Loral Space and Communications Chief Executive Michael B. Targoff was forced to defend his company’s continued investment in satellite manufacturing during an April 2 conference call with
investors, who questioned the value of putting fresh money into the low-margin business. The
highlighted the sharp business-model differences between building commercial telecommunications satellites and operating them.

New York-based Loral in late 2007 assumed a 64 percent economic ownership stake in
Telesat Canada, the world’s fourth-largest satellite-fleet operator in terms of revenue
. But in reporting its 2007 financial results, Loral could only include two months of Telesat operations. So for 2007, the company’s results are dominated by Space Systems/Loral, and Wall Street is unaccustomed to the gross margins of the satellite manufacturing sector.


Space Systems/Loral reported revenue
of $814.3 million in 2007, a 16.9 percent increase over 2006. But the company’s adjusted gross earnings before interest, taxes, depreciation and amortization (EBITDA) figure was
just 4 percent of revenue
, compared to a 9.5 percent adjusted EBITDA margin for 2006.


Loral’s satellite services business reported $241.2 million in revenue
in 2007, including two months of Telesat Canada contributions, with a 50 percent EBITDA margin. Commercial satellite fleet operators typically report EBITDA margins of 70 percent or higher. Loral and Telesat Canada estimate that merging Loral’s Skynet satellites into Telesat Canada’s operations will result in annual savings of 55 million Canadian dollars ($53.8
million) per year. Most of those savings will be realized in 2008, Targoff said.


Space Systems/Loral won four satellite contracts in 2007 – the Intelsat 14, EchoStar 14, SES New Skies NSS-12 and Sirius Satellite Radio
FM-6 satellites. These bookings added $721 million to Loral’s backlog.


Targoff said one or more of these contracts
were responsible for an accounting loss of $14 million for the year, even though the work eventually will add to the company’s EBITDA. This partially explains the lower profitability of the satellite manufacturing division in 2007, he said.

“There are many times when we choose to book a contract for customer relations or other cases … when the price versus the cost of performing [on the contracts] results in a loss we have to take right away,” Targoff said.

Targoff said that over the past 16 months, the eight satellite contracts won by Loral account for 45 percent of the orders for large commercial telecommunications satellites during that period. Market share can be calculated in many different ways, but Loral’s competitors agree that the Palo Alto, Calif.-based manufacturer has been the most successful commercial satellite builder in recent years in terms of contract wins.


How profitable those contracts will be is what has Loral shareholders concerned, judging from the April 2 conference call. The company initially had intended to invest $300 million to expand its production capacity, but recently struck a deal to use Northrop Grumman’s Redondo Beach, Calif., facility from time to time. That will reduce Loral’s capacity-expansion investment to $30 million, the company has said.


Targoff said during the conference call that Loral would need to raise additional funds in 2008 to meet commitments on its current contracts and to build a cash reserve for future growth opportunities. He said the amount of money to be raised, through debt or equity, would be less than $300 million but more than $25 million.


As of Dec. 31, Loral had $315 million in cash and cash equivalents, and $24 million worth of restricted cash, the company said.

Targoff said he is “not satisfied by [Space Systems/Loral’s] bottom-line performance. Margin performance did not follow sales growth.” He said he would be pushing the satellite manufacturing division to improve its profit margins.


Targoff is not the only chief executive dissatisfied with the profitability of what would appear to be a successful international competitor in satellite manufacturing. Europe’s EADS aerospace conglomerate has said that its Astrium Satellites division, a frequent Loral competitor for commercial business, has an unacceptably low profit margin.


The satellite divisions of both Lockheed Martin and Boeing have cut back their participation in the global commercial marketplace because the margins are too low compared to U.S. Defense Department work.


Loral does little military business but hopes its memorandum of agreement with Northrop Grumman will lead to its
satellite hardware being integrated into Northrop Grumman government contract bids.

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