Despite bankruptcy at its parent company, Space Systems/ Loral (SS/L) has picked up some key satellite manufacturing orders recently, most notably in October from DirecTV. The turnaround has clearly been a source of optimism for parent Loral Space & Communications [OTCBB: LRLSQ]. In an exclusive interview with SATELLITE NEWS International Editor Mark Holmes, SS/L President Patrick DeWitt talks about the new orders, working through Chapter 11 and the challenges facing the manufacturer in the coming year.

SN: Could you tell us about what it has been like to manage SS/L through Loral’s bankruptcy process and why you think the company was still able to gain key orders in the commercial marketplace?

DeWitt: In mid-2002, SS/L had a pretty good idea that 2003 was going to be a difficult year. This was even before the issue of bankruptcy arose. We consciously made the statement internally that the company that managed through the downturn in the satellite market would be the best company when the market rebounded. So we laid out plans on how to control our costs and actually go through reductions in the workforce but at the same time maintain critical skills. In fact, we budgeted monies necessary to maintain critical skills throughout 2002 and 2003. Loral’s financial condition started raising issues in early 2003 because some customers had concerns about the viability of the company. We went out and made presentations and worked that issue with customers.

When we filed for Chapter 11 in July 2003 that signaled to our customers that they would benefit from the Chapter 11 process because the court protects potential customers by sanctioning the approval of post-petition contracts. When that occurred, the dialogue with our main customers started to increase dramatically. They were becoming more comfortable that the company would be successful in its restructuring. Intelsat clearly decided that they were going to place orders with us. In fact, there is dialogue with them right now to begin the replacement program for the Intelsat VII series. We began negotiations with DirecTV and PanAmSat [Nasdaq: SPOT] as a result of a couple of things. The first one is the Chapter 11 protection afforded our customers. Second and more important, these customers appreciated that SS/L had leading technology, had a bus in terms of performance and reliability that is second to none and they liked the way we generate technical solutions that benefit their businesses far beyond selling a commodity. The customer community was clearly supportive of SS/L and appreciated the fact that during the downturn the technical talent was still here and could support these customers’ future needs.

SN: Was the positive reaction from customers a surprise to you?

DeWitt: It was not a surprise to us. There had been so much publicity about the over-leveraged situation at Loral that customers obviously had certain concerns. This was primarily from customers who had not historically been with us, but when you are dealing in places like Asia, the financial viability issue was becoming more and more of an issue. Less so in the U.S., but it was still a concern. After the Chapter 11 filing, the knowledge that these new contracts would be approved by the court gave our customers a lot more confidence.

SN: Have you always been optimistic that the company would turn itself around despite the market conditions and the obvious financial problems? Was there any point where you felt it was going to be really tough for the company?

DeWitt: In mid-2003, I knew it was going to be very tough for SS/L. You can imagine a situation where there is a major downturn in the industry in 2002 and 2003 and then the industry starts to recover. You have this stigma of not having the financial viability to perform while the rest of your competitors are being very aggressive in the market place. I knew that unless we restructured, we were going to have a more difficult time despite our good record commercially of capturing our share of the business. When the restructuring was underway our historical customers were very supportive because they knew we had the capability and they knew the financial viability issue would now be resolved.

SN: How difficult was it to manage the company in 2003?

DeWitt: The most difficult thing in 2003 was managing the morale of the employees through this difficult time for the satellite industry. That issue was compounded when Loral filed for Chapter 11. It is a stigma in any environment. We had to do a lot of educating, telling employees what the Chapter 11 process meant and why it was going to be beneficial to SS/L. Shortly thereafter, when our customers came to us and demonstrated their confidence in us, our employees all heard a major sigh of relief and became very bullish on the company. This company historically has been very good to its employees and the employees like working here. They were concerned about our survivability but in the end almost everyone stayed and [they] are pleased the company is assured of success going forward.

SN: In a recent interview, Alcatel Space CEO Pascale Sourisse said she does not expect global commercial satellite orders to reach the 20 mark until next year. Do you believe that is accurate? What levels of satellite orders do you expect to see this year, and what is your target in terms of picking up new business?

DeWitt: We believe that satellite orders in 2004 will be slightly higher than they were in 2003. Our estimate is that there were around 18 satellite awards in 2003. I believe there will be orders for 20 to 22 spacecraft in 2004, slightly better than 2003. We have an internal target of five competitive wins. There is also the government program where we are teamed with Raytheon [in a program] called MUOS [mobile user objective system]. We view that program as a significant upside for our business, to be decided in the May/June timeframe.

SN: There are five big satellite manufacturers. Is there enough business to sustain five companies? Do you expect to see consolidation?

DeWitt: As a satellite manufacturer, we would always like to see fewer competitors but I do believe there is enough business to support the five manufacturers. I continue to believe there will be consolidation in the industry and that the first will occur in Europe with EADS Astrium and Alcatel. They have already taken steps to team up together on a variety of programs and I think that is the first step to an eventual merger of the two companies.

SN: We recently did an interview with Shin Satellite CEO Dumrong Kasemset about the iPSTAR program. In terms of satellite broadband globally, how important is this program in terms of influencing other operators?

DeWitt: The Shin spacecraft is a very important step for the industry in providing broadband through satellites. In fact, Loral has the only domestic program that is dedicated to broadband, WildBlue … If iPSTAR and WildBlue are successful, that will encourage other operators to expand into broadband by satellite. We look upon it as a very positive development for the industry. Clearly, our investments in this technology will benefit from an expanded market for these types of applications.

SN: Could you give us an update on the problems with the Telstar 14/Estrela do Sul satellite?

DeWitt: I can tell you that the investigation is ongoing and it is a significant issue. I would expect over the next week or two we will gain additional information to better understand what happened to the satellite. We have already started the process of placing the satellite into its final orbital position where it will be able to service its key customers. While the satellite will not be able to support the operation of all 41 transponders, it will be capable of supporting a subset of its intended customer base.

SN: Could you give us an update of the satellite you are building for Japan’s Civil Aviation Bureau (JCAB) and the Japanese Meteorological Agency (JMA)? With what has happened, does this jeopardize your prospects of gaining other contracts in Asia?

DeWitt: I don’t believe that will have an impact on our business with most of our Asian customers. Let me explain why. We have a requirement to assume or reject each contract, and we also have a requirement to make sure we protect the creditors. What we have been trying to do is strike a balance when we go forward with the assumption of all of our contracts. In so doing, we make modest changes, thereby getting the support of the court and the credit committee, but yet not undermining our customer relations. With JCAB and JMA, the process was more difficult than we had planned because we were dealing with the government. When we communicated this to other customers, they understood and have been very supportive.

MTSAT [the name of the JCAB/JMA satellite] was a little more difficult and I am glad it came to a satisfactory conclusion for everyone. We reached an agreement with them at the end of January for delivery of the satellite at the end of March. This is the second MTSAT spacecraft we have built and they are very pleased with the technical performance of this new spacecraft and we will be shipping it in March to Tanegashima for launch. In fact, we anticipate receiving additional work from the customer as part of the overall resolution of this matter.

SN: In terms of the international market place, where do you see the growth coming from?

DeWitt: We are very bullish on Asia in terms of international growth. That is part of the world where the infrastructure is best served by satellite applications. I think that you will see more applications for digital audio radio. You will see more applications for direct broadcast systems, so we are very bullish on the Asian market. The U.S. market will continue to be a good market, as we see more companies providing services for HDTV [high-definition TV], a very large consumer of bandwidth. Other broadband applications will also surface in the U.S. In terms of Europe, it will be an active market for us, but it is not one of our primary markets because of competition from EADS Astrium and Alcatel.

SN: In terms of overall revenues, do you expect revenues in 2003 to have grown compared to 2002? Are you forecasting growth for the manufacturing business in 2004? Do you anticipate the need for further restructuring in the year ahead?

DeWitt: As we look upon 2003 with the four satellite awards and our expected awards of 2004, we are forecasting a resumption of normal business volumes within SS/L. This means that we expect to see increasing volumes, probably back to 25 satellites a year for the industry in 2005. Beyond our current restructuring, we don’t anticipate anything further but we are very conscious of the need to maintain our critical skills and continue to focus on that. In fact, we will have to add staff in certain areas as a result of going back to normal business volumes.

SN: In the third quarter of 2003, SS/L had an operating loss of $37 million, compared to an operating loss of $1 million in the year ago quarter. How do you aim to recover from this and return to profitability?

DeWitt: A lot of that activity was a result of some one-time charges and the Chapter 11 process. We believe that we are well on our way to wrapping up that process and having the company move to a viable, profitable company going forward. We think there will be adequate EBITDA [earnings before interest, taxes, depreciation and amortization] margins in 2004, increasing in 2005 and subsequent years.

SN: What are the main challenges facing the company in 2004?

DeWitt: I think that our major objective in 2004 is to successfully conclude Chapter 11, which again I indicated is well on its way to completion. We want to win the MUOS program in conjunction with Raytheon, as well as to win five satellite awards. Those are our major objectives. At the same time, we want to maintain the reliability of our spacecraft and support our customers. When this downturn started in late 2001 and continued in 2002 and 2003, we made a significant effort to maintain our workforce and skill sets. This industry is highly dependent on people who have 20 to 25 years experience in the industry. Looking back at the difficulties we had, we are very pleased that we have the same talent and the same depth that we had when we had the largest satellite backlog in the industry at the end of 2001. We can commit to our customers that we can maintain the performance and reliability they have become accustomed to from SS/L and we are very proud of that achievement.

(John McCarthy, Loral: e-mail: [email protected])