NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2021
Note 1—General
Basis of Presentation
The accompanying condensed consolidated financial statements of Intelsat S.A. and its subsidiaries (“Intelsat S.A.,” “we,” “us,” “our” or the “Company”) have not been audited, but are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. References to U.S. GAAP issued by the Financial Accounting Standards Board (“FASB”) in these footnotes are to the FASB Accounting Standards Codification (“ASC”). The unaudited condensed consolidated financial statements include all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of these financial statements. The results of operations for the periods presented are not necessarily indicative of operating results for the full year or for any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”), on file with the U.S. Securities and Exchange Commission (“SEC”).
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these condensed consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.
C-band Spectrum Clearing
On March 3, 2020, the U.S. Federal Communications Commission (“FCC”) issued its final order in the C-band proceeding (the “FCC Final Order”), which, among other things, provides for monetary incentives for fixed satellite services (“FSS”) providers to clear a portion of the C-band spectrum on an accelerated basis (the “Acceleration Payments”). On August 14, 2020, the Company filed its C-band spectrum transition plan with the FCC. On September 17, 2020, the Company announced that it finalized materially all of its required contracts with satellite manufacturers and launch-vehicle providers to move forward and meet the accelerated C-band spectrum clearing timelines established by the FCC.
Under the FCC Final Order, the Company is eligible to receive Acceleration Payments of approximately $1.2 billion and $3.7 billion based on the milestone clearing certification dates of December 5, 2021 and December 5, 2023, with the respective payments expected to be received in the first half of each successive year, respectively, subject to the satisfaction of certain deadlines and other conditions. In addition, under the FCC Final Order, we are also entitled to receive reimbursement payments for certain C-band spectrum clearing expenses incurred, subject to the satisfaction of certain conditions set forth in the FCC Final Order. As of December 31, 2020 and June 30, 2021, we incurred $405.2 million and $805.6 million, respectively, related to expected reimbursable costs associated with the FCC Final Order, which are included within the receivables line item on our condensed consolidated balance sheets. Fulfillment costs incurred as a result of the FCC Final Order, which include costs to pay personnel or third parties to assist with customer reconfiguration and relocation, installation of filters, and program management costs, are expensed as incurred and are included within other operating expense—C-band on our condensed consolidated statements of operations.
Impact of COVID-19 on the Company
As a result of the novel coronavirus (“COVID-19”) pandemic in 2020 and continuing into 2021, in an effort to safeguard public health, governments around the world, including United States (“U.S.”) federal, state and local governments, implemented a number of orders and restrictions on travel and businesses, among other things. Some of these measures remain in effect and have negatively impacted the U.S. and other economies around the world in the short-term, while the long-term economic impact of COVID-19 remains unknown.
The COVID-19 pandemic has had an adverse impact on our business, results of operations and financial condition, a trend we expect to continue. Among the impacts of the COVID-19 pandemic were a reduction of revenue and a decreased likelihood of collection from certain mobility customers and our Intelsat CA (as defined below) business. We continue to closely monitor the ongoing impact on our employees, customers, business and results of operations.
Bankruptcy Accounting
Our consolidated financial statements included herein have been prepared as if we are a going concern and reflect the application of ASC 852, Reorganizations (“ASC 852”). ASC 852 requires the financial statements, for periods subsequent to the commencement of our Chapter 11 proceedings, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, we classify liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the reorganization under the Chapter 11 proceedings as liabilities subject to compromise on our condensed consolidated balance sheets. In addition, we classify all income, expenses, gains or losses that are incurred or realized as a result of the Chapter 11 proceedings as reorganization items in our condensed consolidated statements of operations. See Note 2—Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less, which are generally time deposits with banks and money market funds. The carrying amount of these investments approximates fair value. Restricted cash represents legally restricted amounts being held as a compensating balance for certain outstanding letters of credit.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our condensed consolidated balance sheets to the total sum of these amounts reported in our condensed consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2020
|
|
As of
June 30, 2021
|
Cash and cash equivalents
|
|
$
|
1,060,917
|
|
|
$
|
631,871
|
|
Restricted cash
|
|
21,130
|
|
|
27,055
|
|
Restricted cash included in other assets
|
|
5,500
|
|
|
—
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
1,087,547
|
|
|
$
|
658,926
|
|
Receivables and Allowance for Credit Losses
We provide satellite services and extend credit to numerous customers in the satellite communication, telecommunications and video markets, as well as the airline industry. We monitor our exposure to credit losses and maintain allowances for credit losses and anticipated losses. The Company’s methodology to measure the provision for credit losses considers all relevant information, including but not limited to, information about historical collectability, current conditions and reasonable and supportable forecasts of future economic conditions. We believe we have adequate customer collateral and reserves to cover our exposure.
The following table provides a roll-forward of the allowance for credit losses reported within our condensed consolidated balance sheets (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Three Months Ended June 30, 2020
|
|
Three Months Ended June 30, 2021
|
|
|
Accounts Receivable
|
|
Contract Assets
|
|
Accounts Receivable
|
|
Contract Assets
|
Balance at April 1
|
|
$
|
51,061
|
|
|
$
|
1,811
|
|
|
$
|
40,984
|
|
|
$
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to costs and expenses
|
|
9,771
|
|
|
(173)
|
|
|
8,449
|
|
|
(183)
|
|
Deductions(1)
|
|
(33,254)
|
|
|
—
|
|
|
(20,231)
|
|
|
—
|
|
Balance at June 30
|
|
$
|
27,578
|
|
|
$
|
1,638
|
|
|
$
|
29,202
|
|
|
$
|
4,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Six Months Ended June 30, 2020
|
|
Six Months Ended June 30, 2021
|
|
|
Accounts Receivable
|
|
Contract Assets
|
|
Accounts Receivable
|
|
Contract Assets
|
Balance at January 1
|
|
$
|
40,028
|
|
|
$
|
—
|
|
|
$
|
40,785
|
|
|
$
|
3,889
|
|
Cumulative-effect adjustment of ASU 2016-13 adoption
|
|
—
|
|
|
916
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Charged to costs and expenses
|
|
28,820
|
|
|
722
|
|
|
15,406
|
|
|
457
|
|
Deductions(1)
|
|
(41,270)
|
|
|
—
|
|
|
(26,989)
|
|
|
—
|
|
Balance at June 30
|
|
$
|
27,578
|
|
|
$
|
1,638
|
|
|
$
|
29,202
|
|
|
$
|
4,346
|
|
(1)Uncollectible accounts written off, net of recoveries.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting For Income Taxes (“ASU 2019-12”). The standard removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 was adopted in the first quarter of 2021. The adoption of ASU 2019-12 did not have a material effect on our condensed consolidated financial statements and associated disclosures.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The standard simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts regarding an entity’s own equity. ASU 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2020-06 will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2021. We are in the process of evaluating the impact that ASU 2020-06 will have on our condensed consolidated financial statements and associated disclosures.
Note 2—Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters
Voluntary Reorganization under Chapter 11
On May 13, 2020, Intelsat S.A. and certain of its subsidiaries (each, a “Debtor” and collectively, the “Debtors”) commenced voluntary cases (the “Chapter 11 Cases”) under title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). Primary factors causing us to file for Chapter 11 protection included the Company’s intention to participate in the accelerated clearing process of C-band spectrum set forth in the FCC Final Order, requiring the Company to incur significant costs related to clearing activities well in advance of receiving reimbursement for such costs and the need for additional financing to fund the C-band clearing process, service our current debt obligations, and meet our operating requirements, as well as the economic slowdown impacting the Company and several of its end markets due to the COVID-19 pandemic. On August 14, 2020, the Company filed its C-band spectrum transition plan with the FCC. On September 17, 2020, the Company announced that it finalized materially all of its required contracts with satellite manufacturers and launch-vehicle providers to move forward and meet the accelerated C-band spectrum clearing timelines established by the FCC.
The Chapter 11 process can be unpredictable and involves significant risks and uncertainties. Pursuant to various orders from the Bankruptcy Court, the Debtors have received approval from the Bankruptcy Court to generally maintain their ordinary operations and uphold certain commitments to their stakeholders, including employees, customers, and vendors, during the restructuring process, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Our ability to fund operating expenses may be subject to obtaining further approvals from the Bankruptcy Court in connection with the Chapter 11 Cases.
On June 9, 2020, Intelsat Jackson received approval from the Bankruptcy Court (the “DIP Order”) to enter into a non-amortizing multiple draw superpriority secured debtor-in-possession term loan facility (the “DIP Facility”), in an aggregate principal amount of $1.0 billion on the terms and conditions as set forth in the DIP Facility credit agreement (the “DIP Credit Agreement”) with certain of the Debtors’ prepetition secured parties (the “DIP Lenders”), and on June 17, 2020, Intelsat Jackson and certain of its subsidiaries as guarantors (together with Intelsat Jackson, the “DIP Debtors”) entered into the DIP Credit Agreement with the DIP Lenders, as amended by an amendment (“DIP Amendment No. 1”) to the DIP Credit Agreement, dated as of August 24, 2020, a second amendment (“DIP Amendment No. 2”), dated as of November 25, 2020, and a third amendment (“DIP Amendment No. 3”), dated as of July 13, 2021. For additional information regarding the DIP Facility, DIP Credit Agreement, DIP Amendment No. 1, DIP Amendment No. 2 and DIP Amendment No. 3, see Note 12—Debt.
On July 11, 2020, the Debtors filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing.
On February 11, 2021, the Debtors entered into a plan support agreement (together with all exhibits and schedules thereto, the “PSA”) with certain of the Debtors’ prepetition secured and unsecured creditors (the “Consenting Creditors” and together with the Debtors, the “PSA Parties”). The PSA contains certain covenants on the part of the PSA Parties, including but not limited to the Consenting Creditors voting in favor of the Joint Chapter 11 Plan of Reorganization of Intelsat S.A. and Its Debtor Affiliates (as proposed, the “Plan”), and provides that the Debtors shall achieve certain milestones (unless extended or waived in writing). In connection with the PSA, on February 12, 2021, the Debtors filed the Plan and the Disclosure Statement for the Joint Chapter 11 Plan of Reorganization of Intelsat S.A. and Its Debtor Affiliates (the “Disclosure Statement”), which describes a variety of topics related to the Chapter 11 Cases, including (i) events leading to the Chapter 11 Cases; (ii) significant events that took place during the Chapter 11
Cases; (iii) certain terms of the Plan; and (iv) certain anticipated risk factors associated with, and anticipated consequences of the Plan. The Bankruptcy Court is currently scheduled to determine the adequacy of the Disclosure Statement in the third quarter of 2021.
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the prepetition existing indebtedness of Intelsat S.A., Intelsat Luxembourg, Intelsat Connect and Intelsat Jackson. For additional discussion regarding the impact of the Chapter 11 Cases on our debt obligations, see Note 12—Debt.
While the Chapter 11 Cases are pending, the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments; however, the Debtors expect to make monthly interest payments on their senior secured debt instruments pursuant to the adequate protection requirements under the DIP Order. The contractual interest expense pursuant to our unsecured debt instruments that was not recognized in our condensed consolidated statement of operations was $102.5 million and $192.3 million for the three months ended June 30, 2020 and 2021, respectively, and $102.5 million and $384.5 million for the six months ended June 30, 2020 and 2021, respectively.
Delisting of Intelsat S.A. Common Shares
On May 20, 2020, the New York Stock Exchange (“NYSE”) filed a Form 25 with the SEC to delist the Company’s common shares, $0.01 par value from the NYSE. The delisting became effective 10 days after the Form 25 was filed. The deregistration of the common shares under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) became effective 90 days after the filing date of the Form 25. The common shares remain registered under Section 12(g) and Section 15(d) of the Exchange Act. The Company’s common shares began trading on the OTC Pink Marketplace on May 19, 2020 under the symbol “INTEQ.”
Liabilities Subject to Compromise
Prepetition unsecured liabilities of the Debtors subject to compromise under the Chapter 11 proceedings have been distinguished from secured liabilities that are not expected to be compromised and post-petition liabilities in our condensed consolidated balance sheets. Liabilities subject to compromise have been recorded at the amounts expected to be allowed by the Bankruptcy Court. The ultimate settlement amounts of these liabilities remain at the discretion of the Bankruptcy Court and may vary from the expected allowed amounts.
Liabilities subject to compromise consisted of the following (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2020
|
|
As of
June 30, 2021
|
Accounts payable
|
$
|
9,545
|
|
|
$
|
10,645
|
|
Debt subject to comprise
|
9,782,161
|
|
|
9,782,161
|
|
Accrued interest on debt subject to compromise
|
341,676
|
|
|
341,676
|
|
Other long-term liabilities subject to compromise
|
35,136
|
|
|
34,748
|
|
Total liabilities subject to compromise
|
$
|
10,168,518
|
|
|
$
|
10,169,230
|
|
Reorganization Items
The expenses, gains and losses directly and incrementally resulting from the Chapter 11 Cases are separately reported as reorganization items in our condensed consolidated statement of operations.
Reorganization items consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Adjustment of debt discount, premium and issuance costs
|
$
|
196,974
|
|
|
$
|
—
|
|
|
$
|
196,974
|
|
|
$
|
—
|
|
Debtor-in-possession financing fees
|
52,182
|
|
|
—
|
|
|
52,182
|
|
|
—
|
|
Professional fees
|
48,971
|
|
|
49,591
|
|
|
48,971
|
|
|
105,373
|
|
Other reorganization costs
|
564
|
|
|
—
|
|
|
564
|
|
|
30
|
|
Total reorganization items
|
$
|
298,691
|
|
|
$
|
49,591
|
|
|
$
|
298,691
|
|
|
$
|
105,403
|
|
Going Concern
Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the normal course of business. In connection with the preparation of our condensed consolidated financial statements, we conducted an evaluation as to whether there
were conditions and events, considered in the aggregate, that raised substantial doubt as to the Company’s ability to continue as a going concern. As reflected in our condensed consolidated financial statements, the Company had cash and cash equivalents of $631.9 million and an accumulated deficit of $8.7 billion as of June 30, 2021. The Company generated income from operations of $22.8 million and a net loss of $326.0 million for the six months ended June 30, 2021.
In light of the Company’s Chapter 11 proceedings, our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the Bankruptcy Court’s approval, implement a business plan of reorganization, emerge from the Chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet our contractual obligations and operating needs. As a result of risks and uncertainties related to, among other things, (i) the Company’s ability to obtain requisite support for the business plan of reorganization from various stakeholders, and (ii) the disruptive effects of the Chapter 11 proceedings on our business making it potentially more difficult to maintain business, financing and operational relationships, substantial doubt exists regarding our ability to continue as a going concern.
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the prepetition existing indebtedness of Intelsat S.A., Intelsat Luxembourg, Intelsat Connect and Intelsat Jackson. As such, we have reclassified all such debt obligations, other than debt subject to compromise, to current maturities of long-term debt on our condensed consolidated balance sheets as of December 31, 2020 and June 30, 2021. For additional discussion regarding the impact of the Chapter 11 Cases on our debt obligations, see Note 12—Debt.
Our condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Note 3—Acquisition of Gogo’s Commercial Aviation Business
On August 31, 2020, following approval from the Bankruptcy Court, Intelsat Jackson and Gogo Inc. (NASDAQ: GOGO), a Delaware corporation (“Gogo”), entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with respect to Gogo’s commercial aviation business, consisting of all of the equity interests of Gogo LLC and Gogo International Holdings LLC (collectively known as “Intelsat CA”), for $400.0 million in cash, subject to customary adjustments. On December 1, 2020, Intelsat Jackson completed the acquisition pursuant to the terms and conditions of the Purchase and Sale Agreement (the “Gogo Transaction”). Upon completion of the acquisition, the entities comprising the Intelsat CA business became indirect wholly-owned subsidiaries of Intelsat S.A.
Intelsat CA is one of the largest global providers of in-flight broadband connectivity. The acquisition of Intelsat CA brings together two complementary enterprises – one of the world’s largest satellite operators with a leading provider of commercial in-flight broadband and entertainment services, to deliver innovation and long-term value to commercial airlines.
The Company accounted for the business combination in accordance with ASC 805, Business Combinations. The Company recorded the acquisition using the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition. The Company based the preliminary allocation of the purchase price on estimates and assumptions known at the date of acquisition that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date.
The net payment associated with the transaction was $386.4 million, which represents total cash consideration of $400.0 million, adjusted for estimated closing cash, indebtedness, working capital excess and any transaction expenses. The primary difference between the net payment and purchase consideration of $409.1 million was the settlement of a pre-existing relationship that was favorable to Intelsat S.A.
The following table summarizes the preliminary allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed on the acquisition date, based on estimated fair values both as disclosed in the Company’s 2020 Annual Report and as adjusted for measurement period adjustments identified during the first half of 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
As of
December, 1, 2020 (preliminary)
|
|
Measurement Period Adjustments
|
|
As of
June 30, 2021
(as adjusted)
|
Assets acquired
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
9,867
|
|
|
$
|
—
|
|
|
$
|
9,867
|
|
Receivables, net of allowances
|
52,849
|
|
|
138
|
|
|
52,987
|
|
Inventory
|
144,014
|
|
|
(5,619)
|
|
|
138,395
|
|
Prepaid expenses and other current assets
|
36,140
|
|
|
—
|
|
|
36,140
|
|
Property and equipment
|
41,328
|
|
|
6,522
|
|
|
47,850
|
|
Amortizable intangible assets
|
|
|
|
|
|
Software
|
45,464
|
|
|
—
|
|
|
45,464
|
|
Trade name
|
1,000
|
|
|
—
|
|
|
1,000
|
|
Goodwill
|
77,620
|
|
|
(2,381)
|
|
|
75,239
|
|
Other assets
|
|
|
|
|
|
Supplemental type certificates
|
24,253
|
|
|
48
|
|
|
24,301
|
|
Line fit certificates
|
21,776
|
|
|
—
|
|
|
21,776
|
|
Other assets
|
100,566
|
|
|
—
|
|
|
100,566
|
|
Total assets acquired
|
554,877
|
|
|
(1,292)
|
|
|
553,585
|
|
Liabilities assumed
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
(63,300)
|
|
|
779
|
|
|
(62,521)
|
|
Contract liabilities
|
(13,527)
|
|
|
513
|
|
|
(13,014)
|
|
Other current liabilities
|
(25,472)
|
|
|
—
|
|
|
(25,472)
|
|
Noncurrent liabilities
|
(43,522)
|
|
|
—
|
|
|
(43,522)
|
|
Total liabilities assumed
|
(145,821)
|
|
|
1,292
|
|
|
(144,529)
|
|
Total purchase consideration
|
$
|
409,056
|
|
|
$
|
—
|
|
|
$
|
409,056
|
|
The fair value estimates of the net assets acquired are based upon calculations and valuations, and estimates and assumptions regarding certain tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. Goodwill represents expected synergies in mobility services and connectivity, $64.5 million of which is deductible for tax purposes.
The measurement period adjustments decreased the provisionally recognized goodwill by $2.4 million and have been recognized prospectively, which primarily relate to a $6.5 million adjustment in the provisional value of property and equipment and a $5.6 million adjustment in the provisional value of inventory as a result of additional information obtained during the first half of 2021. These adjustments did not have a material impact on our condensed consolidated balance sheets, statements of operations or cash flows in any periods previously reported.
The following table presents the unaudited pro forma revenue and net loss of the Company, inclusive of Intelsat CA, as if the acquisition had occurred on January 1, 2020, for the three and six months ended June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
Three Months Ended June 30, 2020
|
|
Six Months Ended June 30, 2020
|
Revenue
|
$
|
516,070
|
|
|
$
|
1,080,220
|
|
Net loss
|
(477,133)
|
|
|
(771,294)
|
|
The unaudited pro forma combined financial information is disclosed for illustrative purposes only, and does not purport to represent what the results of operations would actually have been if the business combination occurred as of the dates indicated or what the results would be for any future periods.
Acquisition-related costs amounted to $0.1 million for both the three and six months ended June 30, 2020, and $1.6 million and $5.0 million for the three and six months ended June 30, 2021, respectively, which were included within selling, general and administrative expenses in our condensed consolidated statements of operations.
Note 4—Share Capital
Under our Articles of Incorporation, we have an authorized share capital of $10.0 million, represented by 1.0 billion shares of any class with a nominal value of $0.01 per share. At June 30, 2021, there were approximately 142.2 million common shares issued and outstanding.
Note 5—Revenue
(a) Contract Liabilities
As of December 31, 2020 and June 30, 2021, we had contract liabilities of $405.2 million and $805.6 million, respectively, related to reimbursable costs associated with the FCC Final Order. As of December 31, 2020, these amounts were included within contract liabilities, net of current portion, and as of June 30, 2021, $698.0 million of these amounts were included within contract liabilities and $107.6 million of these amounts were included within contract liabilities, net of current portion, on our condensed consolidated balance sheets.
For the three months ended June 30, 2020 and 2021, we recognized revenue of $51.6 million and $49.9 million, respectively, and for the six months ended June 30, 2020 and 2021, we recognized revenue of $137.7 million and $140.3 million, respectively, that were included in the contract liability balances as of January 1, 2020 and 2021, respectively.
(b) Assets Recognized from the Costs to Obtain a Customer Contract
For the three months ended June 30, 2020 and 2021, we capitalized $1.3 million and $3.7 million for costs to obtain a customer contract, respectively, and amortized $1.1 million during each of those periods. For the six months ended June 30, 2020 and 2021, we capitalized $2.4 million and $6.4 million for costs to obtain a customer contract, respectively, and amortized $2.7 million and $2.4 million, respectively. As of December 31, 2020 and June 30, 2021, capitalized costs to obtain a customer contract amounted to $10.4 million and $14.3 million, respectively, and were included within other assets in our condensed consolidated balance sheets.
(c) Remaining Performance Obligations
Our remaining performance obligation is our expected future revenue under our existing customer contracts and includes both cancelable and non-cancelable contracts. Our remaining performance obligation was approximately $5.8 billion as of June 30, 2021. As of June 30, 2021, the weighted average remaining customer contract life was approximately 3.7 years. Approximately 34%, 27%, and 39% of our total remaining performance obligation as of June 30, 2021 is expected to be recognized as revenue during 2021 and 2022, 2023 and 2024, and 2025 and thereafter, respectively. The amount included in the remaining performance obligation represents the full-service charge for the duration of the contract and does not include termination fees. The amount of the termination fees, which is not included in the remaining performance obligation amount, is generally calculated as a percentage of the remaining performance obligation associated with the contract. In certain cases of breach for non-payment or customer financial distress or bankruptcy, we may not be able to recover the full value of certain contracts or termination fees. Our remaining performance obligation includes 100% of the remaining performance obligation of our consolidated ownership interests, which is consistent with the accounting for our ownership interest in these entities.
(d) Business and Geographic Segment Information
We operate in a single industry segment in which we provide satellite and other communications services to our customers around the world. Our revenues are disaggregated by billing region, service type and customer set. Revenue by region is based on the locations of customers to which services are billed. Our satellites are in geosynchronous orbit, and consequently are not attributable to any geographic location. Of our remaining assets, substantially all are located in the U.S. Intelsat CA revenues are allocated to the geographic location where the airline customer is domiciled.
The following table disaggregates revenue by billing region (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
North America
|
$
|
257,479
|
|
|
53
|
%
|
|
$
|
287,112
|
|
|
57
|
%
|
|
$
|
492,483
|
|
|
52
|
%
|
|
$
|
572,354
|
|
|
57
|
%
|
Europe
|
52,846
|
|
|
11
|
%
|
|
55,512
|
|
|
11
|
%
|
|
106,784
|
|
|
11
|
%
|
|
108,465
|
|
|
11
|
%
|
Latin America and Caribbean
|
54,007
|
|
|
11
|
%
|
|
48,953
|
|
|
10
|
%
|
|
105,482
|
|
|
11
|
%
|
|
98,660
|
|
|
10
|
%
|
Africa and Middle East
|
58,900
|
|
|
12
|
%
|
|
57,551
|
|
|
11
|
%
|
|
120,803
|
|
|
13
|
%
|
|
113,472
|
|
|
11
|
%
|
Asia-Pacific
|
58,802
|
|
|
12
|
%
|
|
58,734
|
|
|
12
|
%
|
|
115,302
|
|
|
12
|
%
|
|
117,674
|
|
|
12
|
%
|
Total
|
$
|
482,034
|
|
|
|
|
$
|
507,862
|
|
|
|
|
$
|
940,854
|
|
|
|
|
$
|
1,010,625
|
|
|
|
The following table disaggregates revenue by type of service (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
|
On-Network Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transponder services
|
$
|
343,599
|
|
|
71
|
%
|
|
$
|
324,053
|
|
|
64
|
%
|
|
$
|
674,934
|
|
|
72
|
%
|
|
$
|
649,163
|
|
|
64
|
%
|
|
Managed services
|
85,050
|
|
|
18
|
%
|
|
70,228
|
|
|
14
|
%
|
|
157,311
|
|
|
17
|
%
|
|
139,854
|
|
|
14
|
%
|
|
Channel
|
391
|
|
|
—
|
%
|
|
186
|
|
|
—
|
%
|
|
816
|
|
|
—
|
%
|
|
381
|
|
|
—
|
%
|
|
Total on-network revenues
|
429,040
|
|
|
89
|
%
|
|
394,467
|
|
|
78
|
%
|
|
833,061
|
|
|
89
|
%
|
|
789,398
|
|
|
78
|
%
|
|
Off-Network and Other Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transponder, MSS and other off-network services
|
43,617
|
|
|
9
|
%
|
|
39,708
|
|
|
8
|
%
|
|
87,305
|
|
|
9
|
%
|
|
82,303
|
|
|
8
|
%
|
|
Satellite-related services
|
9,377
|
|
|
2
|
%
|
|
9,487
|
|
|
2
|
%
|
|
20,488
|
|
|
2
|
%
|
|
18,493
|
|
|
2
|
%
|
|
Total off-network and other revenues
|
52,994
|
|
|
11
|
%
|
|
49,195
|
|
|
10
|
%
|
|
107,793
|
|
|
11
|
%
|
|
100,796
|
|
|
10
|
%
|
|
In-flight Services Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
—
|
|
|
|
|
57,296
|
|
|
11
|
%
|
|
—
|
|
|
|
|
102,007
|
|
|
10
|
%
|
|
Equipment
|
—
|
|
|
|
|
6,904
|
|
|
1
|
%
|
|
—
|
|
|
|
|
18,424
|
|
|
2
|
%
|
|
Total in-flight services revenue
|
—
|
|
|
|
|
64,200
|
|
|
13
|
%
|
|
—
|
|
|
|
|
120,431
|
|
|
12
|
%
|
|
Total
|
$
|
482,034
|
|
|
|
|
$
|
507,862
|
|
|
|
|
$
|
940,854
|
|
|
|
|
$
|
1,010,625
|
|
|
|
|
The following table disaggregates revenue by type of customer application (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Network services
|
$
|
176,699
|
|
|
37
|
%
|
|
$
|
221,034
|
|
|
44%
|
|
$
|
326,077
|
|
|
35
|
%
|
|
$
|
435,003
|
|
|
43
|
%
|
Media
|
202,563
|
|
|
42
|
%
|
|
184,153
|
|
|
36%
|
|
408,393
|
|
|
43
|
%
|
|
369,106
|
|
|
37
|
%
|
Government
|
96,106
|
|
|
20
|
%
|
|
95,843
|
|
|
19%
|
|
191,859
|
|
|
20
|
%
|
|
193,756
|
|
|
19
|
%
|
Satellite-related services
|
6,666
|
|
|
1
|
%
|
|
6,832
|
|
|
1%
|
|
14,525
|
|
|
2
|
%
|
|
12,760
|
|
|
1
|
%
|
Total
|
$
|
482,034
|
|
|
|
|
$
|
507,862
|
|
|
|
|
$
|
940,854
|
|
|
|
|
$
|
1,010,625
|
|
|
|
Our largest customer accounted for approximately 14% and 11% of our revenue during the three months ended June 30, 2020 and 2021, respectively, and 15% and 11% during the six months ended June 30, 2020 and 2021, respectively. Our ten largest customers accounted for approximately 42% and 36% of our revenue during the three months ended June 30, 2020 and 2021, respectively, and 40% and 36% during the six months ended June 30, 2020 and 2021, respectively.
Note 6—Net Loss per Share
Basic net loss per common share attributable to Intelsat S.A. (“EPS”) is computed by dividing net loss attributable to Intelsat S.A.’s common shareholders by the weighted average number of common shares outstanding during the periods. Diluted EPS assumes the issuance of common shares pursuant to share-based compensation plans and conversion of the Intelsat S.A. 4.5% Convertible Senior Notes due 2025 (the “2025 Convertible Notes”), unless the effect of such issuances would be anti-dilutive.
The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data or where otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Numerator:
|
|
|
|
|
|
|
|
Net loss attributable to Intelsat S.A.
|
$
|
(405,355)
|
|
|
$
|
(152,306)
|
|
|
$
|
(624,126)
|
|
|
$
|
(327,182)
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding (in millions)
|
142.1
|
|
|
142.2
|
|
|
141.8
|
|
|
142.2
|
|
Diluted weighted average shares outstanding (in millions)
|
142.1
|
|
|
142.2
|
|
|
141.8
|
|
|
142.2
|
|
Basic EPS
|
$
|
(2.85)
|
|
|
$
|
(1.07)
|
|
|
$
|
(4.40)
|
|
|
$
|
(2.30)
|
|
Diluted EPS
|
$
|
(2.85)
|
|
|
$
|
(1.07)
|
|
|
$
|
(4.40)
|
|
|
$
|
(2.30)
|
|
Due to a net loss for each of the three and six months ended June 30, 2020 and 2021, there were no dilutive securities, and therefore, basic and diluted EPS were the same. The weighted average number of common shares that could potentially dilute basic EPS in the future was 22.1 million and 22.7 million for the three months ended June 30, 2020 and 2021, respectively, and 22.3 million and 22.6 million for the six months ended June 30, 2020 and 2021, respectively, primarily consisting of the 2025 Convertible Notes.
Note 7—Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosure (“ASC 820”) defines fair value, establishes a market-based framework or hierarchy for measuring fair value and provides for certain required disclosures about fair value measurements. The guidance is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value but does not require any new fair value measurements.
The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:
•Level 1—unadjusted quoted prices for identical assets or liabilities in active markets;
•Level 2—quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and
•Level 3—unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements
The tables below present assets measured and recorded at fair value in our condensed consolidated balance sheets on a recurring basis and their corresponding level within the fair value hierarchy (in thousands). No transfers between Level 1, Level 2 and Level 3 fair value measurements occurred for the three and six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2020
|
Description
|
As of December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
Marketable securities(1)
|
$
|
5,205
|
|
|
$
|
5,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Common stock warrant(2)
|
3,239
|
|
|
—
|
|
—
|
|
|
3,239
|
|
Total assets
|
$
|
8,444
|
|
|
$
|
5,205
|
|
|
$
|
—
|
|
|
$
|
3,239
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2021
|
Description
|
As of June 30, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
Marketable securities(1)
|
$
|
5,450
|
|
|
$
|
5,450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Common stock warrant(2)
|
8,771
|
|
|
—
|
|
|
—
|
|
|
8,771
|
|
Total assets
|
$
|
14,221
|
|
|
$
|
5,450
|
|
|
$
|
—
|
|
|
$
|
8,771
|
|
|
|
|
|
|
|
|
|
(1)The valuation measurement inputs of these marketable securities represent unadjusted quoted prices in active markets and, accordingly, we have classified such investments as Level 1 within the fair value hierarchy. The cost basis of our marketable securities was $4.0 million and $3.8 million as of December 31, 2020 and June 30, 2021, respectively. We sold nominal
amounts of marketable securities resulting in a nominal gain during each of the three and six months ended June 30, 2020 and 2021. These amounts were included in other income, net in our condensed consolidated statements of operations.
(2)We valued the common stock warrant using a valuation technique that reflects the risk-free interest rate, time to maturity, volatility of comparable companies, and the expected transaction price and impact on this asset that may result from a potential merger or acquisition transaction. We identified the inputs used to calculate the fair value as Level 3 inputs and concluded that the valuation in its entirety is classified as Level 3 within the fair value hierarchy.
The following table presents a reconciliation of the common stock warrant, which is measured and recorded at fair value on a recurring basis using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Balance as of beginning of period
|
$
|
3,239
|
|
|
$
|
8,562
|
|
|
$
|
3,239
|
|
|
$
|
3,239
|
|
Unrealized gain included in other income, net
|
—
|
|
|
209
|
|
|
—
|
|
|
5,532
|
|
Balance as of end of period
|
$
|
3,239
|
|
|
$
|
8,771
|
|
|
$
|
3,239
|
|
|
$
|
8,771
|
|
Nonrecurring Fair Value Measurements
The carrying values of certain assets may be adjusted to fair value in subsequent periods on a nonrecurring basis if an event occurs or circumstances change that indicate that the asset is impaired or, for investments in equity securities without readily determinable fair values, observable transactions for identical or similar investments of the same issuer support a change in the investment fair value. During the first quarter of 2020, we recognized an impairment of non-amortizable intangible assets of $12.2 million. This fair value measurement is classified as Level 3 within the fair value hierarchy due to the use of significant unobservable inputs. See Note 11—Goodwill and Other Intangible Assets for additional information.
Other Fair Value Disclosures
See Note 10—Investments, Note 11—Goodwill and Other Intangible Assets and Note 12—Debt for fair value disclosures related to our loan receivables, impairment analysis and debt, respectively. The carrying amounts of the Company's other financial instruments are reasonable estimates of their related fair values due to their short-term nature.
Note 8—Retirement Plans and Other Retiree Benefits
(a) Pension and Other Postretirement Benefits
We maintain a noncontributory defined benefit retirement plan covering employees hired prior to July 19, 2001. The cost of providing benefits to eligible participants under the defined benefit retirement plan is calculated using the plan’s benefit formulas, which take into account the participants’ remuneration, dates of hire, years of eligible service and certain actuarial assumptions. In addition, as part of the overall medical plan, we provide postretirement medical benefits to certain current and future retirees who meet the criteria under the medical plan for postretirement benefit eligibility. In 2015, we amended the defined benefit retirement plan to end the accrual of additional benefits for the remaining active participants. We have received authorization from the Bankruptcy Court to continue making contributions in the ordinary course during our Chapter 11 Cases.
The defined benefit retirement plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We expect that our future contributions to the defined benefit retirement plan will be based on the minimum funding requirements of the Internal Revenue Code and on the plan’s funded status. Any significant decline in the fair value of our defined benefit retirement plan assets or other adverse changes to the significant assumptions used to determine the plan’s funded status would negatively impact its funded status and could result in increased funding in future years. The impact on the funded status is determined based upon market conditions in effect when we completed our annual valuation.
Included in accumulated other comprehensive loss at June 30, 2021 was $111.8 million ($80.2 million, net of tax) that has not yet been recognized in net periodic benefit cost.
The tables below show the components of net periodic benefit cost (income) for the three and six months ended June 30, 2020 and 2021 (in thousands). These amounts are recognized in other income (expense), net in the condensed consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Interest cost
|
$
|
2,962
|
|
|
$
|
2,030
|
|
|
$
|
5,925
|
|
|
$
|
4,060
|
|
Expected return on plan assets
|
(5,810)
|
|
|
(5,592)
|
|
|
(11,621)
|
|
|
(11,183)
|
|
Amortization of unrecognized net loss
|
1,600
|
|
|
2,046
|
|
|
3,200
|
|
|
4,091
|
|
Net periodic benefit income
|
$
|
(1,248)
|
|
|
$
|
(1,516)
|
|
|
$
|
(2,496)
|
|
|
$
|
(3,032)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Interest cost
|
$
|
266
|
|
|
$
|
149
|
|
|
$
|
532
|
|
|
$
|
298
|
|
Amortization of unrecognized prior service credits
|
(636)
|
|
|
(636)
|
|
|
(1,272)
|
|
|
(1,272)
|
|
Amortization of unrecognized net gain
|
(305)
|
|
|
(347)
|
|
|
(610)
|
|
|
(693)
|
|
Net periodic benefit income
|
$
|
(675)
|
|
|
$
|
(834)
|
|
|
$
|
(1,350)
|
|
|
$
|
(1,667)
|
|
(b) Other Retirement Plans
We maintain a defined contribution retirement plan qualified under the provisions of Section 401(k) of the Internal Revenue Code for our employees in the United States. We have received authorization from the Bankruptcy Court to continue making our contributions in the ordinary course during the Chapter 11 Cases. We recognized compensation expense for this plan of $2.2 million and $3.4 million for the three months ended June 30, 2020 and 2021, respectively, and $4.5 million and $6.8 million for the six months ended June 30, 2020 and 2021, respectively. We also maintain other defined contribution retirement plans in several non-U.S. jurisdictions, but such plans are not material to our financial position or results of operations.
Note 9—Satellites and Other Property and Equipment
(a) Satellites and Other Property and Equipment, net
Satellites and other property and equipment, net were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2020
|
|
As of
June 30, 2021
|
Satellites and launch vehicles
|
$
|
10,500,021
|
|
|
$
|
10,925,098
|
|
Information systems and ground segment
|
1,062,216
|
|
|
1,126,371
|
|
Buildings and other
|
322,093
|
|
|
343,952
|
|
Total cost
|
11,884,330
|
|
|
12,395,421
|
|
Less: accumulated depreciation
|
(7,126,453)
|
|
|
(7,436,494)
|
|
Total
|
$
|
4,757,877
|
|
|
$
|
4,958,927
|
|
Satellites and other property and equipment are stated at historical cost, except for satellites that have been impaired. Satellites and other property and equipment acquired as part of an acquisition are stated based on their fair value at the date of acquisition.
Satellites and other property and equipment, net of accumulated depreciation as of December 31, 2020 and June 30, 2021, included construction-in-progress of $768.6 million and $1.1 billion, respectively. These amounts relate primarily to satellites under construction and related launch services. As of June 30, 2021, we incurred C-band clearing related costs and expenses of $950.6 million, of which $794.0 million was capitalized. Of this capitalized amount, $764.9 million and $29.1 million were capitalized as satellites and other property and equipment, net of accumulated depreciation, and other current assets, respectively, in the condensed consolidated balance sheets. An estimated $737.5 million of the capitalized costs is expected to be reimbursable under the FCC Final Order.
Interest costs of $6.2 million and $19.2 million were capitalized for the three months ended June 30, 2020 and 2021, respectively, and $10.2 million and $35.3 million were capitalized for the six months ended June 30, 2020 and 2021, respectively. Additionally, depreciation expense was $154.5 million and $156.7 million for the three months ended June 30, 2020 and 2021, respectively, and $308.9 million and $311.5 million for the six months ended June 30, 2020 and 2021, respectively.
We have entered into launch contracts for the launch of both specified and unspecified future satellites. Each of these launch contracts may be terminated at our option, subject to payment of a termination fee that increases as the applicable launch date approaches. In addition, in the event of a failure of any launch, we may exercise our right to obtain a replacement launch within a specified period following our request for re-launch.
(b) Satellite Launches
Galaxy 30, the first satellite in Intelsat’s Galaxy fleet refresh plan, was successfully launched on August 15, 2020. Galaxy 30 replaced Galaxy 14 at 125ºW serving media customers in the North America region. Galaxy 30 is the first four-frequency Intelsat satellite with C-, Ku-, Ka- and L-band capabilities. In addition, Galaxy 30 offers broadband, mobility and network services to mobile network, enterprise and government customers in the North America region. The satellite also plays an important role in the Company’s U.S. C-band spectrum transition plan. Galaxy 30 entered into service in February 2021.
Note 10—Investments
We have an ownership interest in two entities that meet the criteria of a variable interest entity (“VIE”): Horizons Satellite Holdings LLC (“Horizons Holdings”) and Horizons-3 Satellite LLC (“Horizons 3”), which are discussed in further detail below, including our analyses of the primary beneficiary determination as required under ASC 810, Consolidation (“ASC 810”). We also own noncontrolling investments in equity securities and loan receivables as discussed further below.
(a) Horizons Holdings
Horizons Holdings is a joint venture with JSAT International, Inc. (“JSAT”) that consists of two investments: Horizons-1 Satellite LLC and Horizons-2 Satellite LLC. Horizons Holdings borrowed from JSAT a portion of the funds necessary to finance the construction of the Horizons 2 satellite pursuant to a loan agreement. The borrowing was subsequently repaid. We provide certain services to the joint venture and in return utilize capacity from the joint venture.
We have determined that this joint venture meets the criteria of a VIE under ASC 810, and we have concluded that we are the primary beneficiary because decisions relating to any future relocation of the Horizons 2 satellite, the most significant asset of the joint venture, are effectively controlled by us. In accordance with ASC 810, as the primary beneficiary, we consolidate Horizons Holdings within our condensed consolidated financial statements. Total assets of Horizons Holdings were $14.2 million and $12.2 million as of December 31, 2020 and June 30, 2021, respectively. Total liabilities were nominal as of December 31, 2020 and $1.6 million as of June 30, 2021.
We have a revenue sharing agreement with JSAT related to services sold on the Horizons 1 and Horizons 2 satellites. We are responsible for billing and collection for such services, and we remit 50% of the revenue, less applicable fees and commissions, to JSAT. Amounts payable to JSAT related to the revenue sharing agreement, net of applicable fees and commissions, from the Horizons 1 and Horizons 2 satellites were $1.8 million and $3.0 million as of December 31, 2020 and June 30, 2021, respectively.
(b) Horizons-3 Satellite LLC
On November 4, 2015, we entered into an additional joint venture agreement with JSAT. The joint venture, Horizons 3, was formed for the purpose of developing, launching, managing, operating and owning a high-performance satellite located at the 169ºE orbital location.
Horizons 3, which is 50% owned by each of Intelsat and JSAT, was set up with joint sharing of management authority and equal rights to profits and revenues from the joint venture. Similar to Horizons Holdings, we have a revenue sharing agreement with JSAT related to services sold on the Horizons 3e satellite. In addition, we are responsible for billing and collection for such services, and we remit 50% of the revenue, less applicable fees and commissions, to JSAT. Amounts payable to JSAT related to the revenue sharing agreement, net of applicable fees and commissions, from the Horizons 3e satellite were $5.0 million and $7.7 million as of December 31, 2020 and June 30, 2021, respectively.
We have determined that this joint venture meets the criteria of a VIE under ASC 810; however, we have concluded that we are not the primary beneficiary and therefore do not consolidate Horizons 3. The assessment considered both quantitative and qualitative factors, including an analysis of voting power and other means of control of the joint venture, as well as each owner’s exposure to risk of loss or gain. Because we and JSAT equally share control over the operations of the joint venture and also equally share exposure to risk of losses or gains, we concluded that we are not the primary beneficiary of Horizons 3. Our investment, included within other assets in our condensed consolidated balance sheets, is accounted for using the equity method of accounting. The investment balance, which is equivalent to our maximum exposure to loss, was $103.8 million and $103.7 million as of December 31, 2020 and June 30, 2021, respectively. The investment balance exceeded our equity in the net assets of Horizons 3 by $10.9 million and $10.5 million as of December 31, 2020 and June 30, 2021, respectively. This basis difference represents the capitalized interest that we incurred in relation to financing our investment, and we recognize it as a reduction of our equity in earnings of Horizons 3 on a straight-line basis
over the life of the satellite. We recognized a nominal amount of equity in losses of Horizons 3 in other income, net for each of the three and six months ended June 30, 2020 and 2021.
In connection with our investment in Horizons 3, we entered into a capital contribution and subscription agreement, which requires us to fund our 50% share of the amounts due in order to maintain our respective 50% interest in the joint venture. Pursuant to this agreement, we made contributions of $2.7 million for the year ended December 31, 2020 with no comparable amounts during the six months ended June 30, 2021. We received distributions of $9.0 million for the year ended December 31, 2020 with no comparable amounts for the six months ended June 30, 2021. The Company utilizes the cumulative earnings approach to determine whether distributions received from equity method investees are returns on investment or returns of investment. In addition, our indirect subsidiary that holds our investment in Horizons 3 has entered into a security and pledge agreement with Horizons 3, pursuant to which it has granted a security interest in its membership interest in Horizons 3. Further, our indirect subsidiary has granted a security interest to Horizons 3 in its customer capacity contracts and its ownership interest in its wholly-owned subsidiary that holds the FCC license required for the joint venture’s operations.
The Horizons 3e satellite entered into service in January 2019. The Company purchases satellite capacity and related services from the Horizons 3 joint venture, and then sells that capacity to its customers. We incurred direct costs of revenue related to these purchases of $5.0 million and $4.5 million during the three months ended June 30, 2020 and 2021, respectively, and $10.0 million and $9.0 million during the six months ended June 30, 2020 and 2021, respectively. The Company also sells managed ground network services to the Horizons 3 joint venture and provides program management services for a fee. We recorded an offset to direct costs of revenue related to the provision of these services of $1.8 million and $1.7 million during the three months ended June 30, 2020 and 2021, respectively, and $3.5 million during each of the six months ended June 30, 2020 and 2021. On the condensed consolidated balance sheets as of June 30, 2021, $0.9 million due from Horizons 3 was included in receivables with no comparable amount as of December 31, 2020, and $1.5 million due to Horizons 3 was included in accounts payable and accrued liabilities as of both December 31, 2020 and June 30, 2021.
(c) Investments in Equity Securities
The Company holds noncontrolling equity investments in five separate privately held companies, including investments in equity securities without readily determinable fair values and common stock warrants.
In accordance with ASC 321, Investments—Equity Securities, we use the measurement alternative to measure the fair value of our investments in equity securities without readily determinable fair values. Accordingly, these investments are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer. We recognized an increase in fair value relating to investments of $7.7 million for the three and six months ended June 30, 2021, with no comparable amounts for the three and six months ended June 30, 2020, which are recognized in other income, net in our condensed consolidated statements of operations. Additionally, during the second quarter of 2021, we sold all of our interest in one of our investments for $15.0 million, resulting in a gain of $5.3 million for the three and six months ended June 30, 2021, which is recognized in other income, net in our condensed consolidated statements of operations. These investments were recorded in other assets in our condensed consolidated balance sheets and had a total carrying value of $31.9 million and $29.8 million as of December 31, 2020 and June 30, 2021, respectively.
We measure our stock warrants at fair value and recognized an increase in fair value of stock warrants of $0.2 million and $5.5 million for the three and six months ended June 30, 2021, respectively, with no comparable amounts for the three and six months ended June 30, 2020 (see Note 7—Fair Value Measurements and Note 13—Derivative Instruments and Hedging Activities for additional information). The warrants were recorded in other assets in our condensed consolidated balance sheets and had a cumulative fair value of $3.2 million and $8.8 million as of December 31, 2020 and June 30, 2021, respectively.
(d) Loan Receivables
The Company has loan receivables from three privately held companies that it is holding for long-term investment. These loan receivables are reported at amortized cost, net of the allowance for credit losses. Amortized cost is the outstanding principal, adjusted for unamortized discounts and deferred transaction costs. The Company recognizes interest income on loan receivables using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective interest method.
Loan receivables were recorded in other assets in our condensed consolidated balance sheets at an amortized cost basis of $71.2 million and $73.7 million as of December 31, 2020 and June 30, 2021, respectively. As of December 31, 2020 and June 30, 2021, $1.9 million and $2.1 million, respectively, of accrued interest related to our loan receivables was recorded in prepaid expenses and other current assets in our condensed consolidated balance sheets. We recognized interest income related to our loan receivables of $1.0 million for each of the three months ended June 30, 2020 and 2021, and $1.9 million and $2.1 million for the six months ended June 30, 2020 and 2021, respectively.
A loan is determined to be impaired and placed on non-accrual status when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due under the contractual terms of the applicable loan agreement. We recognized impairment losses of $0.6 million related to loan receivables during the three and six months ended June 30, 2020, with no comparable amounts for the three and six months ended June 30, 2021.
The fair value of loan receivables is evaluated on a loan-by-loan basis, and is determined based on assessments of discounted cash flows that are considered probable of collection. We consider these inputs to be Level 3 within the fair value hierarchy under ASC 820. The cumulative fair value of our loan receivables as of December 31, 2020 and June 30, 2021 was $72.9 million and $75.9 million, respectively.
Note 11—Goodwill and Other Intangible Assets
(a) Goodwill
As a result of the Gogo Transaction, we provisionally recognized goodwill of $77.6 million as of December 1, 2020, which was subsequently decreased by $2.4 million as a result of measurement period adjustments during the first half of 2021. See Note 3—Acquisition of Gogo’s Commercial Aviation Business for additional discussion.
The carrying amounts of goodwill consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2020
|
|
As of
June 30, 2021
|
Goodwill
|
$
|
6,858,447
|
|
|
$
|
6,856,066
|
|
Accumulated impairment losses
|
(4,160,200)
|
|
|
(4,160,200)
|
|
Net carrying amount
|
$
|
2,698,247
|
|
|
$
|
2,695,866
|
|
(b) Orbital Locations, Trade Name and Other Intangible Assets
Orbital Locations and Trade Name. During the first quarter of 2020, we recognized an impairment of our trade name intangible asset of $12.2 million, which is included within impairment of non-amortizable intangible assets in the condensed consolidated statements of operations.
The carrying amounts of acquired intangible assets not subject to amortization consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2020
|
|
As of
June 30, 2021
|
Orbital locations
|
$
|
2,250,000
|
|
|
$
|
2,250,000
|
|
Trade name
|
45,000
|
|
|
45,000
|
|
Total non-amortizable intangible assets
|
$
|
2,295,000
|
|
|
$
|
2,295,000
|
|
Other Intangible Assets. The carrying amounts and accumulated amortization of acquired intangible assets subject to amortization consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of June 30, 2021
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Backlog and other
|
$
|
744,760
|
|
|
$
|
(722,697)
|
|
|
$
|
22,063
|
|
|
$
|
744,760
|
|
|
$
|
(727,740)
|
|
|
$
|
17,020
|
|
Customer relationships
|
534,030
|
|
|
(309,486)
|
|
|
224,544
|
|
|
534,030
|
|
|
(319,719)
|
|
|
214,311
|
|
Software
|
45,808
|
|
|
(1,846)
|
|
|
43,962
|
|
|
47,848
|
|
|
(7,774)
|
|
|
40,074
|
|
Total
|
$
|
1,324,598
|
|
|
$
|
(1,034,029)
|
|
|
$
|
290,569
|
|
|
$
|
1,326,638
|
|
|
$
|
(1,055,233)
|
|
|
$
|
271,405
|
|
Intangible assets are amortized based on the expected pattern of consumption. Amortization expense was $7.8 million and $11.1 million for the three months ended June 30, 2020 and 2021, respectively, and $15.6 million and $21.2 million for the six months ended June 30, 2020 and 2021, respectively.
Note 12—Debt
As discussed in Note 2—Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters, the filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the prepetition existing indebtedness of Intelsat S.A., Intelsat Luxembourg, Intelsat Connect and Intelsat Jackson. As such, we have reclassified all such debt obligations, other than debt subject to compromise, to current maturities of long-term debt on our condensed consolidated balance sheet as of June 30, 2021. Any efforts to enforce payment obligations related to the acceleration of
our debt have been automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. While the Chapter 11 Cases are pending, the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments; however, the Debtors expect to make monthly interest payments on their senior secured debt instruments pursuant to the adequate protection requirements under the DIP Order.
The carrying values and fair values of our notes payable and debt were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of June 30, 2021
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Intelsat S.A.:
|
|
|
|
|
|
|
|
4.5% Convertible Senior Notes due June 2025 (1)
|
$
|
402,500
|
|
|
$
|
130,813
|
|
|
$
|
402,500
|
|
|
$
|
120,750
|
|
Unamortized prepaid debt issuance costs and discount on 4.5% Convertible Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Intelsat S.A. obligations
|
402,500
|
|
|
130,813
|
|
|
402,500
|
|
|
120,750
|
|
Intelsat Luxembourg:
|
|
|
|
|
|
|
|
7.75% Senior Notes due June 2021 (1)
|
421,219
|
|
|
14,743
|
|
|
421,219
|
|
|
8,424
|
|
Unamortized prepaid debt issuance costs on 7.75% Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
8.125% Senior Notes due June 2023 (1)
|
1,000,000
|
|
|
130,000
|
|
|
1,000,000
|
|
|
155,000
|
|
Unamortized prepaid debt issuance costs on 8.125% Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
12.5% Senior Notes due November 2024 (1)
|
403,350
|
|
|
42,352
|
|
|
403,350
|
|
|
54,452
|
|
Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Intelsat Luxembourg obligations
|
1,824,569
|
|
|
187,095
|
|
|
1,824,569
|
|
|
217,876
|
|
Intelsat Connect Finance:
|
|
|
|
|
|
|
|
9.5% Senior Notes due February 2023 (1)
|
1,250,000
|
|
|
334,375
|
|
|
1,250,000
|
|
|
437,500
|
|
Unamortized prepaid debt issuance costs and discount on 9.5% Senior Notes
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Total Intelsat Connect Finance obligations
|
1,250,000
|
|
|
334,375
|
|
|
1,250,000
|
|
|
437,500
|
|
Intelsat Jackson:
|
|
|
|
|
|
|
|
9.5% Senior Secured Notes due September 2022
|
490,000
|
|
|
543,900
|
|
|
490,000
|
|
|
575,750
|
|
Unamortized prepaid debt issuance costs and discount on 9.5% Senior Secured Notes
|
(7,495)
|
|
|
—
|
|
(5,491)
|
|
|
—
|
|
8% Senior Secured Notes due February 2024
|
1,349,678
|
|
|
1,373,297
|
|
|
1,349,678
|
|
|
1,393,543
|
|
Unamortized prepaid debt issuance costs and premium on 8% Senior Secured Notes
|
(3,072)
|
|
|
—
|
|
(2,631)
|
|
|
—
|
|
5.5% Senior Notes due August 2023 (1)
|
1,985,000
|
|
|
1,349,800
|
|
|
1,985,000
|
|
|
1,111,600
|
|
Unamortized prepaid debt issuance costs on 5.5% Senior Notes
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
9.75% Senior Notes due July 2025 (1)
|
1,885,000
|
|
|
1,347,775
|
|
|
1,885,000
|
|
|
1,093,300
|
|
Unamortized prepaid debt issuance costs on 9.75% Senior Notes
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
8.5% Senior Notes due October 2024 (1)
|
2,950,000
|
|
|
2,079,750
|
|
|
2,950,000
|
|
|
1,740,500
|
|
Unamortized prepaid debt issuance costs and premium on 8.5% Senior Notes
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Senior Secured Credit Facilities due November 2023
|
2,000,000
|
|
|
2,025,000
|
|
|
2,000,000
|
|
|
2,030,000
|
|
Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities
|
(16,955)
|
|
|
—
|
|
(14,267)
|
|
|
|
Senior Secured Credit Facilities due January 2024
|
395,000
|
|
|
400,925
|
|
|
395,000
|
|
|
401,913
|
|
Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities
|
(1,238)
|
|
|
—
|
|
(1,050)
|
|
|
—
|
|
6.625% Senior Secured Credit Facilities due January 2024
|
700,000
|
|
|
714,000
|
|
|
700,000
|
|
|
712,250
|
|
Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities
|
(2,194)
|
|
|
—
|
|
(1,862)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of June 30, 2021
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Superpriority Secured DIP Credit Facilities due July 2021
|
1,000,000
|
|
|
1,011,250
|
|
|
1,000,000
|
|
|
1,003,750
|
|
Total Intelsat Jackson obligations
|
12,723,724
|
|
|
10,845,697
|
|
|
12,729,377
|
|
|
10,062,606
|
|
Eliminations:
|
|
|
|
|
|
|
|
8.125% Senior Notes of Intelsat Luxembourg due June 2023 owned by Intelsat Jackson (1)
|
(111,663)
|
|
|
(14,517)
|
|
|
(111,663)
|
|
|
(17,308)
|
|
Unamortized prepaid debt issuance costs on 8.125% Senior Notes
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
12.5% Senior Notes of Intelsat Luxembourg due November 2024 owned by Intelsat Connect Finance, Intelsat Jackson and Intelsat Envision (1)
|
(403,245)
|
|
|
(42,341)
|
|
|
(403,245)
|
|
|
(54,438)
|
|
Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total eliminations:
|
(514,908)
|
|
|
(56,858)
|
|
|
(514,908)
|
|
|
(71,746)
|
|
Total Intelsat S.A. debt
|
15,685,885
|
|
|
11,441,122
|
|
|
15,691,538
|
|
|
10,766,986
|
|
Less: current maturities of long-term debt
|
5,903,724
|
|
|
6,068,372
|
|
|
5,909,377
|
|
|
6,117,206
|
|
Less: debt included in liabilities subject to compromise
|
9,782,161
|
|
|
5,372,750
|
|
|
9,782,161
|
|
|
4,649,780
|
|
Total Intelsat S.A. long-term debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)In connection with the Chapter 11 Cases, these balances have been reclassified as liabilities subject to compromise in our condensed consolidated balance sheet as of June 30, 2021. As of April 15, 2020, the Company ceased making principal and interest payments, and as of May 13, 2020 ceased accruing interest expense in relation to this long-term debt that was reclassified as liabilities subject to compromise.
The fair value for publicly traded instruments is determined using quoted market prices, and the fair value for non-publicly traded instruments is based upon composite pricing from a variety of sources, including market leading data providers, market makers and leading brokerage firms. Substantially all of the inputs used to determine the fair value of our debt are classified as Level 1 inputs within the fair value hierarchy from ASC 820, except our senior secured credit facilities and our 2025 Convertible Notes, the inputs for which are classified as Level 2, and Intelsat Luxembourg’s 8.125% Senior Notes due 2023 and 12.5% Senior Notes due 2024, the inputs for which are classified as Level 3. While the Company’s Chapter 11 proceedings remain ongoing, trading and fair value pricing may be more volatile and limited.
Intelsat Jackson Superpriority Secured Debtor-in-Possession Term Loan Facility
On June 17, 2020 (the “Closing Date”), the DIP Debtors and DIP Lenders entered into the DIP Credit Agreement, a non-amortizing multiple draw superpriority secured debtor-in-possession term loan facility, in an aggregate principal amount of $1.0 billion, on the terms and conditions set forth therein. See Note 2—Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters.
Intelsat Jackson borrowed $500.0 million of term loans under the DIP Facility on the Closing Date. Under the DIP Facility, Intelsat Jackson may, at its sole discretion, make incremental draws of the lesser of $250.0 million and the remaining available commitments of the DIP Lenders. Intelsat Jackson made two additional draws of $250.0 million each on November 27, 2020 and December 14, 2020, bringing the total aggregate principal amount outstanding under the DIP Facility to $1.0 billion as of both December 31, 2020 and June 30, 2021. Drawn amounts under the DIP Facility bear interest at either (i) 4.5% per annum plus a base rate of the highest of (a) the Federal Funds Effective Rate plus ½ of 1.0%, (b) the Prime Rate as in effect on such day and (c) the London Inter-Bank Offered Rate (“LIBOR Rate”) for a one-month interest period on such day (or if such day is not a business day, the immediately preceding business day) plus 1.0%, or (ii) 5.5% plus the LIBOR Rate. For purposes of the DIP Facility, the LIBOR Rate has an effective floor rate of 1.0%. Undrawn amounts under the DIP Facility shall be subject to a ticking fee of 3.6% of the amount of commitments of the DIP Lenders from the entry of the DIP Order until such commitments terminate, which ticking fee shall be payable on the last day of each fiscal quarter prior to the date such commitments terminate and on the date of such termination. If an event of default under the DIP Facility occurs, the overdue amounts under the DIP Facility would bear interest at an additional 2.0% per annum above the interest rate otherwise applicable.
The proceeds of the DIP Facility may be used, among other things, to pay for (i) working capital needs of the DIP Debtors in the ordinary course of business, (ii) potential C-band relocation costs, (iii) investment and other general corporate purposes, and (iv) the
costs and expenses of administering the Chapter 11 Cases. The maturity date of the DIP Facility, as amended by DIP Amendment No. 3 discussed below, is July 13, 2022, subject to certain extensions pursuant to the terms of the DIP Credit Agreement.
The DIP Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the Company’s and its subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of junior or prepetition indebtedness, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type.
The DIP Credit Agreement also includes certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, certain events under ERISA and change of control. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code and certain other events related to the impairment of the DIP Lenders’ rights or liens granted under the DIP Credit Agreement.
On August 24, 2020, the DIP Debtors and DIP Lenders entered into DIP Amendment No. 1 to the DIP Credit Agreement, and on November 25, 2020, entered into DIP Amendment No. 2, each in connection with the Gogo Transaction (see Note 2—Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters for additional information).
On July 13, 2021, the DIP Debtors and DIP Lenders entered into DIP Amendment No. 3 whereby, among other things, the parties agreed to certain technical modifications to the DIP Credit Agreement that provided for the extension of the initial scheduled maturity date of July 13, 2021, and the Debtors agreed to waive certain conditions under the PSA. In connection with DIP Amendment No. 3, the DIP Debtors elected to extend the initial scheduled maturity date for one year to July 13, 2022 and paid 1.0% of the aggregate principal amount in extension fees.
The foregoing descriptions of the DIP Credit Agreement, DIP Amendment No. 1, DIP Amendment No. 2 and DIP Amendment No. 3 do not purport to be complete and are qualified in their entirety by reference to the full text of the DIP Credit Agreement, DIP Amendment No. 1, DIP Amendment No. 2 and DIP Amendment No. 3, as applicable.
Note 13—Derivative Instruments and Hedging Activities
Interest Rate Cap Contracts
As of December 31, 2020, we held interest rate cap contracts with an aggregate notional value of $2.4 billion that matured in February 2021. The fair value of the interest rate cap contracts as of December 31, 2020 was zero. These interest rate cap contracts, which were entered into in 2017 and amended in 2018, were designed to mitigate our risk of interest rate increases on the floating rate portion of our senior secured credit facilities (see Note 12—Debt). The contracts were not designated for hedge accounting treatment in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), and the changes in fair value of these instruments, net of payments received, were recognized in the condensed consolidated statements of operations during the period of change.
Common Stock Warrant
During 2019, we were issued a warrant to purchase common shares of an investment. We concluded that the warrant is a free-standing derivative in accordance with ASC 815.
The following table sets forth the fair value of our derivatives by category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
Classification
|
|
As of
December 31, 2020
|
|
As of
June 30, 2021
|
Common stock warrant
|
|
Other assets
|
|
$
|
3,239
|
|
|
$
|
8,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the effect of the derivative instruments in our condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
Classification
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Interest rate cap contracts
|
|
Loss included in interest expense, net
|
|
$
|
(14)
|
|
|
$
|
—
|
|
|
$
|
(349)
|
|
|
$
|
—
|
|
Common stock warrant
|
|
Gain included in other income, net
|
|
—
|
|
|
209
|
|
|
—
|
|
|
5,532
|
|
Total (loss) gain on derivative financial instruments
|
|
$
|
(14)
|
|
|
$
|
209
|
|
|
$
|
(349)
|
|
|
$
|
5,532
|
|
Note 14—Income Taxes
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.
In response to the COVID-19 pandemic, on March 18, 2020, the Families First Coronavirus Response Act (the “FFCR Act”) was enacted, and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The FFCR Act and the CARES Act contain numerous income tax provisions, such as increasing the 30 percent adjusted taxable income threshold to 50 percent for taxable years beginning in 2019 and 2020 for purposes of determining allowable business interest expense deductions. The CARES Act repeals the 80 percent limitation for taxable years beginning before January 1, 2021 (enacted by the U.S. Tax Cut and Jobs Act (the “Act”)), and it further specifies that net operating losses arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, are allowed as a carryback to each of the five taxable years preceding the taxable year of such losses. Modifications to the tax rules for the carryback of net operating losses and business interest limitations resulted in a federal tax refund of approximately $7.4 million and $15.5 million for the three and six months ended June 30, 2020, respectively. In addition, the CARES Act includes refundable payroll tax credits and deferral of employment side social security payments. As of June 30, 2021, Intelsat’s payroll deferral amount was approximately $6.8 million.
The majority of our operations are located in taxable jurisdictions, including Luxembourg, the U.S. and the United Kingdom (“UK”). Due to our cumulative losses in recent years, and the inherent uncertainty associated with the realization of taxable income in the foreseeable future, we recorded a full valuation allowance against the cumulative net operating losses generated in Luxembourg. The difference between tax expense (benefit) reported in the condensed consolidated statements of operations and tax computed at statutory rates is attributable to the valuation allowance on losses generated in Luxembourg, the provision for foreign taxes, which were principally in the U.S. and the UK, as well as withholding taxes on revenue earned in some of the foreign markets in which we operate, benefits recorded in 2020 from impacts of the CARES Act and a tax reserve established on certain tax benefits taken on the Base Erosion and Anti-Abuse Tax (“BEAT”).
As of December 31, 2020 and June 30, 2021, our gross unrecognized tax benefits were $51.4 million and $55.3 million, respectively (including interest and penalties), of which $47.6 million and $51.3 million, respectively, if recognized, would affect our effective tax rate. As of December 31, 2020 and June 30, 2021, we had recorded reserves for interest and penalties in the amount of $0.8 million and $1.2 million, respectively. We continue to recognize interest and, to the extent applicable, penalties with respect to the unrecognized tax benefits as income tax expense. Since December 31, 2020, the change in the balance of unrecognized tax benefits has consisted of an increase of $2.9 million related to current tax positions, and an increase of $1.0 million related to prior tax positions.
We operate in various taxable jurisdictions throughout the world, and our tax returns are subject to audit and review from time to time. We consider Luxembourg, the U.S., the UK and Brazil to be our significant tax jurisdictions. Our subsidiaries in these jurisdictions are subject to income tax examination for periods after December 31, 2015. We believe that there are no jurisdictions in which the outcome of unresolved tax issues or claims is likely to be material to our results of operations, financial position or cash flows within the next twelve months.
Effective January 31, 2020, the UK formally exited the European Union (“EU”). As a result of the withdrawal, existing tax reliefs and exemptions on intra-European transactions will likely cease to apply to transactions between UK entities and EU entities. In addition, transactions with non-EU countries, such as the U.S., may also be affected. As of June 30, 2021, all relevant tax laws and treaties remained unchanged and the tax consequences were unknown. Therefore, we have not recognized any impacts of the withdrawal in the income tax provision as of June 30, 2021. We will recognize any impacts to the tax provision when changes in tax laws or treaties between the UK and the EU or individual EU member states are enacted.
On December 2, 2019, the U.S. Department of Treasury and the U.S. Internal Revenue Service released final regulations with respect to the BEAT as enacted by the Act. These regulations represent the final version of proposed regulations which were released in December 2018. The BEAT is a minimum tax established by the Act, which was signed into law in December 2017, that subjects certain payments made by U.S. corporations or subsidiaries to foreign related parties to a secondary federal income tax regime in the U.S. The final regulations clarify which taxpayers are subject to the BEAT and how the BEAT rules apply to certain payments and transactions. We have adopted the final BEAT regulations as of the release date. These regulations are effective for the Company as of its tax year ended December 31, 2018. A second set of final regulations was issued on September 1, 2020, addressing among other topics, the application of the BEAT to partnerships and the application of the effectively connected income exception to depreciable or amortizable property contributed to a U.S. partnership by a foreign partner. Similar to the first set of final regulations issued in December 2019, the second set of final regulations are effective for the Company as of its tax year ended December 31, 2018. The Company recognized the BEAT tax impact associated with the second set of final regulations related to its tax year ended December 31, 2020 and six months ended June 30, 2021 in the amounts of $8.8 million and $2.8 million, respectively.
Note 15—Commitments and Contingencies
On May 13, 2020, Intelsat S.A. and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As a result of such bankruptcy filings, substantially all proceedings pending against the Debtors have been stayed and prepetition liabilities are subject to compromise. See Note 2—Chapter 11 Proceedings, Ability to Continue as a Going Concern and Other Related Matters.
SES Claim
On July 14, 2020, SES Americom, Inc. (“SES”) filed a proof of claim in the Bankruptcy Court in the amount of $1.8 billion against each of the Debtors. SES asserts that the Debtors owe money (or will owe money) to SES pursuant to certain contractual and fiduciary obligations made in the context of the consortium agreement between Debtor Intelsat US LLC, SES, and other satellite operators (the “Consortium Agreement”). SES claims that it is entitled to 50% of the combined payments that may eventually be payable to the Debtors and SES pursuant to the FCC Final Order, which provides for Acceleration Payments subject to the satisfaction of certain deadlines and other conditions set forth therein. SES’s proof of claim alleges that the Debtors breached the Consortium Agreement by taking the position that the Debtors are not required to split Acceleration Payments with SES and the other members of the consortium. The proof of claim also alleges breach of fiduciary duties and unjust enrichment and seeks monetary and punitive damages. We dispute the allegations in the proof of claim and on October 19, 2020, filed an objection to the claim, which we intend to litigate vigorously. A trial on the SES claim is scheduled to commence on September 20, 2021 in the Bankruptcy Court. To the extent that any portion of SES’s claim is allowed, we have asked the Bankruptcy Court to “equitably subordinate” such claim based on SES’s conduct in matters related to the Consortium Agreement. While the ultimate resolution of the claim is not currently predictable, if there is an adverse ruling, the ruling could constitute a material adverse outcome on our future consolidated financial condition.
Other Litigation Matters
In the absence of the automatic stay due to the Chapter 11 Cases, we are subject to litigation in the ordinary course of business. Management does not believe that the resolution of any pending proceedings would have a material adverse effect on our financial position or results of operations.
Note 16—Related Party Transactions
(a) Shareholders’ Agreements
Certain shareholders of Intelsat S.A. entered into a shareholders’ agreement in December 2018, which provides, among other things, specific rights to and limitations upon the holders of Intelsat S.A.’s share capital with respect to shares held by such holders.
(b) Governance Agreement
In December 2018, the Company entered into a governance agreement with its shareholder affiliated with Serafina S.A. The agreement contains provisions relating to the composition of the Company’s board of directors and certain other matters.
(c) Indemnification Agreements
We have entered into agreements with our executive officers and directors to provide contractual indemnification in addition to the indemnification provided for in our articles of incorporation.
(d) Horizons Holdings
We have a 50% ownership interest in Horizons Holdings as a result of a joint venture with JSAT (see Note 10(a)—Investments—Horizons Holdings).
(e) Horizons-3 Satellite LLC
We have a 50% ownership interest in Horizons 3 as a result of a joint venture with JSAT (see Note 10(b)—Investments—Horizons-3 Satellite LLC).
Note 17—Condensed Combined Debtors' Financial Information
The following presents our Debtors' condensed combined balance sheets as of December 31, 2020 and June 30, 2021, statements of operations for the three and six months ended June 30, 2020 and 2021 and statements of cash flows for the six months ended June 30, 2020 and 2021. Consolidating adjustments include eliminations of the following:
•investments in subsidiaries;
•intercompany accounts;
•intercompany sales and expenses; and
•intercompany equity balances.
Intercompany balances with non-Debtor affiliates have not been eliminated. On the Debtors’ condensed combined balance sheets, these primarily consist of net intercompany trade receivables generated under our Master Intercompany Service Agreement (“MISA”), funding for the operations of non-Debtor affiliates and funding for the acquisition of Intelsat CA. On the Debtors’ condensed combined statements of operations, total reported revenue includes intercompany revenue of $63.0 million and $70.8 million for the three months ended June 30, 2020 and 2021, respectively, and $122.5 million and $138.4 million for the six months ended June 30, 2020 and 2021, respectively, primarily consisting of satellite capacity charges. Cost from affiliates primarily relates to sales and technical support services provided to Debtors as specified under the MISA. Investments in non-Debtor affiliates are presented under the equity method of accounting in the condensed combined financial statements set forth below.
DEBTORS' CONDENSED COMBINED BALANCE SHEET
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
June 30, 2021
|
|
|
|
(unaudited)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
879,191
|
|
|
$
|
460,617
|
|
Restricted cash
|
20,817
|
|
|
26,682
|
|
Receivables, net of allowances of $34,391 in 2020 and $22,140 in 2021
|
561,573
|
|
|
922,882
|
|
Contract assets, net of allowances
|
15,474
|
|
|
15,066
|
|
Inventory
|
1,347
|
|
|
1,075
|
|
Prepaid expenses and other current assets
|
100,021
|
|
|
87,856
|
|
Intercompany receivables
|
678,188
|
|
|
799,081
|
|
Total current assets
|
2,256,611
|
|
|
2,313,259
|
|
Satellites and other property and equipment, net
|
4,656,678
|
|
|
4,862,789
|
|
Goodwill
|
2,624,452
|
|
|
2,624,452
|
|
Non-amortizable intangible assets
|
2,295,000
|
|
|
2,295,000
|
|
Amortizable intangible assets, net
|
245,649
|
|
|
231,331
|
|
Contract assets, net of current portion and allowances
|
26,642
|
|
|
23,275
|
|
Investment in affiliates
|
150,029
|
|
|
48,117
|
|
Other assets
|
357,897
|
|
|
390,066
|
|
Total assets
|
$
|
12,612,958
|
|
|
$
|
12,788,289
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
222,876
|
|
|
$
|
342,390
|
|
Taxes payable
|
6,743
|
|
|
6,694
|
|
Employee related liabilities
|
36,563
|
|
|
36,445
|
|
Accrued interest payable
|
17,747
|
|
|
18,035
|
|
Current maturities of long-term debt
|
5,903,724
|
|
|
5,909,377
|
|
Contract liabilities
|
146,762
|
|
|
841,136
|
|
Deferred satellite performance incentives
|
47,377
|
|
|
56,115
|
|
Other current liabilities
|
43,885
|
|
|
54,047
|
|
Total current liabilities
|
6,425,677
|
|
|
7,264,239
|
|
Contract liabilities, net of current portion
|
1,422,893
|
|
|
1,072,990
|
|
Deferred satellite performance incentives, net of current portion
|
138,116
|
|
|
127,774
|
|
Deferred income taxes
|
61,069
|
|
|
69,910
|
|
Accrued retirement benefits, net of current portion
|
129,837
|
|
|
118,458
|
|
Other long-term liabilities
|
188,394
|
|
|
210,021
|
|
Liabilities subject to compromise
|
10,168,518
|
|
|
10,169,230
|
|
Shareholders’ deficit:
|
|
|
|
Common shares, nominal value $0.01 per share
|
1,421
|
|
|
1,422
|
|
Paid-in capital
|
2,573,840
|
|
|
2,576,144
|
|
Accumulated deficit
|
(8,416,410)
|
|
|
(8,743,592)
|
|
Accumulated other comprehensive loss
|
(80,397)
|
|
|
(78,307)
|
|
Total shareholders’ deficit
|
(5,921,546)
|
|
|
(6,244,333)
|
|
Total liabilities and shareholders’ deficit
|
$
|
12,612,958
|
|
|
$
|
12,788,289
|
|
DEBTORS' UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Revenue
|
$
|
431,334
|
|
|
$
|
405,550
|
|
|
$
|
840,751
|
|
|
$
|
810,831
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Direct costs of revenue (excluding depreciation and amortization)
|
66,765
|
|
|
65,465
|
|
|
131,891
|
|
|
129,148
|
|
Selling, general and administrative
|
53,958
|
|
|
57,460
|
|
|
124,544
|
|
|
118,760
|
|
Cost from affiliates
|
9,786
|
|
|
11,326
|
|
|
21,448
|
|
|
23,809
|
|
Depreciation and amortization
|
157,392
|
|
|
155,680
|
|
|
315,168
|
|
|
309,058
|
|
Impairment of non-amortizable intangible and other assets
|
34,043
|
|
|
—
|
|
|
46,243
|
|
|
—
|
|
Other operating expense—C-band
|
—
|
|
|
64,638
|
|
|
—
|
|
|
122,994
|
|
Total operating expenses
|
321,944
|
|
|
354,569
|
|
|
639,294
|
|
|
703,769
|
|
Income from operations
|
109,390
|
|
|
50,981
|
|
|
201,457
|
|
|
107,062
|
|
Interest expense, net
|
(221,934)
|
|
|
(122,649)
|
|
|
(539,681)
|
|
|
(248,428)
|
|
Equity in income (loss) of affiliates
|
3,267
|
|
|
(40,984)
|
|
|
1,712
|
|
|
(94,513)
|
|
Other income, net
|
3,432
|
|
|
16,496
|
|
|
12,034
|
|
|
27,630
|
|
Reorganization items
|
(298,691)
|
|
|
(49,591)
|
|
|
(298,691)
|
|
|
(105,403)
|
|
Loss before income taxes
|
(404,536)
|
|
|
(145,747)
|
|
|
(623,169)
|
|
|
(313,652)
|
|
Income tax expense
|
(818)
|
|
|
(6,559)
|
|
|
(957)
|
|
|
(13,530)
|
|
Net loss
|
$
|
(405,354)
|
|
|
$
|
(152,306)
|
|
|
$
|
(624,126)
|
|
|
$
|
(327,182)
|
|
DEBTORS' UNAUDITED CONDENSED COMBINED STATEMENT OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2021
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(624,126)
|
|
|
$
|
(327,182)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
315,168
|
|
|
309,058
|
|
Provision for expected credit losses
|
28,325
|
|
|
11,671
|
|
Foreign currency transaction (gains) losses
|
(719)
|
|
|
430
|
|
Loss on disposal of assets
|
—
|
|
|
41
|
|
Impairment of non-amortizable intangible and other assets
|
46,243
|
|
|
—
|
|
Share-based compensation
|
6,234
|
|
|
2,178
|
|
Deferred income taxes
|
5,631
|
|
|
6,100
|
|
Amortization of discount, premium, issuance costs and related costs
|
17,277
|
|
|
4,978
|
|
Non-cash reorganization items
|
196,974
|
|
|
—
|
|
Debtor-in-possession financing fees
|
52,182
|
|
|
—
|
|
Amortization of actuarial loss and prior service credits for retirement benefits
|
1,317
|
|
|
2,126
|
|
Unrealized losses on derivative financial instruments
|
349
|
|
|
—
|
|
Unrealized losses (gains) on investments and loans held-for-investment
|
721
|
|
|
(29,225)
|
|
Equity in (income) losses of affiliates
|
(1,712)
|
|
|
94,513
|
|
Other non-cash items
|
92
|
|
|
(311)
|
|
Changes in operating assets and liabilities:
|
|
|
|
Receivables
|
(79)
|
|
|
27,008
|
|
Intercompany receivables
|
(70,970)
|
|
|
(106,845)
|
|
Prepaid expenses, contract and other assets
|
(34,700)
|
|
|
20,167
|
|
Accounts payable and accrued liabilities
|
23,791
|
|
|
95,155
|
|
Accrued interest payable
|
48,775
|
|
|
287
|
|
Contract liabilities
|
(38,951)
|
|
|
(56,107)
|
|
Accrued retirement benefits
|
(8,267)
|
|
|
(11,379)
|
|
Other long-term liabilities
|
(11,013)
|
|
|
(8,422)
|
|
Net cash provided by (used in) operating activities
|
(47,458)
|
|
|
34,241
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures (including capitalized interest)
|
(196,043)
|
|
|
(462,583)
|
|
Dividends from affiliates
|
20,878
|
|
|
7,836
|
|
Proceeds from sale of investment
|
—
|
|
|
15,000
|
|
Proceeds from principal payments on loans held-for-investment
|
724
|
|
|
103
|
|
Capital contribution to affiliates
|
(9,005)
|
|
|
—
|
|
Other proceeds from satellites
|
5,625
|
|
|
—
|
|
Net cash used in investing activities
|
(177,821)
|
|
|
(439,644)
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds from debtor-in-possession financing
|
500,000
|
|
|
—
|
|
Debtor-in-possession financing fees
|
(52,182)
|
|
|
—
|
|
Principal payments on deferred satellite performance incentives
|
(19,195)
|
|
|
(6,921)
|
|
Net cash provided by (used in) financing activities
|
428,623
|
|
|
(6,921)
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
686
|
|
|
(385)
|
|
Net change in cash, cash equivalents and restricted cash
|
204,030
|
|
|
(412,709)
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
755,313
|
|
|
900,008
|
|
Cash, cash equivalents, and restricted cash, end of period
|
$
|
959,343
|
|
|
$
|
487,299
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated Debtors' balance sheet to the total sum of these same amounts shown on the condensed consolidated Debtors' statement of cash flows:
|
|
|
|
Cash and cash equivalents
|
$
|
940,366
|
|
|
$
|
460,617
|
|
Restricted cash
|
18,977
|
|
|
26,682
|
|
Total cash, cash equivalents and restricted cash reported in the condensed consolidated Debtors' statement of cash flows
|
$
|
959,343
|
|
|
$
|
487,299
|
|