Satellite Failure, Panamsat Acquisition Lead To Intelsat Loss
Restructuring cost and higher interest expense related to the acquisition of Panamsat Corp. and the September failure of a satellite serving the Africa and the Indian Ocean region helped contribute to a third quarter loss for Intelsat Ltd., the company announced Nov. 14.
Intelsat, the world’s largest Fixed Satellite Services company, lost $172.5 million in the quarter, which closed Sept. 30. The figure included an asset impairment charge of $48.9 million to write down the net book value of the IS-802 satellite and $19.9 million in restructuring cost as Intelsat continues to absorb its acquisition of Panamsat. Interest expense increased $167.8 million to $267.9 million due to $6.4 billion of Panamsat debt that Intelsat acquired.
The IS-802 satellite, based on a Lockheed Martin Corp. 7000 series, suffered a power loss from its south solar array in September that reduced the satellite’s operational capacity. The satellite was located at 33 degrees East, and Intelsat has restored service to all of its IS-802 customers using its existing fleet, including 11 transponders aboard IS-802 that were reactivated and are operating normally.
The spacecraft, launched in June 1997, was not insured under Intelsat’s policy to self-insure satellites beyond their initial years of operations. The $48.9 million charge was determined based on a discounted cash flow analysis with the assistance of an independent third-party appraiser.
This is the second Lockheed Martin 7000 series owned by Intelsat that has failed. The IS-804 spacecraft suffered a failure in January 2005. Intelsat operates two more 7000 series spacecraft — IS-801 and IS-805.
In the 2005 third quarter, Intelsat lost $54.5 million.
Panamsat Impact Widespread
Intelsat recorded revenues of $528 million, an 80 percent improvement over revenues of $293.6 million in the 2005 third quarter. The operations acquired from Panamsat contributed about $218.7 million in revenue, and Intelsat also received one-time contract termination fees of $11.7 million during the most recent quarter. Internal revenue growth was driven by strong sales of lease and managed solutions services to customers in the video and network services groups, with revenue increases generated by existing and new customers in Africa, Middle East and North America.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were $287.5 million in the 2006 third quarter, up from EBITDA of $195.2 million in the 2005 third quarter.
Lease revenue increased $224.1 million to $413.9 million in the 2006 third quarter, driven primarily by $197.5 million in revenues from Panamsat operations as well as the contract termination fees. New business growth contributed $15 million to the total. Managed Solutions revenue increased $22.9 million to $52.7 million in the most recent quarter, with Panamsat accounting for $16.7 million of the gains and new growth contributing $6.2 million.
Channel revenues fell $8.7 million in the 2006 third quarter to $45.4 million due to the continuing decline of this legacy product. Mobile Satellite Services revenue fell from $15.7 million in the 2005 third quarter to $7.1 million in the most recent three months due to reduced use of mobile satellite services sold to customers of Intelsat General Corp. These declines were partially offset by other and unallocated revenue of $9.4 million, primarily due to unallocated conforming revenue adjustments as a result of purchase accounting for the Panamsat acquisition. These adjustments are expected to be identified with specific product lines in the fourth quarter, Intelsat said.
"In our first full quarter of results since acquiring Panamsat, our business performance is solid and we are pleased with our progress on integration," Dave McGlade, the company’s CEO, said in a statement. "Our sales and marketing teams are focused on our key markets and are exploring new opportunities with our expanded customer base. Our Network Services business continues to perform well, with strong demand for Lease Services and Managed Solutions. Integration continues to be on track, and we expect to begin hitting major milestones in satellite and customer operations in the current quarter and into 2007."
Total operating expenses increased $192.8 million to $435.4 million in the 2006 third quarter due to impact of the Panamsat operations. Depreciation and amortization expense increased $54.7 million to $202 million due to the depreciation recognized for assets acquired from Panamsat, and the acquisition also was the main contributor to a $21.2 million gain in selling, general and administrative expense to $56 million.
Intelsat expects to realize about $92 million in annual net operating cost savings from the Panamsat acquisition once the integration is completed by the end of 2008, but to get to that point, Intelsat will occur about $180 million in one-time expenditures, including about $40 million to $45 million in capital expenditures. Nearly $35 million of the $180 million in integration costs was incurred by Panamsat prior to the July closing of the acquisition, with about 60 percent of the integration costs expected to be incurred in 2006 and most of the remainder in 2007.
At Sept. 30, Intelsat’s backlog stood at $8 billion, up from $3.7 billion at the end of June, prior to the Panamsat acquisition.