Solar Array Problem Dents Space Systems/Loral Profit

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PARIS — Satellite manufacturer Space Systems/Loral (SS/L) reported Nov. 14 increased revenue but a sharp drop in operating profit for the nine months ending Sept. 30 as it booked charges including $22 million for a solar array problem on one of its satellites.

Palo Alto, Calif.-based SS/L also reported that a satellite under construction will cost the company $22 million more than expected because of customer penalties and increased manufacturing charges.

SS/L’s results were reported Nov. 14 in a Securities and Exchange Commission filing by Loral Space and Communications of New York, which on Nov. 2 sold SS/L to MDA Corp. of Canada for about $968 million in cash including monthly pre-sale payments.

With SS/L now sold, Loral is cutting staff and other expenses at its New York office. The company booked a $5.8 million charge for the three months ending Sept. 30 to cover severance costs associated with the downsizing.

For the nine months ending Sept. 30, Loral said SS/L revenue was $861.4 million, a 7.5 percent increase from the same period in 2011. Contract backlog stood at $1.63 billion on Sept. 30, up 14 percent from a year earlier.

But operating profit fell sharply, to $16 million from $73 million a year ago.

Loral said the decline was due to six developments — five negative, one positive — that resulted in net operating-profit reduction of $57 million.

The largest of these is a $22 million charge related to an investigation into the June 1 solar array deployment failure on the Intelsat IS-19 telecommunications satellite. The south solar array would not unfurl, and when it finally did deploy it was damaged.

SS/L and Sea Launch AG of Bern, Switzerland, which launched IS-19, have jointly invested in an extended independent failure review investigation that is scheduled to report its results Nov. 30, industry officials said. The officials said the investigation appears to have focused on the SS/L satellite’s design, and not the Sea Launch rocket, as it seeks a root cause.

Luxembourg- and Washington-based Intelsat had been scheduled to pay SS/L $18 million, with interest, during the IS-19’s 15-year service life in what are called orbital incentives. But these incentives are paid in full only if the spacecraft operates as designed for the period.

Loral said that in the three months ending Sept. 30 it booked a $6.5 million charge against future reductions in orbital payments based on current estimates of the effect of the solar array damage on IS-19 performance.

Intelsat has submitted an insurance claim for some $84 million based on its own estimates of the power loss during the satellite’s life.

SS/L and Sea Launch have agreed to share the costs of the independent investigation, which has continued longer than most investigations of this type. Officials have said that whatever the cause, it was not an obvious design or manufacturing error.

Loral said it is reimbursing MDA, as SS/L’s new owner, for the estimated $6.5 million in lost future orbital incentive payments. That charge is included in the $22 million in costs that Loral attributed to the “solar array anomaly investigation, rework and penalties.”

Loral said $18 million in unforeseen costs for the nine months ending Sept. 30 were caused by “penalties and increased manufacturing costs on a single program,” which it did not name.

An additional $15 million in lost operating profit was attributed to “lower margins attributable to the lower average size and profitability of satellites under construction during 2012 compared to 2011.”

SS/L specializes in large, complex commercial telecommunications satellites.

Loral said $9 million in lost profit is related to lower expected profit on a satellite program booked in the first three months of 2012. The company did not name the program, but SS/L booked a two-satellite order from NBN Co. of Australia in February, a contract valued at some $660 million.

A final $3 million in costs were what Loral and SS/L spent in the first nine months of 2012 on a patent infringement lawsuit filed by SS/L customer ViaSat of Carlsbad, Calif. MDA did not assume responsibility for the lawsuit when it purchased SS/L. Loral will indemnify SS/L for lawsuit-related charges and will remain in charge of the defense in the lawsuit.

Countering these charges was a $10 million increase in SS/L profitability that Loral said resulted from a reduction in SS/L’s overhead rates as a result of higher production volume.

 

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