UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2020
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OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to
_____________
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Commission File Number 1-14180
Loral Space & Communications Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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87‑0748324
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(State or
other jurisdiction of incorporation)
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(I.R.S.
Employer Identification No.)
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600 Fifth Avenue, New York, New York
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10020
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(Address
of principal executive offices)
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(Zip
Code)
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(212) 697‑1105
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol
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Name of each exchange on which registered
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Voting Common stock, $.01 par value
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LORL
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Nasdaq Global Select Market
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Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated
filer ☐
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Accelerated
filer
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☑
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Non-accelerated
filer ☐
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Smaller
reporting company
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☑
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Exchange Act Rule 12b-2 of the
Act) Yes ☐ No ☑
As of May
6, 2020, 21,427,078 shares of the registrant’s voting common stock
and 9,505,673 shares of the registrant’s non-voting common stock
were outstanding.
LORAL SPACE & COMMUNICATIONS INC.
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2020
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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March 31,
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December 31,
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2020
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2019
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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255,198 |
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$
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259,067
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Income tax refund receivable
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1,193 |
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576
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Other current assets
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1,600 |
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1,322
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Total current assets
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257,991 |
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260,965
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Right-of-use asset
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831 |
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988
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Income tax refund receivable, non-current
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—
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387
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Investments in affiliates
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4,173 |
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90,184
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Deferred tax assets
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36,301 |
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37,945
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Other assets
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340 |
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341
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Total assets
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$
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299,636 |
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$
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390,810
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
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Accrued employment costs
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$
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1,132 |
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$
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2,611
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Other current liabilities
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2,204 |
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2,883
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Total current liabilities
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3,336 |
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5,494
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Pension and other post-retirement liabilities
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17,061 |
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17,447
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Other liabilities
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19,265 |
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17,842
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Total liabilities
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39,662 |
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40,783
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Commitments and contingencies
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Shareholders' Equity:
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Preferred stock, 0.01 par value; 10,000,000 shares authorized, no
shares
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—
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—
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issued and outstanding
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Common Stock:
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Voting common stock, 0.01 par value; 50,000,000 shares
authorized,
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21,581,572 issued
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216 |
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216
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Non-voting common stock, 0.01 par value; 20,000,000 shares
authorized
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9,505,673 issued and outstanding
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95 |
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95
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Paid-in capital
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1,019,988 |
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1,019,988
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Treasury stock (at cost), 154,494 shares of voting common
stock
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(9,592) |
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(9,592)
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Accumulated deficit
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(727,109) |
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(605,766)
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Accumulated other comprehensive loss
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(23,624) |
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(54,914)
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Total shareholders' equity
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259,974 |
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350,027
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Total liabilities and shareholders' equity
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$
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299,636 |
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$
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390,810
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See notes
to condensed consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
(LOSS) INCOME
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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March 31,
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2020
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2019
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General and administrative expenses
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$
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(1,648)
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$
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(1,803)
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Operating loss
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(1,648)
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(1,803)
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Interest and investment income
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937
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1,602
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Interest expense
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(5)
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(5)
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Other expense
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(1,437)
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(1,216)
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Loss before income taxes and equity in net (loss) income of
affiliates
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(2,153)
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(1,422)
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Income tax provision
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(2,116)
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(2,066)
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Loss before equity in net (loss) income of affiliates
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(4,269)
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(3,488)
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Equity in net (loss) income of affiliates
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(117,074)
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42,004
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Net (loss) income
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(121,343)
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38,516
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Other comprehensive income (loss), net of tax
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31,290
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(6,406)
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Comprehensive (loss) income
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$
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(90,053)
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$
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32,110
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Net (loss) income per share:
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Basic
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$
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(3.92)
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$
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1.25
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Diluted
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$
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(3.92)
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$
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1.23
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Weighted average common shares outstanding:
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Basic
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30,933
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30,933
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Diluted
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30,933
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31,008
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See notes
to condensed consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Common Stock
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Treasury Stock
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Accumulated
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Voting
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Non-Voting
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Voting
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Other
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Shares
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Shares
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Paid-In
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Accumulated
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Comprehensive
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Shareholders'
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Issued
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Amount
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Issued
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Amount
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Capital
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Shares
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Amount
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Deficit
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Loss
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Equity
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Balance, January 1, 2019
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21,582
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$
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216
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9,506
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$
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95
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$
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1,019,988
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154
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$
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(9,592)
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$
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(695,521)
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$
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(17,620)
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$
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297,566
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Net income
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38,516
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Other comprehensive loss
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|
|
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(6,406)
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Comprehensive income
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|
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|
|
|
|
|
|
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|
|
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32,110
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Balance, March 31, 2019
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21,582
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|
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216
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9,506
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95
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1,019,988
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154
|
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(9,592)
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(657,005)
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(24,026)
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329,676
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Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
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51,239
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|
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Other comprehensive loss
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(30,888)
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Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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20,351
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Balance, December 31, 2019
|
21,582
|
|
|
216
|
|
9,506
|
|
|
95
|
|
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1,019,988
|
|
154
|
|
|
(9,592)
|
|
|
(605,766)
|
|
|
(54,914)
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|
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350,027
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Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(121,343)
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|
|
|
|
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Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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31,290
|
|
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|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,053)
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Balance, March 31, 2020
|
21,582
|
|
$
|
216
|
|
9,506
|
|
$
|
95
|
|
$
|
1,019,988
|
|
154
|
|
$
|
(9,592)
|
|
$
|
(727,109)
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|
$
|
(23,624)
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$
|
259,974
|
See notes
to condensed consolidated financial statements
LORAL SPACE & COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
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Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Operating activities:
|
|
|
|
|
|
Net (loss) income
|
$
|
(121,343)
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|
$
|
38,516
|
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
|
|
|
|
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Non-cash operating items (Note 2)
|
|
118,945
|
|
|
(40,300)
|
Changes in operating assets and liabilities:
|
|
|
|
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Other current assets
|
|
(278)
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|
|
(575)
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Accrued employment costs and other current liabilities
|
|
(1,498)
|
|
|
(1,328)
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Income tax refund receivable
|
|
(903)
|
|
|
3,021
|
Pension and other post-retirement liabilities
|
|
(386)
|
|
|
81
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Other liabilities
|
|
1,594
|
|
|
447
|
Net cash used in operating activities
|
|
(3,869)
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|
|
(138)
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Cash, cash equivalents and restricted cash (Note 2) — period
decrease
|
|
(3,869)
|
|
|
(138)
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Cash, cash equivalents and restricted cash (Note 2) — beginning of
year
|
|
259,371
|
|
|
257,251
|
Cash, cash equivalents and restricted cash — end of
period
|
$
|
255,502
|
|
$
|
257,113
|
See notes
to condensed consolidated financial statements
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Principal
Business
Loral Space &
Communications Inc., together with its subsidiaries (“Loral,” the
“Company,” “we,” “our” and “us”) is a leading satellite
communications company engaged, through our ownership interests in
affiliates, in satellite-based communications services.
Description of
Business
Loral has one operating segment
consisting of satellite-based communications services. Loral
participates in satellite services operations primarily through its
ownership interest in Telesat Canada (“Telesat”), a leading global
satellite operator. Loral holds a 62.7% economic interest and a
32.6% voting interest in Telesat. We use the equity method of
accounting for our ownership interest in Telesat (see Note
5).
Telesat
owns and leases a satellite fleet that operates in geostationary
earth orbit approximately 22,000 miles above the equator. In this
orbit, satellites remain in a fixed position relative to points on
the earth’s surface and provide reliable, high-bandwidth services
anywhere in their coverage areas, serving as the backbone for many
forms of telecommunications. Telesat is also developing a global
constellation of low earth orbit (“LEO”) satellites. LEO satellites
operate in a circular orbit around the earth with an altitude
typically between 500 and 870 miles. Unlike geostationary orbit
satellites that operate in a fixed orbital location above the
equator, LEO satellites travel around the earth at high velocities
requiring antennas on the ground to track their movement. LEO
satellite systems have the potential to offer a number of
advantages over geostationary orbit satellites to meet growing
requirements for broadband services, both consumer and commercial,
by providing increased data speeds and capacity, global coverage,
and latency on par with, or potentially better than, terrestrial
services.
2.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules of the Securities and
Exchange Commission (“SEC”) and, in our opinion, include all
adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of results of operations, financial position
and cash flows as of the balance sheet dates presented and for the
periods presented. Certain information and footnote disclosures
normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) have been condensed or
omitted pursuant to SEC rules. We believe that the disclosures made
are adequate to keep the information presented from being
misleading. The results of operations for the three months ended
March 31, 2020 are not necessarily indicative of the results to be
expected for the full year.
The
December 31, 2019 balance sheet has been derived from the audited
consolidated financial statements at that date. These condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in our
latest Annual Report on Form 10-K filed with the SEC.
Investments in
Affiliates
Our
ownership interest in Telesat is accounted for using the equity
method of accounting under U.S. GAAP. Telesat’s financial
statements are prepared in
accordance with international financial reporting standards
(“IFRS”). To allow our reporting of our investment in Telesat under
U.S. GAAP, Telesat provides us with a reconciliation of its
financial statements from IFRS to U.S. GAAP. Income
and losses of Telesat are recorded based on our economic interest.
The contribution of Loral Skynet, a wholly owned subsidiary of
Loral prior to its contribution to Telesat in 2007, was recorded by
Loral at the historical book value of our retained interest
combined with the gain recognized on the contribution. However, the
contribution was recorded by Telesat at fair value. Accordingly,
the amortization of Telesat fair value adjustments applicable to
the Loral Skynet assets and liabilities acquired by Telesat in 2007
is proportionately eliminated in determining our share of the net
income of Telesat. Our equity in net income or loss of Telesat also
reflects amortization of profits eliminated, to the extent of our
economic interest in Telesat, on satellites we constructed for
Telesat while we owned Space Systems/Loral, LLC (formerly known as
Space Systems/Loral, Inc.) (“SSL”) and on Loral’s sale to Telesat
in April 2011 of its portion of the payload on the ViaSat-1
satellite and related assets. Non-refundable cash distributions
received from Telesat in excess of our initial
investment
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
and our
share of cumulative equity in comprehensive income of Telesat, net
of cash distributions received in prior periods, are recorded as
equity in net income of Telesat (“Excess Cash Distribution”) since
we have no obligation to provide future financial support to
Telesat. After receiving an Excess Cash Distribution, we do not
record additional equity in net income of Telesat until our share
of Telesat’s future net income exceeds the Excess Cash
Distribution. Equity in losses of affiliates is not recognized
after the carrying value of an investment, including advances and
loans, has been reduced to zero, unless guarantees or other funding
obligations exist. We had no
guarantees or other
funding obligations for our equity method investments as of March
31, 2020 and December 31, 2019. We use the nature of distribution
approach to classify distributions from equity method investments
on the statements of cash flows. The Company monitors its equity
method investments for factors indicating other-than-temporary
impairment. An impairment loss is recognized when there has been a
loss in value of the affiliate that is
other‑than-temporary.
Use of Estimates in
Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the amount of income (loss) reported for the period.
Actual results could materially differ from estimates.
Significant
estimates also included the allowances for doubtful accounts,
income taxes, including the valuation of deferred tax assets, the
fair value of liabilities indemnified, the dilutive effect of
Telesat stock options (see Note 10) and our pension
liabilities.
Cash, Cash Equivalents and Restricted Cash
As of
March 31, 2020, the Company had $255.2 million of cash and cash
equivalents. Cash and cash equivalents include liquid investments,
primarily money market funds, with maturities of less than 90 days
at the time of purchase. Management determines the appropriate
classification of its investments at the time of purchase and at
each balance sheet date.
As of
March 31, 2020 and December 31, 2019, the Company had restricted
cash of $0.3 million, representing the amount pledged as collateral
to the issuer of a standby letter of credit (the “LC”). The LC,
which expires in August 2021, has been provided as a guaranty to
the lessor of our corporate offices.
The
following table provides a reconciliation of cash, cash equivalents
and restricted cash reported within the condensed consolidated
balance sheet to the condensed consolidated statement of cash flows
(in thousands):
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
255,198
|
|
$
|
259,067
|
Restricted cash included in other assets
|
|
304
|
|
|
304
|
Cash, cash equivalents and restricted cash shown in the statement
of cash flows
|
$
|
255,502
|
|
$
|
259,371
|
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentration of Credit Risk
Financial
instruments which potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and
receivables. Our cash and cash equivalents are maintained with
high-credit-quality financial institutions. As of March 31, 2020,
our cash and cash equivalents were invested primarily in two liquid
Government AAA money market funds. As of December 31, 2019, our
cash and cash equivalents were invested primarily in several liquid
Prime and Government AAA money market funds. Such funds are not
insured by the Federal Deposit Insurance Corporation. The
dispersion across funds reduces the exposure of a default at any
one fund. As a result, management believes that its
potential credit risks are minimal.
Fair Value Measurements
U.S. GAAP
defines fair value as the price that would be received for an asset
or the exit price that would be paid to transfer a liability in the
principal or most advantageous market in an orderly transaction
between market participants. U.S. GAAP also establishes a fair
value hierarchy that gives the highest priority to observable
inputs and the lowest priority to unobservable inputs. The three
levels of the fair value hierarchy are described below:
Level 1: Inputs
represent a fair value that is derived from unadjusted quoted
prices for identical assets or liabilities traded in active markets
at the measurement date.
Level 2: Inputs
represent a fair value that is derived from quoted prices for
similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, model-based
valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities, and pricing inputs, other than quoted prices in active
markets included in Level 1, which are either directly or
indirectly observable as of the reporting date.
Level 3: Inputs
are generally unobservable and typically reflect management’s
estimates of assumptions that market participants would use in
pricing the asset or liability. The fair values are therefore
determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar
techniques.
Assets and Liabilities Measured at Fair Value
The
following table presents our assets and liabilities measured at
fair value on a recurring and non-recurring basis (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
251,244
|
|
$
|
—
|
|
$
|
—
|
|
$
|
256,915
|
|
$
|
—
|
|
$
|
—
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Sale of SSL
|
|
—
|
|
|
—
|
|
|
598
|
|
|
—
|
|
|
—
|
|
|
598
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification - Globalstar do Brasil S.A.
|
$
|
—
|
|
$
|
—
|
|
$
|
145
|
|
$
|
—
|
|
$
|
—
|
|
$
|
145
|
The
carrying amount of money market funds approximates fair value as of
each reporting date because of the short maturity of those
instruments.
The
Company did not have any non-financial assets or non-financial
liabilities that were recognized or disclosed at fair value as of
March 31, 2020 and December 31, 2019.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets and Liabilities Measured at Fair Value on a Non-recurring
Basis
We review
the carrying values of our equity method investments when events
and circumstances warrant and consider all available evidence in
evaluating when declines in fair value are other-than-temporary.
The fair values of our investments are determined based on
valuation techniques using the best information available and may
include quoted market prices, market comparables and discounted
cash flow projections. An impairment charge is recorded when the
carrying amount of the investment exceeds its current fair value
and is determined to be other-than-temporary.
The asset
resulting from the indemnification of SSL is for certain
pre-closing taxes and reflects the excess of payments since
inception over refunds and the estimated liability, which was
originally determined using the fair value objective approach. The
estimated liability for indemnifications relating to Globalstar do
Brasil S.A. (“GdB”), originally determined using expected value
analysis, is net of payments since inception.
Contingencies
Contingencies
by their nature relate to uncertainties that require management to
exercise judgment both in assessing the likelihood that a liability
has been incurred as well as in estimating the amount of potential
loss, if any. We accrue for costs relating to litigation, claims
and other contingent matters when such liabilities become probable
and reasonably estimable. Such estimates may be based on advice
from third parties or on management’s judgment, as appropriate.
Actual amounts paid may differ from amounts estimated, and such
differences will be charged to operations in the period in which
the final determination of the liability is made.
Income Taxes
Loral and
its subsidiaries are subject to U.S. federal, state and local
income taxation on their worldwide income and foreign taxation on
certain income from sources outside the United States. Telesat is
subject to tax in Canada and other jurisdictions, and Loral will
provide in each period any additional U.S. current and deferred tax
required on actual or deemed distributions from Telesat, including
Global Intangible Low Taxed Income (“GILTI”). Deferred income taxes
reflect the future tax effect of temporary differences between the
carrying amount of assets and liabilities for financial and income
tax reporting and are measured by applying anticipated statutory
tax rates in effect for the year during which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent it is more likely than not that the
deferred tax assets will not be realized.
The tax
benefit of an uncertain tax position (“UTP”) taken or expected to
be taken in income tax returns is recognized only if it is “more
likely than not” to be sustained on examination by the taxing
authorities, based on its technical merits as of the reporting
date. The tax benefit recognized in the financial statements from
such a position is measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon
ultimate settlement. The Company recognizes interest and penalties
related to income taxes in income tax expense on a quarterly
basis.
The
unrecognized tax benefit of a UTP is recognized in the period when
the UTP is effectively settled. Previously recognized tax positions
are derecognized in the first period in which it is no longer more
likely than not that the tax position would be sustained upon
examination.
Earnings per Share
Basic earnings per share are computed
based upon the weighted average number of shares of voting and
non-voting common stock outstanding during each period. Shares of
non-voting common stock are in all respects identical to and
treated equally with shares of voting common stock except for the
absence of voting rights (other than as provided in Loral’s Amended
and Restated Certificate of Incorporation which was ratified by
Loral’s stockholders on May 19, 2009). Diluted earnings per
share are based on the weighted average number of shares of voting
and non-voting common stock outstanding during each period,
adjusted for the effect of unconverted restricted stock units. For
diluted earnings per share, earnings are adjusted for the dilutive
effect of Telesat stock options and restricted share
units.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent Accounting Pronouncements
In August
2018, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes
to the Disclosure Requirements for Fair Value Measurement.
ASU No.
2018-13 eliminates, amends, and adds disclosure requirements to
improve the effectiveness of fair value measurement disclosures.
While certain amendments are to be applied prospectively, all other
amendments are to be applied retrospectively to all periods
presented. The new guidance,
adopted by the Company on January 1, 2020, did not have a material
impact on our condensed consolidated financial
statements.
In
February 2016, the FASB amended the Accounting Standards
Codification (“ASC”) by creating ASC Topic 842,
Leases (“ASC
842”). ASC Topic 842 requires a lessee to record a right-of-use
asset and a lease liability for all leases with a lease term
greater than 12 months. The main difference between previous U.S.
GAAP and ASC Topic 842 is the recognition under ASC 842 of lease
assets and lease liabilities by lessees for those leases classified
as operating leases under previous U.S. GAAP. We adopted ASC 842 in
the first quarter of 2019 utilizing the modified retrospective
method with a practical expedient through a cumulative-effect
adjustment at the beginning of the first quarter of 2019. As a
result, on January 1, 2019, we recognized a right-of-use asset and
lease liability for an operating lease of approximately $0.3
million on our condensed consolidated balance sheet.
Subsequent Event
On April
30, 2020, our Board of Directors declared a special dividend of
$5.50 per share for an aggregate dividend of approximately $170.5
million. The special dividend is payable on May 28, 2020 to holders
of record of Loral voting and non-voting common stock as of the
close of business on May 14, 2020.
Additional Cash Flow Information
The
following represents non-cash activities and supplemental
information to the condensed consolidated statements of cash flows
(in thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Non-cash operating items:
|
|
|
|
|
|
Equity in net loss (income) of affiliates
|
$
|
117,074
|
|
$
|
(42,004)
|
Deferred taxes
|
|
1,569
|
|
|
1,464
|
Depreciation and amortization
|
|
1
|
|
|
6
|
Right-of-use asset, net of lease liability
|
|
(1)
|
|
|
4
|
Amortization of prior service credit and actuarial loss
|
|
302
|
|
|
230
|
Net non-cash operating items
|
$
|
118,945
|
|
$
|
(40,300)
|
Supplemental information:
|
|
|
|
|
|
Interest paid
|
$
|
5
|
|
$
|
5
|
Income tax refunds
|
$
|
178
|
|
$
|
2,980
|
Income tax payments
|
$
|
63
|
|
$
|
101
|
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Accumulated Other Comprehensive Loss
The
components of accumulated other comprehensive loss, net of tax, are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
|
|
|
|
|
Pension and
|
|
Telesat-related
|
|
Accumulated
|
|
Other
|
|
Other
|
|
Other
|
|
Post-retirement
|
|
Comprehensive
|
|
Comprehensive
|
|
Benefits
|
|
Loss
|
|
Loss
|
Balance, January 1, 2019
|
$
|
(14,656)
|
|
$
|
(2,964)
|
|
$
|
(17,620)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
(2,307)
|
|
|
(35,783)
|
|
|
(38,090)
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
796
|
|
|
—
|
|
|
796
|
Net current-period other comprehensive income
|
|
(1,511)
|
|
|
(35,783)
|
|
|
(37,294)
|
Balance, December 31, 2019
|
|
(16,167)
|
|
|
(38,747)
|
|
|
(54,914)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassification
|
|
—
|
|
|
31,051
|
|
|
31,051
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
239
|
|
|
—
|
|
|
239
|
Net current-period other comprehensive income
|
|
239
|
|
|
31,051
|
|
|
31,290
|
Balance, March 31, 2020
|
$
|
(15,928)
|
|
$
|
(7,696)
|
|
$
|
(23,624)
|
The
components of other comprehensive income (loss) and related tax
effects are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
|
2019
|
|
Before-Tax
|
|
Tax
|
|
Net-of-Tax
|
|
|
Before-Tax
|
|
Tax (Provision)
|
|
Net-of-Tax
|
|
Amount
|
|
Provision
|
|
Amount
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
Amortization of prior service credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and net actuarial loss
|
$
|
302
|
(a)
|
$
|
(63)
|
|
$
|
239
|
|
|
$
|
230
|
(a)
|
$
|
(48)
|
|
$
|
182
|
Equity in Telesat-related other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income (loss)
|
|
31,063
|
|
|
(12)
|
|
|
31,051
|
|
|
|
(6,589)
|
|
|
1
|
|
|
(6,588)
|
Other comprehensive income (loss)
|
$
|
31,365
|
|
$
|
(75)
|
|
$
|
31,290
|
|
|
$
|
(6,359)
|
|
$
|
(47)
|
|
$
|
(6,406)
|
(a)Reclassifications are included in other expense.
4. Other Current Assets
Other
current assets consists of (in thousands):
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Indemnification receivable from SSL for pre-closing taxes (see Note
13)
|
$
|
598
|
|
$
|
598
|
Due from affiliates
|
|
96
|
|
|
186
|
Prepaid expenses
|
|
790
|
|
|
164
|
Other
|
|
116
|
|
|
374
|
|
$
|
1,600
|
|
$
|
1,322
|
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments in Affiliates
Investments
in affiliates consist of (in thousands):
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Telesat
|
$
|
4,173
|
|
$
|
90,184
|
Equity in
net (loss) income of affiliates consists of (in
thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Telesat
|
$
|
(117,074)
|
|
$
|
42,004
|
Telesat
As of
March 31, 2020 and December 31, 2019, we held a 62.7% economic
interest and a 32.6% voting interest in Telesat. We use the equity
method of accounting for our majority economic interest in Telesat
because we own 32.6% of the voting stock and do not exercise
control by other means to satisfy the U.S. GAAP requirement for
treatment as a consolidated subsidiary. We have also concluded that
Telesat is not a variable interest entity for which we are the
primary beneficiary. Loral’s equity in net income or loss of
Telesat is based on our proportionate share of Telesat’s results in
accordance with U.S. GAAP and in U.S. dollars. Our proportionate
share of Telesat’s net income or loss is based on our economic
interest as our holdings consist of common stock and non-voting
participating preferred shares that have all the rights of common
stock with respect to dividends, return of capital and surplus
distributions, but have no voting rights.
In
addition to recording our share of equity in net loss of Telesat,
we also recorded our share of equity in other comprehensive income
of Telesat of $31.1 million for the three months ended March
31, 2020.
In the
third quarter of 2019, we recorded an out-of-period correction to
decrease our investment in Telesat and increase other comprehensive
loss by $22.1 million. This non-cash adjustment was made to record
the cumulative translation adjustment on our investment in Telesat
from November 2007, when we first acquired our ownership interest
in Telesat, to December 31, 2018. The adjustment resulted from
translating our share of Telesat’s equity from Canadian dollars to
U.S. dollars at historical foreign exchange rates in accordance
with ASC 830,
Foreign Currency Matters, as
required by ASC 323,
Investments –
Equity Method and Joint Ventures.
Previously, we translated our share of Telesat’s equity from
Canadian dollars to U.S. dollars at current foreign exchange rates
at each balance sheet date. This adjustment had no
effect on our equity in net income (loss) of Telesat for any
current or prior reporting period. The Company has not
revised its financial statements for prior periods for this
adjustment, including for the three months ended March 31, 2019,
based on its belief that the effect of such adjustment is not
material to the financial statements taken as a
whole.
On
January 1, 2019, Telesat adopted ASC 842,
Leases, for its
U.S. GAAP reporting which we use to record our equity income in
Telesat. Telesat adopted the new guidance using the modified
retrospective approach with the cumulative effect of initially
applying the standard being recorded on the balance sheet. As a
result, on January 1, 2019, Telesat recognized a right-of-use asset
of $19.6 million and lease liability of $20.0 million on its
condensed consolidated balance sheet.
On
October 11, 2019, Telesat issued $550.0 million of 6.5% senior
notes maturing in October 2027. The 6.5% senior notes are
effectively subordinated to Telesat’s secured indebtedness,
including the obligations under its senior secured credit
facilities and its 4.875% senior secured notes.
On
October 11, 2019, Telesat used the net proceeds from the 6.5%
senior notes offering together with available cash on hand to
redeem its $500 million 8.875% senior notes due November 15, 2024
by repaying all outstanding amounts, including principal,
redemption premium and discounted interest to November 15,
2019.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
On
December 6, 2019, Telesat entered into amended senior secured
credit facilities which provide for term loan borrowings of
$1,908.5 million which mature in December 2026 and revolving credit
facilities of up to $200 million (or Canadian dollar equivalent)
which mature in December 2024. Telesat also issued, through a
private placement, $400 million of 4.875% senior secured notes
which mature in June 2027.
On
December 6, 2019, Telesat repaid all outstanding amounts, including
related fees and expenses, under its former senior secured credit
facilities.
The
ability of Telesat to pay dividends or certain other restricted
payments in cash to Loral is governed by applicable covenants in
Telesat’s debt and shareholder agreements. Telesat’s credit
agreement governing its senior secured credit facilities limits,
among other items, Telesat’s ability to incur debt and make
dividend payments if the total leverage ratio (“Total Leverage
Ratio”) is above 4.50:1.00, with certain exceptions. As of March
31, 2020, Telesat’s Total Leverage Ratio was 5.10:1.00. Telesat is,
however, permitted to pay annual consulting fees of $5.0 million to
Loral in cash (see Note 14).
The
following table presents summary financial data for Telesat in
accordance with U.S. GAAP as of March 31, 2020 and December 31,
2019 and for the three months ended March 31, 2020 and 2019 (in
thousands):
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Balance Sheet Data:
|
|
|
|
|
|
Current assets
|
$
|
934,012
|
|
$
|
877,294
|
Total assets
|
|
3,938,886
|
|
|
4,130,337
|
Current liabilities
|
|
143,850
|
|
|
124,217
|
Long-term debt, including current portion
|
|
2,834,182
|
|
|
2,836,700
|
Total liabilities
|
|
3,468,535
|
|
|
3,504,594
|
Shareholders’ equity
|
|
470,351
|
|
|
625,743
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Statement of Operations Data:
|
|
|
|
|
|
Revenues
|
$
|
158,565
|
|
$
|
167,644
|
Operating expenses
|
|
(35,855)
|
|
|
(40,569)
|
Depreciation and amortization
|
|
(45,417)
|
|
|
(51,208)
|
Other operating expense
|
|
(167)
|
|
|
(55)
|
Operating income
|
|
77,126
|
|
|
75,812
|
Interest expense
|
|
(41,547)
|
|
|
(46,843)
|
Foreign exchange (loss) gain
|
|
(221,643)
|
|
|
52,469
|
Loss on financial instruments
|
|
(7,005)
|
|
|
(15,112)
|
Other income
|
|
4,078
|
|
|
3,834
|
Income tax benefit (provision)
|
|
682
|
|
|
(4,555)
|
Net (loss) income
|
$
|
(188,309)
|
|
$
|
65,605
|
Other
We own
56% of XTAR, a joint venture between us and Hisdesat Servicios
Estrategicos, S.A. (“Hisdesat”) of Spain. We account for our
ownership interest in XTAR under the equity method of accounting
because we do not control certain of its significant operating
decisions. We have also concluded that XTAR is not a variable
interest entity for which we are the primary beneficiary. As of
March 31, 2020 and December 31, 2019, the carrying value of our
investment in XTAR was zero. Beginning January 1, 2016, we
discontinued providing for our allocated share of XTAR’s net losses
as our investment was reduced to zero and we have no commitment to
provide further financial support to XTAR.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
XTAR owns
and operates an X-band satellite, XTAR-EUR, located at 29° E.L.,
which is designed to provide X-band communications services
exclusively to United States, Spanish and allied government users
throughout the satellite’s coverage area, including Europe, the
Middle East and Asia. XTAR also leases 7.2 72MHz X-band
transponders on the Spainsat satellite located at 30° W.L., owned
by Hisdesat. These transponders, designated as XTAR-LANT, provide
capacity to XTAR for additional X-band services and greater
coverage and flexibility.
As of
March 31, 2020 and December 31, 2019, the Company also held an
indirect ownership interest in a foreign company that currently
serves as the exclusive service provider for Globalstar service in
Mexico. The Company accounts for this ownership interest using the
equity method of accounting. As of March 31, 2020 and December 31,
2019, the carrying value of this investment was zero. Loral
has written-off its investment in this company and has no future
funding requirements relating to this investment. Accordingly,
there is no requirement for us to provide for our allocated share
of this company’s net losses. This company is currently in the
process of dissolution and liquidation in Mexico, and Loral
believes that it will not have any liability associated with this
company upon completion of this process.
6. Other Current Liabilities
Other
current liabilities consists of (in thousands):
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Operating lease liability
|
$
|
665
|
|
$
|
652
|
Due to affiliate
|
|
129
|
|
|
5
|
Accrued professional fees
|
|
1,282
|
|
|
1,419
|
Pension and other post-retirement liabilities
|
|
77
|
|
|
77
|
Income taxes payable
|
|
—
|
|
|
673
|
Accrued liabilities
|
|
51
|
|
|
57
|
|
$
|
2,204
|
|
$
|
2,883
|
7. Income Taxes
The
following summarizes our income tax provision (in
thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Current income tax provision
|
$
|
(547)
|
|
$
|
(602)
|
Deferred income tax provision
|
|
(1,569)
|
|
|
(1,464)
|
Income tax provision
|
$
|
(2,116)
|
|
$
|
(2,066)
|
For the
three month periods ended March 31, 2020 and 2019, our income tax
provision is computed by applying an expected effective annual tax
rate against the pre-tax results for each period (after adjusting
for certain tax items that are discrete to each period). The
current income tax provision for each period includes our
anticipated income tax liability related to GILTI from Telesat and
our provision for UTPs. The deferred income tax provision for each
period includes the impact of equity in net (loss) income of
affiliates from our condensed consolidated statement of operations
and the periodic effect of our accounting for GILTI.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
To the
extent that profitability from operations is not sufficient to
realize the benefit from our remaining net deferred tax assets, we
would generate sufficient taxable income from the appreciated value
of our Telesat investment in order to prevent federal net operating
losses from expiring and realize the benefit of all remaining
deferred tax assets.
The
following summarizes amounts for UTPs included in our income tax
provision (in thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Current provision for UTPs
|
$
|
(476)
|
|
$
|
(460)
|
Deferred benefit for UTPs
|
|
100
|
|
|
93
|
Tax provision for UTPs
|
$
|
(376)
|
|
$
|
(367)
|
As of
March 31, 2020, we had unrecognized tax benefits relating to UTPs
of $43 million. The Company recognizes interest and penalties
related to income taxes in income tax expense on a quarterly basis.
As of March 31, 2020, we have accrued no penalties and
approximately $2.5 million for the potential payment of tax-related
interest.
With few
exceptions, the Company is no longer subject to U.S. federal, state
or local income tax examinations by tax authorities for years prior
to 2014. Earlier years related to certain foreign jurisdictions
remain subject to examination. To the extent allowed by law, the
tax authorities may have the right to examine prior periods where
net operating losses were generated and carried forward, and make
adjustments up to the amount of the net operating loss
carryforward. While we intend to contest any future tax assessments
for uncertain tax positions, no assurance can be provided that we
would ultimately prevail. Pursuant to the purchase agreement for
the sale of SSL, we are obligated to indemnify SSL for certain
taxes related to periods prior to the closing of the
transaction.
As of
March 31, 2020, if our positions are sustained by the taxing
authorities, the Company’s income tax provision would be reduced by
approximately $7.7 million. We do not anticipate any significant
change to our unrecognized tax benefits during the next twelve
months.
8. Other Liabilities
Other
liabilities consists of (in thousands):
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Operating lease liability
|
$
|
174
|
|
$
|
345
|
Indemnification liabilities - other (see Note 13)
|
|
145
|
|
|
145
|
Liabilities for uncertain tax positions
|
|
18,946
|
|
|
17,352
|
|
$
|
19,265
|
|
$
|
17,842
|
9. Stock-Based Compensation
Stock Plans
The Loral
amended and restated 2005 stock incentive plan (the “Stock
Incentive Plan”) which allowed for the grant of several forms of
stock-based compensation awards including stock options, stock
appreciation rights, restricted stock, restricted stock units,
stock bonuses and other stock-based awards, had a ten-year term and
has expired. The Company granted 75,262 restricted stock units
under the Stock Incentive Plan that are vested, do not expire and
remained unconverted as of March 31, 2020 and December 31,
2019.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Earnings Per Share
Telesat
has awarded employee stock options, which, if exercised, would
result in dilution of Loral’s economic ownership interest in
Telesat from 62.7% to approximately 62.3%.
The
following table presents the dilutive impact of Telesat stock
options on Loral’s reported net income for the purpose of computing
diluted earnings per share (in thousands):
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2019
|
Net income — basic
|
$
|
38,516
|
Less: Adjustment for dilutive effect of Telesat stock
options
|
|
(254)
|
Net income — diluted
|
$
|
38,262
|
Telesat
stock options are excluded from the calculation of diluted loss per
share for the three months ended March 31, 2020 as the effect would
be antidilutive.
Basic
income per share is computed based upon the weighted average number
of share of voting and non-voting common stock outstanding. The
following is the computation of common shares outstanding for
diluted earnings per share (in thousands):
|
|
|
Three Months Ended
|
|
March 31, 2019
|
Weighted average common shares outstanding
|
30,933
|
Unconverted restricted stock units
|
75
|
Common shares outstanding for diluted earnings per share
|
31,008
|
For
the three months ended
March 31, 2020, the following unconverted restricted stock units
are excluded from the calculation of diluted loss per share as the
effect would have been antidilutive (in thousands):
|
|
|
Three Months Ended
|
|
March 31, 2020
|
Unconverted restricted stock units
|
75
|
11. Pensions and Other Employee Benefit Plans
The following tables provide the components of net periodic cost
for our qualified retirement plan (the “Pension Benefits”) and
health care and life insurance benefits for retired employees and
dependents (the “Other Benefits”) for the three months ended March
31, 2020 and 2019 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Three Months Ended
|
|
Three Months Ended
|
|
March 31,
|
|
March 31,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service cost
(1)
|
$
|
181
|
|
$
|
178
|
|
$
|
—
|
|
$
|
—
|
Interest cost
(2)
|
|
440
|
|
|
510
|
|
|
4
|
|
|
5
|
Expected return on plan assets
(2)
|
|
(669)
|
|
|
(607)
|
|
|
—
|
|
|
—
|
Amortization of net actuarial loss (gain)
(2)
|
|
303
|
|
|
231
|
|
|
(1)
|
|
|
(1)
|
Net periodic cost
|
$
|
255
|
|
$
|
312
|
|
$
|
3
|
|
$
|
4
|
(1)Included
in general and administrative expenses.
(2)Included
in other expense.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Financial Instruments, Derivative Instruments and
Hedging
Financial Instruments
The
carrying amount of cash equivalents approximates fair value because
of the short maturity of those instruments.
Foreign Currency
We are
subject to the risks associated with fluctuations in foreign
currency exchange rates. To limit this foreign exchange rate
exposure, we attempt to denominate all contracts in U.S. dollars.
Where appropriate, derivatives are used to minimize the risk of
foreign exchange rate fluctuations to operating results and cash
flows. We do not use derivative instruments for trading or
speculative purposes.
Derivatives and Hedging Transactions
There
were no derivative instruments as of March 31, 2020 and December
31, 2019.
13. Commitments and Contingencies
Financial Matters
In 2012,
we sold our former subsidiary, SSL, to MDA Communications Holdings, Inc., a subsidiary
of Maxar Technologies
Inc. (formerly known as
MacDonald, Dettwiler and Associates Ltd.) (“MDA”) pursuant to
the Purchase Agreement. Under the terms of the Purchase Agreement,
we are obligated to indemnify MDA and its affiliates from
liabilities with respect to certain pre-closing taxes. Our
condensed consolidated balance sheets include an indemnification
refund receivable of
$0.6 million as of March 31,
2020 and December 31, 2019. Certain tax assessments against SSL for
2007 to 2010 have been settled, resulting in our having received
during the second and third quarters of 2019 refunds of prior
indemnification payments totaling $1.8 million. The remaining
receivable as of March 31, 2020 represents payments to date over
the estimated fair value of the remaining liability for our
indemnification of SSL pre-closing taxes where the final amounts
have not yet been determined. Where appropriate, we intend
vigorously to contest the underlying tax assessments, but there can
be no assurance that we will be successful. Although no assurance
can be provided, we do not believe that these tax-related matters
will have a material adverse effect on our financial position or
results of operations.
In
connection with the sale in 2008 by Loral and certain of its
subsidiaries and DASA Globalstar LLC to Globalstar Inc. of their
respective interests in GdB, the Globalstar Brazilian service
provider, Loral agreed to indemnify Globalstar Inc. and GdB for
certain GdB pre-closing liabilities, primarily related to Brazilian
taxes. Our condensed
consolidated balance sheets include liabilities
of $0.1 million as of March
31, 2020 and December 31, 2019 for indemnification liabilities
relating to the sale of GdB.
See
Note 14 — Related Party Transactions —
Transactions with Affiliates — Telesat
for
commitments and contingencies relating to our agreement to
indemnify Telesat for certain liabilities.
Lease Arrangements
We lease
a facility and certain equipment under agreements expiring at
various dates. We may renew, extend or modify the lease covering
our facilities as needed. We have no sublease income in any of the
periods presented.
We
changed our method of accounting for leases in the first quarter of
2019 due to the adoption of ASC 842. We adopted ASC 842
as of January 1,
2019 using the modified retrospective transition method and elected
to apply the transition as of the beginning of the period of
adoption.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Upon
adoption of ASC 842, we recognized a right-of-use asset and lease
liability of $0.3 million for an operating lease on our
consolidated balance sheet as of January 1, 2019. In March 2019,
the operating lease was modified by extending the
lease termination date from June 30, 2019 to June 30, 2020 and
increasing the rent for the extension period. In December 2019, the
operating lease was further modified by extending the lease
termination date to June 30, 2021.
Lease
costs expensed for the three months ended March 31, 2020 and 2019
were as follows (in thousands):
|
|
|
|
|
|
Lease Expense
|
Three months ended March 31, 2020
|
$
|
174
|
Three months ended March 31, 2019
|
|
163
|
Lease payments
for the three months ended March 31, 2020 were $0.2 million. The
remaining lease term as of March 31, 2020 is 15 months and we used
a discount rate of 7.5% to compute the lease liability.
The
right-of-use asset is being amortized over the life of the
lease.
The following is
a reconciliation of the lease liability to future lease payments as
of March 31, 2020 (in thousands):
|
|
|
2020 (April 1, 2020 to December 31, 2020)
|
$
|
526
|
2021
|
|
350
|
Total operating lease payments
|
|
876
|
Less: Interest
|
|
(37)
|
Operating lease liability
|
$
|
839
|
|
|
|
Amounts recognized in Balance Sheet
|
|
|
Other current liabilities
|
$
|
665
|
Other liabilities
|
|
174
|
|
$
|
839
|
Legal Proceedings
We are not currently subject to any legal proceedings that, if
decided adversely, could have a material adverse effect on our
financial position or results of operations. In the future,
however, we may become subject to legal proceedings and claims,
either asserted or unasserted, that may arise in the ordinary
course of business or otherwise.
14. Related Party Transactions
MHR Fund Management LLC
Mark H.
Rachesky, President and Chief Investment Officer of MHR Fund
Management LLC (“MHR”), and Janet T. Yeung, a principal and the
General Counsel of MHR, are members of Loral’s board of
directors.
Various
funds affiliated with MHR and Dr. Rachesky held, as of March 31,
2020 and December 31, 2019, approximately 39.9% of the outstanding
voting common stock and 58.4% of the combined outstanding voting
and non-voting common stock of Loral.
Transactions with Affiliates
Telesat
As
described in Note 5, we own a 62.7% economic interest and a
32.6% voting interest in Telesat and account for our
ownership interest under the equity method of
accounting.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
In
connection with the acquisition of our ownership interest in
Telesat (which we refer to as the Telesat transaction), Loral and
certain of its subsidiaries, our Canadian co-owner, Public Sector
Pension Investment Board (“PSP”) and one of its subsidiaries,
Telesat and MHR entered into a Shareholders Agreement (the
“Shareholders Agreement”). The Shareholders Agreement provides for,
among other things, the manner in which the affairs of Telesat and
its subsidiaries will be conducted and the relationships among the
parties thereto and future shareholders of Telesat. The
Shareholders Agreement also contains an agreement by Loral not to
engage in a competing satellite communications business and
agreements by the parties to the Shareholders Agreement not to
solicit employees of Telesat or any of its subsidiaries.
Additionally, the Shareholders Agreement details the matters
requiring the approval of the shareholders of Telesat (including
veto rights for Loral over certain extraordinary actions) and
provides for preemptive rights for certain shareholders upon the
issuance of certain capital shares of Telesat. The Shareholders
Agreement also (i) restricts the ability of holders of certain
shares of Telesat to transfer such shares unless certain conditions
are met or approval of the transfer is granted by the directors of
Telesat, (ii) provides for a right of first offer to certain
Telesat shareholders if a holder of equity shares of Telesat wishes
to sell any such shares to a third party and (iii) provides
for, in certain circumstances, tag-along rights in favor of
shareholders that are not affiliated with Loral if Loral sells
equity shares and drag-along rights in favor of Loral in case Loral
or its affiliate enters into an agreement to sell all of its
Telesat equity securities.
In
addition, the Shareholders Agreement provides for either PSP or
Loral to initiate the process of conducting an initial public
offering of the equity shares of Telesat (a “Telesat IPO”). In
connection with our exploration of strategic initiatives to alter
the status quo in our ownership of Telesat, in July 2015, we
exercised our right under the Shareholders Agreement to require
Telesat to conduct a Telesat IPO. Specifically, we requested that
Telesat issue not more than 25 million newly issued shares of
Telesat voting common stock. We also requested the termination of
the Shareholders Agreement and the elimination of certain
provisions in Telesat’s Articles of Incorporation, both of which we
believe are important for a successful public offering. If those
provisions are eliminated, an impediment to the conversion of our
non-voting Telesat shares to voting shares would be eliminated.
Termination or modification of the Shareholders Agreement and
conversion of our non-voting shares to voting shares would enable
us, after a Telesat IPO and subject to the receipt of any necessary
regulatory approvals, to obtain majority voting control of Telesat.
To date, we and PSP have not reached agreement on governance
matters following a Telesat IPO. In the event a strategic
transaction to combine Loral and Telesat into one public company
that we are pursuing is not likely to be achievable in a timely
manner or on satisfactory terms, we may further pursue our right to
a Telesat IPO. There can be no assurance as to whether, when or on
what terms a Telesat IPO, termination or modification of the
Shareholders Agreement or any requested changes to Telesat’s
Articles of Incorporation may occur or that any particular
economic, tax, structural or other objectives or benefits with
respect to a Telesat IPO will be achieved. If a Telesat IPO is
expected to proceed under unfavorable terms or at an unfavorable
price, we may withdraw our demand for a Telesat IPO.
Depending
upon the outcome of discussions with PSP relating to Telesat
strategic matters, we may assert certain claims against PSP for
actions we believe violated our rights relating to the affairs of
Telesat under the Telesat Shareholders Agreement and otherwise. In
response to our claims, PSP has informed us that it believes that
it may have claims against us, although we are not aware of the
legal or factual basis for any such claims. We and PSP have agreed
that, pending the outcome of our discussions, it would be
beneficial to delay the commencement of any action relating to
either party’s claims and have entered into an agreement (the
“Tolling Agreement”) which preserves the parties’ rights to assert
against one another legal claims relating to Telesat. We also
included Telesat as a party to the Tolling Agreement because, as a
technical matter of Canadian law and for purposes of potentially
seeking equitable relief, Telesat may be a necessary party. There
can be no assurance that if the Tolling Agreement lapses that we
and PSP will not pursue legal claims against one another relating
to Telesat. If we pursue
claims against PSP, there can be no assurance that our claims will
be successful or that the relief we seek will be granted. If PSP
pursues claims against us, there can be no assurance that PSP will
not prevail on its claims.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under the
Shareholders Agreement, in the event that, except in certain
limited circumstances, either (i) ownership or control,
directly or indirectly, by Dr. Rachesky of Loral’s voting
stock falls below certain levels other than in connection with
certain specified circumstances, including an acquisition by a
Strategic Competitor (as defined in the Shareholders Agreement) or
(ii) there is a change in the composition of a majority of the
members of the Loral Board of Directors over a consecutive two-year
period without the approval of the incumbent directors, Loral will
lose its veto rights relating to certain extraordinary actions by
Telesat and its subsidiaries. In addition, after either of these
events, PSP will have certain rights to enable it to exit from its
investment in Telesat, including a right to cause Telesat to
conduct an initial public offering in which PSP’s shares would be
the first shares offered or, if no such offering has occurred
within one year due to a lack of cooperation from Loral or
Telesat, to cause the sale of Telesat and to drag along the other
shareholders in such sale, subject to Loral’s right to call PSP’s
shares at fair market value.
The
Shareholders Agreement provides for a board of directors of Telesat
consisting of 10 directors, three nominated by Loral, three
nominated by PSP and four independent directors to be selected by a
nominating committee comprised of one PSP nominee, one nominee of
Loral and one of the independent directors then in office. Each
party to the Shareholders Agreement is obligated to vote all of its
Telesat shares for the election of the directors nominated by the
nominating committee. Pursuant to action by the board of directors
taken on October 31, 2007, Dr. Rachesky, who is
non-executive Chairman of the Board of Directors of Loral, was
appointed non-executive Chairman of the Board of Directors of
Telesat. In addition, Michael B. Targoff, Loral’s Vice Chairman,
serves on the board of directors of Telesat.
On
October 31, 2007, Loral and Telesat entered into a consulting
services agreement (the “Consulting Agreement”). Pursuant to the
terms of the Consulting Agreement, Loral provides to Telesat
certain non-exclusive consulting services in relation to the
business of Loral Skynet which was transferred to Telesat as part
of the Telesat transaction as well as with respect to certain
aspects of the satellite communications business of Telesat. The
Consulting Agreement has a term of seven-years with an automatic
renewal for an additional seven-year term if Loral is not then in
material default under the Shareholders Agreement. Upon expiration
of the initial term on October 31, 2014, the Consulting Agreement
was automatically renewed for the additional seven-year term. In
exchange for Loral’s services under the Consulting Agreement,
Telesat pays Loral an annual fee of $5.0 million, payable quarterly
in arrears on the last day of March, June, September and December
of each year during the term of the Consulting Agreement. Our
general and administrative expenses are net of income related to
the Consulting Agreement of $1.25 million for each of the
three‑month periods ended March 31, 2020 and 2019. For each of the
three-month periods ended March 31, 2020 and 2019, Loral received
payments in cash from Telesat, net of withholding taxes, of
$1.2 million for consulting fees.
In
connection with the acquisition of our ownership interest in
Telesat in 2007, Loral retained the benefit of tax recoveries
related to the transferred assets and indemnified Telesat (“Telesat
Indemnification”) for certain liabilities, including Loral Skynet’s
tax liabilities arising prior to January 1, 2007. The Telesat
Indemnification includes certain tax disputes currently under
review in various jurisdictions including Brazil. The Brazilian tax
authorities challenged Loral Skynet’s historical characterization
of its revenue generated in Brazil for the years 2003 to 2006.
Telesat received and challenged, on Loral Skynet’s behalf, tax
assessments from Brazil totaling approximately $0.7 million. The
Company believes that Loral Skynet’s filing position will
ultimately be sustained requiring no payment under the Telesat
Indemnification. There can be no
assurance that there will be no future claims under the Telesat
Indemnification related to tax disputes.
Loral’s
employees and retirees participate in certain welfare plans
sponsored or managed by Telesat. Loral pays Telesat an annual
administrative fee of $0.1 million and reimburses Telesat for the
plan costs attributable to Loral participants.
Loral,
along with Telesat, PSP and 4440480 Canada Inc., an indirect
wholly-owned subsidiary of Loral (the “Special Purchaser”), entered
into stock option grant agreements (the “Stock Option Grant
Agreements”) and a restricted stock unit grant agreement (the “RSU
Grant Agreement,” and, together with the Stock Option Grant
Agreements, the “Grant Agreements”) with respect to shares in
Telesat with certain executives of Telesat (each, a “Participant”
and collectively, the “Participants”). Each of the Participants is
or was, at the time, an executive of Telesat.
Table of Contents
LORAL SPACE &
COMMUNICATIONS INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Stock
Option Grant Agreements document grants to the Participants of
Telesat stock options (including tandem SAR rights) and provide for
certain rights, obligations and restrictions related to such stock
options, which include, among other things: (w) the possible
obligation of the Special Purchaser to purchase the shares in the
place of Telesat should Telesat be prohibited by applicable law or
under the terms of any credit agreement applicable to Telesat from
purchasing such shares, or otherwise default on such purchase
obligation, pursuant to the terms of the Stock Option Grant
Agreements; and (x) the obligation of the Special Purchaser to
purchase shares upon exercise by Telesat of its call right under
Telesat’s Management Stock Incentive Plan in the event of a
Participant’s termination of employment; and, in the case of
certain executives, (y) the right of each such Participant to
require the Special Purchaser or Loral to purchase a portion of the
shares in Telesat owned by him in the event of exercise after
termination of employment to cover taxes that are greater than the
minimum withholding amount; and (z) the right of each such
Participant to require Telesat to cause the Special Purchaser or
Loral to purchase a portion of the shares in Telesat owned by him,
or that are issuable to him under Telesat's Management Stock
Incentive Plan at the relevant time, in the event that more than
90% of Loral’s common stock is acquired by an unaffiliated third
party that does not also purchase all of PSP’s and its affiliates’
interest in Telesat.
The RSU
Grant Agreement documents a grant to the Participant of restricted
stock units with respect to shares in Telesat and provides for
certain rights, obligations and restrictions related to such
restricted stock units, which include, among other
things: (x) the possible obligation of the Special
Purchaser to purchase the shares in the place of Telesat should
Telesat be prohibited by applicable law or under the terms of any
credit agreement applicable to Telesat from purchasing such shares,
or otherwise default on such purchase obligation, pursuant to the
terms of the RSU Grant Agreement; and (y) the obligation of the
Special Purchaser to purchase shares upon exercise by Telesat of
its call right under Telesat’s Management Stock Incentive Plan in
the event of the termination of the Participant’s
employment.
The Grant
Agreements further provide that, in the event the Special Purchaser
is required to purchase shares, such shares, together with the
obligation to pay for such shares, shall be transferred to a
subsidiary of the Special Purchaser, which subsidiary shall be
wound up into Telesat, with Telesat agreeing to the acquisition of
such subsidiary by Telesat from the Special Purchaser for nominal
consideration and with the purchase price for the shares being paid
by Telesat within ten (10) business days after completion of the
winding-up of such subsidiary into Telesat.
Other
As
described in Note 5, we own 56% of XTAR, a joint venture between
Loral and Hisdesat and account for our investment in XTAR under the
equity method of accounting. SSL constructed XTAR’s satellite,
which was successfully launched in February 2005. XTAR and Loral
have entered into a management agreement whereby Loral provides
general and specific services of a technical, financial and
administrative nature to XTAR. For the services provided by Loral,
XTAR, until December 31, 2013, was charged a quarterly management
fee equal to 3.7% of XTAR’s quarterly gross revenues. Amounts due
to Loral primarily due to the management agreement were $6.6
million and $6.7 million as of March 31, 2020 and December 31,
2019, respectively. Beginning in 2008, Loral and XTAR agreed to
defer amounts owed to Loral under this agreement, and XTAR has
agreed that its excess cash balance (as defined), will be applied
at least quarterly towards repayment of its payables owed to Loral,
as well as to Hisdesat and Telesat. No cash was received under this
agreement for the three months ended March 31, 2020 and 2019, and
we had an allowance of $6.6 million against receivables from XTAR
as of March 31, 2020 and December 31, 2019. Loral and Hisdesat have
agreed to waive future management fees for an indefinite period
starting January 1, 2014.
Consulting Agreement
On
December 14, 2012, Loral entered into a consulting agreement with
Michael B. Targoff, Vice Chairman of the Company and former Chief
Executive Officer and President. Pursuant to this agreement, Mr.
Targoff is engaged as a part-time consultant to the Board to assist
the Board with respect to the oversight of strategic matters
relating to Telesat and XTAR. Under the agreement, Mr. Targoff
receives consulting fees of $120,000 per month and reimburses the
Company for certain expenses. For each of the three month periods
ended March 31, 2020 and 2019, Mr. Targoff earned $360,000 in
consulting fees and reimbursed Loral net expenses of
$11,250.
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with our unaudited condensed consolidated financial statements (the
“financial statements”) included in Item 1 and our latest Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.
INDEX
Loral
Space & Communications Inc., a Delaware corporation, together
with its subsidiaries (“Loral,” the “Company,” “we,” “our,” and
“us”) is a leading satellite communications company engaged,
through our ownership interests in affiliates, in satellite-based
communications services.
Disclosure Regarding Forward-Looking Statements
Except for the historical information contained in the following
discussion and analysis, the matters discussed below are not
historical facts, but are “forward-looking statements” as that term
is defined in the Private Securities Litigation Reform Act of 1995.
In addition, we or our representatives have made and may continue
to make forward-looking statements, orally or in writing, in other
contexts. These forward-looking statements can be identified by the
use of words such as “believes,” “expects,” “plans,” “may,” “will,”
“would,” “could,” “should,” “anticipates,” “estimates,” “project,”
“intend” or “outlook” or other variations of these words. These
statements, including without limitation, those relating to
Telesat, are not guarantees of future performance and involve risks
and uncertainties that are difficult to predict or quantify. Actual
events or results may differ materially as a result of a wide
variety of factors and conditions, many of which are beyond our
control. For a detailed discussion of these and other factors and
conditions, please refer to the Commitments and Contingencies
section below and to our other periodic reports filed with the
Securities and Exchange Commission (“SEC”). We operate in an
industry sector in which the value of securities may be volatile
and may be influenced by economic and other factors beyond our
control. We undertake no obligation to update any forward-looking
statements.
Overview
Business
Loral has
one operating segment consisting of satellite-based communications
services. Loral participates in satellite services operations
primarily through its ownership interest in Telesat Canada
(“Telesat”), a leading global satellite operator. Telesat provides
its satellite and communication services from a fleet of satellites
that occupy Canadian and other orbital locations. Loral holds a
62.7% economic interest and a 32.6% voting interest in Telesat as
of March 31, 2020.
At March
31, 2020, Telesat, with approximately $2.3 billion of backlog,
provided satellite services to customers from its fleet of 16
in-orbit geostationary satellites and the Canadian Ka-band payload
on the ViaSat‑1 satellite. Telesat is also developing a global
constellation of low earth orbit (“LEO”) satellites.
In
January 2018, Telesat launched a Ka-band satellite into low earth
orbit as part of its plans to deploy an advanced, global LEO
constellation. This satellite is being used to perform testing and
live demonstrations of certain features of Telesat’s LEO system
design with existing Telesat customers and potential suppliers of
Telesat LEO system hardware. These satellite leaders will be able
to experience key advantages of Telesat’s LEO system — including
ultra-low latency and high speeds — and assess the role Telesat’s
constellation can play in their next-generation broadband
networks.
On July
24, 2019, Telesat announced that it had entered into a memorandum
of understanding with the Government of Canada (“GoC”) regarding a
partnership intended to ensure access to affordable high-speed
internet connectivity across rural and remote areas of Canada
through the development of the Telesat LEO constellation. The
partnership is expected to generate CAD 1.2 billion in revenue for
Telesat over 10 years, which includes a contribution of up to CAD
600 million from the GoC.
In May
2019, Telesat entered into an agreement with the GoC pursuant to
which the GoC will contribute up to CAD 85 million through
July 31, 2023 to support the development of the Telesat LEO
constellation. For the three months ended March 31, 2020, Telesat
received CAD 4.0 million relating to the agreement from the
GoC.
In
a number of countries, regulators plan to adopt new spectrum
allocations for terrestrial mobile broadband and 5G, including
certain C-band spectrum currently allocated to satellite services.
Telesat currently uses C-band spectrum in a number of countries,
including the United States and Canada. To the extent that
Telesat’s C-band spectrum is made available for use for terrestrial
mobile broadband and 5G, Telesat may be entitled to certain
compensation.
On
February 28, 2020, the Federal Communications Commission (“FCC”)
approved its Report and Order on
Expanding Flexible Use of the 3.7 to 4.2 GHz Band,
which Report
and Order was released on March 3, 2020. The Report and Order
indicated that Telesat could receive as much as $344.4 million from
the repurposing of C‑band spectrum in the United States. In
addition, Telesat will be entitled to reimbursement of reasonable
clearing costs. Telesat’s ability to receive any proceeds would be
subject to meeting certain conditions as set out in that Report and
Order, including a requirement that satellite operators who wish to
receive accelerated relocation payments must make an election with
the FCC by May 29, 2020 and meet the Phase 1 and Phase 2 clearing
dates of December 5, 2021 and 2023, respectively. The FCC will make
accelerated relocation payments available only if satellite
operators who are entitled to at least 80% of accelerated
relocation payments make such elections. While Telesat intends to
make that election, as a practical matter, accelerated relocati