Despite Negative Cash Flow, Loral Reserves Sufficient for 2010

by




PARIS — Loral Space and Communications of New York is forecasting a negative cash flow for 2010 because of capital spending at its Space Systems/Loral satellite-manufacturing subsidiary and the delayed payments that are part of many satellite manufacturing contracts, Loral said.

Loral said it nonetheless has access to sufficient funds, including $168 million in cash as of Dec. 31, to continue its planned investments in 2010. These investments include $40 million to continue work on the Loral-owned share of the ViaSat-1 Ka-band broadband satellite, whose Canadian beams were purchased by Loral, and around $45 million needed to upgrade Space Systems/Loral’s satellite facilities in Palo Alto, Calif., to support the satellite builder’s backlog.

The company also said X-band satellite capacity provider Xtar LLC, in which Loral is a 56 percent shareholder, sharply increased its revenue and reduced its losses in 2009 but is still falling short of targets it needs to meet to break even and repay mounting debt to the other Xtar partner, Hisdesat of Spain.

In a March 15 filing with the U.S. Securities and Exchange Commission (SEC), Loral said that in the three years ending last Dec. 31, Space Systems/Loral won orders for 18 satellites valued at $3.2 billion. The satellite manufacturer’s backlog as of Jan. 1 stood at $1.6 billion, up from $1.4 billion a year ago.

Space Systems/Loral reported 2009 revenue of $993 million, up 14.3 percent from 2008. EBITDA, or earnings before interest, taxes, depreciation and amortization, was 9.2 percent of revenue — 6.5 percent once a one-time revenue gain is removed — up from 5.2 percent a year earlier.

Loral, which unlike every other major builder of satellites is almost exclusively devoted to the commercial market, is adding capacity to its Palo Alto facility to be able to handle between nine and 13 satellite awards per year, with space enough to perform integration and testing on 13 to 14 satellites at any given time.

Industry officials, and Loral’s competitors, have said this is a risky investment that fully exposes Loral to the ups and downs of the commercial market.

What happens when the market enters a down cycle remains to be seen; it has been up in recent years and has given Loral an expertise in large, complicated commercial telecommunications satellites that has delivered orders. The company won seven satellite orders in 2009.

In a practice that satellite manufacturers have long tried to eliminate from the commercial market, Space Systems/Loral routinely agrees to allow its customers to defer payment of around 10 percent of the satellite contract’s value until after the launch. Annual payments are then made over the satellite’s 15-year in-orbit service life — unless a defect is found that can be traced to the manufacturer, in which case the payments, sometimes called orbital incentives, are stopped or reduced.

Loral said that as of Dec. 31, its orbital incentives totaled $240 million and were about evenly split between satellites launched before 2010 and those to be launched in 2010 or after. Some $32 million in incentive payments were due from companies that presented higher-than-average risk profiles.

Loral’s customers include ProtoStar Ltd., whose bankruptcy ended in the auction of the company’s spacecraft; DBSD, formerly ICO North America, whose Chapter 11 bankruptcy reorganization is under way; and TerreStar Networks, whose S-band mobile communications service has yet to demonstrate commercial viability. Loral said in its SEC filing that the DBSD bankruptcy reorganization appears to have protected Loral’s future orbital incentive payments.

Rockville, Md.-based Xtar LLC owns X-band capacity on two satellites whose combined coverage area stretches from Denver to Singapore. Its fully owned Xtar-Eur satellite, located at 29 degrees east, was launched in March 2005. Xtar leases 7.2 transponders on the Spainsat satellite, located at 30 degrees west, which was launched in March 2006.

Xtar recently won a contract to provide Xtar-Eur capacity over Southwest Asia for DRS Technical Services as part of a team led by Intelsat General of Bethesda, Md., and including Paradigm Secure Communications of Britain, which will provide capacity from one of its Skynet 5 satellites.

Xtar is also part of an Intelsat General-led team, including Paradigm, which won a contract with the U.S. Navy to provide satellite links valued at up to more than $500 million for five years. That contract has been put on hold pending a protest by the losing bidders.

Xtar, which has struggled to win expected business from the U.S. and other governments, appears to be gaining traction in the market. The company reported that revenue in 2009 increased by 57 percent, to $32 million, while its net loss dropped to $4.9 million from $28.6 million a year earlier.

Operating expenses, at about $34.5 million, were unchanged from 2008.

Under its contract with Hisdesat, Xtar has been obliged to lease capacity on the Spainsat satellite despite the fact that its business volume has been low. Payments under these lease obligations have been increasing each year, reaching $23 million in 2009, and will plateau at $28 million in 2010 but continue until the Spainsat satellite is retired, expected to be in 2021.

Loral, which is not guaranteeing Xtar’s debt, said the company’s debt to Hisdesat under the lease and for other obligations will total $376 million over the life of Spainsat.