Globalstar, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Globalstar provides mobile satellite voice and data services and sells compatible subscriber equipment. It reported approximately 694,000 subscribers at quarter-end.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $25.5 million | $23.7 million | $72.5 million | $67.7 million |
| Operating loss | $14.8 million | $16.1 million | $46.9 million | $50.7 million |
| Net income (loss) | $(2.6) million | $24.1 million | $(15.4) million | $99.1 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $7.7 million | $7.3 million |
- Q3 revenue grew about 8%; nine-month revenue grew about 7%. Service revenue increased, while equipment sales declined. Service revenue represented 86% of Q3 revenue and 85% for the nine-month period.
- Operating losses narrowed, while operating expenses rose about 1% in both comparison periods. Service growth was led by Duplex and SPOT; Simplex service and equipment sales were pressured by the oil and gas downturn.
- Net income comparisons were heavily affected by noncash derivative fair-value gains: $11.0 million in Q3 2016 versus $54.2 million in Q3 2015, and $50.1 million for nine months 2016 versus $183.4 million in 2015. The 2016 nine-month tax benefit of $6.6 million included a $6.3 million benefit from expiration of a foreign tax-position limitation period.
- Nine-month investing cash use was $17.5 million, mainly network and property spending; financing provided $15.1 million. Cash increased $5.4 million to $12.9 million. The company also held $38.0 million of restricted cash, reserved for facility debt service.
Balance sheet, debt, and liquidity
- At September 30, 2016, current assets were $44.8 million and current liabilities $120.0 million. Cash and cash equivalents were $12.9 million; restricted cash is not freely available for general purposes.
- Debt principal totaled $667.5 million: $559.4 million under the fully drawn senior Facility Agreement, $91.1 million owed to Thermo, and $16.9 million of 8.00% convertible notes. Reported debt carrying value was $585.4 million, net of discounts and financing costs.
- The Facility Agreement matures in December 2022, bears floating-rate interest, and requires semiannual principal payments. The Thermo loan accrues interest at 12%, capitalized rather than paid currently. A 1 percentage-point interest-rate change was estimated to affect annual interest expense by about $5.6 million.
- Management said the company was in covenant compliance at quarter-end, but expected to use remaining Terrapin equity financing to support covenant compliance and debt service. $31.5 million remained available under the $75 million share-purchase agreement. Thermo’s related $30 million equity commitment was exhausted.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management anticipated subscriber growth and further product and market expansion, and expected to draw all or substantially all remaining Terrapin availability. The company had $197.7 million of ground-network construction in progress and expected to begin depreciating it in the near future.
- Management’s terrestrial low-power service opportunity depends on FCC action. The FCC had circulated a proposed order in May 2016; commercial deployment plans were conditional on adoption of the proposed rules and would involve partners.
- Liquidity and covenant compliance depend in part on access to equity funding. Failure to meet financial covenants without an effective equity cure or waiver could trigger default and acceleration of debt. Substantially all domestic assets, other than FCC licenses, secure the senior facility.
- Thales disputes Globalstar’s ownership of certain satellite long-lead items. A prior arbitration award could be pursued again; successful confirmation could materially harm financial condition, results, and liquidity. A related settlement payment of approximately €17.5 million remains conditional, and the company had not predicted the outcome of the long-lead-item dispute.
- The company recorded a $1.4 million litigation settlement for its Brazilian subsidiary, paid in October 2016 with approximately 1.3 million common shares. Hughes also has downside protection tied to shares issued for contract payments, with a recorded liability of $3.1 million and settlement measurement through December 30, 2016.
- Other exposures include foreign-currency movements, highly inflationary Venezuela operations, satellite and ground-network performance, and potential dilution from equity financing and convertible securities. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Availability, pricing, and timing of remaining Terrapin funding, and the company’s ability to satisfy future Facility Agreement covenants and debt service.
- Operating cash generation and liquidity after restricted cash, debt payments, and planned ground-network expenditures.
- Whether service-revenue growth and subscriber trends can offset weakness in equipment sales and Simplex demand.
- FCC decisions and commercial prospects for terrestrial low-power service; no approval or deployment outcome was assured.
- Developments in the Thales disputes and potential obligations, plus settlement and share-related exposure involving Hughes.
- The impact of derivative fair-value changes, which materially affect reported earnings but are sensitive to share price and valuation assumptions.