Loral Space & Communications Inc. Q4 2008 Earnings Call Transcript

| About: Loral Space (LORL)

Loral Space & Communications Inc. (NASDAQ:LORL)

Q4 2008 Earnings Call

March 17, 2009; 11:00 am ET


Michael Targoff - Chief Executive Officer

Harvey Rein - Chief Financial Officer

Richard Mastoloni - Treasurer

Avi Katz - General Counsel

John Capogrossi - Controller

Wendy Lewis - Director of Communications


Jeffrey Smith - UBS

Nicole Torraco - Babson Capital


Good day everyone and welcome to the Loral Space & Communications, year end earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Ms. Wendy Lewis, Director of Communications for Loral.

Wendy Lewis

Good morning. As we proceed with the call, some of the remarks we make about our 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 and good morning everyone. With me today are some of Loral’s senior executives, including CFO, Harvey Rein; General Counsel, Avi Katz; Treasurer, Richard Mastoloni; and Controller, John Capogrossi.

Yesterday we announced our year end and fourth quarter results and filed our 10-K for the year. As in the past, I would like to take this opportunity to review the year, to draw your attention to some of the important highlights and discuss our current status. At the conclusion we will take questions.

In light of the difficult overall economic environment, I am pleased to report that our 2008 results are right on track with our expectations, at both base systems of Loral and Telesat. With seven satellite contracts, SS/L achieved more than 50% market share of its targeted market for the year.

At Telesat, Nimiq 4 was successfully launched and commenced commercial service, albeit a few months behind our original expectations and our synergy objectives were achieved ahead of schedule. The accomplishments are reflected in Telesat’s reported pro forma EBITDA increase of approximately 24%.

Liquidity is high on everyone’s minds these days. When we look at both SS/L and Telesat from a fundamental overall liquidity perspective, I’m gratified to say that neither company has a liquidity issue. Both companies remain well capitalized with operations and planned CapEx funded for the foreseeable future with available credit facilities and with no significant debt maturities until 2014.

Going into more detail, in assessing our current liquidity, particularly at SS/L, it is important to understand the components of our cash uses in 2008. Largely to support growth at SS/L, we used approximately $250 million in cash for operations and capital investments. More specifically while SS/L had positive cash derived from its EBITDA, the cash was offset by a number of operating requirements.

First, $173 million was used for contract asset growth, driven primarily by scheduled milestone payments from customers that lagged behind our expenditures. This, as I will highlight later, is mostly a timing matter. Second, approximately $44 million was used to fund our orbital receivables. Third, $54 million was used for capital expenditures, largely for completion of SS/L’s facility expansion program.

Confirming the timing nature of these cash flows, in 2009 we expected our cash flow at SS/L will reverse the 2008 trend and be positive. Cash flow will be driven by the same satellite construction contracts that used cash in 2008, generating significant milestone payments due in 2009.

This cash from operations will be more than sufficient to cover SS/L’s capital expenditures of about $40 million this year and to fund our orbital balance growth, which should be in the $60 million range, as well as to generate positive cash flow. By the way, as we have described in the past, our capital expenditures on a run rate basis should reduce to between $25 million and $30 million in years subsequent to 2009.

I have repeatedly voiced my view, that given the nature of the satellite manufacturing business, short term metrics do not necessarily reconcile with underlying business values. Thus, even though SS/L utilized significant cash in 2008, I believe the business value strengthened.

I also believe there is little better evidence of the asset value of SS/L, not withstanding the timing of the dynamic cash flows that I have just described and the fact that six of the world major banks agreed to provide revolver financing to us. This was accomplished at the height of the financial crisis in October 2008, when we were able to complete a $100 million revolving credit facility. Again, reflecting the changing cash flows at SS/L, we expect the revolver will be undrawn by the end of the first quarter as compared to having a $55 million balance at year end 2008.

In addition, our previously disclosed concern regarding the impact of the financial crisis uncertain of our customers, while still important, has significantly improved. In fact, by the end of the first quarter of this year, we expect to have received approximately $100 million in receipts from these customers, most of which has already come in as we sit here today.

Our cash position reflects the excess of receipts over expenditures. Thus, at the end of 2008, Loral had $118 million of cash and cash equivalents and $6 million of restricted cash. By February 27 of this year, we improved our year end position by paying off $30 million of the money that had been drawn down on the revolver and we increased our cash by $8 million.

I will also like to address the subject of non-cash charges, which are prevalent throughout American industry. Loral and Telesat were not immune and consequently our reported results reflect significant non-cash charges. The accounting facts are that despite the substantial positive EBITDA at SS/L and Telesat, Loral reported a net loss of $693 million.

This loss was primarily the result of non-cash charges taken at SS/L of $180 million for the calculation of the impairment of goodwill and non-cash charges at Telesat of $455 million, for the calculation of the impairment of other intangible assets at Telesat and $400 million for exchange rate fluctuations, primarily related to Telesat’s United States dollar denominated debt.

Given the macro financial environment, these write-downs were required under accounting rules, even though Telesat’s reported pro forma EBITDA grew by 24% from 2007 to 2008 and SS/L’s EBITDA grew 31%, and both businesses had improved margins.

From an operating perspective, it is worthwhile to take a closer look at SS/L. The company had a number of significant accomplishments in 2008, continuing as a leader in providing high power commercial satellites. Our seven satellite orders accounted for more than half of the announced orders in the medium and large satellite market.

The total value of new bookings for the year was a robust $1.24 billion, which contributed to a 35% increase in our backlog over year end 2007. At the end of 2008, our backlog was a healthy $1.4 billion. SS/L revenues for the year before eliminations increased $67 million over those reported in 2007 and our adjusted EBITDA for the segment increased by $11 million from the previous year.

The current backlog which represents nearly two years of sales at the 2008 level includes satellites from the world leading satellite operators. There are four satellites for SES, among them NEW SKIES 14 will be the largest satellite in the SES fleet and QuetzSat-1 which is fully leased to EchoStar for direct broadcast service in Mexico and North and South America. The backlog also includes three satellites for EchoStar, two for Intelsat and one each for Telesat, Hispasat and AsiaSat.

Additionally SS/L delivered five satellites to its customers during the year, all of which were launched successfully. These include the world’s largest and most complex satellite for delivering mobile services and a 20-kilowatt satellite for high definition television programming.

Looking forward, despite the world financial situation, we believe that technology will continue its inevitable advance and there will be demand around the world for high-power satellites and satellites for newer applications such as broadband and direct mobile broadcast. While timing, particularly for these newer applications maybe more difficult to predict, the replacement market enhanced by high definition requirements, should continue to provide reliable demand. As our recent booking record reflects, SS/L is the provider of choice for these types of satellites.

Turning to Telesat; as I noted earlier, Nimiq 4 entered into service in October and is full leased to Bell TV, which will use the new satellite to enhance and expand its industry leading high definition television services across Canada. From day one of operations, this satellite has been delivering the expected revenue and EBITDA growth that we envisioned.

Another new satellite Telstar 11N was successfully launched last month and will go into service in the second quarter of this year, further boosting revenue and EBITDA. 11N will provide broadband service over the Atlantic Ocean for ships and planes and also provide support for video and data services in Africa, where there is evidence of pent-up demand, as well as Northern Europe and North America. It is currently about 25% preleased.

A third new satellite Nimiq 5, another direct broadcast satellite, is also fully leased to Bell TV. Nimiq 5 which is under construction by Space Systems, Loral is scheduled to be launched later this year and will provide growth in 2010.

In closing, I would like to reiterate that in these uncertain times, we are encouraged by the successful launch of Nimiq 4 and Telstar 11N and the planned addition Nimiq 5 will provide. At SS/L our programmed backlog, our successes in putting the $100 million revolving credit facility in place and our product line, position us well for the future. We believe the combination of Telesat and SS/L continues to provide a solid foundation for growth and shareholder value.

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

Question-and-Answer Session


Thank you. (Operator Instructions) We will take our first question from Mr. Smith, Jeffrey Smith with UBS.

Jeffrey Smith - UBS

Mickey, in light of the recent criticism of executive compensation, do you think that your compensation is appropriate?

Michael Targoff

I think it could be higher, but I do think it’s appropriate, yes. I think it’s important to make sure everybody that understands that if you looked at my contract and you examined what the level of stock options would have been, had the compensation committee granted stock options in line with the contract numbers, it would have been a very large number.

If you look at what I received, I received 175,000 share contract commitment, but only 85 now are restricted shares, but most importantly, those shares are worthless to me unless and until the stocks of Loral goes up to $25. So, I get zero value and my value creation with those grants is absolutely tied to the benefit to the shareholders.

So, frankly I think it’s a terrific precedent for were CEO’s to consider in light of the trading levels of their stock, but I certainly do not have any embarrassment about the sensitivity to the grant that I just received.

Jeffrey Smith - UBS

Okay. Thank you.


Our next question comes from Nicole Torraco with Babson Capital.

Nicole Torraco - Babson Capital

Hi, good morning.

Michael Targoff

Good morning.

Nicole Torraco - Babson Capital

I just want to revisit the impairment charges of Telesat and SS/L. Just sort of understanding what precisely those are due to. The $455 million at Telesat is a portion of that related to actually FX changes or is that something separate?

Michael Targoff

No, that part of it has nothing to do with FX changes. One second. Harvey?

Harvey Rein

Both the calculation involves the cost of the satellite going forward and being denominated in U.S. dollars, which is now strengthened versus the Canadian dollar, impacts the calculation some what.

Michael Targoff

What Harvey was saying, if you heard is that, in fact the calculation relates to the value of Telesat’s orbital-slots, and in calculating the orbital slots, the calculation is made as to what you have to do the popularity orbital-slots and in U.S. dollar terms for Telesat, the cost of a satellite and the launch and insurance is increased vis-à-vis dilutive.

When you do that calculation under the current discount rates that are prevalent as a result of the economic times we are in, you get a result which in this case, was that the carrying value was reduced by, I think it’s a 455.

Nicole Torraco - Babson Capital

Right and I guess to ask a question in a different way, what I’m trying to figure out is what portion of that 455 is related to FX; what portion of that 455 is related to expected lower cash flows from the orbital-slots; and what portion is related to discount rates?

Michael Targoff

Okay, I would tell you that I’m not going to breakdown the portion for the first and the third item you mentioned, but I will tell you, I do not believe there is any calculation with respect to lower cash flows at the orbital-slots.

In fact, the funny thing about the foreign exchanges calculations and it’s more prevalent in the FX charge on the U.S. denominated debt is that that’s calculated without any offset for the fact that a good part of Telesat’s revenue is in U.S. dollars and from a Canadian perspective, the U.S. dollar revenue actually generates more Canadian dollar EBITDA. That offset is ignored in making these calculations. So there was no element to the calculation of the impairment having anything to do with reduced cash flow from the satellites.

Nicole Torraco - Babson Capital

Okay and what is driving then the goodwill impairment, the $188 million at SS/L?

Michael Targoff

That’s just the calculation of cash flows and discount rates and in light of the environment where we find ourselves. When people do valuations and they look at companies, be it comparable or otherwise and they apply discount rates and not withstanding the improved result, you get a calculation that must be measured against goodwill and you have the impact.

Nicole Torraco - Babson Capital

Alright, on EchoStar, what are your forward contractual obligations related to that?

Michael Targoff

Well, when you say your, let’s be very careful, Loral has none. EchoStar as its entity has an obligation to lease certain of the capacity on Spainsat and that lease is about $23 million a year of expenditures for transponders. That’s the principal obligation EchoStar has.

We see EchoStar’s business, which has been disappointing, and I’d like to say that I hope when we talk again next year at this time, that I won’t be saying that, but I’m not predicting anything right now, I’m just feeling better about the tenor of the marketplace for EchoStar.

Nicole Torraco - Babson Capital

Okay. My understandings from the 10-K was that Loral had to increase its investment in EchoStar by some $5 million.

Michael Targoff

No, that’s not correct. We did not have to, we chose to. EchoStar had an opportunity to purchase an obligation to Averion at a discount, and in order to realize the benefit of that, both Loral and Hispasat, the two partners, elected to contribute capital to EchoStar, to take advantage of the opportunity. There was not an obligation at all.

Nicole Torraco - Babson Capital

Okay, so there aren’t contractual obligations of that sort, like a required additional contribution or something like that.

Michael Targoff

That’s correct.

Nicole Torraco - Babson Capital

Okay and then what is the current underfunded status of the pension plan? The $24 million expected to be paid in 2009 seemed a little high. Is it expected to continue at that level?

Michael Targoff

Yes, I think the issue for us is no different from corporate America. The decline in the carrying values of the investments in the pension plan; I think we amortized it over seven years, Harvey.

We amortized it over seven years, but we have to make up the short fall in the values and there is an expense charge, there is a cash charge, and in ‘09 the cash charge will be approximately $24 million, which actually is a bit less than what it was in ‘08; but over the years, we would expect the market does not change, that the cash requirements will go up, we don’t know yet, but I would not be surprised to see the cash requirements go up by $5 million to $10 million.

Nicole Torraco - Babson Capital

Okay and then one on SS/L, how many satellites are under construction, and do you have any expectation you want to give in terms of contract towards next year. You sort of mentioned in the 10-K, four to five is a bit of a threshold in terms of your operations, do you expect to have that many?

Michael Targoff

Okay, I think its about 13 in active construction, but remember what we mentioned in the 10-K is that we take an average of four to five depending on their size and throughput that’s required from the factory to cover our running costs and we had seven last year and they were large.

So, we have as I said in my remarks that somewhat of a cushion, but going towards what the market will be, it’s very difficult to predict, because there are so few orders in general, but the replacements from the key emphasis providers generally should range between 10 to 15 satellites a year over the next number of years and a vast majority of those we would hope to be to the medium, large market size that would be suitable for us.

So, we would hope that we will continue to have bookings that would support the business at a run level that will let us be successful. By the way, when I said before there are about 13 active, I think the total is about 18.

Nicole Torraco - Babson Capital

Okay. It’s 18?

Michael Targoff


Nicole Torraco - Babson Capital

Alright, thank you.


(Operator Instructions) Mr. Targoff at this time I’d like to turn the call back over to you for any additional or closing comments.

Michael Targoff

Okay thank you. Thank you for joining us today. We appreciate your participation and look forward to our next opportunity to update you on our status and have a nice St. Patrick’s Day. Bye-bye.


Ladies and gentlemen that does conclude today’s conference call. We thank you for your participation. Have a wonderful day.

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