Planned SS/L Stock Sale To Affect Financial Arrangements with Parent Company

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BERLIN — Loral Space and Communications will be billing for services it now provides free to its satellite manufacturing division, Space Systems/Loral (SS/L), if it is successful in selling up to 19.9 percent of SS/L in a stock market offering, SS/L said June 10.

New York-based Loral in particular will no longer provide performance guarantees to SS/L customers once these customers have taken delivery of their satellites. For performance guarantees already in place, Loral will charge SS/L a fee of 1 percent of the future revenue associated with the satellite manufacturing contracts, SS/L said in a filing with the U.S. Securities and Exchange Commission (SEC).

Performance guarantees granted for future customers likely will be limited to the period of satellite manufacture, and will be subject to a charge based on the revenue to be generated by the satellite contract, SS/L said.

The stock offering on the U.S. Nasdaq market, being managed by Credit Suisse and J.P. Morgan, also will force SS/L to negotiate a waiver to its current $100 million credit facility, or replace it with a new one. The current line of credit is no longer valid once SS/L is no longer a wholly owned Loral subsidiary. SS/L did not specify the amount of the total planned stock issue or its timing.

SS/L also disclosed in the SEC filing that one of its customers has alleged that SS/L is infringing on the customer’s pending patents. The filing does not name the customer, but ViaSat Corp. of Carlsbad, Calif., has questioned whether Loral is using ViaSat-owned intellectual property, received in SS/L’s construction of the ViaSat-1 Ka-band broadband satellite, in building a similar satellite, called Jupiter, for ViaSat competitor Hughes Communications of Germantown, Md.

“To the extent patents are issued to such third party in a form that covers the technology we use to manufacture satellites, and such patents are found to be valid, we could be enjoined from using such technology and may be required to either take a license under, or design around, such patents,” SS/L said.

On another matter, SS/L has nearly completed an S-band mobile communications satellite, called CMBStar, for EchoStar Corp. of Englewood, Colo., which had planned to provide the satellite to a state-owned organization in China for mobile television.

EchoStar and the Chinese customer in 2008 disagreed on whether the satellite met performance requirements. CMBStar development was suspended, and EchoStar said it ultimately may have to take a $100 million charge if no other customer or use could be found for the satellite.

While not naming the satellite or the customer, SS/L says: “In May 2010 we provided the customer, at its request, with a proposal to complete construction and prepare the satellite for launch under the current specifications.”

EchoStar has an ownership stake in DBSD North America, formerly named ICO, which has an S-band satellite in orbit and is currently in Chapter 11 bankruptcy reorganization.

Palo Alto, Calif.-based SS/L has been the most successful commercial satellite prime contractor in the past few years during what many analysts view as a boom period for the cyclical industry. It has developed a specialty in large, high-power satellites for direct-broadcast television, mobile applications and satellite broadband.

By SS/L’s count, 27 commercial geostationary-orbiting telecommunications satellites were ordered on average each year between 2005 and 2009. Of these, an average of 21.4 satellites per year were ordered following competitions that were open to U.S. companies like SS/L, and SS/L won a 26 percent market share.

SS/L reported operating income of $29.4 million on revenue of $1 billion in 2009. For the three months ending March 31, the company reported operating income of $2.1 million on revenue of $230.9 million.

Forecasts of commercial satellite demand have often been wide of the mark, but current plans by the major satellite fleet operators suggest that the current boom cycle will end in the next couple of years and will be followed by a period of more moderate capital spending on new satellites.

In is SEC filing, SS/L says it believes current market forecasts are overly cautious. Demand for 3D television, continued market growth for high-definition television, and applications for fixed and mobile broadband will keep satellite orders near their recent levels, the company says.

To cover its operating costs, SS/L must win between four and five satellite orders each year. It won seven orders in both 2008 and 2009, and has booked three orders so far in 2010. Backlog as of March 31 stood at $1.4 billion for 19 satellites.

When customers ask for it, SS/L includes orbital incentives in its contracts, meaning 10 percent of the contract price is withheld and is parceled out, with interest, over the satellite’s 15 years of in-orbit operations. If the satellite proves defective in orbit, the payments are reduced or canceled.

The amount of deferred revenue in orbital incentives for SS/L has grown with its success in the marketplace, from $42 million as of Jan. 1, 2006, to $256 million as of March 31. SS/L says 16 of the 24 satellite contracts it signed during the period included orbital incentives, whose total is expected to increase by $70 million in 2010.