Contract Loss Provision, Launch Delay Weigh on Loral Earnings

by

PARIS — Loral Space and Communications on May 10 reported a slight increase in revenue at its satellite manufacturing division, Space Systems/Loral, for the three months ending March 31 but said gross profit fell sharply because of a loss provision on a new contract and a delayed launch of another satellite.

In a conference call with investors and a filing with the U.S. Securities and Exchange Commission (SEC), New York-based Loral reiterated its previous estimate that a lawsuit filed by former customer ViaSat is unlikely to have any serious effect on Loral’s earnings.

Loral said the California district court handling the case, in which ViaSat and Space Systems/Loral have sued each other for patent infringement, had accepted Loral’s petition that the ViaSat lawsuit be dismissed as it concerns Loral. The dispute now will be limited to Palo Alto, Calif.-based Space Systems/Loral and will not directly involve Loral as the parent company.

Space Systems/Loral reported that its revenue for the first three months of 2012 increased by 2 percent, to $286.7 million, over the same period the previous year. But its EBITDA, or earnings before interest, taxes, depreciation and amortization, fell to 4 percent of revenue from 14 percent the previous year.

Several nonrecurring factors accounted for the drop. The first is that Space Systems/Loral was obliged to return one of its satellites awaiting launch at the Baikonur Cosmodrome in Kazakhstan to the California facility because it lost its place in the queue managed by launch services provider International Launch Services of Reston, Va.

Loral Chief Executive Michael B. Targoff did not name the satellite during the conference call, but the Loral-built SiriusXM FM-6 satellite did miss its launch slot in March when Space Systems/Loral asked to recheck the satellite for possible solar array deployment mechanism anomalies.

No problems were found, but by the time SiriusXM FM-6 was declared ready to resume launch preparations, it had forfeited its launch slot.

Targoff said that rather than keep the satellite at the Baikonur spaceport, Space Systems/Loral flew it back to the production facility. Targoff said a round-trip flight of a satellite between Baikonur and Palo Alto costs about $3 million.

The company has taken an $8 million charge against its first-quarter earnings to cover the total expected costs. SiriusXM Radio Inc. of New York has not announced a new launch date for FM-6 but a May 1 filing with the SEC suggests the launch may not occur until 2013.

Loral’s second charge against its first-quarter earnings, valued at $12 million, relates to a contract with Brazilian satellite fleet operator Star One for the Star One C4 satellite.

Loral does not specifically name Star One in its SEC filing, referring only to a South American customer that contracted for a satellite earlier this year.

Shortly after signing the contract, Space Systems/Loral concluded that the construction program would cost more than predicted. Targoff said that accounting rules oblige Loral to take the full estimated impact of the charge in the quarter that the contract is booked.

“That doesn’t mean that this [contract] has been a bad thing for us,” Targoff said of the contract, noting that the contract will help Space Systems/Loral keep its factory full and absorb factory overhead charges. Space Systems/Loral has said it needs four to five satellite orders per year, at a minimum, to cover its fixed production costs.

Space Systems/Loral is in the midst of a three-year upgrade of its production facility to handle more satellites. The company reported total backlog of $2 billion as of March 31, up from $1.4 billion at Dec. 31. In addition to the Star One C4 satellite, Space Systems/Loral this year booked a two-satellite order from Australia’s NBN Co. for Ka-band broadband satellites.

Targoff said that depending on the timing and number of other satellite orders booked in 2012 — and whether they are mainly large, high-power satellites or smaller models — Space Systems/Loral should return to an EBITDA margin of between 8 and 10 percent of revenue.

In its SEC filing, Loral said it has received $23.8 million in payments from Dish Network of Englewood, Colo., following Dish’s purchase of bankrupt satellite-terrestrial mobile broadband provider TerreStar, for which Space Systems/Loral is the satellite manufacturer. A further $22.6 million in payments are expected in the next 12 months, Loral said.