New York-based Loral Space & Communications [NYSE: LOR] appears to have taken more than its share of financial lumps during the 2002 fourth quarter, based on results the company released last week.

The diversified satellite company’s performance was “rather poor” across the board, according to William Kidd, a satellite analyst with Lehman Brothers. Overall, Loral incurred a net loss to common shareholders of $523.4 million during the quarter, compared to a net loss of $42.4 million for the same quarter of 2001.

However, that 2002 fourth quarter loss included charges taken by Loral that, if omitted, would have led to a much less draconian loss of $65 million. The removal of another charge in the fourth quarter of 2001 would have widened those losses to $58 million. In that context, Loral’s financial decline is not as precipitous as may otherwise seem.

One troubling sign is that the company’s traditional strength, fixed satellite services, incurred a 21 percent plunge when revenues slipped to $88.7 million in the fourth quarter, compared to the same period of 2001.

A comparison for the last half of 2002 shows that the deterioration at Loral overall was worse than the financial slippage of Luxembourg-based SES Global, the world’s largest satellite services operator. The reason is a 17.7 percent drop in Loral’s revenues for the second half of 2002, compared with a 10.5 percent revenue dip during the same period for SES, Kidd noted.

Loral’s satellite capacity utilization rate at the end of 2002 dropped to 62 percent, down from an already weak 67 percent at the end of 2001. Fixed satellite service (FSS) operators typically notch utilization rates between 70 percent and 80 percent; Loral clearly is heading in the wrong direction.

Loral’s FSS earnings before interest, taxes, depreciation and amortization (EBITDA) slid during the fourth quarter to $44.1 million, down from $74 million for the same period of 2001. Company officials voiced optimism that FSS bookings would rise this year due to increased demand from the government, military and homeland security markets.

The company’s results from satellite manufacturing and technology declined, as well. Revenues for those activities dipped to $152.6 million during the fourth quarter from $218.8 million for the same quarter the year before. EBITDA from satellite manufacturing and technology, before a one-time charge, edged up to $1.1 million in the fourth quarter, compared to a negative $12.1 million in 2001.

“Though revenues tend to be lumpy in satellite manufacturing, we think the decline is more related to the difficult business environment than just lumpy sales,” Kidd wrote to his clients.

A dearth of commercial-satellite orders worldwide continued throughout 2002, although there is evidence of renewed interest based on increased inquiries and requests for proposals from current and prospective satellite customers, Loral officials said. In light of the reduced workload, Loral’s satellite manufacturing unit, Space Systems/Loral, cut its employee headcount by 26 percent in 2002.

Loral managed to exceed its guidance for cash and credit reserves by ending 2002 with $132 million, company officials said. To preserve cash, the company indefinitely suspended payment of dividends on both its Series C and Series D preferred stock last August.

Investors are concerned about Loral’s liquidity, however. This has led to a drop in the stock price below $1 per share. Company officials have expressed interest in a reverse stock-split to boost the stock price above the $1 level required for the company to remain listed on the New York Stock Exchange.

Skynet Restructuring

With satellite services, manufacturing and broadband sectors all affected by reduced demand, Loral had no escape last year because it operated in each of those business segments through its Loral Skynet, Space Systems/Loral and Loral CyberStar units, respectively. That will not be the case this year, because Loral completed the consolidation of Loral CyberStar operation into Loral Skynet last week in a move that cut costs through staff reductions.

Analysts question whether this consolidation will give Loral Skynet the jumpstart it needs. The combined operation of those units is intended to offer customers a combination of fixed satellite and network services from a single source, company officials said.

The challenge is for Skynet to exploit the competitive advantage of offering FSS and network services before competitors can assemble similar offerings. Intelsat, PanAmSat [Nasdaq: SPOT] and others are seeking to offer such capabilities on a global scale as well.

“Integrating fixed satellite services with a robust networking and engineering capability is key to success in our industry,” said Terry Hart, president of Loral Skynet.

Pat Brant had taken a key role in trying to improve the financial performance at Loral CyberStar prior to his departure as its president and chief operating officer last month. He joined Loral CyberStar in September 1999 when the company closed its year with a significant EBITDA loss. He led it to breakeven EBITDA last year. Joan Byrnes retired as Skynet’s COO last month. Their departures came from integrating Loral CyberStar into Loral Skynet, explained Jeanette Clonan, vice president of investor relations and communications at Loral.

The integration began last October with the exodus of former Loral CyberStar President and CEO Neil Bauer, who also was president of the former Loral Data Services. Bauer, now working as consultant with the Orion Associates firm he heads in McLean, Va., previously had been president and CEO of Orion Network Systems.

One of the beneficiaries of the integration is Robert Hedinger, who has been named Loral Skynet’s executive vice president of sales, marketing and client services. He will report directly to Hart and hold responsibility for Skynet’s sales and marketing strategy. Hedinger had previously served as Loral Skynet’s executive vice president for business development. He now will manage the staffs of Skynet’s three product lines – satellite services, network services and professional services. –Paul Dykewicz