LORAL SPACE & COMMUNICATIONS INC. The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements (the "financial
statements") included in Item 1 and our latest Annual Report on Form 10-K filed
with the
INDEX
Topic Location
Overview Page 24
Consolidated Operating Results Page 28
Liquidity and Capital Resources:
Loral Page 34
Telesat Page 35
Statements of Cash Flows Page 38
Affiliate Matters Page 39
Commitments and Contingencies Page 39
Other Matters Page 39
Disclosure Regarding Forward-Looking Statements
Except for the historical information contained in the following discussion and
analysis, the matters discussed below are not historical facts, but are
"forward-looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, we or our representatives have made
and may continue to make forward-looking statements, orally or in writing, in
other contexts. These forward-looking statements can be identified by the use of
words such as "believes," "expects," "plans," "may," "will," "would," "could,"
"should," "anticipates," "estimates," "project," "intend" or "outlook" or other
variations of these words. These statements, including without limitation, those
relating to Telesat, are not guarantees of future performance and involve risks
and uncertainties that are difficult to predict or quantify. Actual events or
results may differ materially as a result of a wide variety of factors and
conditions, many of which are beyond our control. For a detailed discussion of
these and other factors and conditions, please refer to the Commitments and
Contingencies section below and to our other periodic reports filed with the
Overview Business
Loral has one operating segment consisting of satellite-based communications
services. Loral participates in satellite services operations primarily through
its ownership interest in
At
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On
In
The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once the investment in a satellite is made, the incremental costs to maintain and operate the satellite are relatively low over the life of the satellite, with the exception of in-orbit insurance. Telesat has been able to generate a large contractual revenue backlog by entering into long-term contracts with some of its customers, in some cases for all or substantially all of a satellite's orbital maneuver life. Historically, this has resulted in revenue from the satellite services business being fairly predictable.
Telesat's desirable spectrum rights, commitment to providing the highest level of customer service, deep technical expertise and culture of innovation have enabled it to successfully develop its business to date. Leveraging these strengths and building on its existing contractual revenue backlog, Telesat's focus is on profitably growing its business by increasing the utilization of its in-orbit satellites and, in a disciplined manner, deploying expansion satellite capacity where strong market demand is anticipated. In 2018, Telesat launched a Ka-band satellite into low earth orbit in furtherance of its plans to develop a state-of-the-art, high capacity LEO constellation that will deliver transformative, low latency, fiber-like broadband to commercial and government users worldwide.
Telesat believes that it is well positioned to serve its customers and the
markets in which it participates. Telesat actively pursues opportunities to
develop new satellites, particularly in conjunction with current or prospective
customers
In 2020, Telesat remains focused on increasing utilization of its existing satellites, the development of its global LEO constellation, identifying and pursuing opportunities to invest in other expansion of satellite capacity and leveraging the value of its spectrum rights, all while maintaining operating discipline.
Telesat's operating results are subject to fluctuations as a result of exchange
rate variations. For the nine months ended
Other
We own 56% of
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On
COVID-19
On
Although the COVID-19 pandemic has had a limited impact on Telesat's and our ability to operate our respective businesses, Telesat's customers in the maritime, aeronautical and energy markets have been significantly impacted by the pandemic. At the request of some of these customers, Telesat has agreed to amend terms of certain of their contracts to mitigate the adverse financial impact that COVID-19 is having on their respective businesses. These arrangements will have an adverse impact on Telesat's revenues in the near term. While not sufficient to offset adverse impacts referred to above, Telesat has experienced some increased demand for services as a result of COVID-19, primarily from government, and government-sponsored broadband requirements. In addition, certain of Telesat's maritime and aeronautical customers have commenced voluntary bankruptcy proceedings. As a result, Telesat has had to record a provision for bad debt expense for certain accounts receivable with these customers given the risk that Telesat may not receive payment for all, or substantially all, of the amounts owed to it. Further, bankruptcy laws permit these customers to choose to reject any existing contracts into which they have entered. To the extent they choose to reject their contracts with Telesat, their obligations under those contracts would be voided and Telesat's revenues would be adversely impacted. For additional details on risks associated with the current outbreak of COVID-19, refer to Part II, Other Information - Item 1A. Risk Factors.
On
General
Our principal asset is our majority economic ownership interest in Telesat. In
an effort to maximize shareholder value, we have been exploring, and are in
advanced discussions with our Canadian co-owner in Telesat,
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In 2017, we received
As mentioned above, we have the right under the Telesat Shareholders Agreement
to require Telesat to conduct an initial public offering of its equity shares,
and, in
Depending upon the outcome of the strategic initiatives discussed above, we may assert certain claims against PSP for actions we believe violated our rights relating to the affairs of Telesat under the Telesat Shareholders Agreement and otherwise. In response to our claims, PSP has informed us that it believes that it may have claims against us, although we are not aware of the legal or factual basis for any such claims. We and PSP have agreed that, pending the outcome of our discussions relating to Telesat, it would be beneficial to delay the commencement of any action relating to either party's claims and have entered into an agreement (the "Tolling Agreement") which preserves the parties' rights to assert against one another legal claims relating to Telesat. We also included Telesat as a party to the Tolling Agreement because, as a technical matter of Canadian law and for purposes of potentially seeking equitable relief, Telesat may be a necessary party. There can be no assurance that if the Tolling Agreement lapses that we and PSP will not pursue legal claims against one another relating to Telesat. If we pursue claims against PSP, there can be no assurance that our claims will be successful or that the relief we seek will be granted. If PSP pursues claims against us, there can be no assurance that PSP will not prevail on its claims.
Loral may, from time to time, explore and evaluate other possible strategic transactions and alliances which may include joint ventures and strategic relationships as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of these opportunities, additional funds are likely to be required. There can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to obtain the necessary financing for transactions that require additional funds on favorable terms, if at all.
In connection with the acquisition of our ownership interest in Telesat in 2007, Loral has agreed that, subject to certain exceptions described in the Shareholders Agreement, for so long as Loral has an interest in Telesat, it will not compete in the business of leasing, selling or otherwise furnishing fixed satellite service, broadcast satellite service or audio and video broadcast direct-to-home service using transponder capacity in the C-band, Ku-band and Ka-band (including in each case extended band) frequencies and the business of providing end-to-end data solutions on networks comprised of earth terminals, space segment, and, where appropriate, networking hubs.
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Consolidated Operating Results
See Critical Accounting Matters in our latest Annual Report on Form 10-K filed
with the
Changes in Critical Accounting Policies - There have been no changes in our
critical accounting policies during the nine months ended
Three Months Ended
The following compares our consolidated results for the three months ended
Operating Income (Loss)
Three Months Ended
September 30,
2020 2019
(In thousands)
General and administrative expenses
-
Operating income (loss) $ 4,129 $ (1,615) For the three months ended
Interest and Investment Income
Three Months Ended
September 30,
2020 2019
(In thousands)
Interest and investment income
Interest and investment income decreased by
Other Expense
Three Months Ended
September 30,
2020 2019
(In thousands)Other expense$ 2,300 $ 1,048
Other expense for the three months ended
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Income Tax Provision
Three Months Ended
September 30,
2020 2019
(In thousands)
Income tax provision $ (309) $ (1,275) For the three months ended
Our income tax provision for each period is computed by applying an expected
effective annual tax rate against the pre-tax results for the nine month periods
ended
To the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
Equity in Net Income of Affiliates
Three Months Ended
September 30,
2020 2019
(In thousands)
Telesat $ 49,645 $ 8,784 As of
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Summary financial information for Telesat in accordance with
Three Months Ended Three Months Ended
September 30, September 30,
2020 2019 2020 2019
(In Canadian dollars) (In U.S. dollars)
Statement of Operations Data:
Revenues 202,830 237,894 152,081 180,180
Operating expenses (44,421) (38,235) (33,322) (29,038)
Depreciation and amortization (59,884) (68,976) (44,888) (52,259)
Other operating expense (34) (60) (26) (45)
Operating income 98,491 130,623 73,845 98,838
Interest expense (50,288) (61,018) (37,715) (46,239)
Foreign exchange gain (loss) 66,909 (33,412) 48,943 (24,702)Gain (loss) on financial instruments 419 (5,447) 246 (4,244) Other income
2,011 5,939 1,524 4,497
Income tax provision (12,140) (20,628) (9,053) (15,548)
Net income 105,402 16,057 77,790 12,602
Average exchange rate for translating
Canadian dollars
to U.S. dollars (1 U.S. dollar 1.3345 1.3199
equals)
Telesat's revenue decreased by
Telesat's operating expenses increased by
Telesat's depreciation and amortization decreased by
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Nine Months Ended
The following compares our consolidated results for the nine months ended
Operating Income (Loss)
Nine Months Ended
September 30,
2020 2019
(In thousands)
General and administrative expenses
-
Operating income (loss) $ 680 $ (5,115) For the nine months ended
.
Interest and Investment Income
Nine Months Ended
September 30,
2020 2019
(In thousands)
Interest and investment income
Interest and investment income decreased by
Other Expense
Nine Months Ended
September 30,
2020 2019
(In thousands)Other expense$ 6,440 $ 3,019
Other expense for the nine months ended
Income Tax Provision
Nine Months Ended
September 30,
2020 2019
(In thousands)
Income tax provision
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For the nine months ended
Our income tax provision for each period is computed by applying an expected
effective annual tax rate against the pre-tax results for the nine month periods
ended
To the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.
Equity in Net Income of Affiliates
Nine Months Ended
September 30,
2020 2019
(In thousands)
Telesat $ 9,086 $ 92,066 The following is a reconciliation of the changes in our investment in Telesat
for the nine months ended
Nine Months Ended
September 30, 2020
(In thousands)
Balance, January 1, 2020 $ 90,184
Components of equity in net income of Telesat:
Equity in net income of Telesat $ 6,367
Eliminations of affiliate transactions and related 2,719 9,086
amortization
Equity in Telesat-related other comprehensive income 6,132 Balance, September 30, 2020$ 105,402 Summary financial information for Telesat in accordance withU.S. GAAP and in Canadian dollars andU.S. dollars as ofSeptember 30, 2020 andDecember 31, 2019 and for the nine months endedSeptember 30, 2020 and 2019 follows (in thousands): September 30, December 31, September 30, December 31, 2020 2019 2020 2019 (In Canadian dollars) (In U.S. dollars) Balance Sheet Data: Current assets 1,319,893 1,139,605 990,985 877,294 Total assets 5,453,857 5,365,307 4,094,795 4,130,337 Current liabilities 201,976 161,357 151,645 124,217 Long-term debt, including current 3,762,402 3,684,873 2,824,838 2,836,700 portion Total liabilities 4,592,481 4,552,467 3,448,067 3,504,594 Shareholders' equity 861,376 812,840 646,728 625,743 Period end exchange rate for translating Canadian dollars to U.S. dollars (1 U.S. 1.33191.2990 dollar equals) 32 Table of Contents Nine Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In Canadian dollars) (In U.S. dollars) Statement of Operations Data: Revenues 620,890 693,059 460,407 520,819 Operating expenses (139,870) (136,445) (103,717) (102,536) Depreciation and amortization (179,812) (206,308) (133,336) (155,036) Other operating expense (246) (147) (182) (110) Operating income 300,962 350,159 223,172 263,137 Interest expense (156,363) (185,733) (115,947) (139,574) Foreign exchange (loss) gain (100,315) 98,091 (74,387) 73,713 Loss on financial instruments (15,701) (54,052) (11,643) (40,619) Other income 10,081 16,771 7,476 12,603 Income tax provision (24,961) (35,375) (18,509) (26,584) Net income 13,703 189,861 10,162 142,676 Average exchange rate for translating Canadian dollars to U.S. dollars (1 U.S. dollar 1.3495 1.3309 equals)
Telesat's revenue decreased by
Telesat's operating expenses increased by
Telesat's depreciation and amortization decreased by
In the third quarter of 2019, we recorded an out-of-period correction to
decrease our investment in Telesat and increase other comprehensive loss by
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On
Backlog
Telesat's backlog as of
Liquidity and Capital Resources
Loral
As described above, Loral's principal asset is a 62.7% economic interest in Telesat. The operations of Telesat are not consolidated but are presented using the equity method of accounting. Loral has no debt. Telesat has third party debt with financial institutions. Cash is maintained at Loral and Telesat to support the operating needs of each respective entity. The ability of Telesat to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants relating to its debt and its shareholder agreement.
Cash and Available Credit
At
Loral did not have a credit facility as of
Cash Management
We have a cash management investment program that seeks a competitive return while maintaining a conservative risk profile. Our cash management investment policy establishes what we believe to be conservative guidelines relating to the investment of surplus cash. The policy allows us to invest in commercial paper, money market funds and other similar short-term investments but does not permit us to engage in speculative or leveraged transactions, nor does it permit us to hold or issue financial instruments for trading purposes. The cash management investment policy was designed to preserve capital and safeguard principal, to meet all of our liquidity requirements and to provide a competitive rate of return for similar risk categories of investment. The policy addresses dealer qualifications, lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits, defines a maturity structure, requires all firms to safe keep securities on our behalf, requires certain mandatory reporting activity and discusses review of the portfolio. We operate the cash management investment program under the guidelines of our investment policy and continuously monitor the investments to avoid risks.
We currently invest our cash in two Government AAA money market funds. The dispersion across funds reduces the exposure of a default at one fund.
Liquidity
We believe that our cash and cash equivalents will be sufficient to fund projected expenditures for the next 12 months.
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In the first quarter of 2017, we received
On
We expect that our major cash outlays for the next 12 months will include general corporate expenses, net of consulting fees from Telesat, and an additional distribution to our stockholders as mentioned above.
Risks to Cash Flow
In 2012, we sold our former subsidiary, SSL, to
Telesat Cash and Available Credit
As of
Liquidity
A large portion of Telesat's annual cash receipts are reasonably predictable
because they are primarily derived from an existing backlog of long-term
customer contracts and high contract renewal rates. Telesat believes its cash
and short-term investments as of
The construction of any satellite replacement or expansion programs, including the planned LEO constellation, will require signi?cant capital expenditures. Cash required for any future satellite programs may be funded by Telesat from a range of sources including: cash and short-term investments; cash ?ows from operating activities; cash ?ows from customer prepayments; through borrowings on the revolving credit facility under Telesat's senior secured credit facilities; vendor ?nancing; equity investments; export credit agency ?nancing; additional secured or unsecured ?nancing; proceeds received from repurposing C-band spectrum; and from government sources. In addition, Telesat may sell certain satellite assets and, in accordance with the terms and conditions of its senior secured credit facilities, reinvest the proceeds in new or replacement satellite programs or pay down indebtedness under the senior secured credit facilities. Telesat's ability to access these sources of funding, however, is not guaranteed, and therefore, Telesat may not be able to fully fund additional replacement or new satellite programs. Telesat may seek to complete the development of, fund, and operate its planned LEO constellation through a current or future unrestricted subsidiary.
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Debt
Telesat's debt as of
September 30, December 31,
Maturity Currency 2020 2019
(In thousands)
Senior Secured Credit
Facilities:
Revolving credit facility December 2024 USD or CAD $ - $ -
equivalent
Term Loan B - U.S. facility December 2026 USD 1,894,186 1,908,500
4.875% Senior secured notes June 2027 USD 400,000 400,000
6.5% Senior notes October 2027 USD 550,000 550,000
2,844,186 2,858,500
Less: Deferred financing
costs and
prepayment options (59) (302)
Total debt under
international financial
reporting standards 2,844,127 2,858,198
U.S. GAAP adjustments (19,289) (21,498)
Total debt under U.S. GAAP 2,824,838 2,836,700
Current portion 16,400 16,480
Long-term portion $ 2,808,438 $ 2,820,220 On
On
On
On
Senior Secured Credit Facilities
The obligations under Telesat's credit agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first priority security interest in the assets of Telesat and certain of its subsidiaries (the "Guarantors"). The credit agreement contains covenants that restrict the ability of Telesat and the Guarantors to take specified actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends, entering into sale-leaseback transactions, creating subsidiaries, repaying subordinated debt or amending organizational documents. The credit agreement also requires Telesat and the Guarantors to comply with a maximum first lien leverage ratio and contains customary events of default and affirmative covenants, including an excess cash sweep, that may require Telesat to repay a portion of the outstanding principal under its senior secured credit facilities prior to the stated maturity.
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Telesat's senior secured credit facilities are comprised of the following facilities:
i- Revolving Credit Facility
Telesat's revolving credit facility ("Revolving Facility") is a
ii- Term Loan B -
Telesat's term loan B -
The mandatory principal repayments on Telesat's
Senior Secured Notes
Telesat's senior secured notes, in the amount of
Senior Notes
Telesat's senior notes, in the amount of
As of
Debt Service Cost
Telesat's interest expense for the year ending
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Derivatives
Telesat uses, from time to time, interest rate and currency derivatives to manage its exposure to changes in interest rates and foreign exchange rates.
As of
Telesat also has foreign currency embedded derivatives in its purchase contracts
with suppliers and sales contracts with customers as a result of some of these
contracts being denominated in a currency other than the functional currency of
the substantial parties to the respective contract. The fair value of these
foreign currency embedded derivatives as of
Development Costs and Capital Expenditures
Telesat has entered into contracts for the development of its LEO constellation
and other capital expenditures. The outstanding commitments associated with
these contracts were approximately
Statements of Cash Flows
Net cash used in operating activities was
Net cash provided by operating activities was
Net cash used by operating activities from continuing operations was
Net cash provided by operating activities from discontinued operations was
Net cash used in financing activities was
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Affiliate Matters
Loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity method of accounting (see Note 5 to our financial statements for further information on affiliate matters).
Commitments and Contingencies
Our business and operations are subject to a number of significant risks, the most significant of which are summarized in Part II, Item 1A - Risk Factors and also in Note 13 to our condensed consolidated financial statements.
Other Matters
Recent Accounting Pronouncements
There are no accounting pronouncements that have been issued but not yet adopted that we believe will have a significant impact on our financial statements.
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