UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

 

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2020

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___________ to _____________

 

Commission File Number 1-14180

 

Loral Space & Communications Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

87‑0748324

(State or other jurisdiction of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

600 Fifth Avenue, New York, New York

 

10020

(Address of principal executive offices)

 

(Zip Code)

 

(212) 697‑1105

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Voting Common stock, $.01 par value

LORL

Nasdaq Global Select Market

 

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.

 

 

 

 

 

Large accelerated filer         

 

Accelerated filer

Non-accelerated filer           

 

Smaller reporting company

 

 

Emerging growth company

 

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 (Unaudited) 

Page No.

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended March 31, 2020 and March 31, 2019 

4

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2020 and the year ended December 31, 2019 

5

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and March 31, 2019 

6

 

 

Notes to Condensed Consolidated Financial Statements 

7

 

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 

23

 

 

Item 4 Disclosure Controls and Procedures  

35

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1 Legal Proceedings 

36

 

 

Item 1A Risk Factors 

36

 

 

Item 6 Exhibits 

38

 

 

Signatures 

39

 

 

 

 

2

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2020

 

2019

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

255,198

 

$

259,067

Income tax refund receivable

 

1,193

 

 

576

Other current assets

 

1,600

 

 

1,322

Total current assets

 

257,991

 

 

260,965

Right-of-use asset

 

831

 

 

988

Income tax refund receivable, non-current

 

         —

 

 

387

Investments in affiliates

 

4,173

 

 

90,184

Deferred tax assets

 

36,301

 

 

37,945

Other assets

 

340

 

 

341

Total assets

$

299,636

 

$

390,810

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued employment costs

$

1,132

 

$

2,611

Other current liabilities

 

2,204

 

 

2,883

Total current liabilities

 

3,336

 

 

5,494

Pension and other post-retirement liabilities

 

17,061

 

 

17,447

Other liabilities

 

19,265

 

 

17,842

Total liabilities

 

39,662

 

 

40,783

Commitments and contingencies

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

Preferred stock, 0.01 par value; 10,000,000 shares authorized, no shares

 

         —

 

 

         —

issued and outstanding

 

 

 

 

 

Common Stock:

 

 

 

 

 

Voting common stock, 0.01 par value; 50,000,000 shares authorized,

 

 

 

 

 

21,581,572 issued

 

216

 

 

216

Non-voting common stock, 0.01 par value; 20,000,000 shares authorized

 

 

 

 

 

9,505,673 issued and outstanding

 

95

 

 

95

Paid-in capital

 

1,019,988

 

 

1,019,988

Treasury stock (at cost), 154,494 shares of voting common stock

 

(9,592)

 

 

(9,592)

Accumulated deficit

 

(727,109)

 

 

(605,766)

Accumulated other comprehensive loss

 

(23,624)

 

 

(54,914)

Total shareholders' equity

 

259,974

 

 

350,027

Total liabilities and shareholders' equity

$

299,636

 

$

390,810

 

See notes to condensed consolidated financial statements

 

3

 

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2020

 

2019

General and administrative expenses

$

(1,648)

 

$

(1,803)

Operating loss

 

(1,648)

 

 

(1,803)

Interest and investment income

 

937

 

 

1,602

Interest expense

 

(5)

 

 

(5)

Other expense

 

(1,437)

 

 

(1,216)

Loss before income taxes and equity in net (loss) income of affiliates 

 

(2,153)

 

 

(1,422)

Income tax provision

 

(2,116)

 

 

(2,066)

Loss before equity in net (loss) income of affiliates

 

(4,269)

 

 

(3,488)

Equity in net (loss) income of affiliates

 

(117,074)

 

 

42,004

Net (loss) income

 

(121,343)

 

 

38,516

Other comprehensive income (loss), net of tax

 

31,290

 

 

(6,406)

Comprehensive (loss) income

$

(90,053)

 

$

32,110

 

 

 

 

 

 

Net (loss) income per share:

 

 

 

 

 

Basic

$

(3.92)

 

$

1.25

Diluted

$

(3.92)

 

$

1.23

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

30,933

 

 

30,933

Diluted

 

30,933

 

 

31,008

 

See notes to condensed consolidated financial statements

 

 

4

 

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common Stock

 

 

 

 

Treasury Stock

 

 

 

Accumulated

 

 

 

 

Voting

 

Non-Voting

 

 

 

 

Voting

 

 

 

Other

 

 

 

 

Shares

 

 

 

 

Shares

 

 

 

 

Paid-In

 

 

 

 

 

 

Accumulated

 

Comprehensive

 

Shareholders'

 

Issued

 

Amount

 

Issued

 

Amount

 

Capital

 

Shares 

 

Amount

 

Deficit

 

Loss

 

Equity

Balance, January 1, 2019

21,582

 

$

216

 

9,506

 

$

95

 

$

1,019,988

 

154

 

$

(9,592)

 

$

(695,521)

 

$

(17,620)

 

$

297,566

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,516

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,406)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,110

Balance, March 31, 2019

21,582

 

 

216

 

9,506

 

 

95

 

 

1,019,988

 

154

 

 

(9,592)

 

 

(657,005)

 

 

(24,026)

 

 

329,676

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,239

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,888)

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,351

Balance, December 31, 2019

21,582

 

 

216

 

9,506

 

 

95

 

 

1,019,988

 

154

 

 

(9,592)

 

 

(605,766)

 

 

(54,914)

 

 

350,027

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(121,343)

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,290

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(90,053)

Balance, March 31, 2020

21,582

 

$

216

 

9,506

 

$

95

 

$

1,019,988

 

154

 

$

(9,592)

 

$

(727,109)

 

$

(23,624)

 

$

259,974

 

See notes to condensed consolidated financial statements

 

 

5

 

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2020

 

2019

Operating activities:

 

 

 

 

 

Net (loss) income

$

(121,343)

 

$

38,516

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

Non-cash operating items (Note 2)

 

118,945

 

 

(40,300)

Changes in operating assets and liabilities:

 

 

 

 

 

Other current assets

 

(278)

 

 

(575)

Accrued employment costs and other current liabilities

 

(1,498)

 

 

(1,328)

Income tax refund receivable

 

(903)

 

 

3,021

Pension and other post-retirement liabilities

 

(386)

 

 

81

Other liabilities

 

1,594

 

 

447

Net cash used in operating activities

 

(3,869)

 

 

(138)

Cash, cash equivalents and restricted cash (Note 2) — period decrease

 

(3,869)

 

 

(138)

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

 

6

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

7

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

 

8

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.

 

9

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.

 

10

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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

 

 

 

 

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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

 

 

12

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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.

 

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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.

14

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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.

 

15

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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.

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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.

 

 

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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.

 

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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.

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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.

 

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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.

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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.

 

 

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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

Topic

    

Location

Overview 

 

Page 23

Consolidated Operating Results 

 

Page 27

Liquidity and Capital Resources 

 

 

Loral 

 

Page 30

Telesat 

 

Page 31

Statements of Cash` Flows 

 

Page 34

Affiliate Matters 

 

Page 35

Commitments and Contingencies 

 

Page 35

Other Matters 

 

Page 35

 

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.

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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 relocation payments will be available if and only if both Intelsat and SES make such elections. T