Globalstar, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Globalstar provides mobile satellite voice and data services and related equipment. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $23.0 | $24.0 | $44.0 | $44.5 |
| Operating loss | $(17.4) | $(25.0) | $(34.6) | $(45.6) |
| Net income (loss) | $204.8 | $(433.7) | $75.0 | $(684.3) |
| Operating loss margin | (75.6%) | (104.3%) | (78.6%) | (102.4%) |
| Basic EPS | $0.20 | $(0.48) | $0.07 | $(0.78) |
Net income in 2015 was driven by noncash derivative fair-value gains: $237.1 million for Q2 and $129.2 million for the first half. These gains principally reflected changes in the value of embedded derivatives tied to the company’s stock price; they should not be read as operating earnings or cash generation.
Service revenue rose 4% in Q2 and 5% in the first half, while equipment revenue fell 28% and 20%, respectively. Operating expenses declined 18% in Q2 and 13% in the first half, including lower depreciation and no repeat of the $7.3 million inventory write-down recorded in 2014. Cost of services and marketing, general and administrative expense increased.
For the first half, operating cash flow was negative $1.3 million, versus positive $2.4 million a year earlier. Investing outflows were $14.0 million, mainly for second-generation ground-network upgrades; financing provided $21.2 million, primarily from Terrapin equity proceeds. Cash and equivalents were $12.9 million at June 30, up from $7.1 million at year-end. An additional $37.9 million was restricted for debt service. Current assets of $49.2 million compared with current liabilities of $90.2 million (current ratio approximately 0.55).
At June 30, total debt principal was $668.0 million and carrying value was $629.1 million, including $19.6 million current and $609.4 million long-term carrying value. The $579.1 million senior secured facility was fully drawn and matures in December 2022. Thermo’s subordinated loan accrues interest at 12%, capitalized rather than paid in cash. Debt service reserve cash is not available for general liquidity needs.
Changes and operating indicators
- Total subscribers increased 12% year over year to approximately 672,700 at June 30. Duplex subscribers grew 21%, SPOT 11%, and Simplex 13%.
- SPOT service revenue grew 19% in Q2 and 13% in the first half, supported by subscriber growth and higher ARPU. Duplex service revenue increased modestly as subscriber gains were partly offset by lower ARPU and currency effects.
- Equipment sales weakened, particularly Simplex, reflecting lower demand; handset price reductions and SPOT rebates also reduced equipment revenue while supporting sales or activations.
- First-half debt carrying value declined from $630.1 million at year-end, principally due to convertible-note conversions and a facility principal payment, partly offset by accrued Thermo interest and debt-discount accretion. Equity issuance increased shares outstanding.
Outlook, risks and unusual items
Management described subscriber growth and expected further expansion and higher ARPU, but provided no quantified revenue, earnings, cash-flow or capital-spending guidance in the supplied filing text. The company continued investing in second-generation ground infrastructure; disclosed remaining capital commitments included approximately $11.5 million for the rest of 2015 and $6.4 million for 2016.
- Credit covenant matter: The facility agent disputed the company’s covenant calculation for December 31, 2014, and the company described a potential June 2015 compliance issue under the disputed interpretation. On August 7, 2015, lenders amended and restated the facility, clarified covenant calculations, accepted specified equity cure treatment, extended cure availability, and waived existing defaults. The company also entered a new Terrapin equity line of up to $75 million over 24 months; Thermo committed up to $30 million in equity financing under specified conditions. These are subsequent financing arrangements, not cash already received in full.
- Thales matters: Thales may seek confirmation of an arbitration award; success could materially harm financial condition, results and liquidity. A separate settlement obligation of approximately €17.5 million remained conditional and unsatisfied at June 30. Thales also disputed Globalstar’s ownership of prepaid satellite long-lead items, which the company was considering how to recover.
- Other items: Hughes received $15.5 million of shares for contract payments, with a 40-trading-day downside-protection feature; the company recorded related issuance losses and a liability estimate subject to remeasurement. The strong U.S. dollar reduced reported revenue by $1.2 million in Q2 and $2.3 million in the first half. A 1% interest-rate change was estimated to affect annual interest expense by about $5.8 million.
- The filing identifies foreign-exchange exposure, reliance on equity funding and covenant cures, significant debt and capital needs, and legal and operational risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate operating performance and cash generation from derivative-driven net income; assess the assumptions and volatility behind the Level 3 derivative valuations.
- Check covenant compliance under the amended facility, remaining equity-line availability, conditions on Thermo’s commitment, and the company’s ability to fund debt service and network spending.
- Track subscriber growth alongside ARPU, churn, service revenue, equipment demand and foreign-exchange effects.
- Monitor outcomes and potential cash impact of the Thales arbitration, settlement and long-lead-item dispute.
- Confirm the debt maturity and repayment schedule, restricted-cash requirements, and remaining Hughes and Ericsson commitments.