Globalstar, Inc. — Q2 2016 Form 10-Q
Business and period. Globalstar provides global mobile satellite voice and data services, including Duplex, SPOT and Simplex. This unaudited report covers the three and six months ended June 30, 2016; comparisons are with the same 2015 periods.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $25.1m | $23.0m | $46.9m | $44.0m |
| Operating loss | $(16.4)m | $(17.4)m | $(32.1)m | $(34.6)m |
| Operating margin | (65.4%) | (75.7%) | (68.4%) | (78.6%) |
| Net income (loss) | $14.1m | $204.8m | $(12.8)m | $75.0m |
| Derivative gain | $40.5m | $237.1m | $39.2m | $129.2m |
Q2 service revenue rose 13% to $21.0m, while equipment sales declined 7% to $4.1m. For the first half, service revenue increased 11% to $39.7m and equipment sales fell 13% to $7.2m. Management attributed service growth chiefly to subscriber-base and ARPU increases; the subscriber base was approximately 693,000 at quarter-end, up 3% year over year. Operating losses narrowed, but reported net income was highly affected by noncash derivative fair-value gains. Basic EPS was $0.01 in Q2 and $(0.01) for the first half.
For the six months, operating cash flow was $1.0m, versus cash used of $1.3m in 2015; investing cash outflow was $12.5m and financing cash inflow was $15.1m. Cash increased $3.8m to $11.3m. An additional $37.9m was restricted in the debt-service reserve and is not generally available for operations. At June 30, current assets were $42.2m versus current liabilities of $116.0m.
Debt carrying value was $578.5m ($38.1m current and $540.4m long-term); stated principal was $664.8m. The fully drawn senior Facility Agreement had $559.4m principal outstanding and matures in December 2022. The subordinated Thermo loan had $88.4m principal outstanding and accrues interest at 12% annually, capitalized rather than paid currently. Stockholders’ equity was $256.1m.
Changes, outlook and risks
- Revenue growth was led by SPOT, Duplex and Simplex service. Average SPOT subscribers increased 9%; Duplex subscribers increased 7% in Q2. Simplex customers in oil and gas faced higher churn amid the industry downturn. Equipment sales were lower, especially Duplex and Simplex.
- Marketing, general and administrative expense increased 13% in Q2, primarily reflecting a $1.1m increase in the accrual for a Brazilian litigation settlement. The expected $1.4m settlement was to be paid in Globalstar shares. Higher professional, stock-compensation and subscriber-acquisition costs were partly offset by lower bad-debt expense.
- Six-month capital expenditures, excluding interest, were approximately $9.4m. Ground-network construction in progress was $190.3m; management expected to begin depreciation in the near future. Remaining estimated Ericsson and Hughes contract payments were $6.0m and $0.8m, respectively.
- No numerical full-year guidance is provided. Management said the remaining $31.5m available under its $75m Terrapin stock-purchase agreement could be drawn for covenant cures or general corporate purposes. The company was compliant with Facility Agreement covenants at June 30, but relied on equity-cure contributions, including a $22m June Terrapin draw; failure to maintain compliance or obtain a cure or waiver could permit acceleration of debt. The Thermo equity commitment was exhausted.
- Management described a potential terrestrial low-power broadband opportunity using licensed spectrum. The FCC circulated proposed rules on May 13, 2016; adoption and commercial deployment were not assured. The filing also identifies foreign-currency exposure, variable-rate debt sensitivity (a 1% rate change was estimated to affect annual interest expense by about $5.6m), and Brexit-related regulatory, trade and currency uncertainty.
- Material contingencies include Thales disputes over contract deliverables and ownership of long-lead items; the filing says the outcome is uncertain. Thales may also seek confirmation of a prior arbitration award, which management says could materially harm financial condition, results and liquidity. The company had a $19.5m accrued contract-termination charge. A $7.4m liability for potential additional Hughes share issuance was subject to downside protection through September 30, 2016.
Important facts for investors to verify
- Whether service-revenue growth, subscriber additions and ARPU trends continue, particularly given oil-and-gas exposure and declining equipment sales.
- Cash needs and covenant headroom, the timing and pricing of further Terrapin equity draws, and the effect of ongoing share issuance and potential dilution.
- Debt-service requirements, floating-rate exposure, and the company’s ability to fund operations and capital needs with limited unrestricted cash.
- Developments in the Thales and Hughes matters, the Brazilian settlement, and potential FCC action on terrestrial spectrum authority.
- The magnitude and volatility of noncash derivative gains: the embedded derivative liability was $200.5m at June 30, and its fair value depends significantly on stock-price and other unobservable assumptions.