Loral Space & Communications Inc. Q3 2008 Earnings Call Transcript

Nov.11.08 | About: Loral Space (LORL)

Loral Space & Communications Inc. (NASDAQ:LORL)

Q3 2008 Earnings Call

November 11, 2008 11:00 am ET

Executives

Wendy Lewis - Director of Communications

Michael Targoff - CEO

Analysts

Nicole Torraco - Babson Capital

Tim Lash - Third Point

Eugene Fox - Cardinal Capital Management

Marti Murray - Babson Capital

Operator

Good day, everyone, and welcome to the Loral Space & Communications 2008 third quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

At this time, I would like to turn the conference over to Ms. Wendy Lewis, Director of Communications. Please go ahead, ma’am.

Wendy Lewis

As we proceed with the call, some of the remarks we make about future expectations, plans and prospects will be forward-looking statements under the Private Securities Litigation Reform Act of 1995. As you know, actual results may differ materially from those discussed here as a result of a wide variety of factors and conditions.

Please refer to the most recent 10-K and 10-Q forms that we have filed with the SEC for information on those factors and conditions. Now, I would like to turn the call over to Michael Targoff, Chief Executive Officer of Loral Space & Communications.

Michael Targoff

Thank you, Wendy, and good morning to all of you. With me this morning are some of Loral senior executives, including our Chief Financial Officer, Harvey Rein, our General Counsel, Avi Katz, our Treasurer, Richard Mastoloni and Assistant Treasurer, John stack, as well as our Vice President and Controller, John Capogrossi.

Before we get started today, I would like to take a moment to recognize that it is Veterans Day here in the United States and on behalf of the whole Loral community, I would like to thank all of our veterans who have served our country so valiantly.

Yesterday, we announced our third quarter earnings and filed our 10-Q for the quarter. I would like to take this opportunity to draw your attention to some of the important highlights and then we will take some questions. Given these economic times, I want to pay particular attention to our financial position and how we have bolstered our capability to withstand the impact of continued worldwide economic turmoil.

Since we last talked, we had three notable achievements that I want to highlight. First, we saw the successful launch and in-service operations of Nimiq 4. Second, we had strong bookings at Space Systems/Loral and third, we closed a $100 million revolving credit facility, which improves liquidity at our manufacturing division.

Regarding the importance of this credit facility, we are particularly gratified, not only by the availability of the financing on favorable terms in this troubled market, but also by the support of six world class banks. In terms of bookings, the strong results at SS/L not only reflect the company's capabilities, but also provide a healthy backlog of workflow for 2009 and 2010.

In fact, the program backlog at SS/L at approximately $1.4 billion at September 30 is three times what it was in the earlier part of the decade. With the additional booking of our seventh satellite in October, our backlog should serve to help cushion the company from the potential of reduced bookings that may arise due to the current economic environment.

Regarding the launch of Nimiq 4, we do not generally detail the impact of a particular launch on our financial performance because of the commercially sensitive nature of the information. However, given the importance Nimiq 4, I wanted to give some additional insight and concur your attention to the fact that Goldman Sachs recently initiated research coverage of Telesat. In their report, they estimate that Nimiq 4 and for that matter, Nimiq 5, when it is launched, will each generate between C$65 million and C$70 million in annual revenue with EBITDA contribution margins approaching 90%.

This is consistent with our expectations and right on track with the numbers that we disclosed in our 10-K for 2006. Although Telesat's third quarter numbers do not benefit from Nimiq 4, we will see its impact in the fourth quarter and on a going-forward basis. Combined revenues and adjusted EBITDA were $386 million and $114 million respectively for the quarter.

Revenues for the quarter and adjusted EBITDA after eliminating Telesat were $213 million and $6 million respectively. Our net loss was $50 million. This includes a $35 million charge representing Loral’s share of Telesat's third quarter loss, which as you know, was primarily due to non-cash mark-to-market foreign exchange losses. The company ended the third quarter of 2008 with $124 million in cash. This included $24 million of restricted cash at that time, but subsequent to the close of the quarter, $18 million of the $24 million has become available.

This compares to $339 million in cash at the end of 2007 and we'll talk more a little bit later about the uses of cash and what we expect going forward. So given the use of this cash in the past two years and the importance of liquidity in today's climate, I am going to give some more detail about our cash utilization.

In 2007, SS/L used $150 million in cash and we expect to spend up to $200 million in 2008 for a total use of $350 million invested in SS/L operations over the two-year period. During this period, approximately $100 million of that was spent on the growth of long-term orbital receivable that you see on our balance sheet. About $110 million went to capital expenditures. These were mainly for facility upgrades, new test equipment and a number of catch up projects and as well as our normal ongoing CapEx requirements.

Finally, approximately $120 million went towards growth in receivables and inventory reflecting the change in our business. For 2009, we expect that SS/L, absent any material impact arising from customer liquidity concerns that we discussed in our 10-Q will have much lower cash requirements than we have seen over the last two years. The reason our cash requirements are in a different place from 2007 and 2008 is due to our expected reduction in the projected receivables and inventory levels, our capital expenditures moving out of the catch up phase into a normal ongoing level of $25 million to $30 million and expected improved profitability.

As we stated in our 10-Q, we have sufficient liquidity for the year without any meaningful utilization of the revolver. It is important to note that as long as we continue to be successful, the long-term orbital receivable balance will continue to grow and we will continue to acquire cash to fund that as our volume grows. Thus, given these expectations, our cash on hand at September 30 is expected to be sufficient to execute our business plan at SS/L and at the parent company.

The $100 million credit facility will thus provide SS/L with further liquidity for operations, will also serve as a buffer to meet unexpected cash needs, such as a drawdown on a series credit facility or customers failing to make scheduled milestone payments. At the parent company level, we had no debt and believe that we have significant value in our 64% economic ownership interest in Telesat.

As I mentioned last quarter, we continue to consider accessing the capital markets for debt or equity, which would further strengthen our balance sheet and provide liquidity to fund various growth opportunities that we currently see across business lines. Given these uncertain times, this capital would not only provide further assurance of the financial stability at SS/L, but would also provide our customers with a belt-and-suspenders confidence in us as a critical supplier.

Having looked at the big picture, I would like to take a moment to go over SS/L's numbers for the third quarter. Revenues before eliminations were $216 million compared to $207 million in the third quarter of 2007. Adjusted EBITDA was $10 million, which compares to $13 million in last year's third quarter. However, the current number includes the recognition of a non-cash $4 million foreign exchange loss on a hedge which actually, which actually locked in favorable rates for our performance on the Hispasat contract, we expect to fully recover this accounting loss over the life of the contract.

As I previously mentioned, our backlog at September 30 increased to $1.4 billion without including the October SES booking. This compares to $1 billion on December 30, 2007. We have broadened our family of customers and factory capability and we continue to implement programs to improve our productivity and efficiency. The company has booked seven satellite orders this year to date and recent awards including satellites for SES, Hispasat and two additional world-class satellite operators.

While we've obtained significant bookings for the year-to-date, we have also completed a number of programs. There have been five successful launches of SS/L-built satellites this year, including three in the third quarter. A sixth launch is planned by early next year. The launched satellites include the world's largest and most complex satellite for delivering mobile services and 20-kilowatt satellite that now enables extensive high-definition television programming.

Turning to Telesat, performance is right where we expected it to be and we are seeing a steady improvement in EBITDA and EBITDA margin. I'll briefly review the Telesat numbers with you, using US dollars. Revenues were $170 million for the quarter and adjusted EBITDA was $108 million. This is for Q3 and, remember, it does not include the benefit of the Nimiq 4 launch.

The net loss was $54 million, which includes non-cash mark-to-market foreign exchange losses, which themselves netted $53 million. Cash at the end of the third quarter was $49 million and backlog was $4.8 billion.

As I mentioned earlier, Nimiq 4 was launched in September and began generating revenue for Telesat in the second week of October. Telesat's next satellite, built by SS/L, is expected to be launched in the first quarter and will enter commercial service soon thereafter, bringing the number of Telesat satellite over to 14.

Telesat's third quarter interest cost on its outstanding debt of $2.9 billion was approximately $7 million to $8 million. In addition to Telesat's third quarter adjusted EBITDA of $108 million, if you add the results of the launch of Nimiq 4, we would expect Telesat's adjusted EBITDA on a yearly basis to be in excess of interest by approximately $200 million, and result in reduced leverage to close to six times.

Remaining CapEx for the two satellites that are under construction and test was approximately $185 million. In 2009 when both Telstar 11N and Nimiq 5 will launch, a significant satellite-build growth cycle at Telesat' will be completed with the launch of Anik F3, Nimiq 4, Telstar 11N and Nimiq 5 added to the Telesat fleet. These satellites are designed to deliver services for a minimum of 15 years.

I would like to also note that during the quarter, on September 19, a decision was rendered in the shareholder derivative lawsuit finding that the MHR Fund's $300 million investment in Loral did not meet the Delaware standard for entire fairness. As a result, the court decided that MHR's preferred shares should be converted into 9,505,673 non-voting common shares. The actual order implementing that decision has not yet been entered.

In closing, I would like to reiterate that in these uncertain times, we are encouraged by the successful launch of Nimiq 4, our program backlog at SS/L, and our success in putting the 100 million revolving credit facility in place. These successes strengthen the company and position us well in these times.

With that, I would like to turn the call over to the operator, so you can let us know if you have any questions.

Question-and-answer Session

Operator

(Operator Instructions) We'll take our first question from Marti Murray with Babson Capital.

Nicole Torraco - Babson Capital

Hi, it's actually Nicole Torraco for Marti. Question, on the seven satellites that you mentioned to date, does that include [TopMax]?

Michael Targoff

No.

Nicole Torraco - Babson Capital

Okay. How many satellite orders are you expecting for 2008 globally? I think there was an estimate of around 20.

Michael Targoff

When we say satellite orders, let's remember that we're talking about full-size satellites of the kind that we are generally in a place to compete for and I would say that you're talking between 20 and 25 tops, including the orbital class of satellites might be 25 to 30, 27ish.

Nicole Torraco - Babson Capital

Okay. How do you see Loral's market share evolving in that?

Michael Targoff

Obviously, this is a very good year for us, and this is why we embarked upon the facility expansion have been spending the research and development money. All of us are wary about the impact of the economic times. We have pros and cons. As I've said in prior occasions, certainly to the extent customers have a rebuild requirement for replacing a productive satellite. We would expect that they would find where with all to go forward with that.

On the other hand, customers who are in need of capital from the markets, we'll indeed find difficulty in justifying even on good business plans and justifying the raise of capital. So, I think time will tell, as we move in each quarter will give us more information.

Nicole Torraco - Babson Capital

On the spending, on the manufacturing side, given the amount that you have spent, has that business been performing the way you would have expected, or to ask the question in a different way, when and how do you see getting the returns on that capital that you've invested?

Michael Targoff

Well, it's almost a bit of apples and oranges, your question. Let me just say that we have not yet at a place where I can say that we're satisfied with the operating margin at SS/L. On the other hand, I am pleased with the investments we made. It's borne fruit in the awards we received in 2008 and our capability and our market position. We have expectations, hopes, but expectations that we will see the fruits of this, improve our results. Again, I have to temper everything with the potential impact of the financial situation.

Nicole Torraco - Babson Capital

With respect to your agreement with SIRIUS, have you begun construction on the satellite for them?

Michael Targoff

We have two satellites in construction with SIRIUS and they have been for sometime and we've announced each one. We have an XM satellite as well that's essentially complete.

Nicole Torraco - Babson Capital

Okay. Do you expect them to draw on the line?

Michael Targoff

As I think I've indicated in our Q, there are requirements in that credit agreement for them to satisfy and I don't think it's appropriate for me to talk about the conditions. I think it's probably disclosed, but I think I can say that right now the conditions are something that we're looking at closely.

Nicole Torraco - Babson Capital

One last question, can you give any update on the Northrop Grumman agreement, how you're doing with the government business?

Michael Targoff

No, just what we say in the Q, so far we haven't had any fruits of it that's worth talking about.

Nicole Torraco - Babson Capital

Okay.

Michael Targoff

Thank you.

Nicole Torraco - Babson Capital

Thanks.

Operator

(Operator Instructions) We'll go next to Tim Lash with Third Point.

Tim Lash - Third Point

On the seven orders for this year, up until last night you had publicly disclosed six, one unnamed. When did the seventh order come in? Was that earlier in the year?

Michael Targoff

It's in our backlog and bookings, but at this point, we're not disclosing the particulars of it, but we will shortly.

Tim Lash - Third Point

Okay. When did you receive the order? When did it hit backlog?

Michael Targoff

It hit backlog for the first time in the third quarter.

Tim Lash - Third Point

Got it, okay. With respect to the investment that you're making SS/L, in the 10-Q you hinted at another $25 million to $30 million for next-generation equipment investment that you were looking at. Why wasn't that considered last year when you brought up the capacity expansion to begin with?

Michael Targoff

They are two different things. The capability for growth is beyond the 5 to 6 satellites, and the other is equipment that has to be regularly upgraded to handle the new, complex satellites that we are actually in the forefront of and during the tight times in the bankruptcy, reorganization, obviously Loral was unable to keep pace with those requirements. So, it's catching up with new equipment and creating greater capabilities. So they are really two different things.

Tim Lash - Third Point

Got it. With respect to the customer advances and contracts and process items, contracts and process continue to ramp up, has there been some sort of shift in your policy in terms of billing customers? What are you doing there? Are you not getting bills out? What's going on? And then on customer advances, those have come way down, too. So have you changed your terms with customers in terms of upfront capital or?

Michael Targoff

No, there's really no change. It's a reflection of timing on events and bookings and it will go up and down. I think we indicated in the Q that we have about $60 million of receivables, unbilled receivables on some of the customers that give us some concern, but otherwise for the most part we are in regular course, would expect to get a host of small payments from customers that we have confidence, should deliver no problems to us.

Tim Lash - Third Point

Got it. In terms of long-term receivables, you've been investing in this for sometime and you have made note of it on multiple occasions. Obviously, the Board thinks this is a really good investment. Could you provide some insight given that you seem to think it is important as to how the long-term receivable values are arrived at?

Is it a discounted cash, risk-adjusted discounted cash flow stream that you sort of factor in and as satellites get launched, that increases the NPV? Is that the risk judgment that you make those NPVs, is that how you calculate it?

Michael Targoff

It's a little more complex than that. But, first let me correct something I think in your question or at least clarify something. The nature of our business, whether it's Loral or any of our competitors, has historically been and I would not think it would be likely to change, that the customers expect to pay a portion of the contract price over the life of the satellite.

This is not a voluntary decision of our management or our Board. It is a nature of our business. And if you want to be in this business, this is what we should expect. The calculation of the amounts on the balance sheet do reflect present values and also some reserve for collectibles.

Tim Lash - Third Point

Got it. Then with the pension liabilities that you…?

Michael Targoff

Right. I'm sorry?

Tim Lash - Third Point

With the pension liabilities, that's declined quite nicely over the last year. You've indicated you're going to continue to fund that. Can you kind of talk about, are there tax advantages to funding that and on and above your sort of ongoing payments? I mean what's driving you to be so aggressive in paying that down or covering that liability?

Michael Targoff

Basically, we honor our funding obligations under the law. It's not because we voluntarily are trying to take advantage of it, tax advantage. And maybe from time to time, we do some timing shifts, but for the most part, it is purely a reflection of what's required under the laws in the United States.

We are, as I indicated in the Q, we are not immune from the market decline and we indicate our numbers in this sharp decline in our carrying values and that will have an impact on us as it will on the rest of corporate America and then in the ensuing what might be as many as seven years or it could change.

Tim Lash - Third Point

Got it. And one follow-up question with respect to that pension liability. How is that invested? Is that invested in Loral stock?

Michael Targoff

No, not at all.

Tim Lash - Third Point

Okay.

Michael Targoff

Standard.

Tim Lash - Third Point

Okay.

Michael Targoff

Okay, can we move on?

Operator

We'll go next to Eugene Fox with Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Okay, just a few questions. Can you talk about some of the factors such as increased R&D spending, as well as sales and marketing that have impacted SS/L margins, how you see them playing out over the course of the quarter and next year?

Michael Targoff

Yes, the sales and marketing increase this year, because our vision as to the opportunities this year, which turned out to be true, depending upon the outlook as we move quarter to quarter, we will either turn that faucet up or down, if we can capture the same awards that we did this year, we would be thrilled to spend the money.

On the other hand, if the market is softer for any reason, we will certainly modulate that. R&D, we had a catch up, again, as I have mentioned with the research and development, our ongoing levels of R&D, we would expect the assumption that business in the ordinary course and we don't have to throttle it down, would stay in the mid-20 range. We would hope that we can justify spending that money because we're doing good things.

Eugene Fox - Cardinal Capital Management

Could you give us a sense of what your target, near-term targets for EBITDA margins would be in that business?

Michael Targoff

No, we're not going to do that. We've declined to do that. I would like to be able to help you, but I think you will just have to gauge it from what we do disclose about our backlog and our quarterly results.

Eugene Fox - Cardinal Capital Management

Well, let me ask it differently. Should we expect as a result of increased volumes to see higher margins?

Michael Targoff

Well, we would hope that with increased volumes, that would result in higher and better margins. I think I've talked in prior quarter calls about our disappointment and explained some of the factors, which I hope and trust are not ongoing that caused that and we would like to see and in each quarter we would hope to see improved margins.

Eugene Fox - Cardinal Capital Management

Okay. You referenced earlier in the call that the order in the lawsuit had not been entered. Is that the primary reason of why it's not reflected in the current financials?

Michael Targoff

Yes, we can't reflect it in the financials until it's received.

Eugene Fox - Cardinal Capital Management

Any sense as to when that's expected?

Michael Targoff

Towards the end of the year. It could be very late this year or very early next year.

Eugene Fox - Cardinal Capital Management

Okay. I'll get back in queue. Thank you.

Operator

We'll take a follow-up from Marti Murray with Babson Capital.

Marti Murray - Babson Capital

What is the date by which the company has to decide to whether they are going to appeal a shareholder litigation?

Michael Targoff

Not sure about Delaware law, but generally its 30 days, I believe from the entry of the order.

Marti Murray - Babson Capital

Okay, so have you made a decision?

Michael Targoff

No, the order hasn't been entered. The company [remembers] the derivative plaintiff. So it's a complicated question. I don't think it's appropriate to talk about it.

Marti Murray - Babson Capital

Sorry?

Michael Targoff

I said, I don't think it's appropriate to discuss the legal strategy.

Marti Murray - Babson Capital

Okay.

Operator

(Operator Instructions) And we have no further questions at this time.

Michael Targoff

Okay. Thank you all very much. I appreciate your interest and look forward to seeing you and talking to you again soon. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation.

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