Globalstar, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 1, 2018. Globalstar provides mobile satellite voice and data services, subscriber equipment, and related products. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $35.7 | $30.5 | $98.2 | $83.2 |
| Operating income (loss) | ($18.0) | ($10.7) | ($29.0) | ($38.3) |
| Net income (loss) | $9.0 | $52.4 | $89.9 | ($66.5) |
| Operating cash flow | Not separately presented | Not separately presented | $19.8 | $16.6 |
- Revenue rose 17% in Q3 and 18% year to date. Service revenue increased to $29.9 million in Q3 and $83.9 million for nine months; equipment sales increased to $5.8 million and $14.3 million, respectively.
- Service growth reflected higher ARPU across core products. Q3 average subscribers were 747,200 versus 714,660; Duplex subscribers declined, while SPOT and Simplex subscribers increased. Management cited price increases, stronger SPOT subscriber retention, and Simplex expansion.
- Operating expenses were $53.7 million in Q3, up 30%, and $127.1 million for nine months, up 5%. Q3 operating loss widened as depreciation and amortization and merger-related advisory/legal costs increased.
- Reported net income was substantially affected by noncash derivative gains: $39.1 million in Q3 and $145.9 million for nine months, versus $78.8 million and $4.9 million in the prior-year periods. Nine-month results also included a $20.5 million benefit from reversing the Thales contract termination charge and $6.8 million income from a legal settlement.
- Derived gross profit before depreciation, amortization and accretion (revenue less cost of services and equipment sales) was approximately $21.8 million, or 61% of revenue, in Q3, versus $18.2 million, or 60%, in Q3 2017. Nine-month figures were approximately $59.4 million, or 61%, versus $48.1 million, or 58%. These are calculated from reported line items.
- Basic and diluted EPS were $0.01 in Q3 2018 versus $0.04 in Q3 2017; nine-month EPS was $0.07 versus a loss of $0.06.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $20.5 million, down from $41.6 million at year-end 2017. Restricted cash was $52.9 million, reserved for Facility Agreement debt service and not freely available for general purposes.
- Nine-month operating cash flow of $19.8 million and investing outflows of $13.2 million were more than offset by $38.5 million of financing outflows, principally $38.9 million of Facility Agreement principal payments. Cash, cash equivalents and restricted cash totaled $73.4 million, down from $105.3 million at year-end.
- Total debt principal was $545.8 million; carrying value was $495.3 million after discounts and deferred financing costs. Carrying amounts included $87.7 million current and $407.6 million long-term debt. Facility Agreement principal outstanding was $428.3 million; Thermo subordinated loan principal was $116.1 million and accrues interest at 12%.
- Management said December 2018 and June 2019 Facility Agreement payments are expected to exceed available cash sources while maintaining the required reserve. Funding was not fully arranged. The company anticipated needing an equity cure contribution to meet the December 31, 2018 financial covenant test, with its source not fully arranged. It reported covenant compliance as of September 30.
- Current assets were $115.7 million and current liabilities $162.5 million. Restricted cash comprises most of reported cash plus restricted cash, and should not be treated as unrestricted liquidity.
Changes, outlook and risks
- Globalstar launched Sat-Fi2 in April, SPOT X in May, and SmartOne Solar in March 2018. Management said Sat-Fi2 sales were slower than expected amid usability and production issues; SPOT X sales were also affected by production issues expected to be resolved. Sat-Fi2 was the first product operating on the upgraded ground network.
- Approximately $220.9 million of next-generation ground infrastructure was placed into service in 2018, increasing depreciation; management estimated depreciation of about $4.4 million per quarter for those assets. A further $16.5 million remained in construction in progress.
- Globalstar adopted ASC 606 on January 1, 2018 using the modified retrospective method. It recorded a $3.1 million reduction to opening retained deficit; prior-year results were not restated, so reported comparisons are not fully on the same accounting basis. Q3 service revenue included more contract-expiration revenue than under legacy accounting; year-to-date ARPU impact was described as minimal.
- The company removed a €17.5 million Thales-related liability, reducing nine-month operating expenses by $20.5 million, after concluding the arbitration award’s enforcement period had expired. It said alternative recovery efforts could still be pursued and would be defended.
- A shareholder lawsuit filed in September alleges fiduciary-duty and related claims involving spectrum monetization efforts, the 2017 offering, and a proposed merger. The merger agreement with Thermo-related parties was terminated by mutual agreement on July 31, with no termination fee. The company reported $2.4 million of legal and adviser costs for the action and related records matters; potential legal-fee losses were reasonably possible but not estimable.
- No specific financial guidance was provided. Management identified funding, covenant compliance, debt service, product acceptance and production, satellite and ground-network performance, spectrum authorization, competition, foreign currency and litigation as risks. The filing reported no material changes to the risk factors in the 2017 Form 10-K.
Investor verification priorities
- Confirm the plan and committed sources for upcoming debt payments, the required reserve, and the anticipated covenant equity cure.
- Assess operating performance excluding derivative fair-value gains and the Thales reversal; review recurring operating cash generation against debt service needs.
- Track subscriber trends and ARPU by product, including Duplex subscriber declines and whether new-device production and sales issues are resolved.
- Review the implications of the shareholder litigation, possible insurance recoveries, and the status of any remaining Thales-related obligations.
- Evaluate unrestricted liquidity separately from restricted cash and monitor the effect of floating-rate debt and foreign-exchange exposure.