Globalstar, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Globalstar provides satellite-based mobile voice and data services, including Duplex, SPOT and Simplex. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Service revenue | $15.4 | $14.2 | $42.1 | $41.8 |
| Equipment revenue | $5.2 | $4.0 | $15.1 | $13.7 |
| Total revenue | $20.5 | $18.2 | $57.3 | $55.4 |
| Operating loss | $(17.7) | $(21.4) | $(76.0) | $(51.0) |
| Net loss | $(41.2) | $(0.7) | $(93.2) | $(21.2) |
| Operating cash flow | Not separately provided | Not separately provided | $10.9 | $(10.9) |
- Q3 revenue rose 13%; nine-month revenue rose 3% (about 7% excluding the $2.0 million Open Range revenue recognized in 2011). Q3 operating loss narrowed, while the nine-month operating loss widened.
- Net losses reflect, among other factors, derivative fair-value movements: a Q3 loss of $16.5 million versus a $23.8 million gain in 2011, and a nine-month loss of $2.6 million versus a $34.1 million gain. Interest expense also increased as less interest was capitalized during satellite construction.
- Nine-month operating expenses included a $22.0 million Thales contract termination charge and a $7.1 million reduction in the carrying value of the first-generation constellation. Excluding these items, management reported nine-month operating expenses decreased about 2% year over year.
- Cash and cash equivalents were $1.2 million at September 30; restricted cash was $50.4 million. Management also reported $22.8 million remaining in the contingent equity account and $3.0 million then available under the Facility Agreement. Current assets were $151.0 million against current liabilities of $762.9 million.
- Nine-month investing cash use was $47.8 million, mainly for satellites, ground systems and related costs; financing provided $27.9 million. Cash declined $8.7 million during the period. Operating cash flow benefited from a $6.0 million refund and favorable working-capital movements.
- Total debt principal was $793.8 million; its carrying value was $742.1 million. The balance sheet classified $651.9 million of debt as current, including Facility Agreement borrowings classified current because of covenant defaults and the upcoming put right on the 5.75% notes.
Material changes and operating trends
- SPOT and Simplex subscriber growth supported service revenue: Q3 SPOT service revenue increased 33% and Simplex increased 9%. Ending subscribers increased year over year by 22% for SPOT and 34% for Simplex.
- Duplex service revenue fell 3% in Q3 and 12% for the first nine months, with Duplex subscribers down about 6% year over year amid two-way communication reliability issues. Q3 Duplex equipment sales increased 164% from a low comparison base.
- Q3 cost of services fell 33% and marketing, general and administrative expense fell 24%, reflecting cost controls and operational streamlining. Depreciation, amortization and accretion rose 54% in Q3 and 39% for the nine-month period as additional second-generation satellites entered service.
- Cash used in investing declined from $84.5 million to $47.8 million for the first nine months, as satellite construction neared completion and some ground-upgrade payments were deferred.
Outlook, risks and contingencies
- Globalstar had launched 18 of its first 24 second-generation satellites and planned to launch the remaining six in Q1 2013, subject to factors outside its control. It expected improved coverage and reliability to support Duplex usage, customers and equipment sales; these are forward-looking expectations, not assured results.
- Management stated that cash on hand, operating cash flow and remaining contingent-equity funds were insufficient to meet contractual obligations over the next 12 months. The company was seeking additional financing and amendments to existing debt, including the Facility Agreement and 5.75% notes. It said it could not estimate when, or whether, longer-term plans would be completed.
- Lenders concluded that defaults had occurred under the Facility Agreement in connection with the Thales settlement. As of issuance, the COFACE Agent had not notified the company of an intention to accelerate the debt; however, future covenant noncompliance was expected, and failure to obtain waivers or amendments could lead to acceleration and cross-acceleration. After quarter-end, a waiver permitted a contingent-equity draw and lenders permitted $2.4 million of Facility funding for a Thales milestone payment.
- Holders of the $71.8 million 5.75% notes could require cash repurchase on April 1, 2013. The company said additional financing was needed for contractual obligations, launch-related costs, the Thales settlement and satellite plans.
- The Thales settlement included a $22.0 million charge and an accrued termination amount of approximately €17.5 million. A separate €3.864 million Thales claim remained unresolved. The agreement for six additional satellites, software upgrades and services was priced at €149.9 million and depended on obtaining financing for at least 85% of the contract price, among other conditions.
- Deferred Hughes and Ericsson payments carried interest at 10% and 6.5%, respectively. Contract termination could require payments of $20.0 million to Hughes or $10.0 million to Ericsson and could create impairment charges.
- The filing identifies foreign-currency and variable-rate debt exposure. A 1 percentage-point interest-rate change on the full Facility Agreement borrowing was estimated to affect annual interest expense by about $5.9 million. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Globalstar secured sufficient financing and lender amendments or waivers, and whether any debt acceleration or cross-default occurred.
- Whether the April 1, 2013 5.75% note put was funded or amended, and how much cash remained available after required payments.
- Whether the remaining six satellites launched and entered service on schedule, and whether Duplex reliability and revenue improved.
- Whether the Thales settlement obligations, unresolved claim, and financing conditions for the additional six satellites were resolved.
- Whether deferred contractor payments, equipment inventory and future sales supported liquidity without additional material impairment or dilution.