INTELSAT S.A. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and their notes included in Item 1-Financial Statements in this Quarterly Report, and with our audited consolidated financial statements and their notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Annual Report"). In addition, see "Forward-Looking Statements" for a discussion of factors that could cause our future financial condition and results of operations to be materially different from those discussed below. 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 Internet Service Providers. 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. Through our recent acquisition of Gogo Inc.'s ("Gogo") commercial aviation business ("Gogo CA"), we became the global leader in providing in-flight connectivity ("IFC") and wireless in-flight entertainment ("IFE") solutions to the commercial aviation industry. Services provided by our Gogo CA business include passenger connectivity, which allows passengers to connect to the Internet from their personal Wi-Fi-enabled devices; passenger entertainment, which offers passengers the opportunity to enjoy a broad selection of IFE options on their laptops and personal Wi-Fi enabled devices; and Connected Aircraft Services ("CAS"), which offer airlines connectivity for various operations and currently include, among others, real-time credit card transaction processing, electronic flight bags and real-time weather information. Recent Developments Voluntary Reorganization under Chapter 11 OnMay 13, 2020 , Intelsat S.A. and certain of its subsidiaries (each, a "Debtor" and collectively, the "Debtors") commenced voluntary cases (the "Chapter 11 Cases") under title 11 of the United States Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court "). Primary factors causing us to file for Chapter 11 protection included the Company's intention to participate in the accelerated clearing process of C-band spectrum set forth in theU.S. Federal Communications Commission's ("FCC ")March 3, 2020 final order (the "FCC Final Order"), requiring the Company to incur significant costs related to clearing activities well in advance of receiving reimbursement for such costs and the need for additional financing to fund the C-band clearing process, service our current debt obligations, and meet our operating requirements, as well as the economic slowdown impacting the Company and several of its end markets due to the novel coronavirus ("COVID-19") pandemic. OnAugust 14, 2020 , the Company filed its C-band spectrum transition plan with theFCC . TheFCC Final Order provides for monetary enticements for fixed satellite services ("FSS") providers to clear a portion of the C-band spectrum on an accelerated basis (the "Acceleration Payments"). OnSeptember 17, 2020 , the Company announced that it finalized materially all of its required contracts with satellite manufacturers and launch-vehicle providers to move forward and meet the accelerated C-band spectrum clearing timelines established by theFCC . Under theFCC Final Order, the Company is eligible to receive Acceleration Payments of approximately$1.2 billion and$3.7 billion based on the milestone clearing certification dates ofDecember 5, 2021 andDecember 5, 2023 , with the respective payments expected to be received in the first half of each successive year, respectively, subject to the satisfaction of certain deadlines and other conditions set forth therein. The Chapter 11 process can be unpredictable and involves significant risks and uncertainties. As a result of these risks and uncertainties, the amount and composition of the Company's assets, liabilities, officers and/or directors could be significantly different 33 -------------------------------------------------------------------------------- following the outcome of the Chapter 11 Cases, and the description of the Company's operations, properties and liquidity and capital resources included in this Quarterly Report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process. Pursuant to various orders from theBankruptcy Court , the Debtors have received approval from theBankruptcy Court to generally maintain their ordinary course operations and uphold certain commitments to their stakeholders, including employees, customers, and vendors during the restructuring process, subject to the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. While the Chapter 11 Cases are pending, the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments; however, the Debtors expect to make interest payments on a monthly basis to holders of their senior secured debt instruments. For the three months endedMarch 31, 2021 , the contractual interest expense pursuant to our unsecured debt instruments that was not recognized in our condensed consolidated statements of operations was$192.3 million . The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the prepetition existing indebtedness of Intelsat S.A.,Intelsat Luxembourg , Intelsat Connect andIntelsat Jackson . For additional discussion regarding the impact of the Chapter 11 Cases on our debt obligations, see Item 1, Note 12-Debt. OnJune 9, 2020 ,Intelsat Jackson received approval from theBankruptcy Court (the "DIP Order") to enter into a non-amortizing multiple draw superpriority secured debtor-in-possession term loan facility (the "DIP Facility"), in an aggregate principal amount of$1.0 billion on the terms and conditions as set forth in the DIP Facility credit agreement (the "DIP Credit Agreement"), with certain of the Debtors' prepetition secured parties (the "DIP Lenders"), and onJune 17, 2020 ,Intelsat Jackson and certain of its subsidiaries as guarantors (together withIntelsat Jackson , the "DIP Debtors") entered into the DIP Credit Agreement with the DIP Lenders, as amended by an amendment ("DIP Amendment No. 1") to the DIP Credit Agreement, dated as ofAugust 24, 2020 , and as further amended by a second amendment ("DIP Amendment No. 2") to the DIP Credit Agreement, dated as ofNovember 25, 2020 . For additional information regarding the DIP Facility, DIP Credit Agreement, DIP Amendment No. 1 and DIP Amendment No. 2, see Liquidity and Capital Resources-Debt below. OnJuly 11, 2020 , the Debtors filed with theBankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. OnFebruary 11, 2021 , the Debtors entered into a plan support agreement (together with all exhibits and schedules thereto, the "PSA") with certain of the Debtors' prepetition secured and unsecured creditors (the "Consenting Creditors" and together with the Debtors, the "PSA Parties"). The PSA contains certain covenants on the part of the PSA Parties, including but not limited to the Consenting Creditors voting in favor of the Joint Chapter 11 Plan of Reorganization of Intelsat S.A. and Its Debtor Affiliates (as proposed, the "Plan"), and provides that the Debtors shall achieve certain milestones (unless extended or waived in writing). In connection with the PSA, onFebruary 12, 2021 , the Debtors filed the Plan and the Disclosure Statement for the Joint Chapter 11 Plan of Reorganization of Intelsat S.A. and Its Debtor Affiliates (the "Disclosure Statement"), which describes a variety of topics related to the Chapter 11 Cases, including (i) events leading to the Chapter 11 Cases; (ii) significant events that took place during the Chapter 11 Cases; (iii) certain terms of the Plan; and (iv) certain anticipated risk factors associated with, and anticipated consequences of the Plan.The Bankruptcy Court is currently scheduled to determine the adequacy of the Disclosure Statement in the second quarter of 2021. Update on the Impact of COVID-19 on the Company The COVID-19 pandemic has had an adverse impact on our business, results of operations and financial condition, a trend we expect to continue. Among the impacts of the COVID-19 pandemic were a reduction of revenue and a decreased likelihood of collection from certain mobility customers. We continue to closely monitor the ongoing impact on our employees, customers, business and results of operations. Gogo Transaction OnAugust 31, 2020 , following approval from theBankruptcy Court ,Intelsat Jackson and Gogo entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with respect to Gogo's commercial aviation business for$400.0 million in cash, subject to customary adjustments (the "Purchase Price"). The transaction further propels the Company's efforts in the growing commercial IFC market, pairing our high-capacity global satellite and ground network with Gogo's installed base of more than 3,000 commercial aircraft to redefine the connectivity experience. In connection with the transactions contemplated by the Purchase and Sale Agreement, the DIP Debtors and DIP Lenders entered into DIP Amendment No. 1 and DIP Amendment No. 2 to our DIP Credit Agreement (see -Voluntary Reorganization under Chapter 11 above). OnDecember 1, 2020 , we completed the transaction (the "Gogo Transaction") and funded the Purchase Price with proceeds from our existing DIP Facility and cash on hand. 34 -------------------------------------------------------------------------------- A. Results of Operations Three Months EndedMarch 31, 2020 and 2021 The following table sets forth our comparative statements of operations for the periods shown with the increase (decrease) and percentage changes, except those deemed not meaningful ("NM"), between the periods presented (in thousands, except percentages): Three Months Three Months Ended Ended Dollar Percentage March 31, 2020 March 31, 2021 Change Change Revenue$ 458,820 $ 502,763 $ 43,943 10% Operating expenses: Direct costs of revenue (excluding depreciation and amortization) 105,085 165,233 60,148 57% Selling, general and administrative 80,967 102,614 21,647 27% Depreciation and amortization 163,048 165,241 2,193 1% Impairment of non-amortizable intangible NM assets 12,200 - (12,200) Other operating expense-C-band - 58,356 58,356 NM Total operating expenses 361,300 491,444 130,144 36% Income from operations 97,520 11,319 (86,201) (88%) Interest expense, net (318,329) (132,343) 185,986 (58%) Other income, net 2,735 9,719 6,984 NM Reorganization items - (55,812) (55,812) NM Loss before income taxes (218,074) (167,117) 50,957 (23%) Income tax expense (141) (7,189) (7,048) NM Net loss (218,215) (174,306) 43,909 (20%) Net income attributable to noncontrolling interest (556) (570) (14) 3%
Net loss attributable to Intelsat S.A.
(20%)
Revenue
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.
Our Gogo CA business generates two types of revenue: service revenue and
equipment revenue. Service revenue is primarily derived from connectivity
services and, to a lesser extent, from entertainment services, CAS and
maintenance services. Connectivity is provided to our customers using both
air-to-ground ("ATG") and satellite technologies. Service revenue is earned by
services paid for by passengers, airlines and third parties. Equipment revenue
primarily consists of the sale of ATG and satellite connectivity equipment and
the sale of entertainment equipment. Equipment revenue also includes revenue
generated by our installation of connectivity or entertainment equipment on
commercial aircraft.
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--------------------------------------------------------------------------------The following table sets forth our comparative revenue by service type, for the periods below (in thousands, except percentages):
Three Months Three Months
Ended Ended Increase Percentage
March 31, 2020 March 31, 2021 (Decrease) Change
On-Network Revenues
Transponder services $ 331,334 $ 325,110 $ (6,224) (2%)
Managed services 72,261 69,626 (2,635) (4%)
Channel 426 194 (232) (54%)
Total on-network revenues 404,021 394,930 (9,091) (2%)
Off-Network and Other Revenues
Transponder, MSS and other off-network services 43,688 42,595 (1,093) (3%)
Satellite-related services 11,111 9,006 (2,105) (19%)
Total off-network and other revenues 54,799 51,601 (3,198) (6%)
In-flight Services Revenues
Services - 44,711 44,711 NM
Equipment - 11,521 11,521 NM
Total in-flight services revenue - 56,232 56,232 NM
Total $ 458,820 $ 502,763 $ 43,943 10%
Total revenue for the three months ended March 31, 2021 increased by $43.9
million , or 10%, as compared to the three months ended March 31, 2020 . By
service type, our revenues increased or decreased due to the following:
On-Network Revenues:
•Transponder services-an aggregate decrease of $6.2 million , primarily due to an
$18.9 million net decrease in revenue from media customers, partially offset by
an $11.3 million increase from network services customers. The decrease in
revenue from media customers was primarily due to non-renewals, renewals at
lower prices, and service contractions relating to distribution and
direct-to-home ("DTH") solution application customers, partially offset by
renegotiated contracts and new business from a DTH solution application customer
in Europe . The increase in revenue from network services customers was primarily
due to a renegotiated contract with a maritime mobility customer for a different
service mix of revenues previously classified as managed services, new business
and pricing and capacity increases for an enterprise networks customer, and a
service transfer from managed services to transponder services for a cellular
backhaul customer. These increased revenues were partially offset by
non-renewals, pricing decreases, service contractions, and a service contract
termination.
•Managed services-an aggregate decrease of $2.6 million , primarily due to a $2.5
million decrease in revenue from network services customers and a $2.0 million
decrease in revenue from media customers, partially offset by a $1.8 million
increase in revenue from government customers. The decline in revenues from
network services customers was primarily driven by a renegotiated contract with
a maritime mobility customer for a different service mix of revenues previously
classified as managed services, a service transfer from managed services to
transponder services for a cellular backhaul customer, and non-renewals,
partially offset by increased revenues from new flex maritime services. The
decrease in revenue from media customers was primarily due to a decline in
occasional use video services and non-renewals. The increase in revenues from
government customers was primarily attributable to new flex services and the
entry into service of Galaxy 30, partially offset by non-renewals.
Off-Network and Other Revenues:
•Satellite-related services-an aggregate decrease of $2.1 million , primarily
reflecting decreased revenues from professional services supporting third-party
satellites.
In-flight Services Revenues:
•Services and equipment-an aggregate increase of $56.2 million attributable to
our Gogo CA business.
Operating Expenses
Direct Costs of Revenue (Excluding Depreciation and Amortization)
Direct costs of revenue increased by $60.1 million , or 57%, to $165.2 million
for the three months ended March 31, 2021 , as compared to the three months ended
March 31, 2020 . The increase was primarily due to a $61.2 million increase in
costs attributable to our Gogo CA business, and a $3.3 million increase in
staff-related expenses largely relating to our employee retention incentive
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plans. These increases were partially offset by a $3.5 million decrease in
third-party managed capacity costs largely related to a government customer.
Selling, General and Administrative
Selling, general and administrative expenses increased by $21.6 million , or 27%,
to $102.6 million for the three months ended March 31, 2021 , as compared to the
three months ended March 31, 2020 . The increase was primarily due to a $28.9
million increase in costs attributable to our Gogo CA business, and a $7.2
million increase in staff-related expenses largely relating to our employee
retention incentive plans. These increases were partially offset by a $13.4
million decrease in bad debt expense due to a higher bad debt expense for the
three months ended March 31, 2020 , largely relating to a certain customer that
filed for Chapter 11 bankruptcy protection in 2020.
Depreciation and Amortization
Depreciation and amortization expense increased by $2.2 million , or 1%, to
$165.2 million for the three months ended March 31, 2021 , as compared to the
three months ended March 31, 2020 . Significant items impacting depreciation and
amortization included:
•an increase of $6.7 million in depreciation and amortization expense
attributable to our Gogo CA business; and
•an increase of $1.0 million in depreciation expense resulting from the impact
of a satellite placed in service; partially offset by
•a decrease of $5.4 million in depreciation expense due to the timing of certain
satellites becoming fully depreciated.
Impairment of Non-Amortizable Intangible Assets
We recognized an impairment charge of $12.2 million for the three months ended
March 31, 2020 relating to the Intelsat trade name intangible asset, with no
comparable amounts for the three months ended March 31, 2021 . See Item 1, Note
11-Goodwill and Other Intangible Assets for further discussion.
Other Operating Expense-C-band
Other operating expense-C-band consists of reimbursable and non-reimbursable
costs associated with our C-band spectrum relocation efforts. We incurred $58.4
million of reimbursable and non-reimbursable C-band clearing related expenses
for the three months ended March 31, 2021 , with no comparable amounts for the
three months ended March 31, 2020 .
Interest Expense, Net
Interest expense, net consists of gross interest expense incurred together with
gains and losses on interest rate cap contracts (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, 2020 , we held interest
rate cap contracts with an aggregate notional amount of $2.4 billion that
matured in February 2021 . These interest rate cap contracts were held to
mitigate the risk of interest rate increases on the floating-rate term loans
under our senior secured credit facilities. The contracts were not designated as
hedges for accounting purposes. Interest expense, net decreased by $186.0
million , or 58%, to $132.3 million for the three months ended March 31, 2021 , as
compared to the three months ended March 31, 2020 , primarily due to the
following:
•a decrease of $171.4 million in interest expense primarily resulting from
Chapter 11 restructuring activities, partially offset by an increase in interest
expense recognized on our senior secured credit facilities; and
•a decrease of $12.0 million due to higher capitalized interest primarily
resulting from increased levels of satellites and related assets under
construction.
The non-cash portion of total interest expense, net was $26.7 million for the
three months ended March 31, 2021 , primarily consisting of interest expense
related to the significant financing component identified in customer contracts,
amortization and accretion of discounts and premiums and amortization of
deferred financing fees.
Other Income, Net
Other income, net was $9.7 million for the three months ended March 31, 2021 , as
compared to $2.7 million for the three months ended March 31, 2020 . The net
increase in other income primarily consisted of a $5.3 million gain on one of
our investments and lower foreign currency losses of $3.8 million for the three
months ended March 31, 2021 as compared to the three months ended March 31,
2020 . These gains were offset, in part, by a net decrease of $3.0 million on the
sale of assets for the three months ended March 31, 2021 as compared to the
three months ended March 31, 2020 .
37
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Reorganization Items
Reorganization items reflect direct costs incurred in connection with the
Chapter 11 Cases. Reorganization items of $55.8 million for the three months
ended March 31, 2021 primarily consisted of professional fees. There were no
comparable amounts for the three months ended March 31, 2020 .
Income Tax Expense
Income tax expense increased by $7.0 million to $7.2 million for the three
months ended March 31, 2021 , as compared to the three months ended March 31,
2020 . The increase was principally attributable to higher income from our U.S.
subsidiaries for the three months ended March 31, 2021 , withholding taxes on
revenue earned in some of the foreign markets in which we operate, benefits
recorded in 2020 from impacts of the Coronavirus Aid, Relief, and Economic
Security Act and a tax reserve established on certain tax benefits taken on the
Base Erosion Anti-Abuse Tax.
Cash paid for income taxes, net of refunds, totaled $1.0 million and $0.5
million for the three months ended March 31, 2020 and 2021, respectively.
Net Loss Attributable to Intelsat S.A.
Net loss attributable to Intelsat S.A. was $174.9 million for the three months
ended March 31, 2021 , as compared to net loss attributable to Intelsat S.A. of
$218.8 million for the three months ended March 31, 2020 . The change reflects
the various items discussed above.
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.
A reconciliation of net loss to EBITDA for the periods shown is as follows (in
thousands):
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2021
Net loss $ (218,215) $ (174,306)
Add:
Interest expense, net 318,329 132,343
Income tax expense 141 7,189
Depreciation and amortization 163,048 165,241
EBITDA $ 263,303 $ 130,467
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
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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):
Three Months Three Months
Ended Ended
March 31, 2020 March 31, 2021
Net loss $ (218,215) $ (174,306)
Add:
Interest expense, net 318,329 132,343
Income tax expense 141 7,189
Depreciation and amortization 163,048 165,241
EBITDA 263,303 130,467
Add:
Compensation and benefits(1) 3,706 20,273
Non-recurring and non-cash items(2) 10,899 64,958
Impairment of non-amortizable intangible assets(3) 12,200 -
Reorganization items(4) - 55,812
Proportionate share from unconsolidated joint venture(5): Interest expense, net
1,080 633
Depreciation and amortization 2,815 2,815
Adjusted EBITDA(6)(7) $
294,003
(1)Reflects non-cash expenses incurred relating to our equity compensation plans and, for the three months endedMarch 31, 2021 , expenses incurred relating to our employee retention incentive plans in connection with our Chapter 11 proceedings. (2)Reflects certain non-recurring expenses, gains and losses and non-cash items, including the following: costs associated with our C-band spectrum relocation efforts; professional fees related to our liability management initiatives; merger and acquisition costs; certain research and development costs; amortization of supplemental type certificates; severance, retention and relocation payments; changes in fair value of certain investments; certain foreign exchange gains and losses; and other various non-recurring expenses. (3)Reflects a non-cash impairment charge recorded in connection with a trade name impairment (see Item 1, Note 11-Goodwill and Other Intangible Assets). (4)Reflects direct costs incurred in connection with our Chapter 11 proceedings. See Item 1, Note 2-Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters. (5)Reflects adjustments related to our interest inHorizons-3 Satellite LLC ("Horizons 3"). See Item 1, Note 10(b)-Investments-Horizons-3 Satellite LLC . (6)Adjusted EBITDA included$26.1 million and$26.5 million for the three months endedMarch 31, 2020 and 2021, respectively, of revenue relating to the significant financing component identified in customer contracts in accordance with the adoption of ASC 606, Revenue from Contracts with Customers. (7)Intelsat S.A. Adjusted EBITDA reflected$4.7 million and$4.0 million for the three months endedMarch 31, 2020 and 2021, respectively, of Adjusted EBITDA attributable toIntelsat Horizons-3 LLC , its subsidiaries and its proportionate share of Horizons 3. These entities are considered to be unrestricted subsidiaries under the definitions set forth in our applicable debt agreements. 39 -------------------------------------------------------------------------------- B. 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. AtMarch 31, 2021 , the aggregate principal amount of our debt outstanding not held by affiliates was$15.7 billion . Our interest expense, net for the three months endedMarch 31, 2021 was$132.3 million , which included$26.7 million of non-cash interest expense. AtMarch 31, 2021 , cash, cash equivalents and restricted cash were approximately$847.2 million . The commencement of the Chapter 11 Cases accelerated substantially all of our outstanding debt. Any efforts to enforce payment obligations related to the acceleration of our debt have been automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. During the pendency of the Chapter 11 Cases, as discussed above in -Recent Developments, Voluntary Reorganization under Chapter 11, the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments. In past years, our cash flows from operations and cash on hand have been sufficient to fund interest obligations ($1.1 billion and$634.7 million for the years endedDecember 31, 2019 and 2020, respectively), and significant capital expenditures ($229.8 million and$606.8 million for the years endedDecember 31, 2019 and 2020, respectively). However, as discussed above in -Recent Developments, Voluntary Reorganization under Chapter 11, our ability to fund operating expenses is now, to some extent, subject to obtaining certain approvals from theBankruptcy Court in connection with our Chapter 11 proceedings. A significant factor driving the Company's decision to file for Chapter 11 protection was the Company's desire to participate in theFCC 's process for accelerated clearing of the C-band spectrum, for which we need to incur significant upfront expenses for clearing activities well in advance of receiving reimbursement payments. OnAugust 14, 2020 , the Company filed its C-band spectrum transition plan with theFCC . In addition to the significant capital expenditures we expect to make in 2021 and beyond, we expect total clearing costs will be approximately$1.3 billion over the next three years. Our primary source of liquidity is and will continue to be cash generated from operations, as well as existing cash. We currently expect to use cash on hand and cash flows from operations to fund our most significant cash outlays, including debt service requirements and capital expenditures, in the next twelve months and beyond. We also expect to receive reimbursement payments for certain upfront C-band spectrum clearing expenses incurred, and under theFCC Final Order, the Company is eligible to receive Acceleration Payments of approximately$1.2 billion and$3.7 billion based on the milestone clearing certification dates ofDecember 5, 2021 andDecember 5, 2023 , respectively, with the respective payments expected to be received in the first half of each successive year, subject to the satisfaction of certain deadlines and other conditions set forth therein. Cash Flow Items Our cash flows consisted of the following for the periods shown (in thousands): Three Months Three Months Ended Ended March 31, 2020 March 31, 2021 Net cash provided by operating activities$ 14,277 $ 12,407 Net cash used in investing activities (32,827) (245,681) Net cash used in financing activities (9,685) (4,987)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(2,007) (2,111)
Net change in cash, cash equivalents and restricted cash
Net Cash Provided by Operating Activities Net cash provided by operating activities decreased by$1.9 million to$12.4 million for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 . The decrease was due to a$9.7 million decrease from changes in operating assets and liabilities, partially offset by a$7.8 million decrease in net loss and changes in non-cash items. The decrease from changes in operating assets and liabilities was primarily due to lower inflows related to prepaid and other assets, as well higher outflows for contract liabilities, partially offset by higher inflows from receivables.Net Cash Used in Investing Activities Net cash used in investing activities increased by$212.9 million to$245.7 million for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 , primarily due to increased capital expenditures. 40 --------------------------------------------------------------------------------Net Cash Used in Financing Activities Net cash used in financing activities decreased by$4.7 million to$5.0 million for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 , primarily due to lower principal payments on deferred performance incentives. Restricted Cash As ofMarch 31, 2021 ,$32.5 million of cash was legally restricted, being held as a compensating balance for certain outstanding letters of credit. Debt The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the prepetition existing indebtedness of Intelsat S.A.,Intelsat Luxembourg , Intelsat Connect andIntelsat Jackson . Any efforts to enforce payment obligations related to the acceleration of our debt have been automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. While the Chapter 11 Cases are pending, the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments; however, the Debtors expect to make monthly interest payments on their senior secured debt instruments pursuant to the adequate protection requirements under the DIP Order. Intelsat Jackson Superpriority Secured Debtor-in-Possession Term Loan Facility OnJune 17, 2020 (the "Closing Date"), the DIP Debtors and DIP Lenders entered into the DIP Credit Agreement, a non-amortizing multiple draw superpriority secured debtor-in-possession term loan facility, in an aggregate principal amount of$1.0 billion , on the terms and conditions set forth therein (see-Recent Developments-Voluntary Reorganization under Chapter 11 above).Intelsat Jackson borrowed$500.0 million of term loans under the DIP Facility on the Closing Date. Under the DIP Facility,Intelsat Jackson may, at its sole discretion, make incremental draws of the lesser of$250.0 million and the remaining available commitments of the DIP Lenders.Intelsat Jackson made two additional draws of$250.0 million each onNovember 27, 2020 andDecember 14, 2020 , bringing the total aggregate principal amount outstanding under the DIP Facility to$1.0 billion as of bothDecember 31, 2020 andMarch 31, 2021 . Drawn amounts under the DIP Facility bear interest at either (i) 4.5% per annum plus a base rate of the highest of (a) the Federal Funds Effective Rate plus ½ of 1.0%, (b) the Prime Rate as in effect on such day and (c) the London Inter-Bank Offered Rate ("LIBOR Rate") for a one-month interest period on such day (or if such day is not a business day, the immediately preceding business day) plus 1.0%, or (ii) 5.5% plus the LIBOR Rate. For purposes of the DIP Facility, the LIBOR Rate has an effective floor rate of 1.0%. Undrawn amounts under the DIP Facility shall be subject to a ticking fee of 3.6% of the amount of commitments of the DIP Lenders from the entry of the DIP Order until such commitments terminate, which ticking fee shall be payable on the last day of each fiscal quarter prior to the date such commitments terminate and on the date of such termination. If an event of default under the DIP Facility occurs, the overdue amounts under the DIP Facility would bear interest at an additional 2.0% per annum above the interest rate otherwise applicable. The proceeds of the DIP Facility may be used, among other things, to pay for (i) working capital needs of the DIP Debtors in the ordinary course of business, (ii) potential C-band relocation costs, (iii) investment and other general corporate purposes, and (iv) the costs and expenses of administering the Chapter 11 Cases. The maturity date of the DIP Facility isJuly 13, 2021 , subject to certain extensions pursuant to the terms of the DIP Credit Agreement. The DIP Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the Company's and its subsidiaries' ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of junior or prepetition indebtedness, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP Credit Agreement also includes certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, certain events under the Employee Retirement Income Security Act of 1974, as amended, and change of control. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by theBankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code and certain other events related to the impairment of the DIP Lenders' rights or liens granted under the DIP Credit Agreement. OnAugust 24, 2020 , the DIP Debtors and DIP Lenders entered into DIP Amendment No. 1 to the DIP Credit Agreement, and onNovember 25, 2020 , the DIP Debtors and DIP Lenders entered into DIP Amendment No. 2 to the DIP Credit Agreement, each in connection with the Gogo Transaction (see Item 1, Note 2-Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters for additional information). 41 -------------------------------------------------------------------------------- The foregoing descriptions of the DIP Credit Agreement, DIP Amendment No. 1 and DIP Amendment No. 2 do not purport to be complete and are qualified in their entirety by reference to the full text of the DIP Credit Agreement, DIP Amendment No. 1 and DIP Amendment No. 2, as applicable. 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 ofMarch 31, 2021 , our contracted backlog was approximately$5.9 billion . 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 is generally calculated as a percentage of the remaining backlog associated with the contract. In certain cases of breach for non-payment or customer 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 interests in these entities. 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. 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. Further, following the Company's filing of its C-band spectrum transition plan with theFCC onAugust 14, 2020 , we expect total clearing costs will be approximately$1.3 billion over the next three years, of which approximately$800.0 million is expected to be incurred in 2021. Payments for satellites and other property and equipment during the three months endedMarch 31, 2021 were$244.6 million . However, subject to the satisfaction of certain deadlines and other conditions set forth in theFCC Final Order, the Company is eligible to receive Acceleration Payments in an aggregate total amount of approximately$4.9 billion over the next 2 years. We intend to fund our capital expenditure requirements from cash on hand and cash provided from operating activities; however, our ability to fund capital expenditures in the ordinary course is, to some extent, subject to obtaining certain approvals from theBankruptcy Court in connection with our Chapter 11 proceedings. Off-Balance Sheet Arrangements We have revenue sharing agreements withJSAT International, Inc. ("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 Item 1, Note 10-Investments for disclosures relating to the revenue sharing agreements with JSAT. Contractual Obligations Other than as disclosed elsewhere in this report with respect to the filing of the Chapter 11 Cases and the acceleration of substantially all of our debt as a result, there have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations as disclosed in our 2020 Annual Report. Critical Accounting Policies and Estimates The preparation of these condensed consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these condensed consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. The Company's significant accounting policies are described in Note 1-Background and Summary of Significant Accounting Policies in our 2020 Annual Report. The Company's critical accounting estimates are described in Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report and are further described below. 42 -------------------------------------------------------------------------------- Bankruptcy Accounting Our condensed consolidated financial statements included herein have been prepared as if we are a going concern and reflect the application of ASC 852, Reorganizations ("ASC 852"). ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 proceedings, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, we classify liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the reorganization under the Chapter 11 proceedings as liabilities subject to compromise on our condensed consolidated balance sheets. In addition, we classify all income, expenses, gains or losses that are incurred or realized as a result of the Chapter 11 proceedings as reorganization items in our condensed consolidated statements of operations (see Item 1, Note 2-Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters). Recently Issued Accounting Pronouncements For disclosures related to recently issued accounting pronouncements, see Item 1, Note 1-General-Recently Issued Accounting Pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's disclosures about market risk made in Part II-Item 7A-Quantitative and Qualitative Disclosures about Market Risk of the Company's 2020 Annual Report. Item 4. Controls and Procedures Disclosure Controls and Procedures We have carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the quarter endedMarch 31, 2021 . Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as ofMarch 31, 2021 . Changes in Internal Control over Financial Reporting Except as described below, there were no other changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(f) of the Exchange Act during the quarter endedMarch 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. OnDecember 1, 2020 , we completed our acquisition of Gogo CA. As part of our ongoing integration of the Gogo CA business, we are currently integrating policies, processes, people, technology and operations for the combined Company. Management will continue to evaluate the Company's internal control over financial reporting as it continues to integrate the Gogo CA business. 43
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