Globalstar, Inc. — 2011 Form 10-K
Business and period: Globalstar provides satellite-based mobile voice and data services, including two-way Duplex and one-way SPOT and Simplex offerings. This annual report covers the year ended December 31, 2011; quarterly figures below are unaudited. The company had approximately 486,000 subscribers at year-end, up 11% from 2010, and had launched 18 of 24 planned second-generation satellites.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $72.8 million | $67.9 million |
| Operating loss | $73.2 million | $59.8 million |
| Net loss | $54.9 million | $97.5 million |
| Operating margin | Approximately (101%) | Approximately (88%) |
| Cash from operating activities | $(5.5) million | $(23.3) million |
| Cash and cash equivalents, year-end | $10.0 million | $33.0 million |
| Long-term debt carrying value, year-end | $723.9 million | $664.5 million |
- Revenue increased 7%, driven by SPOT and Simplex growth. Service revenue was $55.4 million (76% of revenue); equipment sales were $17.4 million (24%).
- Operating expenses rose 14% to $146.1 million, principally because depreciation and amortization increased to $50.0 million as new satellites entered service. The operating loss therefore widened despite higher revenue.
- Net loss narrowed substantially, primarily reflecting a $23.8 million derivative gain versus a $30.0 million derivative loss in 2010; this fair-value change is not an indication of improved operating profitability.
- Cash used in investing was $99.4 million, including $85.6 million for satellites, ground systems and launches. Financing provided $82.6 million; cash declined by $23.1 million.
- Year-end current assets were $69.5 million against current liabilities of $91.6 million. Restricted cash of $46.8 million was principally reserved for debt service and is not ordinary operating liquidity. The company also reported $8.0 million available under its facility and $45.8 million in its contingent equity account at year-end, subject to contractual conditions.
- Total debt principal was $783.9 million, compared with its $723.9 million carrying value. Debt includes a $578.3 million senior secured facility and convertible notes. The $71.8 million 5.75% notes may be put to the company for cash on April 1, 2013.
Material changes versus prior periods
- Duplex service revenue fell 15% to $19.8 million; average monthly Duplex ARPU declined to $17.54 from $19.92, and year-end Duplex subscribers decreased 4% to 92,047. Management attributed weakness to unreliable two-way service from the aging first-generation constellation and price reductions intended to retain customers.
- SPOT service revenue increased 34% to $19.8 million and year-end subscribers rose 34% to 202,741. However, 25% of reported SPOT subscribers were suspended accounts with no service revenue being recognized while payments were collected.
- Simplex service revenue increased 20% to $5.5 million, with year-end subscribers up 7% to 140,760.
- Inventory write-downs were $8.8 million, following $10.9 million in 2010. Total inventory remained $41.8 million, with a further $9.2 million in advances for inventory, much of it related to Duplex products.
- Cash used in operating activities improved from $23.3 million to $5.5 million, largely because of favorable working-capital movements; investing outflows also fell as satellite construction neared completion.
Outlook, risks and unusual items
- Management planned to launch the remaining six second-generation satellites in the second half of 2012 and expected improved Duplex reliability and service revenue as additional satellites entered service. The filing provides no clear company-wide revenue or earnings forecast.
- Management expected improved 2012 operating cash flow and believed year-end cash, contingent equity draws and operating cash flows could fund the fourth launch and 2012 obligations. These expectations depend on launch execution, satellite performance, contractor payment deferrals and operating improvements. Longer-term satellite and ground-network plans require additional financing not yet arranged.
- Momentum-wheel anomalies affected certain satellites launched in 2010 and 2011. A software solution was being developed, but success was not assured; failure to resolve the issue could impair satellite assets and service plans.
- Globalstar was in arbitration with Thales over rights and pricing for additional satellites. Thales sought €51.5 million in termination charges; Globalstar asserted a counterclaim of up to €395 million. The outcome was unknown, and no reserve was recorded.
- Hughes and Ericsson payments were deferred, with interest accruing; continued deferrals and revised payment terms are important to near-term liquidity. The company also was negotiating termination of Qualcomm equipment commitments.
- The FCC had suspended the company’s U.S. authority to use its Ancillary Terrestrial Component (ATC) spectrum pending compliance with gating criteria. ATC plans therefore remained uncertain. Spectrum sharing, foreign licensing and gateway availability are additional regulatory and operating risks.
- Other material risks include substantial secured debt and restrictive covenants, potential dilution from equity-linked financing and warrants, currency exposure (about 34% of 2011 sales were denominated in foreign currencies), and dependence on third-party launches, vendors and gateway operators. The stock was moved to the Nasdaq Capital Market after failing the $1 minimum bid requirement.
- Auditors issued an unmodified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- Whether all 24 second-generation satellites were launched, accepted and operating reliably, including resolution of momentum-wheel anomalies.
- Actual Duplex service quality, subscriber retention, ARPU and revenue recovery, alongside SPOT account collections and Simplex growth.
- Available unrestricted liquidity, contingent-equity draw conditions, contractor payment status, and financing needed beyond 2012.
- The outcome and financial consequences of the Thales arbitration, and the status and cost of Hughes and Ericsson ground-network commitments.
- Debt covenant compliance, funding of the 5.75% note reserve and the company’s ability to meet the April 2013 noteholder put and scheduled facility repayments.
- Any changes in ATC authorization, spectrum-sharing obligations, Nasdaq listing status and potential dilution from financing or outstanding warrants.