Globalstar, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Globalstar provides mobile satellite voice and data services, equipment, and related products through its satellite network. This unaudited filing covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Globalstar adopted ASC 606 on January 1, 2018 using the modified retrospective method, so prior-period results were not restated.
Financial performance and liquidity
- Revenue: $28.7 million, up approximately 17%. Service revenue rose to $26.0 million from $21.5 million, while equipment sales declined to $2.7 million from $3.2 million. Growth in service revenue reflected higher ARPU across core categories; average total subscribers increased to 727,860 from 687,160.
- Operating results: Operating expenses increased 5% to $41.7 million. Operating loss improved to $13.0 million from $15.1 million; operating margin was approximately negative 45% versus negative 61%.
- Net income and EPS: Net income was $87.9 million, or $0.07 basic and $0.06 diluted per share, compared with a $20.2 million net loss, or $0.02 per share, in Q1 2017. The 2018 result was driven principally by a $108.9 million noncash derivative gain, not operating profit. The gain largely reflected a 47% decline in Globalstar’s stock price during the quarter and a lower fair value of embedded derivative liabilities.
- Cash flow: Operating cash flow was $9.8 million, up from $5.3 million. Investing cash outflow was $2.4 million, versus $4.1 million; financing cash flow was zero, compared with $12.0 million of proceeds in Q1 2017. Cash, cash equivalents and restricted cash totaled $112.7 million, including $48.8 million of unrestricted cash and $63.9 million restricted.
- Debt and working capital: Debt carrying value was $520.5 million ($577.9 million principal before discounts and financing costs), including $79.2 million classified current. Current liabilities of $166.5 million exceeded current assets of $144.1 million. Restricted cash is not generally available for operating needs; $51.1 million was in the debt-service reserve account.
- Assets and equity: Total assets were $1.127 billion and stockholders’ equity was $384.0 million at March 31, 2018. Property and equipment, net, was $958.1 million.
Material changes versus Q1 2017
- Service revenue growth was led by SPOT, up 25%, and Simplex, up 28%; Duplex revenue rose 16% despite a 6% decrease in average subscribers. Duplex ARPU rose 23%, SPOT ARPU 18%, and Simplex ARPU 14%.
- Marketing, general and administrative expense increased $1.9 million, primarily due to advisers working on strategic opportunities, subscriber acquisition costs, and personnel costs.
- ASC 606 adoption reduced opening retained earnings by $3.1 million. For Q1, reported net income was approximately $1.0 million lower than it would have been under legacy accounting, according to the filing’s reconciliation.
- Globalstar began depreciating upgraded ground-network assets in Q2 2018 after placing the network into service in connection with the April launch of Sat-Fi2.
Outlook, commentary and risks
- Funding and covenants: Management said the December 2018 Facility Agreement principal payment is expected to exceed available cash while also maintaining the required debt-service reserve. The source of funds was not fully arranged. Globalstar anticipated needing an equity cure contribution to remain compliant with financial covenants for the measurement period ending December 31, 2018, and had not fully arranged its source. The company reported covenant compliance at March 31.
- Debt terms: The senior facility was fully drawn, matures in December 2022, and carried interest at LIBOR plus 3.25% through June 2018, with scheduled annual margin increases thereafter. A 1 percentage-point interest-rate change would affect annual interest expense by approximately $4.7 million. Thermo’s subordinated loan accrued interest at 12%, capitalized rather than paid in cash.
- Proposed merger: On April 24, 2018, Globalstar agreed to acquire Thermo Acquisitions, an entity controlled by Globalstar’s CEO, in a transaction unanimously recommended by a special committee of independent directors and approved by the board. Globalstar would acquire, among other items, more than 99% of FiberLight, $100 million in cash, and 15.5 million CenturyLink shares. Thermo Acquisitions’ stockholders would receive Globalstar shares valued at $1.645 billion, subject to adjustments. Closing depends on customary conditions and lender amendments. The proposed senior-debt amendment was subject to approvals, due diligence and definitive documentation; it contemplated up to $30 million in annual principal deferrals and a fixed 3.25% margin over six-month LIBOR, subject to liquidity tests.
- Products and spectrum: Sat-Fi2 launched in April 2018 as the first product using the upgraded ground network. The company described SPOT X and IoT-focused Simplex products as under development. It also continued to pursue international approvals for terrestrial broadband use of its licensed spectrum.
- Contingencies: A €17.5 million Thales contract termination charge remained accrued, with payment subject to conditions not met as of March 31. Thales could potentially refile to confirm an earlier arbitration award; the company said a successful confirmation could materially harm its financial condition, results and liquidity. Management said it knew of no other pending matter expected to have a material adverse effect.
- Other risks: Derivative valuations are Level 3 estimates sensitive to stock price, volatility and other assumptions. The filing also identifies floating-rate debt, foreign-currency exposure, satellite and network performance, regulatory and spectrum approvals, and the proposed merger’s completion and financing as risks. Management provided no quantified operating guidance in the supplied filing text.
Important facts for investors to verify
- How Globalstar planned to fund the December 2018 debt payment and required covenant cure, and whether the proposed lender amendments received final approval.
- The merger’s final consideration and share issuance, FiberLight’s financial results and debt terms, closing conditions, and protections addressing the CEO-controlled counterparty.
- Whether service-revenue and subscriber trends continued, including Duplex subscriber declines and the performance of Sat-Fi2 and newer Simplex products.
- The extent to which reported earnings depended on noncash derivative remeasurement, and the sensitivity of those valuations to stock-price and volatility assumptions.
- The status and potential cash impact of the Thales matter, alongside the availability of unrestricted cash after debt-service and covenant requirements.