Loral Sees Bright Outlook for Satellite Manufacturing Despite Slow Start in 2010

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PARIS — Loral Space and Communications, which intends to offer a minority stake in its satellite-manufacturing division, Space Systems/Loral, in the coming weeks, on May 18 sought to convince investors that the commercial satellite manufacturing business remains strong and that Loral will better position itself to win NASA work.

But the company, in a filing with the U.S. Securities and Exchange Commission (SEC), also acknowledged serious bad-debt issues with one of its customers and said that to fulfill its contract obligations it will need to make above-average investment in Space Systems/Loral in 2010 and 2011.

New York-based Loral expects to make an initial public offering of up to 19.9 percent of Space Systems/Loral by mid-year, saying the proceeds will be used to reinvest in the Palo Alto, Calif.-based manufacturer’s development.

In a May 18 presentation to Loral shareholders, Loral Chief Executive Michael B. Targoff did not indicate whether the recent stock-market turmoil would delay the offering.

“The satellite industry continues to prosper,” Targoff said, noting that Space Systems/Loral booked awards for seven large commercial telecommunications satellites in 2009, following seven won in 2008. Despite the slow start in 2010 — no orders in the first three months of the year, and one order in May — Targoff said the satellite manufacturing business enjoys a “continued strong industry demand environment.”

The Space Systems/Loral backlog stood at $1.4 billion as of March 31. The satellite builder has a $100 million line of credit available to it, and appears well-positioned if, as many industry officials predict, several governments order high-power Ka-band satellites to provide Internet access to rural areas.

Space Systems/Loral reported revenue of $206.7 million for the three months ending March 31, up 9.8 percent from the same period a year ago. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, was 6.2 percent of revenue, compared with 5.5 percent a year earlier.

Targoff said Loral should know within weeks whether Barrett Xplore of Canada, which has already agreed to purchase 35 percent of Canadian satellite beams that Loral controls on the future ViaSat-1 Ka-band broadband satellite, will exercise its option to take 75 percent of the capacity.

On the negative side of the ledger, Space Systems/Loral needs to maintain an average factory throughput of between four and five large satellites per year to maintain its 2,600-person work force and its current level of spending, according to Loral.

The company has said capital spending for Space Systems/Loral over time should average between $25 million and $30 million. But in its May 10 SEC filing, Loral said spending in 2010 and 2011 will be between $40 million and $50 million per year to meet its current contract obligations.

As is the case for many commercial satellite builders, Space Systems/Loral permits its customers to pay only 90 percent of the contract price of the satellite before launch. The balance is paid in annual increments, with interest, over the satellite’s 15-year orbital life assuming no major manufacturing defects are discovered.

As of March 31, Space Systems/Loral had an outstanding balance of $256 million in these orbital receivables.

Loral has said in the past that its satellites and related services are indispensable to its customers, meaning the orbital incentive payments are generally not at risk, even when the customers are in poor financial shape.

Loral has several such customers, including DBSD North America, the former ICO, which is in Chapter 11 bankruptcy reorganization but has indicated it would maintain its Loral contracts.

Another, unnamed customer that has launched one of the two satellites it has ordered from Loral has missed deadlines for $10 million in payments owed to Loral as of April 30. The same customer owes the manufacturer $36 million in orbital-incentive payments over the satellite’s life, and in addition has fallen behind by $14 million in payments for the second satellite.

Loral said in its SEC filing it remains confident that this customer — by Loral’s description, it is almost certainly mobile satellite services provider TerreStar Networks of Reston, Va. — will make good on its debt, even if it changes ownership or is forced into a restructuring.