Globalstar, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Globalstar provides mobile satellite voice and data services and related equipment. This unaudited quarterly report covers the three months ended March 31, 2012; comparative results are for Q1 2011. Unless stated otherwise, financial amounts below are in U.S. dollars.
Key financial results and liquidity
- Revenue: $16.7 million, down 8% from $18.3 million. Service revenue fell 11% to $12.6 million; equipment revenue increased 1% to $4.1 million.
- Profitability: Operating loss was $14.9 million versus $12.8 million; net loss was $24.5 million versus $6.5 million. Basic and diluted loss per share were $0.07 versus $0.02. Operating margin was approximately negative 89%, compared with negative 70%.
- Cash flow: Cash used in operations was $2.6 million, improving from $3.6 million. Investing used $23.3 million, principally for the second-generation satellite and ground program; financing provided $23.3 million. Cash and cash equivalents declined $2.2 million to $7.7 million.
- Liquidity: At quarter-end, current assets were $68.6 million and current liabilities $80.0 million. In addition to $7.7 million cash, the company reported $3.0 million available under its Facility Agreement and $27.3 million remaining in its contingent equity account. Restricted cash totaled $49.3 million and is not equivalent to unrestricted operating cash.
- Debt: Long-term debt had $790.4 million principal and $732.7 million carrying value, up from $783.9 million and $723.9 million, respectively, at year-end. No current portion was reported. The Facility Agreement is floating-rate debt; scheduled principal payments were deferred to the earlier of eight months after the fourth satellite launch or June 30, 2013.
- Balance sheet: Total assets were $1.425 billion and stockholders’ equity $533.8 million. Inventory was $41.2 million, in addition to $9.2 million of inventory advances.
Changes versus Q1 2011
- Reported revenue decreased by $1.5 million, mainly because Q1 2011 included approximately $2.0 million recognized upon termination of the Open Range partnership. Excluding that item, management said revenue increased approximately $0.5 million, or 3%.
- SPOT service revenue rose 27%, supported by subscriber growth; Simplex service revenue rose 7%. Duplex service revenue declined 18%, and Duplex subscribers declined about 5%, reflecting ongoing two-way service issues. SPOT subscribers increased about 29%; Simplex subscribers increased about 11%.
- Total subscribers reached 498,397, up approximately 11% year over year. However, 24% of SPOT subscribers were suspended accounts at March 31, 2012, versus 16% a year earlier.
- Operating expenses increased 2% to $31.7 million. Lower service costs and marketing, general and administrative expenses were offset by a $4.1 million increase in depreciation, amortization and accretion as more second-generation satellites entered service.
- Net loss widened substantially, including a $6.5 million derivative loss versus a $6.4 million derivative gain in Q1 2011. Management attributed the current-period derivative loss primarily to the increase in the company’s stock price. Interest expense, net of capitalized amounts, also rose to $3.1 million from $1.2 million.
Outlook, risks and unusual items
- Management planned to launch the remaining six second-generation satellites in the second half of 2012 and expected expanded coverage to support better Duplex reliability, service revenue and ARPU. Eighteen of 24 satellites had been launched by quarter-end.
- Management believed cash on hand, operating improvements and anticipated draws of the remaining contingent equity funds would cover the fourth launch and existing debt and restructured contractual obligations over the next 12 months without additional external financing. That expectation is subject to significant uncertainties. Longer-term satellite, ground-system and product plans require additional external financing, which had not been arranged.
- The company was seeking a waiver or amendment for a Facility Agreement nonfinancial covenant concerning in-orbit acceptance of the 18 launched satellites. The company was compliant with covenants at March 31, but failure to obtain relief could constitute a default and could trigger cross-default or cross-acceleration provisions.
- A Thales arbitration concerned the company’s rights and pricing for additional satellites. Thales sought €51.5 million in termination charges; Globalstar disputed the claim and asserted a potential reimbursement claim of up to €395 million. The outcome was unknown, and no adjustment or reserve was recorded.
- Some second-generation satellite momentum wheels had shown anomalous behavior. A software solution was being developed, but success was not assured; failure to resolve the issue could impair certain satellite assets.
- Payment terms with Hughes and Ericsson were extended, with deferred balances bearing interest. The Hughes agreement included a potential $20.0 million termination payment. The company also projected it would miss payroll requirements under its Louisiana relocation agreement and recorded a $1.6 million liability.
- Management cited recurring operating losses and negative operating cash flows in each of the prior three years, satellite-service reliability issues, launch and deployment timing, contractor obligations, financing needs and execution of its operating plan as significant uncertainties.
Most important facts for investors to verify
- Whether the remaining six satellites launched on schedule and whether the momentum-wheel issue was successfully resolved.
- Whether Globalstar obtained the Facility Agreement covenant waiver or amendment, and maintained access to available facility and contingent-equity funding.
- The outcome and financial consequences of the Thales arbitration, including any impact on satellite procurement or contractor payments.
- Whether Duplex reliability, subscriber trends and operating cash flow improved, and whether suspended SPOT accounts converted to paying subscribers.
- Whether additional financing was secured for longer-term satellite, ground-infrastructure and product plans.