PARIS
– Loral Chief Executive Michael B. Targoff said the company needs to raise fresh cash for its Space Systems/Loral satellite manufacturing subsidiary in the coming months to finance investments similar to the ViaSat-1 broadband satellite Loral is building for ViaSat Inc.
In a May 20 meeting with shareholders, Targoff said New York-based Loral will be looking to make unusual investments similar to the ViaSat-1 deal despite the near-term costs it must incur in the process.
Targoff also said he is optimistic that Space Systems/Loral, which has won three commercial satellite awards so far in 2008, will end the year with between seven and 11 contracts.
Despite its recent success on the commercial market, Space Systems/Loral of Palo Alto, Calif., reported lower gross profit margins for the three months ending March 31 when compared to the same period a year earlier. Targoff said this was “unsatisfactory operating performance” that will improve over time, and he asked shareholders to judge the company over the long term instead of reacting to quarterly fluctuations in the business.
“I know we have to do that. The law requires it and that’s what people do,” Targoff said of publicly traded Loral’s obligation to report financial results every three months. “But it’s not the way I look at the business in valuing its worth.”
Loral reported that it had $315 million in cash as of Dec. 31, 2007, and $204 million as of March 31. “We will need new capital this year for Space Systems/Loral … to be able to meet opportunities like the ViaSat opportunity.”
Carlsbad, Calif.-based ViaSat is procuring the large all-Ka-band ViaSat-1 broadband satellite to be delivered in 2011. Space Systems/Loral won the contract to build ViaSat-1 after agreeing to purchase a portion of the satellite’s capacity for eventual resale to Telesat Canada, in which Loral holds a 64 percent economic stake.
Loral is paying some $16 million in 2008 for ViaSat-1’s construction, and ultimately will be spending $60 million on the project as its 15 percent share of the cost of launching, insuring and operating the spacecraft.
Loral made a $14 million investment to secure another satellite contract this year as part of what Targoff referred to as “an investment in the future – buying relationships and capabilities for select customers.”
These investments, plus an expected $82 million in capital expenses this year – triple what the company expects to spend in the coming years – help explain why Loral will need to raise new funds, through new equity or a loan, Targoff said.
Loral announced May 19 that, when Telesat’s results are included, the company’s revenue
totaled $386 million for the three months ending March 31. EBITDA, or earnings before interest, taxes, depreciation and amortization, was
$99 million. For the Space Systems/Loral division alone, revenue
increased by 10 percent, to $220 million, but EBITDA was just $5 million, down from $8 million a year earlier.
Loral’s principal shareholder blamed French government subsidies for Loral’s inability to book more satellite orders with higher profit margins at a time when the U.S. dollar’s slide against the euro should favor the U.S. manufacturer.
Mark H. Rachesky, whose MHR Fund Management LLC is Loral’s biggest shareholder, took the floor during the meeting to defend Loral management against shareholders upset with the company’s financial performance and its stock price. Loral’s stock price has dropped by about 60 percent in the past 12 months.
Loral is more exposed to the commercial satellite manufacturing market than any other publicly traded company. Among its competitors, it is alone in having almost no regular government business, where contracts are often awarded on a cost-plus basis rather than the firm, fixed-price terms that characterize the commercial satellite world.
In addition, around 10 percent of a given commercial contract award is recouped piecemeal, in annual payments that stretch over 15 years once the satellite is in operation – and only then if the spacecraft performs to specifications.
Space Systems/Loral needs to win five or six satellite orders per year to cover its fixed costs, meaning operating expenses it incurs regardless of whether it wins business, the company said in a May 19 filing with the U.S. Securities and Exchange Commission.
U.S.-based satellite manufacturers Boeing and Lockheed Martin, relying on their large store of U.S. Defense Department and other U.S. government business, are only intermittent competitors in the commercial satellite market. Orbital Sciences Corp. competes regularly for commercial contracts, but only for smaller, less powerful spacecraft that are outside Loral’s core target market.
That leaves the two main European satellite prime contractors, Thales Alenia Space of France and Italy, and Astrium Satellites of France, Germany, Britain and Spain. Both have been able to maintain their market presence despite the sharp decline of the U.S. dollar against the euro. Both are relatively small divisions inside large, publicly traded aerospace and defense companies, and both have won orders for which
Loral competed in recent months.
Rachesky said the Europeans’ success is due to government backing.
“You’d think, ‘Wow, why wouldn’t the [Loral] satellite manufacturing business be producing a tremendous amount of EBITDA in an environment where the euro is so strong?’” Rachesky said. “The fact of the matter is that every time we bid on a satellite, we’re competing against the French. And … the French government has decided to heavily subsidize the satellite manufacturers in their country, for jobs or whatever other purposes. So they will bid at times at substantial losses to themselves. We have a fairly good idea of what it would cost to make these things. However, they’re getting substantial subsidies. The question is: How long will the government continue that kind of practice?”
Thales Alenia Space and Astrium officials say they are bound by the same profit-and-loss constraints as their U.S. counterparts, especially given that they are part of publicly traded companies that must answer to shareholders.
U.S. and European manufacturers have long said that the commercial satellite market offers profit margins that are too thin, with competition too fierce, to support any company dependent on it. Loral’s U.S. and European competitors often have wondered aloud about Loral’s success on the commercial market, suggesting that Loral has won business at prices that cannot sustain the company over the long term.
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