Globalstar, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Globalstar provides mobile satellite voice and data services and sells subscriber equipment. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $23.7 million | $23.4 million | $67.7 million | $68.0 million |
| Operating income (loss) | ($16.1 million) | ($18.1 million) | ($50.7 million) | ($63.7 million) |
| Net income (loss) | $24.1 million | $129.4 million | $99.1 million | ($554.9 million) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $7.3 million | $6.9 million |
| Investing cash flow | Not provided for the quarter | Not provided for the quarter | ($21.5 million) | ($6.1 million) |
- Q3 service revenue rose 6% to $19.6 million; equipment revenue fell 18% to $4.0 million. For the nine-month period, service revenue grew 5% to $55.4 million while equipment revenue declined 19% to $12.4 million.
- Operating loss narrowed in both comparisons. Operating loss as a share of revenue was approximately 68% in Q3 2015 and 75% for the first nine months of 2015.
- Reported net income was materially affected by non-cash derivative fair-value gains: $54.2 million in Q3 and $183.4 million year to date. The comparable 2014 figures were gains of $167.0 million and losses of $418.7 million, respectively. Net income therefore does not reflect operating performance alone.
- Cash and cash equivalents were $28.0 million at September 30, up from $7.1 million at December 31, 2014. An additional $37.9 million was restricted for debt service. Current assets were $59.8 million versus current liabilities of $103.6 million.
- At September 30, total debt principal was $676.4 million and carrying value was $638.5 million; $19.6 million of carrying value was current. The senior secured Facility Agreement was fully drawn and matures in December 2022. Its floating rate was LIBOR plus 2.75% through June 2017, with scheduled annual step-ups thereafter.
Changes versus prior comparable periods
- Revenue was nearly flat year to date despite service growth, as equipment sales declined. Management cited lower equipment prices, promotions and rebates, product mix, and U.S. dollar appreciation; foreign exchange reduced revenue by $3.7 million year to date.
- Subscriber growth supported service revenue: subscribers reached approximately 686,600 at period-end, up 11% year over year. SPOT and Simplex service revenue grew, while Q3 Duplex service revenue declined approximately 4% amid lower ARPU and currency effects.
- Year-to-date operating expenses fell 10%, principally because the prior-year period included a $7.3 million inventory value reduction and depreciation declined. Marketing, general and administrative expense increased 15%, including higher customer acquisition and bad-debt costs.
- Year-to-date cash from operations increased modestly, but investing outflows rose with second-generation ground-network spending. Financing cash inflows included $39.0 million from Terrapin equity draws.
Outlook, risks and unusual items
- Management expected to introduce second-generation products in 2016 and anticipated subscriber-base and ARPU growth. The filing provides no quantified revenue, earnings or cash-flow guidance.
- In August 2015, Globalstar amended and restated its credit arrangements, clarified covenant calculations and extended the period in which equity cure contributions could be made. It reported compliance with Facility Agreement covenants at September 30. A covenant breach not cured or waived could trigger default and acceleration.
- A $75 million Terrapin equity line had $60 million remaining at quarter-end. Thermo had a remaining $15 million equity commitment under specified conditions. Draws may dilute existing shareholders; the Thermo subordinated loan bears 12% interest, added to principal rather than paid currently.
- The Hughes agreement required downside protection on shares issued for contract payments. Globalstar recorded a $4.7 million liability at September 30 and expected settlement in December 2015. The company also recorded a $2.9 million Q3 loss on equity issuance, primarily related to this feature.
- Capital commitments for Hughes, Ericsson and other ground-network work totaled $145.0 million, including $13.9 million of estimated future payments: $9.2 million for the remainder of 2015 and $4.6 million for 2016. Ericsson work was expected to finish in Q2 2016.
- Thales disputes Globalstar’s claimed ownership of certain prepaid satellite long-lead items. A prior arbitration award and settlement arrangements remain relevant; the $17.5 million termination charge remains accrued, and the condition for payment had not been satisfied at quarter-end. The filing states that the outcome of the long-lead-item dispute cannot be predicted.
- Foreign-exchange exposure includes Venezuela. From July 1, 2015, the company used the SIMADI exchange rate for its Venezuelan subsidiary and recorded a $1.9 million Q3 loss related to that subsidiary. Management also estimated that a 1 percentage-point interest-rate change would alter annual interest expense by approximately $5.8 million.
Most important facts for investors to verify
- Whether recurring service growth can translate into improved operating results and cash generation, given persistent operating losses and equipment-price reductions.
- How much of reported earnings is attributable to volatile, non-cash derivative remeasurement rather than operating performance.
- Available liquidity after separating unrestricted cash from the $37.9 million debt-service reserve, and the company’s reliance on Terrapin or Thermo funding.
- Debt-service capacity, covenant compliance, scheduled repayments and the effect of the 12% Thermo loan and floating-rate facility.
- Second-generation product launch timing, ground-network completion costs, and the resolution or financial effect of the Hughes and Thales matters.