementing private fixed and mobile networks, or for the provision of capacity or capabilities through hosted payloads. Managed Services Hybrid services primarily using IntelsatOne, including our IntelsatOne Flex broadband platform, which combine satellite capacity, teleport facilities, satellite
communications hardware
such as broadband hubs or video multiplexers and fiber optic
cable and other ground facilities to provide managed and
monitored broadband, trunking, video and private network
services to customers. Managed services are marketed to each of
our customer sets as follows:
•Network Services: enterprises, cellular operators and fixed and
mobile value-added service providers which deliver end-services
such as private data networks, wireless infrastructure and
maritime and aeronautical broadband.
•Media: programmers outsourcing elements of their transmission
infrastructure and part time occasional use services used
primarily by news and sports organizations to gather content
from remote locations.
•Government: users seeking secured, integrated, end-to-end
solutions.
Channel Standardized services of predetermined bandwidth and technical
characteristics primarily used for point-to-point bilateral
services for telecommunications providers. Channel is not
considered a core service offering due to changing market
requirements and the proliferation of fiber alternatives for
point-to-point customer applications. Channel services are
exclusively marketed to traditionaltelecommunications providers
in our network services customer set.
Transponder, Mobile Capacity for voice, data and video services provided by
Satellite Services third-party commercial satellite operators for which the desired
and Other frequency type or geographic coverage is not available on our
network. These services include L-band MSS, for which Intelsat
General is a reseller. In addition, this revenue category
includes the sale of customer premises equipment and other
hardware, as well as certain fees related to services provided
to other satellite operators. These products are primarily
marketed as follows:
•Government: direct government users, andgovernment contractors
working on programs where aggregation of capacity is required.
Satellite-related Services include a number of satellite-related consulting and
Services technical services that involve the lifecycle of satellite
operations and related infrastructure, from satellite and launch
vehicle procurement through TT&C services and related equipment
sales. These services are typically marketed to other satellite
operators.
We market our services on a global basis, with almost every populated region of
the world contributing to our revenue. The diversity of our revenue allows us to
benefit from changing market conditions and lowers our risk from revenue
fluctuations in our service applications and geographic regions.
Trends Impacting Our Revenue
Our revenue at any given time is dependent upon a number of factors, including,
but not limited to, demand for our services from existing and emerging
applications; the supply of capacity available on our fleet and those of our
competitors in a given region, and the substitution of competing technologies
such as fiber optic cable networks. See Item 1-Business-Our Sector for a
discussion of the global trends creating demand for our services. Trends in
revenue can be impacted by:
• Growth in demand from wireless telecommunications companies seeking to
complete or enhance broadband infrastructure, particularly those operating
in developing regions or regions with geographic challenges;
• Growth in demand for broadband connectivity for enterprises and government
organizations, providing fixed and mobile services and value-added
applications on a global basis;
• Lower overall pricing for satellite-based services, resulting from
oversupply of wide beam capacity or due to the introduction of
high-throughput technology, which is designed to achieve a lower cost per
unit;
• Lower demand for satellite-based solutions, resulting from fiber substitution;
• Satellite capacity needed to provide broadband connectivity for mobile
networks on ships, planes and oil and gas platforms;
• Global demand for television content in SD, HD and UHD television formats,
which uses our satellite network and IntelsatOne terrestrial services for
distribution, in some regions offset by next generation compression
technologies;
46--------------------------------------------------------------------------------
• Increased popularity of OTT content distribution, which will increase the
demand for broadband infrastructure in the developing world, but could
decrease demand in developed markets over the mid to long-term as niche and
ethnic programming transitions from satellite to internet distribution;
• Use of commercial satellite services by governments for military and other
operations, which has partially slowed as a result of the tempo of military
operations and recent changes in the
• Our use of third-party or off-network services to satisfy government demand
for capacity not available on our network. These services are low risk in
nature, with no required upfront investment and terms and conditions of the
procured capacity which typically match the contractual commitments from
our customers. Demand for certain of these off-network services has
declined with reductions in troop deployment in regions of conflict.
See Item 1-Business-Our Customer Sets and Growing Applications for a discussion
of our customers' uses of our services and see Item 1-Business-Our Strategy for
a discussion of our strategies with respect to marketing to our various customer
sets.
Customer Applications
Our transponder services, managed services, MSS and channel are used by our
customers for three primary customer applications: network service applications,
media applications and government applications.
Pricing
Pricing of our services is based upon a number of factors, including, but not
limited to, the region served by the capacity, the power and other
characteristics of the satellite beam, the amount of demand for the capacity
available on a particular satellite and the total supply of capacity serving any
particular region. In 2019, pricing trends varied by application, but were
fairly stable throughout the year overall. Slight declines in network services
were fueled by lower pricing on high volume commitments leveraging our global
wide beam and Intelsat Epic fleets for large mobile network operators, balanced
by relatively stable pricing for mobility customers. Government applications
commanded competitive prices due to lowest price technically acceptable policies
in some regions, but continued to command a premium in coverage areas with
limited capacity. Media application pricing was stronger in 2019 as compared to
2018, but demand faces pressure from competing lower-cost terrestrial
alternatives. According to Euroconsult, the annual average price per transponder
for regular capacity is forecasted to be on a slight downward trend globally
from $1.20 million to $1.03 million per 36 MHz transponder over the period from
2019 to 2024, reflecting increasing supply from new satellite entrants, among
other factors. HTS capacity, which is designed to attain a lower cost point,
facilitating market expansion into new applications, is expected to have similar
rates of yield decline over time as increased supply enters the market.
The pricing of our services is generally fixed for the duration of the service
commitment. New and renewing service commitments are priced to reflect regional
demand and other factors as discussed above.
Operating Expenses
Direct Costs of Revenue (Excluding Depreciation and Amortization)
Direct costs of revenue relate to costs associated with the operation and
control of our satellites, our communications network and engineering support,
and the purchase of off-network capacity. Direct costs of revenue consist
principally of salaries and related employment costs, in-orbit insurance, earth
station operating costs and facilities costs. Our direct costs of revenue
fluctuate based on the number and type of services offered and under
development, particularly as sales of off-network transponder services and sales
of customer premises equipment fluctuate. We expect our direct costs of revenue
to increase as we add customers and expand our managed services and use of
off-network capacity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses relate to costs associated with our
sales and marketing staff and our administrative staff, which include legal,
finance, corporate information technology and human resources. Staff expenses
consist primarily of salaries and related employment costs, including stock
compensation, travel costs and office occupancy costs. Selling, general and
administrative expenses also include building maintenance and rent expenses and
the provision for uncollectible accounts. Selling, general and administrative
expenses generally fluctuate with the number of customers served and the number
and types of services offered. These expenses also include research and
development expenses, and fees for professional services.
47
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Depreciation and Amortization
Our capital assets consist primarily of our satellites and associated ground
network infrastructure. Included in capitalized satellite costs are the costs
for satellite construction, satellite launch services, insurance premiums for
satellite launch and the in-orbit testing period, the net present value of
deferred satellite performance incentives payable to satellite manufacturers,
and capitalized interest incurred during the satellite construction period.
Capital assets are depreciated or amortized on a straight-line basis over their
estimated useful lives. The remaining depreciable lives of our satellites range
from less than one year to 16 years as of December 31, 2019 .
Contracted Backlog
We benefit from strong visibility of our future revenues. Our contracted backlog
is our expected future revenue under existing customer contracts and includes
both cancelable and non-cancelable contracts. As of December 31, 2019 , our
contracted backlog was approximately $7.0 billion . Approximately 88% of this
backlog related to contracts that were non-cancelable and approximately 11%
related to contracts that were cancelable subject to substantial termination
fees. The remaining 1% of backlog related to contracts with little or no
termination fees, and represented the difference between our contracted backlog
and remaining performance obligations. As of December 31, 2019 , the weighted
average remaining customer contract life was approximately 4.2 years. We expect
to deliver services associated with approximately $1.6 billion , or approximately
23%, of our December 31, 2019 contracted backlog during the year ending
December 31, 2020 . The amount included in backlog represents the full service
charge for the duration of the contract and does not include termination fees.
The amount of the termination fees, which is not included in the backlog amount,
is generally calculated as a percentage of the remaining backlog associated with
the contract. In certain cases of breach for non-payment or customer financial
distress or bankruptcy, we may not be able to recover the full value of certain
contracts or termination fees. Our contracted backlog includes 100% of the
backlog of our consolidated ownership interests, which is consistent with the
accounting for our ownership interest in these entities.
Our contracted backlog as of December 31, 2019 was as follows (in millions):
Period Contracted Backlog
2020 $ 1,611
2021 1,137
2022 870
2023 681
2024 550
2025 and thereafter 2,108
Total $ 6,957
Our contracted backlog by service type as of December 31, 2019 was as follows
(in millions, except percentages):
Service Type Contracted Backlog Percent
Transponder services $ 5,663 81 %
Managed services 1,010 15 %
Off-Network and Other 281 4 %
Channel 3 - %
Total $ 6,957
We believe this backlog and the resulting predictable cash flows in the FSS sector make our results less volatile than that of typical companies outside our industry.
48
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Operating Results Years Ended
The following table sets forth our comparative statements of operations for the
periods shown with the increase (decrease) and percentage changes, except those
deemed not meaningful ("NM"), between the periods presented (in thousands,
except percentages):
Year Ended Year Ended Increase Percentage
December 31, 2018 December 31, 2019 (Decrease) Change
Revenue $ 2,161,190 $ 2,061,465 $ (99,725 ) (5 )%
Operating expenses:
Direct costs of revenue
(excluding depreciation and
amortization) 330,874 406,153 75,279 23 %
Selling, general and
administrative 200,857 226,918 26,061 13 %
Depreciation and amortization 687,589 658,233 (29,356 ) (4 )%
Satellite impairment loss - 381,565 381,565 NM
Total operating expenses 1,219,320 1,672,869 453,549 37 %
Income from operations 941,870 388,596 (553,274 ) (59 )%
Interest expense, net 1,212,374 1,273,112 60,738 5 %
Loss on early extinguishment of
debt (199,658 ) - 199,658 NM
Other income (expense), net 4,541 (34,078 ) (38,619 ) NM
Loss before income taxes (465,621 ) (918,594 ) (452,973 ) 97 %
Provision for (benefit from)
income taxes 130,069 (7,384 ) (137,453 ) NM
Net loss (595,690 ) (911,210 ) (315,520 ) 53 %
Net income attributable to
noncontrolling interest (3,915 ) (2,385 ) 1,530 (39 )%
Net loss attributable to
Intelsat S.A. $ (599,605 ) $ (913,595 ) $ (313,990 ) 52 %
Revenue
The following table sets forth our comparative revenue by service type, with
Off-Network and Other Revenues shown separately from On-Network Revenues for the
periods below (in thousands, except percentages):
Year Ended Year Ended
December 31, December 31, Increase Percentage
2018 2019 (Decrease) Change
On-Network Revenues
Transponder services $ 1,570,278 $ 1,468,791 $ (101,487 ) (6 )%
Managed services 393,264 374,026 (19,238 ) (5 )%
Channel 4,250 2,400 (1,850 ) (44 )%
Total on-network revenues 1,967,792 1,845,217 (122,575 ) (6 )%
Off-Network and Other Revenues
Transponder, MSS and other
off-network services 150,186 175,602 25,416 17 %
Satellite-related services 43,212 40,646 (2,566 ) (6 )%
Total off-network and other
revenues 193,398 216,248 22,850 12 %
Total $ 2,161,190 $ 2,061,465 $ (99,725 ) (5 )%
Total revenue for the year ended December 31, 2019 decreased by $99.7 million ,
or 5%, as compared to the year ended December 31, 2018 . By service type, our
revenues increased or decreased due to the following:
On-Network Revenues:
• Transponder services- an aggregate decrease of
due to a
customers and a
from network services customers was primarily due to non-renewals, renewals
at lower pricing or lower capacity, and service contractions for enterprise
and wireless infrastructure applications mainly in the
America, and
million in lost revenue resulting from the failure of Intelsat 29e, a
portion of which services were restored with off-network services. Revenue
from network
49-------------------------------------------------------------------------------- services customers also declined in part due to non-renewals and pricing declines related toEurope -to-Africa connectivity. These declines were partially offset by increased revenues from maritime and aeronautical mobility customers and increased revenues from customers for telecommunications infrastructure in theAsia-Pacific region . The decline from media customers was primarily due to non-renewals relating to distribution services.
• Managed services-an aggregate decrease of
million decrease in revenue from media customers mainly due to non-renewals
and renewals at lower pricing. This decline includes approximately
million in lost revenue resulting from the failure of Intelsat 29e, a
portion of which services were restored with off-network services. These
declines were partially offset by increased revenues from maritime mobility
services.
Off-Network and Other Revenues:
• Transponder, MSS and other off-network services-an aggregate increase of
$25.4 million , primarily due to a$27.3 million increase in revenue from network services customers largely relating to revenue recognized in the
first quarter of 2019 accounted for as a sales-type lease under ASC 842 as
well as the transfer of certain Intelsat 29e customer services to
off-network capacity. This was partially offset by a
in revenue from government customers.
• Satellite-related services-an aggregate decrease of $2.6 million ,
reflecting decreased revenues from professional services supporting
third-party satellites.
Operating Expenses
Direct Costs of Revenue (Excluding Depreciation and Amortization)
Direct costs of revenue increased by $75.3 million , or 23%, to $406.2 million
for the year ended December 31, 2019 , as compared to the year ended December 31,
2018 . The increase was primarily due to the following:
• an increase of $48.7 million in costs incurred in connection with the
purchase of capacity from two uncapitalized satellites, Intelsat 38 and
Horizons 3e, that entered into service in 2019;
• an increase of
recognized under ASC 842;
• an increase of
part of the Intelsat 29e customer restoration process; and
• an increase of$9.7 million in staff-related expenses; partially offset by • a decrease of$5.7 million in costs largely due to the write-off of
uncollectible revenue related to Horizons 2 that is payable to JSAT as
part of a revenue sharing agreement;
• a decrease of
• a decrease of
Selling, General and Administrative Selling, general and administrative expenses increased by$26.1 million , or 13%, to$226.9 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . The increase was primarily due to the following:
• an increase of
customers in the
• an increase of
• an increase of
offset by
50--------------------------------------------------------------------------------
• a decrease of$15.1 million in professional fees largely due to higher
costs incurred in 2018 relating to financing transactions and the
reorganization of ownership of certain assets among our subsidiaries that
was implemented in 2018 (the "2018 Internal Reorganization").
Depreciation and Amortization
Depreciation and amortization expense decreased by $29.4 million , or 4%, to
$658.2 million for the year ended December 31, 2019 , as compared to the year
ended December 31, 2018 . Significant items impacting depreciation and
amortization included:
• a decrease of
Intelsat 29e;
• a decrease of
certain satellites becoming fully depreciated; and
• a decrease of
in the pattern of consumption of amortizable intangible assets, as these
assets primarily include acquired backlog, which relates to contracts
covering varying periods that expire over time, and acquired customer
relationships, for which the value diminishes over time; partially offset
by
• an increase of $14.3 million in depreciation expense resulting from the
impact of satellites placed in service; and
• an increase of $9.2 million in depreciation expense resulting from the
impact of certain ground segment assets placed in service.
Satellite Impairment Loss
We recognized an impairment charge of $381.6 million for the year
ended December 31, 2019 relating to the failure of Intelsat 29e (see Note
8-Satellites and Other Property and Equipment). The impairment charge consisted
of approximately $377.9 million related to the write-off of the carrying value
of the satellite and associated deferred satellite performance incentive
obligations and approximately $3.7 million related to prepaid regulatory fees.
No comparable amounts were recognized for the year ended December 31, 2018 .
Interest Expense, Net
Interest expense, net consists of gross interest expense incurred together with
gains and losses on the interest rate cap contracts we hold (which reflect the
changes in their fair values), offset by interest income earned and interest
capitalized related to assets under construction. As of December 31, 2019 , we
held interest rate cap contracts with an aggregate notional amount of
$2.4 billion to mitigate the risk of interest rate increases on the
floating-rate term loans under our senior secured credit facilities. The
interest rate cap contracts have not been designated as hedges for accounting
purposes.
Interest expense, net increased by $60.7 million , or 5%, to $1.3 billion for the
year ended December 31, 2019 , as compared to the year ended December 31, 2018 .
The increase in interest expense, net was principally due to the following:
• an increase of
the interest rate cap contracts;
• a net increase of
activities in 2018 and incremental debt raise in 2019; and
• an increase of
resulting from decreased levels of satellites and related assets under
construction; partially offset by
• a decrease of
due to higher cash balances; and
• a decrease of $3.4 million from lower interest expense associated with
deferred satellite performance incentives.
The non-cash portion of total interest expense, net was
51
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component identified in customer contracts, the gain or loss resulting from the
change in fair value of the interest rate cap contracts we hold, amortization
and accretion of discounts and premiums and amortization of deferred financing
fees.
Loss on Early Extinguishment of Debt
No gain or loss on early extinguishment was recognized for the year ended
December 31, 2019 , as compared to a loss of $199.7 million for the year ended
December 31, 2018 , consisting of the difference between the carrying value of
the debt repurchased and the total cash amount paid (including related fees and
expenses), together with write-offs of unamortized debt issuance costs and
unamortized debt discount or premium.
Other Income (Expense), Net
Other expense, net was $34.1 million for the year ended December 31, 2019 , as
compared to other income, net of $4.5 million for the year ended December 31,
2018 . The decrease of $38.6 million was primarily driven by a net loss of $43.8
million related to the change in value of certain investments in third parties
and loans held-for-investment with no comparative amounts in 2018, partially
offset by lower foreign exchange fluctuation losses of $4.9 million mainly
related to our business conducted in Brazilian reais and Euros.
Provision for (Benefit from) Income Taxes
Our income tax expense decreased by $137.5 million to a benefit of $7.4 million
for the year ended December 31, 2019 , as compared to a provision of $130.1
million for the year ended December 31, 2018 . The decrease was primarily
attributable to the 2018 Internal Reorganization and a decrease in valuation
allowance recorded for our U.S. subsidiaries, offset by the impact of the final
Base Erosion Anti-Abuse Tax regulations released by the U.S. Department of
Treasury and the U.S. Internal Revenue Service .
Cash paid for income taxes, net of refunds, totaled $33.6 million and $57.1
million for the years ended December 31, 2019 and 2018, respectively.
Net Loss Attributable to Intelsat S.A.
Net loss attributable to Intelsat S.A. was $913.6 million for the year ended
December 31, 2019 , as compared to net loss attributable to Intelsat S.A. of
$599.6 million for the year ended December 31, 2018 . The change reflects the
various items discussed above.
Operating Results Years Ended December 31, 2017 and 2018
We have omitted discussion of the earliest of the three years covered by our
consolidated financial statements presented in this Annual Report because that
disclosure was already included in our Annual Report on Form 20-F for the fiscal
year ended December 31, 2018 , filed with the SEC on February 20, 2019 , in Part
I, Item 5 under the heading "Operating Results Years Ended December 31, 2017 and
2018." You are encouraged to reference that disclosure for a discussion of our
operating results for the year ended December 31, 2017 compared to the year
ended December 31, 2018 .
EBITDA
EBITDA consists of earnings before net interest, loss (gain) on early
extinguishment of debt, taxes and depreciation and amortization. Given our high
level of leverage, refinancing activities are a frequent part of our efforts to
manage our costs of borrowing. Accordingly, we consider loss (gain) on early
extinguishment of debt an element of interest expense. EBITDA is a measure
commonly used in the FSS sector, and we present EBITDA to enhance the
understanding of our operating performance. We use EBITDA as one criterion for
evaluating our performance relative to that of our peers. We believe that EBITDA
is an operating performance measure, and not a liquidity measure, that provides
investors and analysts with a measure of operating results unaffected by
differences in capital structures, capital investment cycles and ages of related
assets among otherwise comparable companies. However, EBITDA is not a measure of
financial performance under U.S. GAAP, and our EBITDA may not be comparable to
similarly titled measures of other companies. EBITDA should not be considered as
an alternative to operating income (loss) or net income (loss) determined in
accordance with U.S. GAAP, as an indicator of our operating performance, or as
an alternative to cash flows from operating activities determined in accordance
with U.S. GAAP, as an indicator of cash flows, or as a measure of liquidity.
52
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A reconciliation of net loss to EBITDA for the periods shown is as follows (in
thousands):
Year Ended Year Ended Year Ended
December 31, 2017 December 31, 2018 December 31, 2019
Net loss $ (174,814 ) $ (595,690 ) $ (911,210 )
Add:
Interest expense, net 1,020,770 1,212,374 1,273,112
Loss on early extinguishment of debt 4,109 199,658 -
Provision for (benefit from) income taxes 71,130 130,069 (7,384 )
Depreciation and amortization 707,824 687,589 658,233
EBITDA $ 1,629,019 $ 1,634,000 $ 1,012,751
Adjusted EBITDA
In addition to EBITDA, we calculate a measure called Adjusted EBITDA to assess
the operating performance of Intelsat S.A. Adjusted EBITDA consists of EBITDA of
Intelsat S.A. as adjusted to exclude or include certain unusual items, certain
other operating expense items and certain other adjustments as described in the
table and related footnotes below. Our management believes that the presentation
of Adjusted EBITDA provides useful information to investors, lenders and
financial analysts regarding our financial condition and results of operations
because it permits clearer comparability of our operating performance between
periods. By excluding the potential volatility related to the timing and extent
of non-operating activities, such as impairments of asset value and other
non-recurring items, our management believes that Adjusted EBITDA provides a
useful means of evaluating the success of our operating activities. We also use
Adjusted EBITDA, together with other appropriate metrics, to set goals for and
measure the operating performance of our business, and it is one of the
principal measures we use to evaluate our management's performance in
determining compensation under our incentive compensation plans. Adjusted EBITDA
measures have been used historically by investors, lenders and financial
analysts to estimate the value of a company, to make informed investment
decisions and to evaluate performance. Our management believes that the
inclusion of Adjusted EBITDA facilitates comparison of our results with those of
companies having different capital structures.
Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and
may not be comparable to similarly titled measures of other companies. Adjusted
EBITDA should not be considered as an alternative to operating income (loss) or
net income (loss) determined in accordance with U.S. GAAP, as an indicator of
our operating performance, as an alternative to cash flows from operating
activities determined in accordance with U.S. GAAP, as an indicator of cash
flows, or as a measure of liquidity.
A reconciliation of net loss to EBITDA and EBITDA to Adjusted EBITDA is as follows (in thousands):
Year Ended Year Ended Year Ended
December 31, 2017 December 31, 2018 December 31, 2019
Net loss $ (174,814 ) $ (595,690 ) $ (911,210 )
Add:
Interest expense, net 1,020,770 1,212,374 1,273,112
Loss on early extinguishment of debt 4,109 199,658 -
Provision for (benefit from) income
taxes 71,130 130,069 (7,384 )
Depreciation and amortization 707,824 687,589 658,233
EBITDA 1,629,019 1,634,000 1,012,751
Add:
Compensation and benefits (1) 15,995 6,824 13,189 Non-recurring and other non-cash items (2) 19,589 27,646 58,625 Satellite impairment loss (3) - - 381,565 Proportionate share from unconsolidated joint venture(4): Interest expense, net - - 5,014 Depreciation and amortization - - 10,320 Adjusted EBITDA(5)(6)$ 1,664,603 $
1,668,470
____________________________
(1) Reflects non-cash expenses incurred relating to our equity compensation
plans.
53--------------------------------------------------------------------------------
(2) Reflects certain non-recurring expenses, gains and losses and non-cash
items, including the following: professional fees related to our
liability, business strategy and tax management initiatives; costs
associated with our C-band spectrum solution proposal; severance,
retention and relocation payments; changes in fair value of certaininvestments; certain foreign exchange gains and losses; and other various
non-recurring expenses. These costs were partially offset by non-cash
income related to the recognition of deferred revenue on a straight-line
basis for certain prepaid capacity service contracts.
(3) Reflects a non-cash impairment charge recorded in connection with the
Intelsat 29e satellite loss.
(4) Reflects adjustments related to our interest in Horizons-3 Satellite LLC ("Horizons 3"). See Item 8, Note 9(b)-Investments-Horizons-3 Satellite
LLC.
(5) Adjusted EBITDA included
ended
significant financing component identified in customer contracts in
accordance with the adoption of ASC 606. These impacts are not permitted
to be reflected in the applicable consolidated and Adjusted EBITDA
definitions under our debt agreements.
(6) For the year ended December 31, 2019 , Intelsat S.A. Adjusted EBITDA
reflected $12.5 million of Adjusted EBITDA attributable to Intelsat
3, with a nominal amount for the comparative period in 2018. These
entities are considered to be unrestricted subsidiaries under the
definitions set forth in our applicable debt agreements.
Liquidity and Capital Resources
Overview
We are a highly leveraged company and our contractual obligations, commitments and debt service requirements over the next several years are significant. AtDecember 31, 2019 , the aggregate principal amount of our debt outstanding not held by affiliates was$14.7 billion . Our interest expense, net for the year endedDecember 31, 2019 was$1.3 billion , which included$179.1 million of non-cash interest expense. We also expect to make significant capital expenditures in 2020 and future years, as set forth below in-Capital Expenditures. Our primary source of liquidity is and will continue to be cash generated from operations, as well as existing cash. AtDecember 31, 2019 , cash, cash equivalents and restricted cash amounted to approximately$830.9 million . We currently expect to use cash on hand, cash flows from operations and refinancing of our third-party debt to fund our most significant cash outlays, including debt service requirements and capital expenditures, in the next twelve months and beyond, and expect such sources to be sufficient to fund our requirements over that time and beyond. In past years, our cash flows from operations and cash on hand have been sufficient to fund interest obligations ($1.1 billion in each of the years endedDecember 31, 2018 and 2019), and significant capital expenditures ($255.7 million and$229.8 million for the years endedDecember 31, 2018 and 2019, respectively). Our total capital expenditures are expected to range from$200 million to$250 million in 2020,$225 million to$300 million in 2021, and$225 million to$325 million in 2022. However, an inability to generate sufficient cash flow to satisfy our debt service obligations or to refinance our obligations on commercially reasonable terms would have an adverse effect on our business, financial position, results of operations and cash flows, as well as on our and our subsidiaries' ability to satisfy their obligations in respect of their respective debt. See Item 1A-Risk Factors-Risk Factors Relating to Our Business-We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness. We also continually evaluate ways to simplify our capital structure and opportunistically extend our maturities and reduce our costs of debt. In addition, we may from time to time retain any future earnings and cash to repurchase, repay, redeem or retire any of our outstanding debt securities in privately negotiated or open market transactions, by tender offer or otherwise. Cash Flow Items Our cash flows consisted of the following for the periods shown (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2017 2018 2019
Net cash provided by operating activities
$ 255,539 Net cash used in investing activities (468,297 ) (283,634 ) (292,733 ) Net cash provided by (used in) financing activities (121,698 ) (90,323 ) 362,910 Net change in cash, cash equivalents and restricted cash (124,633 ) (34,234 ) 323,707 54
-------------------------------------------------------------------------------- Net Cash Provided by Operating Activities Net cash provided by operating activities decreased by$88.6 million to$255.5 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . The decrease was due to a$176.5 million increase in net loss and changes in non-cash items offset by a$87.9 million increase from changes in operating assets and liabilities. The increase in operating assets and liabilities was primarily due to higher inflows from customer receivables and deferred revenue and contract liabilities, partially offset by higher outflows related to other long-term liabilities.Net Cash Used in Investing Activities Net cash used in investing activities increased by$9.1 million to$292.7 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . The increase was primarily due to increased purchases of investments and origination of loans held-for-investment and lower insurance proceeds received related to Intelsat 33e, partially offset by lower capital expenditures and capital contributions to a joint venture. Net Cash Provided by Financing Activities Net cash provided by financing activities increased by$453.2 million to$362.9 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . The increase was primarily due to an add-on offering of$400.0 million aggregate principal amount ofIntelsat Jackson's 9.75% Senior Notes due 2025 (the "2025 Jackson Notes") completed in 2019, as compared to net cash outflows of$283.9 million in connection with our refinancing activities in 2018. The increase was partially offset by$224.3 million in net proceeds from a common shares offering in 2018. Restricted Cash As ofDecember 31, 2019 ,$20.2 million of cash was legally restricted, being held as a compensating balance for certain outstanding letters of credit. Long-Term Debt This section describes the changes to our long-term debt for the years endedDecember 31, 2018 and 2019. For details regarding our outstanding long-term indebtedness as ofDecember 31, 2019 , see Note 11-Long-Term Debt to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this Annual Report. Senior Secured Credit FacilitiesIntelsat Jackson Senior Secured Credit Agreement OnJanuary 12, 2011 ,Intelsat Jackson entered into a secured credit agreement (the "Intelsat Jackson Secured Credit Agreement"), which included a$3.25 billion term loan facility and a$500.0 million revolving credit facility, and borrowed the full$3.25 billion under the term loan facility. The term loan facility required regularly scheduled quarterly payments of principal equal to 0.25% of the original principal amount of the term loan beginning six months afterJanuary 12, 2011 , with the remaining unpaid amount due and payable at maturity. OnOctober 3, 2012 ,Intelsat Jackson entered into an Amendment and Joinder Agreement (the "Jackson Credit Agreement Amendment"), which amended the Intelsat Jackson Secured Credit Agreement. As a result of the Jackson Credit Agreement Amendment, interest rates for borrowings under the term loan facility and the revolving credit facility were reduced. InApril 2013 , our corporate family rating was upgraded by Moody's, and as a result, the interest rate for the borrowing under the term loan facility and revolving credit facility were further reduced to LIBOR plus 3.00% or the AboveBank Rate ("ABR") plus 2.00%. OnNovember 27, 2013 ,Intelsat Jackson entered into a Second Amendment and Joinder Agreement (the "Second Jackson Credit Agreement Amendment"), which further amended the Intelsat Jackson Secured Credit Agreement. The Second Jackson Credit Agreement Amendment reduced interest rates for borrowings under the term loan facility and extended the maturity of the term loan facility. In addition, it reduced the interest rate applicable to$450 million of the$500 million total revolving credit facility and extended the maturity of such portion. As a result of the Second Jackson Credit Agreement Amendment, interest rates for borrowings under the term loan facility and the new tranche of the revolving credit facility were (i) LIBOR plus 2.75%, or (ii) the ABR plus 1.75%. The LIBOR and the ABR, plus applicable margins, related to the term loan facility and the new tranche of the revolving credit facility were determined as specified in the Intelsat Jackson Secured Credit Agreement, as amended by the Second Jackson Credit Agreement Amendment, and the LIBOR was not to be less than 1.00% per annum. The maturity date of the term loan facility was extended fromApril 2, 2018 toJune 30, 2019 and the maturity of the new 55 --------------------------------------------------------------------------------$450 million tranche of the revolving credit facility was extended fromJanuary 12, 2016 toJuly 12, 2017 . The interest rates and maturity date applicable to the$50 million tranche of the revolving credit facility that was not amended did not change. The Second Jackson Credit Agreement Amendment further removed the requirement for regularly scheduled quarterly principal payments under the term loan facility. InJune 2017 ,Intelsat Jackson terminated all remaining commitments under its revolving credit facility. OnNovember 27, 2017 ,Intelsat Jackson entered into a Third Amendment and Joinder Agreement (the "Third Jackson Credit Agreement Amendment"), which further amended the Intelsat Jackson Secured Credit Agreement. The Third Jackson Credit Agreement Amendment extended the maturity date of$2.0 billion of the existing floating rate B-2 Tranche of term loans (the "B-3 Tranche Term Loans"), toNovember 27, 2023 , subject to springing maturity in the event that certain series ofIntelsat Jackson's senior notes are not refinanced prior to the dates specified in the Third Jackson Credit Agreement Amendment. The B-3 Tranche Term Loans have an applicable interest rate margin of 3.75% for LIBOR loans and 2.75% for base rate loans (atIntelsat Jackson's election as applicable). The B-3 Tranche Term Loans were subject to a prepayment premium of 1.00% of the principal amount for any voluntary prepayment of, or amendment or modification in respect of, the B-3 Tranche Term Loans prior toNovember 27, 2018 in connection with prepayments, amendments or modifications that have the effect of reducing the applicable interest rate margin on the B-3 Tranche Term Loans, subject to certain exceptions. The Third Jackson Credit Agreement Amendment also (i) added a provision requiring that, beginning with the fiscal year endingDecember 31, 2018 ,Intelsat Jackson apply a certain percentage of its Excess Cash Flow (as defined in the Third Jackson Credit Agreement Amendment), if any, after operational needs for each fiscal year towards the repayment of outstanding term loans, subject to certain deductions, (ii) amended the most-favored nation provision with respect to the incurrence of certain indebtedness byIntelsat Jackson and its restricted subsidiaries, and (iii) amended the covenant limiting the ability ofIntelsat Jackson to make certain dividends, distributions and other restricted payments to its shareholders based on its leverage level at that time. OnDecember 12, 2017 ,Intelsat Jackson further amended theIntelsat Jackson Secured Credit Agreement by entering into a Fourth Amendment and Joinder Agreement (the "Fourth Jackson Credit Agreement Amendment"), which, among other things, (i) permittedIntelsat Jackson to establish one or more series of additional incremental term loan tranches if the proceeds thereof are used to refinance an existing tranche of term loans, and (ii) added a most-favored nation provision applicable to the B-3 Tranche Term Loans for further extensions of the existing floating rate B-2 Tranche Term Loans under certain circumstances. OnJanuary 2, 2018 ,Intelsat Jackson entered into a Fifth Amendment and Joinder Agreement (the "Fifth Jackson Credit Agreement Amendment"), which further amended the Intelsat Jackson Secured Credit Agreement. The FifthJackson Credit Agreement Amendment refinanced the remaining$1.095 billion B-2 Tranche Term Loans, through the creation of (i) a new incremental floating rate tranche of term loans with a principal amount of$395.0 million (the "B-4 Tranche Term Loans"), and (ii) a new incremental fixed rate tranche of term loans with a principal amount of$700.0 million (the "B-5 Tranche Term Loans"). The maturity date of both the B-4 Tranche Term Loans and the B-5 Tranche Term Loans isJanuary 2, 2024 , subject to springing maturity in the event that certain series ofIntelsat Jackson's senior notes are not refinanced or repaid prior to the dates specified in the Fifth Jackson Credit Agreement Amendment. The B-4 Tranche Term Loans have an applicable interest rate margin of 4.50% per annum for LIBOR loans and 3.50% per annum for base rate loans (atIntelsat Jackson's election as applicable). We entered into interest rate cap contracts inDecember 2017 and amended them inMay 2018 to mitigate the risk of interest rate increases on the B-3 and B-4 Tranche Term Loans. The B-5 Tranche Term Loans have an interest rate of 6.625% per annum. The Fifth Jackson Credit Agreement Amendment also specified make-whole and prepayment premiums applicable to the B-4 Tranche Term Loans and the B-5 Tranche Term Loans at various dates.Intelsat Jackson's obligations under the Intelsat Jackson Secured Credit Agreement are guaranteed by ICF and certain ofIntelsat Jackson's subsidiaries.Intelsat Jackson's obligations under the Intelsat Jackson Secured Credit Agreement are secured by a first priority security interest in substantially all of the assets ofIntelsat Jackson and the guarantors party thereto, to the extent legally permissible and subject to certain agreed exceptions, and by a pledge of the equity interests of the subsidiary guarantors and the direct subsidiaries of each guarantor, subject to certain exceptions, including exceptions for equity interests in certain non-U.S. subsidiaries, existing contractual prohibitions and prohibitions under other legal requirements. The Intelsat Jackson Secured Credit Agreement following a further amendment inNovember 2018 includes one financial covenant:Intelsat Jackson must maintain a consolidated secured debt to consolidated EBITDA ratio equal to or less than 3.50 to 1.00 at the end of each fiscal quarter, measured based on the trailing 12 months, as such financial measure is defined in the 56 -------------------------------------------------------------------------------- Intelsat Jackson Secured Credit Agreement.Intelsat Jackson was in compliance with this financial maintenance covenant ratio with a consolidated secured debt to consolidated EBITDA ratio of 3.20 to 1.00 as ofDecember 31, 2019 . 2019 Debt TransactionJune 2019 Intelsat Jackson Senior Notes Add-On Offering InJune 2019 ,Intelsat Jackson completed an add-on offering of$400.0 million aggregate principal amount of its 2025 Jackson Notes. The notes are guaranteed by all ofIntelsat Jackson's subsidiaries that guarantee its obligations under the Intelsat Jackson Secured Credit Agreement and senior notes, as well as by certain ofIntelsat Jackson's parent entities. 2018 Debt and Other Capital Markets Transactions March 2018/May 2018 ICF Tender Offer for Intelsat Luxembourg Notes and Redemption InMarch 2018 , ICF commenced a cash tender offer to purchase any and all of the outstanding aggregate principal amount of the 6.75% Senior Notes due 2018 (the "2018 Luxembourg Notes"). ICF purchased a total of$31.2 million aggregate principal amount of the 2018 Luxembourg Notes at par value inMarch 2018 andApril 2018 . InMay 2018 , pursuant to a previously issued notice of redemption,Intelsat Luxembourg redeemed$46.0 million aggregate principal amount of the 2018 Luxembourg Notes at par value together with accrued and unpaid interest thereon.June 2018 Intelsat S.A. Senior Convertible Notes Offering and Common Shares Offering InJune 2018 , we completed an offering of 15,498,652 Intelsat S.A. common shares, nominal value$0.01 per share (the "Common Shares"), at a public offering price of$14.84 per common share, and we completed an offering of$402.5 million aggregate principal amount of our 4.5% Convertible Senior Notes due 2025 (the "2025 Convertible Notes"). These notes are guaranteed by a direct subsidiary ofIntelsat Luxembourg , Intelsat Envision. The net proceeds from the Common Shares offering and 2025 Convertible Notes offering were used to repurchase approximately$600 million aggregate principal amount ofIntelsat Luxembourg's 7.75% Senior Notes due 2021 (the "2021 Luxembourg Notes") in privately negotiated transactions with individual holders inJune 2018 . We used the remaining net proceeds of the Common Shares offering and 2025 Convertible Notes offering for further repurchases of 2021 Luxembourg Notes and for other general corporate purposes, including repurchases of other tranches of debt of Intelsat S.A.'s subsidiaries.August 2018 Intelsat Connect Senior Notes Refinancing and Exchange ofIntelsat Luxembourg Senior Notes InAugust 2018 , Intelsat Connect completed an offering of$1.25 billion aggregate principal amount of 9.5% Senior Notes due 2023 (the "2023 ICF Notes"). These notes are guaranteed by Intelsat Envision andIntelsat Luxembourg . Intelsat Connect used the net proceeds from the offering to repurchase or redeem all$731.9 million outstanding aggregate principal amount of Intelsat Connect 12.5% Senior Notes due 2022 (the "2022 ICF Notes"). The remaining net proceeds from the offering were used to repurchase approximately$448.9 million aggregate principal amount ofIntelsat Jackson's 7.25% Senior Notes due 2020 (the "2020 Jackson Notes") and$30.0 million aggregate principal amount of other unsecured notes ofIntelsat Jackson , and to pay related fees and expenses. Also inAugust 2018 , Intelsat Connect and Intelsat Envision completed debt exchanges receiving new notes issued byIntelsat Luxembourg , which mature inAugust 2026 and have an interest rate of 13.5%, in exchange for$1.58 billion aggregate principal amount of 2021 Luxembourg Notes that were previously held by Intelsat Connect and Intelsat Envision.September 2018 Intelsat Jackson Senior Notes Offering and Tender Offer InSeptember 2018 ,Intelsat Jackson completed an offering of$2.25 billion aggregate principal amount of 8.5% Senior Notes due 2024 (the "2024 Jackson Senior Unsecured Notes"). The notes are guaranteed by all ofIntelsat Jackson's subsidiaries that guarantee its obligations under the Intelsat Jackson Secured Credit Agreement, as well as by certain ofIntelsat Jackson's parent entities.Intelsat Jackson used the net proceeds from the offering to repurchase through a tender offer and redeem all remaining outstanding 2020 Jackson Notes. The remaining net proceeds from the 2024 Jackson Senior Unsecured Notes offering were used to repurchase and redeem approximately$441.3 million aggregate principal amount ofIntelsat Jackson's 7.5% Senior Notes due 2021 (the "2021 Jackson Notes") inSeptember 2018 andOctober 2018 , and to pay related fees and expenses. 57 --------------------------------------------------------------------------------October 2018 Intelsat Jackson Senior Notes Add-On Offering and Redemption of 2021 Jackson Notes InOctober 2018 ,Intelsat Jackson completed an add-on offering of$700 million aggregate principal amount of its 2024 Jackson Senior Unsecured Notes. The net proceeds from the add-on offering, together with cash on hand, were used to repurchase and redeem all the remaining approximately$708.7 million aggregate principal amount of outstanding 2021 Jackson Notes inOctober 2018 that were not earlier repurchased or redeemed, and to pay related fees and expenses. Satellite Performance Incentives Our cost of satellite construction includes an element of deferred consideration to satellite manufacturers referred to as satellite performance incentives. We are contractually obligated to make these payments over the lives of the satellites, provided the satellites continue to operate in accordance with contractual specifications. We capitalize the present value of these payments as part of the cost of the satellites and record a corresponding liability to the satellite manufacturers. This asset is amortized over the useful lives of the satellites, interest expense is recognized on the deferred financing and the liability is reduced as the payments are made. Our total satellite performance incentive payment liability as ofDecember 31, 2018 and 2019 was$245.6 million and$218.7 million , respectively. Capital Expenditures Our capital expenditures depend on our business strategies and reflect our commercial responses to opportunities and trends in our industry. Our actual capital expenditures may differ from our expected capital expenditures if, among other things, we enter into any currently unplanned strategic transactions. Levels of capital spending from one year to the next are also influenced by the nature of the satellite life cycle and by the capital-intensive nature of the satellite industry. For example, we incur significant capital expenditures during the years in which satellites are under construction. We typically procure a new satellite within a timeframe that would allow the satellite to be deployed at least one year prior to the end of the service life of the satellite to be replaced. As a result, we frequently experience significant variances in our capital expenditures from year to year. The following table compares our satellite-related capital expenditures to total capital expenditures from 2015 through 2019 (in thousands). Satellite-Related Total Capital Year Capital Expenditures Expenditures 2015 $ 657,656$ 724,362 2016 629,346 714,570 2017 355,675 461,627 2018 165,143 255,696 2019 134,597 229,818 Total $ 1,942,417$ 2,386,073 Payments for satellites and other property and equipment for the year endedDecember 31, 2019 were$229.8 million . We intend to fund our capital expenditure requirements through cash on hand and cash provided from operating activities. Capital expenditure guidance for 2020 through 2022 (the "Guidance Period") assumes investment in five satellites, two of which are currently in the manufacturing phase. Of the remaining three satellites, no manufacturing contracts have yet been signed. Off-Balance Sheet Arrangements We have revenue sharing agreements with JSAT related to services sold on the Horizons 1, Horizons 2 and Horizons 3 satellites. We are responsible for billing and collection for such services and we remit 50% of the revenue, less applicable fees and commissions, to JSAT. Refer to Note 9-Investments for disclosures relating to the revenue sharing agreements with JSAT. 58 --------------------------------------------------------------------------------
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and capital and certain other commitments as ofDecember 31, 2019 , and the expected year of payments (in thousands): Payments due by year Contractual 2025 and Obligations(1) 2020 2021 2022 2023 2024 thereafter Other Total Long-Term debt obligations Intelsat S.A. and subsidiary notes and credit facilities-principal payments $ -$ 421,219 $ 490,000 $ 6,123,337 $ 5,394,783 $ 2,287,500 $ -$ 14,716,839 Intelsat S.A. and subsidiary notes and credit facilities-interest payments(2) 1,149,619 1,107,493 1,090,796 909,198 527,029 192,844 - 4,976,979 Horizons-3 Satellite LLC capital contributions and purchase obligations(3) 28,586 32,358 33,600 33,723 34,314 192,618 - 355,199 Purchase obligations(4) 276,255 221,533 174,487 56,940 46,405 102,318 - 877,938 Satellite performance incentive obligations 65,301 51,685 36,816 25,366 24,726 104,084 - 307,978 Operating lease obligations 20,136 16,329 15,508 15,122 15,006 71,633 - 153,734 Sublease rental income (775 ) (492 ) (236 ) (120 ) (56 ) (138 ) - (1,817 ) Income tax contingencies(5) - - - - - - 24,954 24,954 Total contractual obligations$ 1,539,122 $ 1,850,125 $ 1,840,971 $ 7,163,566 $ 6,042,207 $ 2,950,859 $ 24,954 $ 21,411,804 (1) Obligations related to our pension and postretirement medical benefit obligations are excluded from the table. We maintain a noncontributory
defined benefit retirement plan covering substantially all of our employees
hired prior to
defined benefit retirement plan will be based on the minimum funding
requirements of the Internal Revenue Code and on the plan's funded status.
The impact on the funded status is determined based upon market conditions
in effect when we completed our annual valuation. In the first quarter of
2015, we amended the defined benefit retirement plan to cease the accrual of
additional benefits for the remaining active participants effective
retirement plan in 2020 will be approximately
postretirement medical benefits throughout the year based on benefits paid.
We anticipate that our contributions to fund postretirement medical benefits
in 2020 will be approximately
Other Retiree Benefits to our consolidated financial statements included in
Item 8-Financial Statements and Supplementary Data of this Annual Report.
(2) Represents estimated interest payments to be made on our fixed and variable
rate debt. Interest payments for variable rate debt and incentive
obligations have been estimated based on the current interest rates.
(3) This amount includes commitments to make capital contributions to and
purchase satellite capacity from Horizons 3. See Note
9(b)-Investments-Horizons-3 Satellite LLC .
(4) Includes obligations under satellite construction and launch contracts,
estimated payments to be made on performance incentive obligations related
to certain satellites that are currently under construction, and commitments
under customer and vendor contracts.
(5) The timing of future cash flows from income tax contingencies cannot be
reasonably estimated and therefore is reflected in the other column. See
Note 14-Income Taxes to our consolidated financial statements included inItem 8-Financial Statements and Supplementary Data of this Annual Report for
further discussion of income tax contingencies.
Satellite Construction and Launch Obligations As ofDecember 31, 2019 , we had approximately$461.5 million of expenditures remaining under our existing satellite construction and launch contracts, including expected orbital performance incentive payments for satellites currently in the construction phase. These contracts typically require that we make progress payments during the period of the satellites' construction, and contain provisions that allow us to cancel the contracts for or without cause. If cancelled without cause, we could be subject to substantial termination penalties, including the forfeiture of progress payments made to-date and additional penalty payments. If cancelled for cause, we are entitled to recover progress payments made to-date and liquidated damages as specified in the 59 -------------------------------------------------------------------------------- contracts. See Item 1-Business-Our Network-Satellite Systems-Future Satellites for details relating to certain of our satellite construction and launch contracts. Satellite Performance Incentive Obligations Satellite construction contracts also typically require that we make orbital incentive payments (plus interest, as defined in each agreement with the satellite manufacturer) over the orbital life of the satellite. The incentive obligations may be subject to reduction or refund if the satellite fails to meet specific technical operating standards. As ofDecember 31, 2019 , we had$308.0 million of satellite performance incentive obligations, including future interest payments, for satellites currently in orbit. Customer and Vendor Contracts We have contracts with certain of our customers which require us to provide equipment, services and other support during the term of the related contracts. We also have long-term contractual obligations with service providers primarily related to the operation of certain of our satellites. As ofDecember 31, 2019 , we had commitments under these customer and vendor contracts which totaled approximately$416.4 million related to the provision of equipment, services and other support. Operating Leases We have commitments for operating leases primarily relating to equipment and office facilities. These leases contain escalation provisions for payment increases. As ofDecember 31, 2019 , minimum annual rental payments due under all leases (net of sublease income on leased facilities) totaled approximately$151.9 million , exclusive of potential increases in real estate taxes, operating assessments and future sublease income. Critical Accounting Policies The preparation of financial statements in accordance withU.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if: (1) it requires assumptions to be made that were uncertain at the time the estimate was made; and (2) changes in the estimate, or selection of different estimates, could have a material effect on our consolidated results of operations or financial condition. We believe that some of the more important estimates and related assumptions that affect our financial condition and results of operations are in the areas of revenue recognition, the allowance for doubtful accounts, asset impairments, income taxes and pension and other postretirement benefits. InJanuary 2018 , we adopted ASC 606 using the modified retrospective method. We recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of accumulated deficit. The comparative information as of and for the year endedDecember 31, 2017 has not been restated and continues to be reported under the accounting standards in effect for that year. Based on our assessment, the adoption of the new standard impacts the total consideration for prepayment contracts, accounting of incremental costs for obtaining a contract, allocation of the transaction price to performance obligations and accounting for contract modifications, and requires additional disclosures. While we believe that our estimates, assessments, assumptions, and judgments are reasonable, they are based on information presently available. Actual results may differ significantly. Additionally, changes in our estimates, assessments, assumptions, or judgments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations. Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts Revenue Recognition. We earn revenue primarily from satellite utilization services and, to a lesser extent, from providing managed services to our customers. The Company's contracts for satellite utilization services often contain multiple service orders for the provision of capacity on or over different beams, satellites, frequencies, geographies or time periods. Under each separate service order, the Company's satellite services, comprised of transponder services, managed services, channel services, and occasional use managed services, are delivered in a series of time periods that are distinct from each other and have the same pattern of transfer to the customer. In each period, the Company's obligation is to make those services available to the customer. Throughout each period of services being provided, the customer simultaneously receives and consumes the benefits, resulting in revenue recognition over time. Our contract assets include unbilled amounts typically resulting from sales under our long-term contracts when the total contract value is recognized on a straight-line basis and the revenue recognized exceeds 60 -------------------------------------------------------------------------------- the amount billed to the customer. Contract liabilities consist of advance payments and collections in excess of revenue recognized and deferred revenue. While the majority of our revenue transactions contain standard business terms and conditions, there are certain transactions that contain non-standard business terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting for these transactions, including but not limited to: • whether contracts with a prepayment contain a significant financing component; • whether an arrangement should be reported gross as a principal versus net as an agent; and • whether an arrangement contains a service contract or a lease. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which requires us to evaluate the creditworthiness of our customers. Changes in judgments in making these assumptions and estimates could materially impact the timing and/or amount of revenue recognition. Allowance for Doubtful Accounts. Our allowance for doubtful accounts is determined through a subjective evaluation of the aging of our accounts receivable, and considers such factors as the likelihood of collection based upon an evaluation of the customer's creditworthiness, the customer's payment history and other conditions or circumstances that may affect the likelihood of payment, such as political and economic conditions in the country in which the customer is located. If our estimate of the likelihood of collection is not accurate, we may experience lower revenue or a change in our provision for doubtful accounts. Asset Impairment AssessmentsGoodwill . We account for goodwill and other intangible assets in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" or the "Codification") Topic 350-Intangibles-Goodwill and Other. Under this topic, goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized but is tested for impairment annually or more often if an event or circumstances indicate that an impairment loss has been incurred. We are required to identify reporting units for impairment analysis. We have identified only one reporting unit for the goodwill impairment test. Additionally, our identifiable intangible assets with estimable useful lives are amortized based on the expected pattern of consumption for each respective asset. Assumptions and Approach Used. We make our qualitative evaluation considering, among other things, general macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Based on our qualitative assessment performed at each ofDecember 31, 2018 and 2019, we concluded that there was not a likelihood of more than 50% that the fair value of our reporting unit was less than its carrying value; therefore, no further testing of goodwill was required. Orbital Locations andTrade Name . Intelsat is authorized by governments to operate satellites at certain orbital locations-i.e., longitudinal coordinates along the Clarke Belt. The Clarke Belt is the part of space approximately 35,800 kilometers above the plane of the equator where geostationary orbit may be achieved. Various governments acquire rights to these orbital locations through filings made with the ITU, a sub-organization of theUnited Nations . We will continue to have rights to operate satellites at our orbital locations so long as we maintain our authorizations to do so. See "Part I-Item 1A-Risk Factors-Risk Factors Relating to Regulation". Our rights to operate at orbital locations can be used and sold individually; however, since satellites and customers can be and are moved from one orbital location to another, our rights are used in conjunction with each other as a network that can be adapted to meet the changing needs of our customers and market demands. Due to the interchangeable nature of orbital locations, the aggregate value of all of the orbital locations is used to measure the extent of impairment, if any. AtDecember 31, 2018 and 2019, we determined, based on an examination of qualitative factors, that there was no impairment of our orbital locations and trade name. Long-Lived and Amortizable Intangible Assets. We review our long-lived and amortizable intangible assets to assess whether an impairment has occurred in accordance with the guidance provided under ASC 360-Property, Plant and Equipment, whenever events or changes in circumstances indicate, in our judgment, that the carrying amount of an asset may not be recoverable. These indicators of impairment can include, but are not limited to, the following: 61 --------------------------------------------------------------------------------
• satellite anomalies, such as a partial or full loss of power;
• under-performance of an asset as compared to expectations; and
• shortened useful lives due to changes in the way an asset is used or
expected to be used.
The recoverability of an asset to be held and used is measured by a comparison
of the carrying amount of the asset to the estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds its
fair value, determined by either a quoted market price, if any, or a value
determined by utilizing discounted cash flow techniques. Additionally, when
assets are expected to be used in future periods, a shortened depreciable life
may be utilized if appropriate, resulting in accelerated depreciation.
Assumptions and Approach Used. We employ a discounted future cash flow approach
to estimate the fair value of our long-lived intangible assets when an
impairment assessment is required.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes. We are
subject to income taxes in Luxembourg, as well as the United States and a number
of other foreign jurisdictions. Significant judgment is required in the
calculation of our tax provision and the resulting tax liabilities and in the
recoverability of our deferred tax assets that arise from temporary differences
between the tax and financial statement recognition of revenue and expense and
net operating loss and credit carryforwards.
We regularly assess the likelihood that our deferred tax assets can be
recovered. A valuation allowance is required when it is more likely than not
that all or a portion of the deferred tax asset will not be realized. We
evaluate the recoverability of our deferred tax assets based in part on the
existence of deferred tax liabilities that can be used to realize the deferred
tax assets.
During the ordinary course of business, there are transactions and calculations
for which the ultimate tax determination is uncertain. We evaluate our tax
positions to determine if it is more likely than not that a tax position is
sustainable, based solely on its technical merits and presuming the taxing
authorities have full knowledge of the position and access to all relevant facts
and information. When a tax position does not meet the more likely than not
standard, we record a liability or contra asset for the entire amount of the
unrecognized tax impact. Additionally, for those tax positions that are
determined more likely than not to be sustainable, we measure the tax position
at the largest amount of benefit more likely than not (determined by cumulative
probability) to be realized upon settlement with the taxing authority.
Pension and Other Postretirement Benefits
We maintain a noncontributory defined benefit retirement plan covering
substantially all of our employees hired prior to July 19, 2001 . The cost of
providing benefits to eligible participants under the defined benefit retirement
plan is calculated using the plan's benefit formulas, which take into account
the participants' remuneration, dates of hire, years of eligible service, and
certain actuarial assumptions. In addition, as part of the overall medical plan,
we provide postretirement medical benefits to certain current retirees who meet
the criteria under the medical plan for postretirement benefit eligibility.
Expenses for our defined benefit retirement plan and for postretirement medical
benefits that are provided under our medical plan are developed from actuarial
valuations. Any significant decline in the fair value of our defined benefit
retirement plan assets or other adverse changes to the significant assumptions
used to determine the plan's funded status would negatively impact its funded
status and could result in increased funding in future periods.
Key assumptions, including discount rates used in determining the present value
of future benefit payments and expected return on plan assets, are reviewed and
updated on an annual basis. The discount rates reflect market rates for
high-quality corporate bonds. We consider current market conditions, including
changes in interest rates, in making assumptions. The Society of Actuaries
("SOA") issued new mortality and mortality improvement tables and modified those
tables in 2017, 2018 and 2019. Our December 31, 2019 valuation used mortality
and improvement tables based on the SOA tables, adjusted to reflect (1) an
ultimate rate of mortality improvement consistent with both historical
experience and U.S. Social Security long-term projections, and (2) a shorter
transition period to reach the ultimate rate, which is consistent with
historical patterns. In establishing the expected return on assets assumption,
we review the asset allocations considering plan maturity and develop return
assumptions based on different asset classes. The return assumptions are
established after reviewing historical returns of broader market indexes, as
well as historical performance of the investments in the plan.
62
--------------------------------------------------------------------------------Recently Adopted and Recently Issued Accounting Pronouncements Refer to Note 1-Background and Summary of Significant Accounting Policies included in Item 8 of this Form 10-K for further information about recently adopted and recently issued accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to the market risk associated with unfavorable movements in interest rates and foreign currencies. The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. We do not purchase or hold any derivative financial instruments for speculative purposes. Interest Rate Risk The satellite communications industry is a capital intensive, technology driven business. We are subject to interest rate risk primarily associated with our borrowings. Interest rate risk is the risk that changes in interest rates could adversely affect earnings and cash flows. Specific risks include the risk of increasing interest rates on short-term debt, for planned new fixed-rate long-term financings, for planned refinancings using long-term fixed-rate debt, and for existing variable-rate debt. The Company utilizes derivative instruments from time to time in order to reduce its exposure to the risk of interest-rate volatility. Approximately 83% of our debt, or$11.9 billion principal amount was fixed-rate debt as ofDecember 31, 2018 . As ofDecember 31, 2019 , our fixed-rate debt increased to approximately 84% of our debt, or$12.3 billion principal amount. While our fixed-rate debt does not expose us to earnings risk when market interest rates change, such debt is subject to changes in fair value (see Note 11-Long-Term Debt for fair value disclosures for our long-term debt). Our sensitivity analyses indicate that based on the level of fixed-rate debt outstanding as ofDecember 31, 2019 , a 100 basis point decrease in market rates would result in an increase in fair value of this fixed-rate debt of approximately$369.3 million . While our variable-rate debt may impact earnings and cash flows as interest rates change, it is not subject to changes in fair values. As ofDecember 31, 2019 , we held interest rate cap contracts with an aggregate notional amount of$2.4 billion that mature inFebruary 2021 . These contracts were entered into to mitigate our risk of interest rate increases on the floating rate term loans under our senior secured credit facilities. If LIBOR exceeds 1.89% prior to the expiration date of the contracts, the Company will receive the resulting increase in interest payments required to the term loan lenders from the counterparties to the arrangement. These interest rate cap contracts have not been designated for hedge accounting treatment in accordance with ASC 815, Derivatives and Hedging, and the changes in fair value of these instruments are recognized in earnings during the period of change. Foreign Currency Risk We do not currently use material foreign currency derivatives to hedge our foreign currency exposures. Substantially all of our customer contracts, capital expenditure contracts and operating expense obligations are denominated inU.S. dollars. Consequently, we are not exposed to material foreign currency exchange risk. However, the service contracts with our Brazilian customers provide for payment in Brazilian reais. Accordingly, we are subject to the risk of a reduction in the value of the Brazilian real as compared to theU.S. dollar in connection with payments made by Brazilian customers, and our exposure to fluctuations in the exchange rate for Brazilian reais is ongoing. However, the rates payable under our service contracts with Brazilian customers are adjusted annually to account for inflation inBrazil , thereby mitigating the risk. For the years endedDecember 31, 2017 , 2018 and 2019, our Brazilian customers represented approximately 4.0%, 3.3% and 2.4% of our revenue, respectively. Transactions in other currencies are converted intoU.S. dollars using exchange rates in effect on the dates of the transactions. 63
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