Quarterly Report (10-q)

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Table of Contents

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 June 30, 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 August 5, 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.

Table of Contents

LORAL SPACE & COMMUNICATIONS INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 2020



PART I — FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)	Page No.

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	3

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and June 30, 2019	4

Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2020 and June 30, 2019	5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019	6

Notes to Condensed Consolidated Financial Statements	7

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 4: Disclosure Controls and Procedures	39

PART II — OTHER INFORMATION

Item 1: Legal Proceedings	40

Item 1A: Risk Factors	40

Item 6: Exhibits	42

Signatures	43

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	June 30,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	81,626	$	259,067
Income tax refund receivable		1,188		576
Other current assets		1,265		1,322
Total current assets		84,079		260,965
Right-of-use asset		671		988
Income tax refund receivable, non-current		—		387
Investments in affiliates		63,234		90,184
Deferred tax assets		38,105		37,945
Other assets		340		341
Total assets	$	186,429	$	390,810

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued employment costs	$	1,802	$	2,611
Other current liabilities		2,474		2,883
Total current liabilities		4,276		5,494
Pension and other post-retirement liabilities		16,499		17,447
Other liabilities		19,423		17,842
Total liabilities		40,198		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		(823,673)		(605,766)
Accumulated other comprehensive loss		(40,803)		(54,914)
Total shareholders' equity		146,231		350,027
Total liabilities and shareholders' equity	$	186,429	$	390,810

See notes to condensed consolidated financial statements

Table of Contents

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
General and administrative expenses	$	(1,801)	$	(1,697)	$	(3,449)	$	(3,500)
Operating loss		(1,801)		(1,697)		(3,449)		(3,500)
Interest and investment income		92		1,566		1,029		3,168
Interest expense		(6)		(5)		(11)		(10)
Other expense		(2,703)		(755)		(4,140)		(1,971)
Loss before income taxes and equity in net income (loss) of affiliates		(4,418)		(891)		(6,571)		(2,313)
Income tax benefit (provision)		1,469		(2,160)		(647)		(4,226)
Loss before equity in net income (loss) of affiliates		(2,949)		(3,051)		(7,218)		(6,539)
Equity in net income (loss) of affiliates		76,515		41,278		(40,559)		83,282
Net income (loss)		73,566		38,227		(47,777)		76,743
Other comprehensive (loss) income, net of tax		(17,179)		(6,646)		14,111		(13,052)
Comprehensive income (loss)	$	56,387	$	31,581	$	(33,666)	$	63,691

Net income (loss) per share:
Basic	$	2.38	$	1.24	$	(1.54)	$	2.48
Diluted	$	2.36	$	1.23	$	(1.54)	$	2.46

Weighted average common shares outstanding:
Basic		30,933		30,933		30,933		30,933
Diluted		31,017		31,008		30,933		31,008

See notes to condensed consolidated financial statements

Table of Contents

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													38,227
Other comprehensive loss															(6,646)
Comprehensive income																	31,581
Balance, June 30, 2019	21,582		216	9,506		95		1,019,988	154		(9,592)		(618,778)		(30,672)		361,257
Net income													13,012
Other comprehensive loss															(24,242)
Comprehensive loss																	(11,230)
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
Net income													73,566
Other comprehensive loss															(17,179)
Comprehensive income																	56,387
Common dividend paid ($5.50 per share)													(170,130)				(170,130)
Balance, June 30, 2020	21,582	$	216	9,506	$	95	$	1,019,988	154	$	(9,592)	$	(823,673)	$	(40,803)	$	146,231

See notes to condensed consolidated financial statements

Table of Contents

LORAL SPACE & COMMUNICATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2020		2019
Operating activities:
Net (loss) income	$	(47,777)	$	76,743
Adjustments to reconcile net (loss) income to net cash (used in) provided by
Operating activities:
Non-cash operating items (Note 2)		40,900		(79,449)
Changes in operating assets and liabilities:
Other current assets		56		(419)
Accrued employment costs and other current liabilities		(570)		(1,476)
Income taxes receivable and payable		(898)		2,998
Pension and other post-retirement liabilities		(948)		(115)
Other liabilities		1,926		720
Net cash used in operating activities - continuing operations		(7,311)		(998)
Net cash provided by operating activities – discontinued operations		—		1,737
Net cash (used in) provided by operating activities		(7,311)		739
Financing activities:
Dividend paid		(170,130)		—
Net cash used in financing activities – continuing operations		(170,130)		—
Net cash used in financing activities – discontinued operations		—		—
Net cash used in financing activities		(170,130)		—
Cash, cash equivalents and restricted cash (Note 2) — period decrease		(177,441)		739
Cash, cash equivalents and restricted cash (Note 2) — beginning of year		259,371		257,251
Cash, cash equivalents and restricted cash — end of period	$	81,930	$	257,990

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 and six months ended June 30, 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 and our share of cumulative equity in

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 June 30, 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 June 30, 2020, the Company had $81.6 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.

On April 30, 2020, our Board of Directors declared a special dividend of $5.50 per share for an aggregate dividend of $170.1 million. The special dividend was paid 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.

As of June 30, 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):


	June 30,		December 31,
	2020		2019
Cash and cash equivalents	$	81,626	$	259,067
Restricted cash included in other assets		304		304
Cash, cash equivalents and restricted cash shown in the statement of cash flows	$	81,930	$	259,371

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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 June 30, 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):



	June 30, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents:
Money market funds	$	78,639	$	—	$	—	$	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 June 30, 2020 and December 31, 2019.

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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.

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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.

Additional Cash Flow Information

The following represents non-cash activities and supplemental information to the condensed consolidated statements of cash flows (in thousands):


	Six Months Ended
	June 30,
	2020		2019
Non-cash operating items:
Equity in net loss (income) of affiliates	$	40,559	$	(83,282)
Deferred taxes		(300)		3,308
Depreciation and amortization		2		8
Right-of-use asset, net of lease liability		(3)		16
Amortization of prior service credit and actuarial loss		642		501
Net non-cash operating items	$	40,900	$	(79,449)
Supplemental information:
Interest paid	$	11	$	10
Income tax refunds	$	178	$	2,980
Income tax payments	$	126	$	163

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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 loss		(1,511)		(35,783)		(37,294)
Balance, December 31, 2019		(16,167)		(38,747)		(54,914)

Other comprehensive income before reclassification		—		13,603		13,603
Amounts reclassified from accumulated other comprehensive loss		508		—		508
Net current-period other comprehensive income		508		13,603		14,111
Balance, June 30, 2020	$	(15,659)	$	(25,144)	$	(40,803)

The components of other comprehensive income (loss) and related tax effects are as follows (in thousands):


	Three Months Ended June 30,
	2020							2019
	Before-Tax			Tax (Provision)		Net-of-Tax		Before-Tax			Tax (Provision)		Net-of-Tax
	Amount			Benefit		Amount		Amount			Benefit		Amount
Amortization of prior service credits
and net actuarial loss	$	340	^(a)	$	(71)	$	269	$	271	^(a)	$	(58)	$	213
Equity in Telesat-related other
comprehensive loss		(17,454)			6		(17,448)		(6,861)			2		(6,859)
Other comprehensive loss	$	(17,114)		$	(65)	$	(17,179)	$	(6,590)		$	(56)	$	(6,646)


	Six Months Ended June 30,
	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	$	642	^(a)	$	(134)	$	508	$	501	^(a)	$	(106)	$	395
Equity in Telesat-related other
comprehensive income (loss)		13,609			(6)		13,603		(13,450)			3		(13,447)
Other comprehensive income (loss)	$	14,251		$	(140)	$	14,111	$	(12,949)		$	(103)	$	(13,052)

(a)

Reclassifications are included in other expense.

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Other Current Assets

Other current assets consists of (in thousands):


	June 30,		December 31,
	2020		2019
Indemnification receivable from SSL for pre-closing taxes (see Note 13)	$	598	$	598
Due from affiliates		63		186
Prepaid expenses		592		164
Other		12		374
	$	1,265	$	1,322

5. Investments in Affiliates

Investments in affiliates consist of (in thousands):


	June 30,		December 31,
	2020		2019
Telesat	$	63,234	$	90,184

Equity in net income (loss) of affiliates consists of (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Telesat	$	76,515	$	41,278	$	(40,559)	$	83,282

Telesat

As of June 30, 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 $13.6 million for the six months ended June 30, 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 and six months ended June 30, 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.

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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 June 30, 2020, Telesat’s Total Leverage Ratio was 4.99:1.00. 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 June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019 (in thousands):


	June 30,		December 31,
	2020		2019
Balance Sheet Data:
Current assets	$	965,015	$	877,294
Total assets		4,016,324		4,130,337
Current liabilities		127,735		124,217
Long-term debt, including current portion		2,829,344		2,836,700
Total liabilities		3,443,905		3,504,594
Shareholders’ equity		572,419		625,743


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Statement of Operations Data:
Revenues	$	149,761	$	172,995	$	308,326	$	340,639
Operating expenses		(34,540)		(32,929)		(70,395)		(73,498)
Depreciation and amortization		(43,031)		(51,569)		(88,448)		(102,777)
Other operating income (expense)		11		(10)		(156)		(65)
Operating income		72,201		88,487		149,327		164,299
Interest expense		(36,685)		(46,492)		(78,232)		(93,335)
Foreign exchange gain (loss)		98,313		45,946		(123,330)		98,415
Loss on financial instruments		(4,884)		(21,263)		(11,889)		(36,375)
Other income		1,874		4,272		5,952		8,106
Income tax provision		(10,138)		(6,481)		(9,456)		(11,036)
Net income (loss)	$	120,681	$	64,469	$	(67,628)	$	130,074

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 June 30, 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.

As of June 30, 2020, XTAR owned and operated an X-band satellite, XTAR–EUR (the “Satellite”) located at the 29° E.L. orbital slot (“the “Orbital Slot”). In addition, XTAR leased from Hisdesat 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L. (the “Transponder Lease”). For services provided by Loral, XTAR, until December 31, 2013, was charged a quarterly management fee under a management agreement with Loral (the “Loral Management Agreement”). As of June 30, 2020, the amount due to Loral under the Loral Management Agreement was $6.6 million, and we had an allowance of $6.6 million against this receivable.

On July 1, 2020, Loral, XTAR and Hisdesat restructured their relationship, including, among other things, the following: (i) Hisdesat purchased the Satellite and certain assets related to operation of the Satellite (the “Purchased Assets”) from XTAR; (ii) XTAR’s agreement with Hisdesat to operate the Satellite at the Orbital Slot was terminated and the rights and licenses to operate the Satellite at the Orbital Slot reverted to Hisdesat; (iii) the Transponder Lease was terminated; (iv) XTAR and Hisdesat entered into an agreement under which XTAR will continue to market and sell capacity on the Satellite and on the Spainsat satellite; (v) XTAR and Loral terminated the Loral Management Agreement; and (vi) Loral granted to Hisdesat an option to acquire for nominal consideration, subject to receipt of all required regulatory approvals, Loral’s membership interests in XTAR. On July 2, 2020, Loral received from XTAR $5.9 million from the proceeds of the sale of the Purchased Assets in full and final settlement of the past due receivable outstanding of $6.6 million under the Loral Management Agreement. The accounting for the full and final settlement of the past due receivable will be reflected in the Company’s financial statements for the third quarter of 2020.

As of June 30, 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 June 30, 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):


	June 30,		December 31,
	2020		2019
Operating lease liability	$	677	$	652
Due to affiliate		—		5
Accrued professional fees		1,595		1,419
Pension and other post-retirement liabilities		77		77
Income taxes payable		—		673
Accrued liabilities		125		57
	$	2,474	$	2,883

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Income Taxes

The following summarizes our income tax benefit (provision) (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Current income tax provision	$	(400)	$	(316)	$	(947)	$	(918)
Deferred income tax benefit (provision)		1,869		(1,844)		300		(3,308)
Income tax benefit (provision)	$	1,469	$	(2,160)	$	(647)	$	(4,226)

For the six month periods ended June 30, 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). For the three month periods ended June 30, 2020 and 2019, this amount is then reduced by the tax recorded for the three months ended March 31, 2020 and 2019. 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 income (loss) of affiliates from our condensed consolidated statement of operations and the periodic effect of our accounting for GILTI.

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 benefit (provision) (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Current provision for UTPs	$	(332)	$	(277)	$	(808)	$	(737)
Deferred benefit for UTPs		72		60		172		153
Tax provision for UTPs	$	(260)	$	(217)	$	(636)	$	(584)

As of June 30, 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 June 30, 2020, we have accrued no penalties and approximately $2.8 million for the potential payment of tax-related interest.

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 June 30, 2020, if our positions are sustained by the taxing authorities, the Company’s income tax provision would be reduced by approximately $7.9 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):


	June 30,		December 31,
	2020		2019
Operating lease liability	$	—	$	345
Indemnification liabilities - other (see Note 13)		145		145
Liabilities for uncertain tax positions		19,278		17,352
	$	19,423	$	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. As of June 30, 2020 and December 31, 2019, outstanding and unconverted restricted stock units (“RSUs”) were 92,857 and 75,262, respectively, that are vested and do not expire.

On May 28, 2020, we paid a special dividend of $5.50 per share for an aggregate dividend of $170.1 million. In accordance with Loral’s Stock Incentive Plan, an equitable adjustment was made to outstanding stock-based awards to reflect the cash dividend. As a result, RSUs outstanding under the Stock Incentive Plan increased by 17,595 in the second quarter of 2020.

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				Six Months Ended
	June 30,				June 30,
	2020		2019		2019
Net income — basic	$	73,566	$	38,227	$	76,743
Less: Adjustment for dilutive effect of Telesat stock options		(398)		(230)		(484)
Net income — diluted	$	73,168	$	37,997	$	76,259

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LORAL SPACE & COMMUNICATIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Telesat stock options are excluded from the calculation of diluted loss per share for the six months ended June 30, 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				Six Months Ended
	June 30,				June 30,
	2020		2019		2019
Weighted average common shares outstanding		30,933		30,933		30,933
Unconverted restricted stock units		84		75		75
Common shares outstanding for diluted earnings per share		31,017		31,008		31,008

For the six months ended June 30, 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):


		Six Months Ended
		June 30, 2020
Unconverted restricted stock units		84

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 and six months ended June 30, 2020 and 2019 (in thousands):


	Pension Benefits				Other Benefits
	Three Months Ended				Three Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Service cost ⁽¹⁾	$	171	$	183	$	—	$	—
Interest cost ⁽²⁾		443		499		4		5
Expected return on plan assets ⁽²⁾		(657)		(609)		—		—
Amortization of net actuarial loss ⁽²⁾		341		272		(1)		(1)
Net periodic cost	$	298	$	345	$	3	$	4


	Pension Benefits				Other Benefits
	Six Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Service cost ⁽¹⁾	$	352	$	361	$	—	$	—
Interest cost ⁽²⁾		883		1,009		8		10
Expected return on plan assets ⁽²⁾		(1,326)		(1,216)		—		—
Amortization of net actuarial loss (gain) ⁽²⁾		644		503		(2)		(2)
Net periodic cost	$	553	$	657	$	6	$	8

⁽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 June 30, 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”). Under the terms of the purchase agreement for the sale, 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 June 30, 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 June 30, 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 June 30, 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 and six months ended June 30, 2020 and 2019 were as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Rent Expense	$	173	$	171	$	347	$	334

Lease payments for the six months ended June 30, 2020 were $0.4 million. The remaining lease term as of June 30, 2020 is 12 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 June 30, 2020 (in thousands):

LORL

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