Form 6-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 or 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of October, 2017

001-35878

(Commission File Number)

 

 

Intelsat S.A.

(Translation of registrant’s name into English)

 

 

4 rue Albert Borschette

Luxembourg

Grand Duchy of Luxembourg

L-1246

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.    Form 20-F  ☒    Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

 

 

 


Table of Contents

 

INTELSAT S.A.

Quarterly Report for the three and nine months ended September 30, 2017

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

  

Financial Statements:

  
  

Condensed Consolidated Balance Sheets as of December  31, 2016 and September 30, 2017 (Unaudited)

     6  
  

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2017

     7  
  

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2017

     8  
  

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2017

     9  
  

Notes to the Condensed Consolidated Financial Statements (Unaudited)

     10  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     51  

PART II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     52  

Item 1A.

  

Risk Factors

     52  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     52  

Item 3.

  

Defaults Upon Senior Securities

     52  

Item 4.

  

Mine Safety Disclosures

     52  

Item 5.

  

Other Information

     52  

SIGNATURES

     53  

 

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INTRODUCTION

In this Quarterly Report, unless otherwise indicated or the context otherwise requires, (1) the terms “we,” “us,” “our,” “the Company” and “Intelsat S.A.” refer to Intelsat S.A. and its subsidiaries on a consolidated basis, (2) the term “Intelsat Holdings” refers to Intelsat Holdings S.A., Intelsat S.A.’s indirect wholly-owned subsidiary, (3) the term “Intelsat Investments” refers to Intelsat Investments S.A. (formerly Intelsat S.A.), Intelsat S.A.’s indirect wholly-owned subsidiary, (4) the term “Intelsat Luxembourg” refers to Intelsat (Luxembourg) S.A., Intelsat Investments’ direct wholly-owned subsidiary, (5) the terms “Intelsat Connect” and “ICF” refer to Intelsat Connect Finance S.A., Intelsat Luxembourg’s direct wholly-owned subsidiary, (6) the term “Intelsat Jackson” refers to Intelsat Jackson Holdings S.A., Intelsat Connect’s direct wholly-owned subsidiary, (7) the term “Intelsat Corp” refers to Intelsat Corporation, Intelsat Jackson’s direct wholly-owned subsidiary and (8) the term “Intelsat General” refers to Intelsat General Corporation, our government business subsidiary.

In this Quarterly Report, unless the context otherwise requires, all references to transponder capacity or demand refer to transponder capacity or demand in the C-band and Ku-band frequencies only.

FINANCIAL AND OTHER INFORMATION

Unless otherwise indicated, all references to “dollars” and “$” in this Quarterly Report are to, and all monetary amounts in this Quarterly Report are presented in, U.S. dollars. Unless otherwise indicated, the financial information contained in this Quarterly Report has been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

Certain monetary amounts, percentages and other figures included in this Quarterly Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

In this Quarterly Report, we refer to and rely on publicly available information regarding our industry and our competitors. Although we believe the information is reliable, we cannot guarantee the accuracy and completeness of the information and have not independently verified it.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report constitute forward-looking statements that do not directly or exclusively relate to historical facts.

When used in this Quarterly Report, the words “may,” “will,” “might,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “intend,” “potential,” “outlook” and “continue,” and the negative of these terms, and other similar expressions are intended to identify forward-looking statements and information.

The forward-looking statements made in this Quarterly Report reflect our intentions, plans, expectations, assumptions, anticipations, projections, estimations, predictions, outlook and beliefs about future events. These forward-looking statements speak only as of the date of this Quarterly Report and are not guarantees of future performance or results and are subject to risks, uncertainties and other factors, many of which are outside of our control. These factors could cause actual results or developments to differ materially from the expectations expressed or implied in the forward-looking statements and include known and unknown risks. Known risks include, among others, the risks discussed in Item 3D—Risk Factors in our Annual Report on Form 20-F for the year ended December 31, 2016, as amended by Amendment No.1 on Form 20-F/A filed on October 11, 2017 (the “Form 20-F”) the political, economic and legal conditions in the markets we are targeting for communications services or in which we operate, and other risks and uncertainties inherent in the telecommunications business in general and the satellite communications business in particular.

The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:

 

    risks associated with operating our in-orbit satellites;

 

    satellite launch failures, satellite launch and construction delays and in-orbit failures or reduced satellite performance;

 

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    potential changes in the number of companies offering commercial satellite launch services and the number of commercial satellite launch opportunities available in any given time period that could impact our ability to timely schedule future launches and the prices we pay for such launches;

 

    our ability to obtain new satellite insurance policies with financially viable insurance carriers on commercially reasonable terms or at all, as well as the ability of our insurance carriers to fulfill their obligations;

 

    possible future losses on satellites that are not adequately covered by insurance;

 

    U.S. and other government regulation;

 

    changes in our contracted backlog or expected contracted backlog for future services;

 

    pricing pressure and overcapacity in the markets in which we compete;

 

    our ability to access capital markets for debt or equity;

 

    the competitive environment in which we operate;

 

    customer defaults on their obligations to us;

 

    our international operations and other uncertainties associated with doing business internationally;

 

    potential adverse reactions or changes to business or employee relationships resulting from the termination of the proposed OneWeb/SoftBank Transactions (See Note 1—General— Terminated Combination Agreement with OneWeb and Share Purchase Agreement with SoftBank);

 

    competitive responses to the terminated OneWeb/SoftBank Transactions;

 

    diversion of management’s attention from ongoing business operations and opportunities as a result of the terminated OneWeb/SoftBank Transactions;

 

    litigation; and

 

    other risks discussed in our Annual Report or this Quarterly Report.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements. Because actual results could differ materially from our intentions, plans, expectations, assumptions, anticipations, projections, estimations, predictions, outlook and beliefs about the future, you are urged not to rely on forward-looking statements in this Quarterly Report and to view all forward-looking statements made in this Quarterly Report with caution. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

INTELSAT S.A.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

     As of
December 31,
2016
    As of
September 30,
2017
 
           (unaudited)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 666,024     $ 580,694  

Restricted cash

     —         17,541  

Receivables, net of allowance of $54,744 in 2016 and $44,372 in 2017

     203,036       194,953  

Prepaid expenses and other current assets

     55,908       59,125  
  

 

 

   

 

 

 

Total current assets

     924,968       852,313  

Satellites and other property and equipment, net

     6,185,842       6,028,395  

Goodwill

     2,620,627       2,620,627  

Non-amortizable intangible assets

     2,452,900       2,452,900  

Amortizable intangible assets, net

     391,838       360,147  

Other assets

     365,834       403,480  
  

 

 

   

 

 

 

Total assets

   $ 12,942,009     $ 12,717,862  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 215,987     $ 97,599  

Taxes payable

     16,733       8,343  

Employee related liabilities

     50,178       31,208  

Accrued interest payable

     204,840       295,030  

Current portion of long-term debt

     —         96,527  

Deferred satellite performance incentives

     23,455       23,855  

Deferred revenue

     157,684       169,040  

Other current liabilities

     64,786       45,642  
  

 

 

   

 

 

 

Total current liabilities

     733,663       767,244  

Long-term debt, net of current portion

     14,198,084       14,120,002  

Deferred satellite performance incentives, net of current portion

     210,706       220,477  

Deferred revenue, net of current portion

     906,744       824,393  

Deferred income taxes

     168,445       168,693  

Accrued retirement benefits

     186,284       175,739  

Other long-term liabilities

     148,081       126,391  

Shareholders’ deficit:

    

Common shares; nominal value $0.01 per share

     1,180       1,190  

Paid-in capital

     2,156,911       2,171,011  

Accumulated deficit

     (5,715,931     (5,804,708

Accumulated other comprehensive loss

     (76,305     (73,040
  

 

 

   

 

 

 

Total Intelsat S.A. shareholders’ deficit

     (3,634,145     (3,705,547

Noncontrolling interest

     24,147       20,470  
  

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 12,942,009     $ 12,717,862  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Three Months
Ended

September 30,
2016
    Three Months
Ended

September 30,
2017
    Nine Months
Ended

September 30,
2016
    Nine Months
Ended

September 30,
2017
 

Revenue

   $ 542,727     $ 538,759     $ 1,637,353     $ 1,610,472  

Operating expenses:

        

Direct costs of revenue (excluding depreciation and amortization)

     88,460       78,111       254,334       242,003  

Selling, general and administrative

     58,948       47,873       175,244       152,343  

Depreciation and amortization

     174,909       178,742       520,869       535,384  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     322,317       304,726       950,447       929,730  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     220,410       234,033       686,906       680,742  

Interest expense, net

     243,039       261,834       694,937       756,180  

Gain (loss) on early extinguishment of debt

     219,560       (4,565     350,962       (4,109

Other income (expense), net

     324       1,797       (1,084     3,814  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     197,255       (30,569     341,847       (75,733

Provision for (benefit from) or income taxes

     650       (1,153     11,538       10,125  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     196,605       (29,416     330,309       (85,858

Net income attributable to noncontrolling interest

     (983     (996     (2,932     (2,919
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Intelsat S.A.

   $ 195,622     $ (30,412   $ 327,377     $ (88,777
  

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative preferred dividends

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ 195,622     $ (30,412   $ 327,377     $ (88,777
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share attributable to Intelsat S.A.:

        

Basic

   $ 1.66     $ (0.26   $ 2.89     $ (0.75

Diluted

   $ 1.65     $ (0.26   $ 2.77     $ (0.75

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

 

     Three Months
Ended

September 30,
2016
    Three Months
Ended

September 30,
2017
    Nine Months
Ended

September 30,
2016
    Nine Months
Ended

September 30,
2017
 

Net income (loss)

   $ 196,605     $ (29,416   $ 330,309     $ (85,858

Other comprehensive income, net of tax:

        

Defined benefit retirement plans:

        

Reclassification adjustment for amortization of unrecognized prior service credits included in net periodic pension costs and other, net of tax

     (1     27       (3     23  

Reclassification adjustment for amortization of unrecognized actuarial loss included in net periodic pension costs, net of tax

     532       566       1,596       1,651  

Marketable securities:

        

Unrealized gains on investments, net of tax

     137       147       254       429  

Reclassification adjustment for realized gain on investments, net of tax

     (17     (32     (28     (61

Derivatives:

        

Unrealized gain on fair value of derivatives, net of tax

     —         329       —         1,223  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     651       1,037       1,819       3,265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     197,256       (28,379     332,128       (82,593

Comprehensive income attributable to noncontrolling interest

     (983     (996     (2,932     (2,919
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Intelsat S.A.

   $ 196,273     $ (29,375   $ 329,196     $ (85,512
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months
Ended

September 30,
2016
    Nine Months
Ended

September 30,
2017
 

Cash flows from operating activities:

    

Net income (loss)

   $ 330,309     $ (85,858

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     520,869       535,384  

Provision for doubtful accounts

     26,153       (5,891

Foreign currency transaction gain

     (4,141     (2,363

Loss on disposal of assets

     —         26  

Share-based compensation

     18,028       13,848  

Deferred income taxes

     (8,512     (10,610

Amortization of discount, premium, issuance costs and related costs

     17,643       36,191  

(Gain) loss on early extinguishment of debt

     (350,962     4,109  

Unrealized gains on derivative financial instruments

     (764     —    

Amortization of actuarial loss and prior service credits for retirement benefits

     2,521       2,537  

Other non-cash items

     1,166       (301

Changes in operating assets and liabilities:

    

Receivables

     (4,565     14,611  

Prepaid expenses and other assets

     (39,830     (1,783

Accounts payable and accrued liabilities

     (3,381     (43,447

Accrued interest payable

     143,058       90,190  

Deferred revenue

     (37,517     (85,272

Accrued retirement benefits

     (7,148     (10,545

Other long-term liabilities

     (6,932     (8,734
  

 

 

   

 

 

 

Net cash provided by operating activities

     595,995       442,092  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Payments for satellites and other property and equipment (including capitalized interest)

     (620,471     (404,122

Purchase of cost method investments

     (4,000     (16,000

Capital contributions to unconsolidated affiliates

     (6,678     (23,355

Proceeds from insurance settlements

     —         28,351  
  

 

 

   

 

 

 

Net cash used in investing activities

     (631,149     (415,126
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of long-term debt

     1,250,000       1,500,000  

Repayment of long-term debt

     (328,569     (1,500,000

Debt issuance costs

     (25,809     (21,188

Payments on tender, debt exchange and consent

     (34,009     (14

Dividends paid to preferred shareholders

     (4,959     —    

Other payments for satellites

     (18,333     (35,396

Principal payments on deferred satellite performance incentives

     (12,734     (33,976

Dividends paid to noncontrolling interest

     (6,765     (6,596

Restricted cash for collateral

     —         (17,530

Other financing activities

     1,942       678  
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     820,764       (114,022
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     716       1,726  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     786,326       (85,330

Cash and cash equivalents, beginning of period

     171,541       666,024  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 957,867     $ 580,694  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid, net of amounts capitalized

   $ 537,313     $ 631,676  

Income taxes paid, net of refunds

     17,980       30,394  

Supplemental disclosure of non-cash investing activities:

    

Accrued capital expenditures and payments for satellites

   $ 64,335     $ 17,294  

Capitalization of deferred satellite performance incentives

     69,909       44,445  

Supplemental disclosure of non-cash financing activities:

    

Debt financing and restricted cash received

   $ 480,200     $ —    

Restricted cash used

     (480,200     —    

Restricted cash—letters of credit collateral

     —         17,530  

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INTELSAT S.A.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

Note 1 General

Basis of Presentation

The accompanying condensed consolidated financial statements of Intelsat S.A. and its subsidiaries (“Intelsat S.A.,” “we,” “us,” “our” or the “Company”) have not been audited, but are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. References to U.S. GAAP issued by the Financial Accounting Standards Board (“FASB”) in these footnotes are to the FASB Accounting Standards Codification (“ASC”). The unaudited condensed consolidated financial statements include all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of these financial statements. The results of operations for the periods presented are not necessarily indicative of operating results for the full year or for any future period. The condensed consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 20-F for the year ended December 31, 2016 on file with the U.S. Securities and Exchange Commission.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these condensed consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.

Terminated Combination Agreement with OneWeb and Share Purchase Agreement with SoftBank

In February 2017, Intelsat entered into a combination agreement (as amended, the “Combination Agreement”) with WorldVu Satellites Limited (“OneWeb”), which provided for a combination of the businesses of Intelsat and OneWeb pursuant to a merger (the “OneWeb Combination”), and Intelsat entered into a share purchase agreement (as amended, the “Share Purchase Agreement”) with SoftBank Group Corp. (“SoftBank”), which provided for a cash investment by SoftBank in exchange for shares of Intelsat (the “SoftBank Investment” and, together with the OneWeb Combination, the “OneWeb/SoftBank Transactions”). The consummation of the OneWeb/SoftBank Transactions was conditioned on the successful completion of debt exchange offers for certain outstanding notes of Intelsat Jackson, Intelsat Luxembourg and ICF. In June 2017, Intelsat announced that the debt exchange offers had expired without sufficient tenders having been received, and Intelsat subsequently received termination notices from OneWeb and SoftBank terminating the Combination Agreement and Share Purchase Agreement, respectively.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in FASB ASC Topic 605 – Revenue Recognition. The guidance in ASU 2014-09 clarifies the principles for recognizing revenue and improves financial reporting by creating a common revenue standard for U.S. GAAP and International Financial Reporting Standards.

 

    In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Public entities can now elect to defer implementation of ASU 2014-09 to interim and annual periods beginning after December 15, 2017. Additionally, ASU 2015-14 permits early adoption of the standard but not before the original effective date, i.e. annual periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method.

 

    In February 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The standard amends the principal versus agent guidance in ASU 2014-09 and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer.

 

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    In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The standard amends the guidance in ASU 2014-09 about identifying performance obligations and accounting for licenses of intellectual property.

 

    In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The standard makes narrow-scope amendments to ASU 2014-09 and provides practical expedients to simplify the transition to the new standard and to clarify certain aspects of the standard.

 

    In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The standard affects certain narrow aspects of the guidance issued in ASU 2014-09.

We are still in the process of evaluating the impact that these standards will have on our consolidated financial statements and associated disclosures, and have not yet selected a transition method. We are finalizing our accounting positions under ASU 2014-09, as amended, including the significant judgments and estimates required. We are evaluating and directing the implementation of the new revenue recognition standard and related amendments.

In preparation for adoption of the new guidance, we have assessed contracts entered into with key customers and other forms of agreements with customers globally and have evaluated the provisions under the five-step model specified by the new guidance. Based on our initial assessment, we anticipate that the adoption of the new standard will impact the amount of total consideration for prepayment contracts, accounting of incremental costs for obtaining a contract, allocation of the transaction price to all performance obligations in arrangements, accounting for contract modifications, and additional disclosures. We have identified all contracts with prepayment provisions and determined that certain contracts contain a significant financing component primarily due to the length of time between when payment is received and when the transfer of services to the customer occurs. Further, we currently expense sales commissions under our sales incentive program as incurred. Under the new standard, we believe we will be required to defer and amortize a portion of these commissions as contract costs over the life of the contract.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, on a modified retrospective basis with early adoption allowed. We are in the process of evaluating the impact that ASU 2016-02 will have on our consolidated financial statements and associated disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how companies measure and recognize credit impairment for any financial assets. The standard will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are within the scope of the standard. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019 for public business entities that are SEC filers, on a modified retrospective basis. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. We are in the process of evaluating the impact that ASU 2016-13 will have on our consolidated financial statements and associated disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses specific issues relating to diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Additionally, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which requires that amounts described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for interim and annual periods beginning after December 15, 2017 for public business entities, on a retrospective basis. Early adoption is permitted for both standards in any interim or annual period, and for ASU 2016-15 with a condition that the entire ASU is adopted in the same period. We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements and associated disclosures. The amendments in ASU 2016-18 will change the presentation of cash flows from restricted cash from supplemental disclosure of non-cash financing activities to cash flows from financing activities in our consolidated statement of cash flows. During both the three months and nine months ended September 30, 2016, the amendments in ASU 2016-18 would have resulted in reclassification of $480.2 million, currently presented as debt financing and restricted cash received under supplemental disclosure of non-cash financing activities, to proceeds from issuance of long-term debt under cash flows from financing activities. During both the three months and nine months ended September 30, 2017, the amendments in ASU 2016-18 would have resulted in elimination of $17.5 million, currently presented as restricted cash – letters of credit collateral under supplemental disclosure of non-cash financing activities, and elimination of $17.5 million outflow from restricted cash for collateral.

 

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In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments in ASU 2016-16 eliminate the current requirement to defer the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2017 for public business entities, on a modified retrospective basis. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. We plan to adopt the amendments in the first quarter of 2018 and expect the effect of ASU 2016-16 to be a cumulative benefit to retained earnings on January 1, 2018. Based on our existing intercompany structure, we expect the benefit to retained earnings to be between $4 million and $10 million. The benefit relates to certain deferred intercompany gains/losses, mostly in connection with a series of intercompany transactions in 2011 and related steps that reorganized the ownership of our assets among our subsidiaries.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which is intended to simplify the subsequent measurement of goodwill. The amendments in ASU 2017-04 modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities, as if that reporting unit had been acquired in a business combination. ASU 2017-04 will be effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 for public business entities, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. When adopted, we expect the amendments in ASU 2017-04 to simplify the process of testing for goodwill impairment, if required.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost in the financial statements. ASU 2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost and report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. ASU 2017-07 is effective for interim and annual periods beginning after December 15, 2017 for public business entities. Early adoption is permitted as of the beginning of an annual period for which interim or annual financial statements have not been issued. We are in the process of evaluating the impact that ASU 2017-07 will have on our consolidated financial statements and associated disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which is intended to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under ASU 2017-09 modification accounting is required only if the fair value (or calculated intrinsic value, if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. The amendment should be applied prospectively to an award modified on or after the adoption date. We do not anticipate this ASU will have a material impact on our consolidated financial statements and associated disclosures. We will continue to evaluate the impact of ASU 2017-09 as any modifications will occur.

Note 2 Share Capital

Under our Articles of Incorporation, we have an authorized share capital of $10.0 million, represented by 1.0 billion shares of any class with a nominal value of $0.01 per share. At September 30, 2017, there were 119.0 million common shares issued and outstanding.

On May 1, 2016, each of our 5.75% Series A Mandatorily convertible junior non-voting preferred shares (the “Series A Preferred Shares”) automatically converted into 2.7778 common shares, based on the average of the closing prices per common share over the 40 trading day period ending on the third trading day prior to the mandatory conversion date. The automatic conversion for a total of 9.6 million new common shares was recorded on May 2, 2016.

Note 3 Net Income (Loss) per Share

Basic earnings per share (“EPS”) is computed by dividing net income (loss) attributable to Intelsat S.A.’s common shareholders by the weighted average number of common shares outstanding during the periods.

 

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The following table sets forth the computation of basic and diluted net income (loss) per share attributable to Intelsat S.A.:

 

     (in thousands, except per share data or where otherwise noted)  
     Three Months
Ended

September 30,
2016
     Three Months
Ended

September 30,
2017
     Nine Months
Ended

September 30,
2016
     Nine Months
Ended

September 30,
2017
 

Numerator:

           

Net income (loss)

   $ 196,605      $ (29,416    $ 330,309      $ (85,858

Net income attributable to noncontrolling interest

     (983      (996      (2,932      (2,919
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Intelsat S.A.

     195,622        (30,412      327,377        (88,777
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to common shareholders

     195,622        (30,412      327,377        (88,777

Numerator for Basic EPS—income (loss) available to
common shareholders

     195,622        (30,412      327,377        (88,777

Numerator for Diluted EPS

     195,622        (30,412      327,377        (88,777

Denominator:

           

Basic weighted average shares outstanding (in millions)

     117.8        119.0        113.4        118.7  

Weighted average dilutive shares outstanding (in millions):

           

Preferred shares (in millions)

     —          —          4.2        —    

Employee compensation related shares including options and restricted stock units (in millions)

     0.8        —          0.7        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding (in millions)

     118.6        119.0        118.3        118.7  

Basic net income (loss) per common share attributable to Intelsat S.A.

   $ 1.66      $ (0.26    $ 2.89      $ (0.75
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income (loss) per common share attributable to Intelsat S.A.

   $ 1.65      $ (0.26    $ 2.77      $ (0.75
  

 

 

    

 

 

    

 

 

    

 

 

 

Due to a net loss for the three and nine months ended September 30, 2017, there were no dilutive securities, and therefore, basic and diluted EPS were the same. The weighted average number of shares that could potentially dilute basic EPS in the future was 6.0 million and 2.7 million (consisting of restricted share units and options to purchase common shares) for the three months ended September 30, 2016 and 2017, respectively, and 6.4 million and 5.4 million for the nine months ended September 30, 2016 and 2017, respectively.

Note 4 Share-Based and Other Compensation Plans

In April 2013, our board of directors adopted the amended and restated Intelsat Global, Ltd. 2008 Share Incentive Plan (as amended, the “2008 Equity Plan”). Also in April 2013, our board of directors adopted the Intelsat S.A. 2013 Equity Incentive Plan (the “2013 Equity Plan”). No new awards may be granted under the 2008 Equity Plan.

The 2013 Equity Plan provides for a variety of equity based awards, including incentive stock options (within the meaning of Section 422 of the United States Internal Revenue Service Tax Code), restricted shares, restricted share units (“RSUs”), other share-based awards and performance compensation awards. Effective June 16, 2016, we increased the aggregate number of common shares authorized for issuance under the 2013 Equity Plan to 20.0 million common shares.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to improve accounting for share-based payment transactions as part of the FASB’s simplification initiative. We adopted this ASU in the first quarter of 2017 and are recognizing forfeitures as they occur. The adoption did not have a material impact on our consolidated financial statements and associated disclosures.

 

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For all share-based awards, we recognize the compensation costs over the vesting period during which the employee provides service in exchange for the award. During the nine months ended September 30, 2016 and 2017, we recorded compensation expense of $18.0 million and $13.8 million, respectively.

Option modifications

During the nine months ended September 30, 2016, we amended 1.2 million stock options under the 2008 Equity Plan (including 0.7 million of anti-dilution options), and 0.4 million stock options under the 2013 Equity Plan in order to modify the exercise prices to $4.16 for the anti-dilution options and to $3.77 for the remainder. As a result of the change, we estimated the difference between fair value of the amended options and the fair value of the original awards before settlement. The fair value was measured using the Black-Scholes option pricing model and the following assumptions were used for the amended options and the original awards before amendment: risk-free interest rates of 0.8% to 1.5%; dividend yields of 0.0%; expected volatility of 50-60%; and expected life of one to four years.

All such options were fully vested and we recognized additional compensation expense associated with the modifications of $2.0 million for the nine months ended September 30, 2016.

There were no option modifications during the nine months ended September 30, 2017.

Time-based RSUs

We granted 1.2 million time-based RSUs during the nine months ended September 30, 2017. These RSUs vest on average over three years from the date of grant in equal annual installments.

The fair value of time-based RSUs is deemed to be the market price of common shares on the date of grant. The weighted average grant date fair value of time-based RSUs granted during the nine months ended September 30, 2017 was $4.28 per RSU.

Performance-based RSUs

We granted 0.8 million performance-based RSUs during the nine months ended September 30, 2017. These RSUs vest after three years from the date of grant upon achievement of an adjusted EBITDA target and achievement of a relative shareholder return (“RSR”), which is based on our relative shareholder return percentile ranking versus the S&P 900 Index as defined in the grant agreement.

We measure the fair value of performance-based RSUs at the date of grant using the market price of our common shares (to measure the portion of the award based on the adjusted EBITDA target) and a Monte Carlo simulation model (to measure the portion of the award based on an RSR target).

The weighted average grant date fair value of performance-based RSUs granted during the nine months ended September 30, 2017 was $2.79 per RSU.

Note 5 Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements and Disclosure (“FASB ASC 820”) defines fair value, establishes a market-based framework or hierarchy for measuring fair value and provides for certain required disclosures about fair value measurements. The guidance is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value but does not require any new fair value measurements.

The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:

 

    Level 1—unadjusted quoted prices for identical assets or liabilities in active markets;

 

    Level 2—quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation; and

 

    Level 3—unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability.

 

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We have identified investments in marketable securities and put option embedded derivative instruments as those items that meet the criteria of the disclosure requirements and fair value framework of FASB ASC 820.

The following tables present assets and liabilities measured and recorded at fair value in our consolidated balance sheets on a recurring basis and their level within the fair value hierarchy (in thousands), excluding long-term debt (see Note 10—Long-Term Debt). We did not have any transfers between Level 1 and Level 2 fair value measurements during the nine months ended September 30, 2017.

 

    

Fair Value Measurements at December 31, 2016

 
     As of
December 31,
2016
     Quoted Prices in
Active Markets for

Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Description

           

Assets

           

Marketable securities(1)

   $ 5,381      $ 5,381      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 5,381      $ 5,381      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Put option embedded derivative(2)

   $ 1,496      $ —        $ —        $ 1,496  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,496      $ —        $ —        $ 1,496  
  

 

 

    

 

 

    

 

 

    

 

 

 
    

Fair Value Measurements at September 30, 2017

 
     As of
September 30,

2017
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Description

           

Assets

           

Marketable securities(1)

   $ 5,713      $ 5,713      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 5,713      $ 5,713      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Put option embedded derivative(2)

   $ 167      $ —        $ —        $ 167  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 167      $ —        $ —        $ 167  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The valuation measurement inputs of these marketable securities represent unadjusted quoted prices in active markets and, accordingly, we have classified such investments within Level 1 of the fair value hierarchy. The cost basis of our available-for-sale marketable securities was $5.0 million at December 31, 2016 and $4.6 million at September 30, 2017. We sold marketable securities with a cost basis of $0.5 million during the nine months ended September 30, 2017 and recorded a nominal gain on the sale, which was included within other income (expense), net in our consolidated statement of operations.
(2) We valued the contingent put option embedded within ICF’s 12.50% Senior Notes due 2022 (the “2022 ICF Notes”) using a valuation technique which reflects the estimated date and probability of a change of control, the fair value of the 2022 ICF Notes, and a credit valuation adjustment reflecting our credit spreads. We identified the inputs used to calculate the fair value as Level 3 inputs and concluded that the valuation in its entirety was classified as Level 3 within the fair value hierarchy.

Note 6 Retirement Plans and Other Retiree Benefits

(a) Pension and Other Postretirement Benefits

We maintain a noncontributory defined benefit retirement plan covering substantially all of our employees hired prior to July 19, 2001. The cost of providing benefits to eligible participants under the defined benefit retirement plan is calculated using the plan’s benefit formulas, which take into account the participants’ remuneration, dates of hire, years of eligible service, and certain actuarial assumptions. In addition, as part of the overall medical plan, we provide postretirement medical benefits to certain current retirees who meet the criteria under the medical plan for postretirement benefit eligibility.

The defined benefit retirement plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. We expect that our future contributions to the defined benefit retirement plan will be based on the minimum funding requirements of the Internal Revenue Code and on the plan’s funded status. Any significant decline in the fair value of our defined benefit retirement plan assets or other adverse changes to the significant assumptions used to determine the plan’s funded status would

 

15


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negatively impact its funded status and could result in increased funding in future periods. The impact on the funded status is determined based upon market conditions in effect when we completed our annual valuation. During the nine months ended September 30, 2017, we made cash contributions to the defined benefit retirement plan of $2.0 million. We anticipate that our remaining contributions to the defined benefit retirement plan in 2017 will be approximately $0.9 million. We fund the postretirement medical benefits throughout the year based on benefits paid. We anticipate that our contributions to fund postretirement medical benefits in 2017 will be approximately $4.1 million.

Included in accumulated other comprehensive loss at September 30, 2017, is $121.3 million ($76.5 million, net of tax) that has not yet been recognized in the net periodic pension cost, which includes unrecognized actuarial losses.

Prior service credits and actuarial losses are reclassified from accumulated other comprehensive loss to net periodic pension benefit costs, which are included in both direct costs of revenue and selling, general and administrative on our condensed consolidated statements of operations for the three and nine months ended September 30, 2017. The following table presents these reclassifications, net of tax, as well as the reclassification of the realized gain on investments, and the statement of operations line items that are impacted (in thousands):

 

     Three Months
Ended
September 30,
2016
     Three Months
Ended
September 30,
2017
     Nine Months
Ended
September 30,
2016
     Nine Months
Ended
September 30,
2017
 

Amortization of prior service credits reclassified from other comprehensive loss to net periodic pension benefit costs included in:

           

Direct costs of revenue (excluding depreciation and amortization)

   $ (1    $ 16      $ (2    $ 14  

Selling, general and administrative

     —          11        (1      9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (1    $ 27      $ (3    $ 23  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortization of actuarial loss reclassified from other comprehensive loss to net periodic pension benefit costs included in:

           

Direct costs of revenue (excluding depreciation and amortization)

   $ 326      $ 345      $ 989      $ 1,009  

Selling, general and administrative

     206        221        607        642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  532      $  566      $  1,596      $ 1,651  
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gain on investments included in:

           

Other expense, net

   $ (17    $ (32    $ (28    $ (61
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (17    $ (32    $ (28    $ (61
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension benefit costs included the following components (in thousands):

 

     Three Months
Ended
September 30,
2016
     Three Months
Ended
September 30,
2017
     Nine Months
Ended
September 30,
2016
     Nine Months
Ended
September 30,
2017
 

Interest cost

   $ 4,046      $ 3,695      $ 12,137      $ 11,084  

Expected return on plan assets

     (6,384      (6,103      (19,151      (18,308

Amortization of unrecognized net loss

     842        938        2,527        2,813  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total benefit

   $ (1,496    $ (1,470    $ (4,487    $ (4,411
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Net periodic other postretirement benefit costs included the following components (in thousands):

 

     Three Months
Ended
September 30,
2016
     Three Months
Ended
September 30,
2017
     Nine Months
Ended
September 30,
2016
     Nine Months
Ended
September 30,
2017
 

Interest cost

   $ 841      $ 717      $ 2,522      $ 2,152  

Amortization of unrecognized prior service credits

     (2      (2      (6      (6

Amortization of unrecognized net gain

     —          (114      —          (342
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs

   $ 839      $ 601      $ 2,516      $ 1,804  
  

 

 

    

 

 

    

 

 

    

 

 

 

(b) Other Retirement Plans

In connection with the amendment of the defined benefit retirement plan in the first quarter of 2015, the two defined contribution retirement plans we previously maintained for the benefit of our employees in the United States, were merged into a single plan, which is qualified under the provisions of Section 401(k) of the Internal Revenue Code. We recognized compensation expense for these plans of $7.3 million and $5.9 million during the nine months ended September 30, 2016 and 2017, respectively. We also maintain other defined contribution retirement plans in several non-U.S. jurisdictions, but such plans are not material to our financial position or results of operations.

Note 7 Satellites and Other Property and Equipment

(a) Satellites and Other Property and Equipment, net

Satellites and other property and equipment, net were comprised of the following (in thousands):

 

     As of
December 31,
2016
     As of
September 30,
2017
 

Satellites and launch vehicles

   $ 10,363,771      $ 10,618,226  

Information systems and ground segment

     727,929        790,217  

Buildings and other

     250,369        260,446  
  

 

 

    

 

 

 

Total cost

     11,342,069        11,668,889  

Less: accumulated depreciation

     (5,156,227      (5,640,494
  

 

 

    

 

 

 

Total

   $ 6,185,842      $ 6,028,395  
  

 

 

    

 

 

 

Satellites and other property and equipment are stated at historical cost, with the exception of satellites that have been impaired. Satellites and other property and equipment acquired as part of an acquisition are based on their fair value at the date of acquisition.

Satellites and other property and equipment, net as of December 31, 2016 and September 30, 2017 included construction-in-progress of $1.1 billion and $0.7 billion, respectively. These amounts relate primarily to satellites under construction and related launch services. Interest costs of $79.0 million and $46.7 million were capitalized during the nine months ended September 30, 2016 and 2017, respectively.

We have entered into launch contracts for the launch of both specified and unspecified future satellites. Each of these launch contracts may be terminated at our option, subject to payment of a termination fee that increases as the applicable launch date approaches. In addition, in the event of a failure of any launch, we may exercise our right to obtain a replacement launch within a specified period following our request for re-launch.

(b) Recent Satellite Launches

On August 24, 2016, we successfully launched our Intelsat 33e satellite into orbit. Intelsat 33e is the second of six high-throughput satellites (“HTS”) within our Intelsat EpicNG platform, featuring high-performance spot beams and an advanced digital payload. Due to a malfunction in the primary thruster for orbit raising, Intelsat 33e arrived at its 60ºE orbital location in December 2016 and entered into service in late January 2017. In addition, in February 2017, measurements indicated higher than expected fuel use while performing stationkeeping maneuvers. A failure review board was established to determine the cause of the primary thruster failure and a separate team to investigate fuel use anomalies. As of September 30, 2017, these investigations were ongoing and final

 

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Table of Contents

conclusions have not been reached. We continue to participate in the investigations. We filed a loss claim in March 2017 with our insurers relating to the loss of life for approximately $78 million. The claim is still in process and we have received approximately $28.4 million in cash from certain insurers. Intelsat 33e is fully operational, delivering commercial-grade services for enterprise, fixed and mobile network operators, aeronautical and maritime mobility service providers, and for government customers in the Africa, Europe, Middle East and Asia regions.

Intelsat 32e, a customized payload positioned on a third-party satellite, was successfully launched on February 14, 2017. Intelsat 32e is the third of six in our planned Intelsat EpicNG fleet, featuring high-performance spot beams. Intelsat 32e increases our service capabilities over the in-demand North Atlantic and Caribbean regions, supplying services for applications such as in-flight connectivity for commercial flights and passenger and commercial broadband for cruise lines and shipping vessels. Intelsat 32e entered into service in March 2017.

On July 5, 2017, we successfully launched our Intelsat 35e satellite into orbit. The fourth of our Intelsat EpicNG next-generation high-throughput satellites, Intelsat 35e will deliver high-performance services in C- and Ku-bands. The Intelsat 35e Ku-band services include a customized high power wide beam for direct-to-home (“DTH”) service delivery in the Caribbean, as well as services for mobility and government applications in the Caribbean, trans-Europe to Africa and the African continent. Intelsat 35e entered into service in August 2017.

Intelsat 37e, the fifth satellite in the Intelsat EpicNG fleet, was successfully launched on September 29, 2017. The all-digital Intelsat 37e is the first high-throughput satellite to offer full, high-resolution interconnectivity between C-, Ku- and Ka- bands delivering additional services and improved throughput to support enterprise, broadband, government and mobility applications in the Americas, Africa and Europe. Intelsat 37e is expected to enter into service in the first quarter of 2018.

Note 8 Investments

We have an ownership interest in two entities that meet the criteria of a variable interest entity (“VIE”), Horizons Satellite Holdings, LLC (“Horizons Holdings”) and Horizons-3 Satellite LLC (“Horizons 3”). Horizons Holdings is discussed in further detail below, including our analyses of the primary beneficiary determination as required under FASB ASC Topic 810, Consolidation (“FASB ASC 810”). In addition, Horizons 3 is discussed in greater detail below. Additionally, we have cost method investments where we have a minority investment, discussed further below.

(a) Horizons Holdings

Our first joint venture with JSAT International, Inc. (“JSAT”) is named Horizons Satellite Holdings, LLC, and consists of two investments: Horizons-1 Satellite LLC (“Horizons-1”) and Horizons-2 Satellite LLC (“Horizons-2”). Horizons Holdings borrowed from JSAT a portion of the funds necessary to finance the construction of the Horizons-2 satellite pursuant to a loan agreement. The borrowing was subsequently repaid. We provide certain services to the joint venture and utilize capacity from the joint venture.

We have determined that this joint venture meets the criteria of a VIE under FASB ASC 810, and we have concluded that we are the primary beneficiary because decisions relating to any future relocation of the Horizons-2 satellite, the most significant asset of the joint venture, are effectively controlled by us. In accordance with FASB ASC 810, as the primary beneficiary, we consolidate Horizons Holdings within our consolidated financial statements. Total assets of Horizons Holdings were $48.3 million and $41.0 million as of December 31, 2016, and September 30, 2017, respectively. Total liabilities for the same periods were immaterial.

We have a revenue sharing agreement with JSAT related to services sold on the Horizons-1 and Horizons-2 satellites. We are responsible for billing and collection for such services, and we remit 50% of the revenue, less applicable fees and commissions, to JSAT. Amounts payable to JSAT related to the revenue sharing agreement, net of applicable fees and commissions, from the Horizons-1 and Horizons-2 satellites were $6.2 million and $4.7 million as of December 31, 2016, and September 30, 2017, respectively.

(b) Horizons 3 Satellite LLC

On November 4, 2015, we entered into a new joint venture agreement with JSAT. The joint venture, named Horizons 3, was formed for the purpose of developing, launching, managing, operating and owning a high performance satellite to be located at the 169ºE orbital location.

Horizons 3, which is 50% owned by each of Intelsat and JSAT, was set up with a joint share of management authority and equal rights to profits and revenues from the joint venture. Similar to Horizons Holdings, we have a revenue sharing agreement with JSAT related to services sold on the Horizons 3 satellite. In addition, we are responsible for billing and collection for such services, and we remit 50% of the revenue, less applicable fees and commissions, to JSAT.

 

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We have determined that this joint venture meets the criteria of a VIE under FASB ASC 810, and we have concluded that we are not the primary beneficiary, and therefore, do not consolidate Horizons 3. The assessment considered both quantitative and qualitative factors, including an analysis of voting power and other means of control of the joint venture as well as each owner’s exposure to risk of loss or gain. Because we and JSAT equally share control over the operations of the joint venture and also equally share exposure to risk of losses or gains, we concluded that we are not the primary beneficiary of Horizons 3. Our investment, included within other assets in our condensed consolidated balance sheets, is accounted for using the equity method of accounting and the investment balance was $31.1 million and $54.5 million as of December 31, 2016 and September 30, 2017, respectively.

In connection with our investment in Horizons 3, we entered into a capital contribution and subscription agreement, which requires us to fund our 50% share of the amounts due in order to maintain our respective 50% interest in the joint venture. Pursuant to this agreement, we made contributions of $10.3 million and $21.1 million during the year ended December 31, 2016 and the nine months ended September 30, 2017, respectively. In addition, our indirect subsidiary that holds our investment in Horizons 3 has entered into a security and pledge agreement with Horizons 3, pursuant to which it has granted a security interest in its membership interests in Horizons 3. Further, our indirect subsidiary has granted a security interest to Horizons 3 in its customer capacity contracts and its ownership interest in its wholly-owned subsidiary that will hold the U.S. Federal Communications Commission license required for the joint venture’s operations.

(c) Cost Method Investments

Our cost method investments recorded in other assets in our condensed consolidated balance sheets had a total carrying value of $29.0 million as of December 31, 2016 and $45.0 million as of September 30, 2017. The balance as of September 30, 2017 consists of 4 minority investments.

 

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(d) Equity Attributable to Intelsat S.A. and Noncontrolling Interest

The following tables present changes in equity attributable to the Company and equity attributable to our noncontrolling interest, which is included in the equity section of our condensed consolidated balance sheet (in thousands):

 

     Intelsat S.A.
Shareholders’
Deficit
     Noncontrolling
Interest
     Total
Shareholders’
Deficit
 

Balance at January 1, 2016

   $ (4,649,565    $ 29,212      $ (4,620,353

Net income

     990,197        3,915        994,112  

Dividends paid to noncontrolling interests

     —          (8,980      (8,980

Share-based compensation

     23,089        —          23,089  

Postretirement/pension liability adjustment

     2,041        —          2,041  

Other comprehensive income

     93        —          93  
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2016

   $ (3,634,145    $ 24,147      $ (3,609,998
  

 

 

    

 

 

    

 

 

 
     Intelsat S.A.
Shareholders’
Deficit
     Noncontrolling
Interest
     Total
Shareholders’
Deficit
 

Balance at January 1, 2017

   $ (3,634,145    $ 24,147      $ (3,609,998

Net income (loss)

     (88,777      2,919        (85,858

Dividends paid to noncontrolling interests

     —          (6,596      (6,596

Share-based compensation

     14,110        —          14,110  

Unrealized gain on fair value of derivatives

     1,223        —          1,223  

Postretirement/pension liability adjustment

     1,674        —          1,674  

Other comprehensive income

     368        —          368  
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2017

   $ (3,705,547    $ 20,470      $ (3,685,077
  

 

 

    

 

 

    

 

 

 

 

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Note 9 Goodwill and Other Intangible Assets

The carrying amounts of goodwill and acquired intangible assets not subject to amortization consist of the following (in thousands):

 

     As of
December 31,
2016
     As of
September 30,
2017
 

Goodwill(1)

   $ 2,620,627      $ 2,620,627  

Orbital locations

     2,387,700        2,387,700  

Trade name

     65,200        65,200  

 

(1) Net of accumulated impairment losses of $4,160,200.

We account for goodwill and other non-amortizable intangible assets in accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other, and have deemed these assets to have indefinite lives. Therefore, these assets are not amortized but are tested on an annual basis for impairment during the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable.

The carrying amount and accumulated amortization of acquired intangible assets subject to amortization consist of the following (in thousands):

 

     As of December 31, 2016      As of September 30, 2017  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Backlog and other

   $ 743,760      $ (669,045   $ 74,715      $ 743,760      $ (682,080   $ 61,680  

Customer relationships

     534,030        (216,907     317,123        534,030        (235,563     298,467  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,277,790      $ (885,952   $ 391,838      $ 1,277,790      $ (917,643   $ 360,147  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Intangible assets are amortized based on the expected pattern of consumption. We recorded amortization expense of $36.4 million and $31.7 million for the nine months ended September 30, 2016 and 2017, respectively.

 

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Note 10 Long-Term Debt

The carrying values and fair values of our notes payable and long-term debt were as follows (in thousands):

 

     As of December 31, 2016     As of September 30, 2017  
     Carrying Value     Fair Value     Carrying Value     Fair Value  

Intelsat Luxembourg:

        

6.75% Senior Notes due June 2018

   $ 500,000     $ 410,000     $ 96,650     $ 92,784  

Unamortized prepaid debt issuance costs on 6.75% Senior Notes

     (5,746     —         (123     —    

7.75% Senior Notes due June 2021

     2,000,000       640,000       2,000,000       1,290,000  

Unamortized prepaid debt issuance costs on 7.75% Senior Notes

     (16,588     —         (14,165     —    

8.125% Senior Notes due June 2023

     1,000,000       295,000       1,000,000       625,000  

Unamortized prepaid debt issuance costs on 8.125% Senior Notes

     (9,764     —         (8,872     —    

12.5% Senior Notes due November 2024

     —         —         403,350       331,417  

Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes

     —         —         (211,339     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intelsat Luxembourg obligations

     3,467,902       1,345,000       3,265,501       2,339,201  
  

 

 

   

 

 

   

 

 

   

 

 

 

Intelsat Connect Finance:

        

12.5% Senior Notes due April 2022

   $ 731,884     $ 475,725     $ 731,892     $ 717,254  

Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes

     (297,257     —         (275,274     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intelsat Connect Finance obligations

     434,627       475,725       456,618       717,254  
  

 

 

   

 

 

   

 

 

   

 

 

 

Intelsat Jackson:

        

9.5% Senior Secured Notes due September 2022

   $ 490,000     $ 543,900     $ 490,000     $ 583,100  

Unamortized prepaid debt issuance costs and discount on 9.5% Senior Secured Notes

     (20,243     —         (18,261     —    

8.0% Senior Secured Notes due February 2024

     1,349,678       1,383,420       1,349,678       1,450,904  

Unamortized prepaid debt issuance costs and premium on 8.0% Senior Secured Notes

     (6,005     —         (5,547     —    

7.25% Senior Notes due October 2020

     2,200,000       1,716,000       2,200,000       2,117,500  

Unamortized prepaid debt issuance costs and premium on 7.25% Senior Notes

     (6,756     —         (5,563     —    

7.25% Senior Notes due April 2019

     1,500,000       1,260,000       —         —    

Unamortized prepaid debt issuance costs on 7.25% Senior Notes

     (5,886     —         —         —    

7.5% Senior Notes due April 2021

     1,150,000       879,750       1,150,000       1,092,500  

Unamortized prepaid debt issuance costs on 7.5% Senior Notes

     (6,828     —         (5,778     —    

5.5% Senior Notes due August 2023

     2,000,000       1,340,000       2,000,000       1,700,000  

Unamortized prepaid debt issuance costs on 5.5% Senior Notes

     (14,900     —         (13,468     —    

9.75% Senior Notes due July 2025

     —         —         1,500,000       1,522,500  

Unamortized prepaid debt issuance costs on 9.75% Senior Notes

     —         —         (20,713  

Senior Secured Credit Facilities due June 2019

     3,095,000       3,013,756       3,095,000       3,083,393  

Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities

     (21,682     —         (15,227     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intelsat Jackson obligations

     11,702,378       10,136,826       11,700,121       11,549,897  
  

 

 

   

 

 

   

 

 

   

 

 

 

Eliminations:

        

6.75% Senior Notes due June 2018 owned by Intelsat Connect Finance

   $ (402,570   $ (330,107   $ —       $ —    

Unamortized prepaid debt issuance costs and discount on 6.75% Senior Notes

     5,490       —         —         —    

7.75% Senior Notes due June 2021 owned by Intelsat Connect Finance

     (979,168     (313,334     (979,168     (631,563

Unamortized prepaid debt issuance costs on 7.75% Senior Notes

     8,121       —         6,935       —    

8.125% Senior Notes due June 2023 owned by Intelsat Connect Finance

     (111,663     (32,941     (111,663     (69,789

Unamortized prepaid debt issuance costs on 8.125% Senior Notes

     1,090       —         991       —    

Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes due April 2022

     71,877       —         68,844       —    

12.5% Senior Notes due November 2024 owned by Intelsat Connect Finance

     —         —         (402,595     (330,797

Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes

     —         —         210,945       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total eliminations:

     (1,406,823     (676,382     (1,205,711     (1,032,149
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Intelsat S.A. long-term debt

   $ 14,198,084     $ 11,281,169     $ 14,216,529     $ 13,574,203  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less current portion of long-term debt:

        

Intelsat Luxembourg:

        

6.75% Senior Notes due June 2018

   $ —         $ 96,650    

Unamortized prepaid debt issuance costs on 6.75% Senior Notes

     —           (123  
  

 

 

     

 

 

   

Total current portion of long-term debts:

     —           96,527    
  

 

 

     

 

 

   

Total long-term debt, excluding current portion

   $ 14,198,084       $ 14,120,002    
  

 

 

     

 

 

   

 

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The fair value for publicly traded instruments is determined using quoted market prices, and for non-publicly traded instruments, fair value is based upon composite pricing from a variety of sources, including market leading data providers, market makers, and leading brokerage firms. Substantially all of the inputs used to determine the fair value of our debt are classified as Level 1 inputs within the fair value hierarchy from FASB ASC 820, except our senior secured credit facilities, the inputs for which are classified as Level 2.

Intelsat Jackson Senior Secured Credit Agreement

On January 12, 2011, Intelsat Jackson entered into a secured credit agreement (the “Intelsat Jackson Secured Credit Agreement”), which included a $3.25 billion term loan facility and a $500 million revolving credit facility, and borrowed the full $3.25 billion under the term loan facility. The term loan facility required regularly scheduled quarterly payments of principal equal to 0.25% of the original principal amount of the term loan beginning six months after January 12, 2011, with the remaining unpaid amount due and payable at maturity. Intelsat Jackson was required to pay a commitment fee for the unused commitments under the revolving credit facility, if any, at a rate per annum of 0.375%.

On October 3, 2012, Intelsat Jackson entered into an Amendment and Joinder Agreement (the “Jackson Credit Agreement Amendment”), which amended the Intelsat Jackson Secured Credit Agreement. As a result of the Jackson Credit Agreement Amendment, interest rates for borrowings under the term loan facility and the revolving credit facility were reduced. In April 2013, our corporate family rating was upgraded by Moody’s, and as a result, the interest rate for the borrowing under the term loan facility and revolving credit facility were further reduced to LIBOR plus 3.00% or the Above Bank Rate (“ABR”) plus 2.00%.

On November 27, 2013, Intelsat Jackson entered into a Second Amendment and Joinder Agreement (the “Second Jackson Credit Agreement Amendment”), which further amended the Intelsat Jackson Secured Credit Agreement. The Second Jackson Credit Agreement Amendment reduced interest rates for borrowings under the term loan facility and extended the maturity of the term loan facility. In addition, it reduced the interest rates applicable to $450 million of the $500 million total revolving credit facility and extended the maturity of such portion. As a result of the Second Jackson Credit Agreement Amendment, interest rates for borrowings under the term loan facility and the new tranche of the revolving credit facility are (i) LIBOR plus 2.75%, or (ii) the ABR plus 1.75%. The LIBOR and the ABR, plus applicable margins, related to the term loan facility and the new tranche of the revolving credit facility are determined as specified in the Intelsat Jackson Secured Credit Agreement, as amended by the Second Jackson Credit Agreement Amendment, and the LIBOR will not be less than 1.00% per annum. The maturity date of the term loan facility was extended from April 2, 2018 to June 30, 2019 and the maturity of the new $450 million tranche of the revolving credit facility was extended from January 12, 2016 to July 12, 2017. The interest rates and maturity date applicable to the $50 million tranche of the revolving credit facility that was not amended did not change. The Second Jackson Credit Agreement Amendment further removed the requirement for regularly scheduled quarterly principal payments under the term loan facility.

In January 2017, Intelsat Jackson permanently reduced the revolving credit commitments under the Intelsat Jackson Secured Credit Agreement from $450 million to $35 million. In June 2017, Intelsat Jackson terminated all remaining commitments under its revolving credit facility.

Intelsat Jackson’s obligations under the Intelsat Jackson Secured Credit Agreement are guaranteed by ICF and certain of Intelsat Jackson’s subsidiaries. Intelsat Jackson’s obligations under the Intelsat Jackson Secured Credit Agreement are secured by a first priority security interest in substantially all of the assets of Intelsat Jackson and the guarantors party thereto, to the extent legally permissible and subject to certain agreed exceptions, and by a pledge of the equity interests of the subsidiary guarantors and the direct subsidiaries of each guarantor, subject to certain exceptions, including exceptions for equity interests in certain non-U.S. subsidiaries, existing contractual prohibitions and prohibitions under other legal requirements.

The Intelsat Jackson Secured Credit Agreement includes two financial covenants. Intelsat Jackson must maintain a consolidated secured debt to consolidated EBITDA ratio equal to or less than 3.50 to 1.00 at the end of each fiscal quarter, as well as a consolidated EBITDA to consolidated interest expense ratio equal to or greater than 1.75 to 1.00 at the end of each fiscal quarter, in each case as such financial measures are defined in the Intelsat Jackson Secured Credit Agreement. Intelsat Jackson was in compliance with these financial maintenance covenant ratios with a consolidated secured debt to consolidated EBITDA ratio of 2.70 to 1.00 and a consolidated EBITDA to consolidated interest expense ratio of 2.15 to 1.00 as of September 30, 2017.

2017 Debt Transactions

January 2017 Intelsat Luxembourg Exchange Offer

In January 2017, Intelsat Luxembourg completed a debt exchange (the “Second 2018 Luxembourg Exchange”), whereby it exchanged $403.3 million aggregate principal amount of its 6.75% Senior Notes due 2018 (the “2018 Luxembourg Notes”) for an equal aggregate principal amount of newly issued unsecured 12.50% Senior Notes due 2024 (the “2024 Luxembourg Notes”). The Second 2018 Luxembourg Exchange consisted of $377.6 million aggregate principal amount of 2018 Luxembourg Notes held by ICF, together with $25 million aggregate principal amount of 2018 Luxembourg Notes repurchased by us in the fourth quarter of 2015. We consolidate ICF, the holder of the 2018 Luxembourg Notes exchanged in the Second 2018 Luxembourg Exchange.

 

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Intelsat Jackson, Intelsat Luxembourg and ICF Exchange Offers Related to the Combination Agreement

In March 2017, in connection with the Combination Agreement, each of ICF, Intelsat Jackson and Intelsat Luxembourg commenced offers to exchange any and all of their respective outstanding senior unsecured notes. In June 2017, Intelsat announced that the debt exchange offers had expired without sufficient tenders having been received, and accordingly had been terminated.

July 2017 Intelsat Jackson Senior Notes Refinancing

On July 5, 2017, Intelsat Jackson completed an offering of $1.5 billion aggregate principal amount of 9.75% Senior Notes due 2025 (the “2025 Jackson Notes”). These notes are guaranteed by all of Intelsat Jackson’s subsidiaries that guarantee its obligations under the Intelsat Jackson Secured Credit Agreement and senior notes, as well as by certain of Intelsat Jackson’s parent entities. Also on July 5, 2017, the net proceeds from the sale of the 2025 Jackson Notes were used, along with other available cash, to satisfy and discharge all $1.5 billion aggregate principal amount of Intelsat Jackson’s 7.25% Senior Notes due 2019. In connection with the satisfaction and discharge, we recognized a loss on early extinguishment of debt of $4.6 million, consisting of the difference between the carrying value of the debt redeemed and the total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt issuance costs.

Note 11 Derivative Instruments and Hedging Activities

Put Option Embedded Derivative Instrument

The 2022 ICF Notes contain a contingent put option clause within the host contract, which affords the holders of the notes the option to require us to repurchase such notes at 101% of their principal amount in the event of a change of control, as defined in the indenture governing the notes. We concluded that the contingent put option required bifurcation in accordance with ASC 815, and have recorded the embedded derivative at fair value on the consolidated balance sheet in “Other liabilities.” We estimated the fair value of the put option derivative using a valuation technique which reflects the estimated date and probability of a change of control, the fair value of the 2022 ICF Notes, and a credit valuation adjustment reflecting our credit spreads. The fair value of the embedded derivative was $1.5 million as of December 31, 2016 and $0.2 million as of September 30, 2017.

The following table sets forth the fair value of our derivatives by category (in thousands):

 

Derivatives not designated as hedging instruments

   Balance Sheets Location      As of
December 31,
2016
     As of
September 30,
2017
 

Put option embedded derivative

     Other liabilities      $ 1,496      $ 167  
     

 

 

    

 

 

 

Total derivatives

      $ 1,496      $ 167  
     

 

 

    

 

 

 

Note 12 Income Taxes

The majority of our operations are located in taxable jurisdictions, including Luxembourg, the United States (“U.S.”) and the United Kingdom (“UK”). Our Luxembourg companies that file tax returns as a consolidated group generated taxable income for the nine months ended September 30, 2017. Due to our cumulative losses in recent years, and the inherent uncertainty associated with the realization of future taxable income in the foreseeable future, we recorded a full valuation allowance against the cumulative net operating losses generated in Luxembourg. The difference between tax expense (benefit) reported in the condensed consolidated statements of operations and tax computed at statutory rates is attributable to the valuation allowance on losses generated in Luxembourg, the provision for foreign taxes, which were principally in the U.S. and the UK, as well as withholding taxes on revenue earned in many of the foreign markets in which we operate.

As of December 31, 2016 and September 30, 2017, our gross unrecognized tax benefits were $36.2 million and $30.8 million, respectively (including interest and penalties), of which $27.9 million and $24.5 million, respectively, if recognized, would affect our effective tax rate. As of December 31, 2016 and September 30, 2017, we had recorded reserves for interest and penalties in the amount of $3.1 million and $0.5 million, respectively. We continue to recognize interest and, to the extent applicable, penalties with respect to the unrecognized tax benefits as income tax expense. Since December 31, 2016, the change in the balance of unrecognized tax benefits consisted of an increase of $1.7 million related to current tax positions, an increase of $0.2 million related to prior tax positions and a decrease of $7.3 million related to expiration of the statutes of limitations on the assessment of certain taxes.

 

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We operate in various taxable jurisdictions throughout the world, and our tax returns are subject to audit and review from time to time. We consider Luxembourg, the U.S., the UK and Brazil to be our significant tax jurisdictions. Our Luxembourg, U.S., UK and Brazilian subsidiaries are subject to income tax examination for periods after December 31, 2011. Within the next twelve months, we believe that there are no jurisdictions in which the outcome of unresolved tax issues or claims is likely to be material to our results of operations, financial position or cash flows.

In March 2014, Intelsat Corporation, Intelsat Global Service LLC, Intelsat General, Intelsat USA License LLC and Intelsat USA Sales LLC were notified by the District of Columbia Office of the Tax Revenue of its intent to initiate an audit for the tax years ending 2010 and 2011. In June 2017, this audit was closed without any adjustments that were material to our results of operations, financial position or cash flows.

On March 29, 2017, the UK Government gave formal notice of its intention to leave the European Union (“EU”). This notice started the two-year negotiation period to establish the withdrawal terms. Once the UK ultimately withdraws from the EU, existing tax reliefs and exemptions on intra-European transactions will likely cease to apply to transactions between UK entities and EU entities. In addition, transactions with non-EU countries, such as the U.S., may also be affected. As of September 30, 2017, all relevant tax laws and treaties remain unchanged and the tax consequences are unknown. Therefore, we have not recognized any impacts of the withdrawal in the income tax provision as of September 30, 2017. We will recognize any impacts to the tax provision when enacted changes in tax laws or treaties between the UK and the EU or individual EU Member States occur, but no later than the date of the withdrawal.

Note 13 Commitments and Contingencies

We are subject to litigation in the ordinary course of business. Management does not believe that the resolution of any pending proceedings would have a material adverse effect on our financial position or results of operations.

Note 14 Business and Geographic Segment Information

We operate in a single industry segment in which we provide satellite services to our communications customers around the world. Revenue by region is based on the locations of customers to which services are billed. Our satellites are in geosynchronous orbit, and consequently are not attributable to any geographic location. Of our remaining assets, substantially all are located in the United States.

The geographic distribution of our revenue based upon billing region of the customer was as follows:

 

     Three Months
Ended
September 30,
2016
    Three Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Nine Months
Ended
September 30,
2017
 

North America

     50     51     49     50

Europe

     14     13     14     13

Latin America and Caribbean

     15     14     15     14

Africa and Middle East

     12     13     13     14

Asia-Pacific

     9     9     9     9

Approximately 8% and 9% of our revenue was derived from our largest customer during the three months ended September 30, 2016 and 2017, respectively. Approximately 7% and 9% of our revenue was also derived from our largest customer during the nine months ended September 30, 2016 and 2017, respectively. Our ten largest customers accounted for approximately 32% and 36% of our revenue during the three months ended September 30, 2016 and 2017, respectively and approximately 31% and 34% of our revenue during the nine months ended September 30, 2016 and 2017, respectively.

We earn revenue primarily by providing services to our customers using our satellite transponder capacity. Our customers generally obtain satellite capacity from us by placing an order pursuant to one of several master customer service agreements. On-network services are comprised primarily of services delivered on our owned network infrastructure, as well as commitments for third-party capacity, generally long-term in nature, that we integrate and market as part of our owned infrastructure. In the case of third-party services in support of government applications, the commitments for third-party capacity are shorter and matched to the government contracting period, and thus remain classified as off-network services. Off-network services can include transponder services and other satellite-based transmission services, such as mobile satellite services (“MSS”), which are sourced from other operators, often in frequencies not available on our network. Under the category Off-Network and Other Revenues, we also include revenues from consulting and other services.

 

25


Table of Contents

Our revenues were derived from the following services, with Off-Network and Other Revenues shown separately from On-Network Revenues (in thousands, except percentages):

 

     Three Months
Ended
September 30,
2016
    Three Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Nine Months
Ended
September 30,
2017
 

On-Network Revenues

                    

Transponder services

   $ 388,372        72   $ 383,316        71   $ 1,163,185        71   $ 1,158,364        72

Managed services

     103,034        19     111,835        21     310,470        19     311,381        19

Channel

     1,873        0     1,407        0     7,200        0     4,100        0
  

 

 

      

 

 

      

 

 

      

 

 

    

Total on-network revenues

     493,279        91     496,558        92     1,480,855        90     1,473,845        91

Off-Network and Other Revenues

                    

Transponder, MSS and other off-network services

     39,365        7     33,594        6     121,441        7     103,088        7

Satellite-related services

     10,083        2     8,607        2     35,057        2     33,539        2
  

 

 

      

 

 

      

 

 

      

 

 

    

Total off-network and other revenues

     49,448        9     42,201        8     156,498        10     136,627        9
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 542,727        100   $ 538,759        100   $ 1,637,353        100   $ 1,610,472        100
  

 

 

      

 

 

      

 

 

      

 

 

    

Note 15 Related Party Transactions

(a) Shareholders’ Agreements

Certain shareholders of Intelsat Global S.A. entered into shareholders’ agreements on February 4, 2008. The shareholders’ agreements were assigned to Intelsat S.A. by amendments effective as of March 30, 2012. The shareholders’ agreements and the articles of incorporation of Intelsat S.A. provided, among other things, for the governance of Intelsat S.A. and its subsidiaries and provided specific rights to and limitations upon the holders of Intelsat S.A.’s share capital with respect to shares held by such holders. In connection with our initial public offering (the “IPO”) in April 2013, these articles of incorporation and shareholders’ agreements were amended.

(b) Governance Agreement

Prior to the consummation of the IPO, we entered into a governance agreement (as amended, the “Governance Agreement”) with our shareholder affiliated with BC Partners (the “BC Shareholder”), our shareholder affiliated with Silver Lake (the “Silver Lake Shareholder”) and David McGlade, our Executive Chairman (collectively with the BC Shareholder and the Silver Lake Shareholder, the “Governance Shareholders”). The Governance Agreement contains provisions relating to the composition of our board of directors and certain other matters.

(c) Indemnification Agreements

We have entered into agreements with our executive officers and directors to provide contractual indemnification in addition to the indemnification provided for in our articles of incorporation.

(d) Horizons Holdings

We have a 50% ownership interest in Horizons Holdings as a result of a joint venture with JSAT (see Note 8(a)—Investments—Horizons Holdings).

(e) Horizons 3 Satellite LLC

We have a 50% ownership interest in Horizons 3 as a result of a joint venture with JSAT (see Note 8(b)—Investments—Horizons-3 Satellite LLC).

Note 16 Supplemental Consolidating Financial Information

On April 5, 2011, Intelsat Jackson completed an offering of $2.65 billion aggregate principal amount of senior notes, consisting of $1.5 billion aggregate principal amount of its 7.25% Senior Notes due 2019 and $1.15 billion aggregate principal amount of its 7.5% Senior Notes due 2021 (collectively, the “New Jackson Notes”). The New Jackson Notes are fully and unconditionally guaranteed, jointly and severally, by Intelsat S.A., Intelsat Holdings, Intelsat Investment Holdings S.à r.l. and Intelsat Investments (collectively, the “Parent Guarantors”); Intelsat Luxembourg and certain wholly-owned subsidiaries of Intelsat Jackson (the

 

26


Table of Contents

“Subsidiary Guarantors”). On July 5, 2017, the net proceeds from the sale of the 2025 Jackson Notes were used, along with other available cash, to satisfy and discharge all $1.5 billion aggregate principal amount of Intelsat Jackson’s 7.25% Senior Notes due 2019 pursuant to the indenture governing such notes.

On April 26, 2012, Intelsat Jackson completed an offering of $1.2 billion aggregate principal amount of its 7.25% Senior Notes due 2020, which are fully and unconditionally guaranteed, jointly and severally, by the Parent Guarantors, Intelsat Luxembourg and the Subsidiary Guarantors.

Separate financial statements of the Parent Guarantors, Intelsat Luxembourg, Intelsat Connect Finance, Intelsat Jackson and the Subsidiary Guarantors are not presented because management believes that such financial statements would not be material to investors. Investments in Intelsat Jackson’s subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following:

 

    elimination of investment in subsidiaries;

 

    elimination of intercompany accounts;

 

    elimination of intercompany sales between guarantor and non-guarantor subsidiaries; and

 

    elimination of equity in earnings (losses) of subsidiaries.

Other comprehensive income for the three months ended September 30, 2016 was $0.7 million compared to $1.0 million for the three months ended September 30, 2017. Other comprehensive income for the nine months ended September 30, 2016 was $1.8 million compared to $3.3 million for the nine months ended September 30, 2017. Other comprehensive income except unrealized gain on fair value of derivatives is fully attributable to the Subsidiary Guarantors, which are also consolidated within Intelsat Jackson and unrealized gain on fair value of derivatives is attributable to Intelsat Connect.

 

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Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2017

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Connect
Finance
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     Consolidation
and
Eliminations
    Consolidated  

ASSETS

                  

Current assets:

                  

Cash and cash equivalents

   $ 1,012     $ 48,080     $ 45,945     $ 413,618     $ 252,201      $ 72,039      $ (252,201   $ 580,694  

Restricted Cash

     —         —         —         17,297       1,812        244        (1,812     17,541  

Receivables, net of allowance

     6       —         15       142,715       142,398        52,217        (142,398     194,953  

Prepaid expenses and other current assets

     2,070       —         —         49,846       49,622        9,430        (51,843     59,125  

Intercompany receivables

     —         —         47,395       294,036       —          280,419        (621,850     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     3,088       48,080       93,355       917,512       446,033        414,349        (1,070,104     852,313  

Satellites and other property and equipment, net

     —         —         —         5,941,087       5,941,087        87,308        (5,941,087     6,028,395  

Goodwill

     —         —         —         2,620,627       2,620,627        —          (2,620,627     2,620,627  

Non-amortizable intangible assets

     —         —         —         2,452,900       2,452,900        —          (2,452,900     2,452,900  

Amortizable intangible assets, net

     —         —         —         360,147       360,147        —          (360,147     360,147  

Investment in affiliates

     (3,146,493     63,084       (935,645     192,157       192,157        —          3,634,740       —    

Other assets

     168       —         1,033,328       312,138       312,138        91,255        (1,345,547     403,480  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ (3,143,237   $ 111,164     $ 191,038     $ 12,796,568     $ 12,325,089      $ 592,912      $ (10,155,672   $ 12,717,862  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

                  

Current liabilities:

                  

Accounts payable and accrued liabilities

   $ 31,533     $ 356     $ 1,511     $ 84,945     $ 84,602      $ 21,028      $ (86,825   $ 137,150  

Accrued interest payable

     —         52,641       26,938       215,451       3,480        —          (3,480     295,030  

Current portion of long-term debt

     —         96,527       —         —         —          —          —         96,527  

Deferred satellite performance incentives

     —         —         —         23,855       23,855        —          (23,855     23,855  

Other current liabilities

     —         —         —         212,440       212,440        2,242        (212,440     214,682  

Intercompany payables

     510,307       111,543       —         —         2,417,192        —          (3,039,042     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     541,840       261,067       28,449       536,691       2,741,569        23,270        (3,365,642     767,244  

Long-term debt, net of current portion

     —         3,168,974       456,618       11,700,121       —          —          (1,205,711     14,120,002  

Deferred satellite performance incentives, net of current portion

     —         —         —         220,477       220,477        —          (220,477     220,477  

Deferred revenue, net of current portion

     —         —         —         824,245       824,245        148        (824,245     824,393  

Deferred income taxes

     —         —         —         156,312       156,312        12,461        (156,392     168,693  

Accrued retirement benefits

     —         —         —         175,534       175,534        205        (175,534     175,739  

Other long-term liabilities

     —         447       226       118,833       118,833        7,332        (119,280     126,391  

Shareholders’ equity (deficit):

     1,190       7,202       —         200       5,558,066        24        (5,565,492     1,190  

Common shares

     —         —         —         —         —          —          —         —    

Other shareholders’ equity (deficit)

     (3,686,267     (3,326,526     (294,255     (935,845     2,530,053        549,472        1,477,101       (3,686,267
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ (3,143,237   $ 111,164     $ 191,038     $ 12,796,568     $ 12,325,089      $ 592,912      $ (10,155,672   $ 12,717,862  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

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Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2016

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Connect
Finance
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
     Non-
Guarantor
Subsidiaries
     Consolidation
and
Eliminations
    Consolidated  

ASSETS

                  

Current assets:

                  

Cash and cash equivalents

   $ 552     $ 59,752     $ 29,985     $ 495,225     $ 414,339      $ 80,510      $ (414,339   $ 666,024  

Receivables, net of allowance

     2       —         —         151,345       151,322        51,689        (151,322     203,036  

Prepaid expenses and other current assets

     882       3       —         48,320       48,263        6,703        (48,263     55,908  

Intercompany receivables

     —         —         8,867       557,959       —          302,118        (868,944     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

   $ 1,436     $ 59,755     $ 38,852     $ 1,252,849     $ 613,924      $ 441,020      $ (1,482,868   $ 924,968  

Satellites and other property and equipment, net

     —         —         —         6,096,459       6,096,459        89,383        (6,096,459     6,185,842  

Goodwill

     —         —         —         2,620,627       2,620,627        —          (2,620,627     2,620,627  

Non-amortizable intangible assets

     —         —         —         2,452,900       2,452,900        —          (2,452,900     2,452,900  

Amortizable intangible assets, net

     —         —         —         391,838       391,838        —          (391,838     391,838  

Investment in affiliates

     (3,086,095     (23,113     (651,909     184,804       184,804        —          3,391,509       —    

Other assets

     169       —         681,910       303,623       303,623        62,123        (985,614     365,834  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ (3,084,490   $ 36,642     $ 68,853     $ 13,303,100     $ 12,664,175      $ 592,526      $ (10,638,797   $ 12,942,009  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

       

Current liabilities:

                  

Accounts payable and accrued liabilities

   $ 23,153     $ —       $ 10,830     $ 221,564     $ 218,897      $ 27,351      $ (218,897   $ 282,898  

Accrued interest payable

     —         13,158       2,287       189,395       3,146        —          (3,146     204,840  

Deferred satellite performance incentives

     —         —         —         23,455       23,455        —          (23,455     23,455  

Other current liabilities

     —         —         —         219,389       219,389        3,081        (219,389     222,470  

Intercompany payables

     502,355       366,589       —         —         2,183,616        —          (3,052,560     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     525,508       379,747       13,117       653,803       2,648,503        30,432        (3,517,447     733,663  

Long-term debt, net of current portion

     —         3,467,902       434,627       11,702,378       —          —          (1,406,823     14,198,084  

Deferred satellite performance incentives, net of current portion

     —         —         —         210,706       210,706        —          (210,706     210,706  

Deferred revenue, net of current portion

     —         —         —         906,521       906,521        223        (906,521     906,744  

Deferred income taxes

     —         —         —         156,081       156,081        12,444        (156,161     168,445  

Accrued retirement benefits

     —         —         —         186,086       186,086        198        (186,086     186,284  

Other long-term liabilities

     —         —         1,554       139,434       139,434        7,093        (139,434     148,081  

Shareholders’ equity (deficit):

                  

Common shares

     1,180       7,202       —         200       5,558,066        24        (5,565,492     1,180  

Other shareholders’ equity (deficit)

     (3,611,178     (3,818,209     (380,445     (652,109     2,858,778        542,112        1,449,873       (3,611,178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ (3,084,490   $ 36,642     $ 68,853     $ 13,303,100     $ 12,664,175      $ 592,526      $ (10,638,797   $ 12,942,009  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

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Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Connect
Finance
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

   $ 6,338     $ —       $ —       $ 502,825     $ 502,828     $ 121,017     $ (594,249   $ 538,759  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                

Direct costs of revenue (excluding depreciation and amortization)

     —         —         —         68,105       68,105       101,348       (159,447     78,111  

Selling, general and administrative

     4,057       84       444       28,845       29,240       14,522       (29,319     47,873  

Depreciation and amortization

     —         —         —         174,071       174,071       4,671       (174,071     178,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,057       84       444       271,021       271,416       120,541       (362,837     304,726  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     2,281       (84     (444     231,804       231,412       476       (231,412     234,033  

Interest expense (income), net

     4,232       76,390       (3,397     188,170       44,250       50       (47,861     261,834  

Loss on early extinguishment of debt

     —         (556     —         (4,564     —         —         555       (4,565

Subsidiary income (loss)

     (28,439     44,424       41,471       (2,500     (2,500     —         (52,456     —    

Other income (expense), net

     (22     —         —         337       1,383       1,481       (1,382     1,797  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (30,412     (32,606     44,424       36,907       186,045       1,907       (236,834     (30,569

Provision for (benefit from) income taxes

     —         —         —         (4,564     (4,564     3,411       4,564       (1,153
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (30,412     (32,606     44,424       41,471       190,609       (1,504     (241,398     (29,416

Net income attributable to noncontrolling interest

     —         —         —         —         —         (996     —         (996
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Intelsat S.A.

   $ (30,412   $ (32,606   $ 44,424     $ 41,471     $ 190,609     $ (2,500   $ (241,398   $ (30,412
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

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Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
     Non-
Guarantor
Subsidiaries
    Consolidation
and Eliminations
    Consolidated  

Revenue

   $ —       $ —       $ 493,318     $ 493,321      $ 141,605     $ (585,517   $ 542,727  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Direct costs of revenue (excluding depreciation and amortization)

     —         —         67,878       67,878        112,769       (160,065     88,460  

Selling, general and administrative

     1,941       42       37,707       34,628        19,266       (34,636     58,948  

Depreciation and amortization

     —         —         170,625       170,625        4,284       (170,625     174,909  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,941       42       276,210       273,131        136,319       (365,326     322,317  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (1,941     (42     217,108       220,190        5,286       (220,191     220,410  

Interest expense (income), net

     3,631       68,137       171,604       45,350        (333     (45,350     243,039  

Gain on early extinguishment of debt

     —         —         219,560       —          —         —         219,560  

Subsidiary income

     201,194       274,492       10,111       10,111        —         (495,908     —    

Other income (expense), net

     —         —         (213     811        537       (811     (324
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     195,622       206,313       274,962       185,762        6,156       (671,560     197,255  

Provision for income taxes

     —         —         463       463        187       (463     650  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     195,622       206,313       274,499       185,299        5,969       (671,097     196,605  

Net income attributable to noncontrolling interest

     —         —         —         —          (983     —         (983
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Intelsat S.A.

   $ 195,622     $ 206,313     $ 274,499     $ 185,299      $ 4,986     $ (671,097   $ 195,622  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

31


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INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Connect
Finance
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
    Consolidation and
Eliminations
    Consolidated  

Revenue

   $ 12,824     $ —       $ —       $ 1,497,003     $ 1,497,012      $ 385,904     $ (1,782,271   $ 1,610,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

                 

Direct costs of revenue (excluding depreciation and amortization)

     —         —         —         207,118       207,118        320,041       (492,274     242,003  

Selling, general and administrative

     16,375       524       1,201       86,987       85,507        45,349       (83,600     152,343  

Depreciation and amortization

     —         —         —         521,586       521,586        13,798       (521,586     535,384  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,375       524       1,201       815,691       814,211        379,188       (1,097,460     929,730  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (3,551     (524     (1,201     681,312       682,801        6,716       (684,811     680,742  

Interest expense (income), net

     11,666       228,817       (11,222     537,014       134,932        196       (145,223     756,180  

Gain (loss) on early extinguishment of debt

     —         209,771       6       (4,612     —          —         (209,274     (4,109

Subsidiary income (loss)

     (73,553     147,010       136,980       670       670        —         (211,777     —    

Other income (expense), net

     (7     —         (3     3,239       3,854        585       (3,854     3,814  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (88,777     127,440       147,004       143,595       552,393        7,105       (964,493     (75,733

Provision for income taxes

     —         —         —         6,615       6,615        3,510       (6,615     10,125  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     (88,777     127,440       147,004       136,980       545,778        3,595       (957,878     (85,858

Net income attributable to noncontrolling interest

     —         —         —         —         —          (2,919     —         (2,919
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Intelsat S.A.

   $ (88,777   $ 127,440     $ 147,004     $ 136,980     $ 545,778      $ 676     $ (957,878   $ (88,777
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

32


Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
     Non-
Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Revenue

   $ —       $ —       $ 1,490,614     $ 1,490,623      $ 422,785     $ (1,766,669   $ 1,637,353  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Direct costs of revenue (excluding depreciation and amortization)

     —         —         192,734       192,734        337,619       (468,753     254,334  

Selling, general and administrative

     6,186       152       111,687       108,040        57,246       (108,067     175,244  

Depreciation and amortization

     —         —         506,816       506,816        14,053       (506,816     520,869  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     6,186       152       811,237       807,590        408,918       (1,083,636     950,447  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (6,186     (152     679,377       683,033        13,867       (683,033     686,906  

Interest expense (income), net

     10,026       204,599       489,419       138,554        (9,107     (138,554     694,937  

Gain on early extinguishment of debt

     —         —         350,962       —          —         —         350,962  

Subsidiary income

     343,591       565,357       34,248       34,248        —         (977,444     —    

Other income (expense), net

     (2     —         (5,270     1,457        4,187       (1,456     (1,084
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     327,377       360,606       569,898       580,184        27,161       (1,523,379     341,847  

Provision for (benefit from) income taxes

     —         —         12,300       12,300        (762     (12,300     11,538  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     327,377       360,606       557,598       567,884        27,923       (1,511,079     330,309  

Net income attributable to noncontrolling interest

     —         —         —         —          (2,932     —         (2,932
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Intelsat S.A.

   $ 327,377     $ 360,606     $ 557,598     $ 567,884      $ 24,991     $ (1,511,079   $ 327,377  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

33


Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
    Intelsat
Connect
Finance
    Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Consolidation
and
Eliminations
    Consolidated  

Cash flows from operating activities:

   $ 205     $ (141,980   $ 8,419     $ 566,576     $ 678,348     $ 10,873     $ (680,349   $ 442,092  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

                

Payments for satellites and other property and equipment (including capitalized interest)

     —         —         —         (393,091     (393,091     (11,031     393,091       (404,122

Repayment from (disbursements for) intercompany loans

     —         —         —         (603     (603     —         1,206       —    

Investment in subsidiaries

     —         (7,144     —         (30,460     (23,960     —         61,564       —    

Dividend from affiliates

     —         139,454       139,454       11,595       11,595       —         (302,098     —    

Purchase of cost method investments

     —         —         —         (16,000     (16,000     —         16,000       (16,000

Capital contributions to unconsolidated affiliates

     —         —         —         (2,271     —         (21,084     —         (23,355

Proceeds from insurance settlements

     —         —         —         28,351       28,351       —         (28,351     28,351  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     —         132,310       139,454       (402,479     (393,708     (32,115     141,412       (415,126
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

                

Proceeds from issuance of long-term debt

     —         —         —         1,500,000       —         —         —         1,500,000  

Repayments of long-term debt

     —         —         —         (1,500,000     —         —         —         (1,500,000

Proceeds from (repayment of) intercompany borrowing

     —         —         —         —         —         603       (603     —    

Debt issuance costs

       (2,002       (21,186         2,000       (21,188

Payments on debt exchange

     —         —         (14     —         —         —         —         (14

Dividends paid to preferred shareholders

     —         —         —         —         (8,724     —         8,724       —    

Other payments for satellites

     —         —         —         (35,396     (35,396     —         35,396       (35,396

Capital contribution from parent

       —         7,144       —         48,946       30,460       (86,550     —    

Dividends to shareholders

     —         —         (139,454     (139,454     (417,425     (11,595     707,928       —    

Principal payments on deferred satellite performance incentives

     —         —         —         (33,976     (33,976     —         33,976       (33,976

Dividends paid to noncontrolling interest

     —         —         —         —         —         (6,596     —         (6,596

Restricted cash for collateral

     —         —         —         (17,292     (1,808     (238     1,808       (17,530

Other financing activities

     263       —         414       —         —         —         1       678  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     263       (2,002     (131,910     (247,304     (448,383     12,634       702,680       (114,022
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (8     —         (3     1,600       1,605       137       (1,605     1,726  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     460       (11,672     15,960       (81,607     (162,138     (8,471     162,138       (85,330

Cash and cash equivalents, beginning of period

     552       59,752       29,985       495,225       414,339       80,510       (414,339     666,024  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,012     $ 48,080     $ 45,945     $ 413,618     $ 252,201     $ 72,039     $ (252,201   $ 580,694  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

34


Table of Contents

INTELSAT S.A. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(in thousands)

 

     Intelsat S.A.
and Other
Parent
Guarantors
    Intelsat
Luxembourg
     Intelsat
Jackson
    Jackson
Subsidiary
Guarantors
    Non-
Guarantor
Subsidiaries
    Consolidation
and Eliminations
    Consolidated  

Cash flows from operating activities:

   $ (9,846   $ 223,309      $ 706,220     $ 1,190,405     $ (323,688   $ (1,190,405   $ 595,995  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

               

Payments for satellites and other property and equipment (including capitalized interest)

     —         —          (607,964     (607,964     (12,507     607,964       (620,471

Repayment from (disbursements for) intercompany loans

     4,895       —          —         —         359,237       (364,132     —    

Investment in subsidiaries

     (5,357     —          (5,877     (5,877     —         17,111       —    

Dividend from affiliates

     —         134,700        6,765       6,765       —         (148,230     —    

Purchase of cost method investment

     —         —          (4,000     (4,000     —         4,000       (4,000

Capital contributions to unconsolidated affiliates

     —         —          —         —         (5,490     —         (5,490

Other investing activities

     —         —          —         —         (1,188     —         (1,188
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (462     134,700        (611,076     (611,076     340,052       116,713       (631,149
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

               

Proceeds from issuance of long-term debt

     —         —          1,250,000       —         —         —         1,250,000  

Repayments of long-term debt

     —         —          (328,569     —         —         —         (328,569

Proceeds from (repayment of) intercompany borrowing

     —         —          (364,132     (12,438     —         376,570       —    

Debt issuance costs

     —         —          (25,809     —         —         —         (25,809

Payments on tender, debt exchange and consent

     —         —          (34,009     —         —         —         (34,009

Dividends paid to preferred shareholders

     (4,959     —          —         —         —         —         (4,959

Payments for satellites

     —         —          (18,333     (18,333     —         18,333       (18,333

Capital contribution from parent

     —         —          —         78,045       11,234       (89,279     —    

Dividends to shareholders

     —         —          (134,700     (393,137     (6,765     534,602       —    

Principal payments on deferred satellite performance incentives

     —         —          (12,734     (12,734     —         12,734       (12,734

Dividends paid to noncontrolling interest

     —         —          —         —         (6,765     —         (6,765

Other financing activities

     —         —          1,942       —         —         —         1,942  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (4,959     —          333,656       (358,597     (2,296     852,960       820,764  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (2     —          (497     (490     1,215       490       716  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (15,269     358,009        428,303       220,242       15,283       (220,242     786,326  

Cash and cash equivalents, beginning of period

     16,941       760        109,959       89,641       43,881       (89,641     171,541  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,672     $ 358,769      $ 538,262     $ 309,883     $ 59,164     $ (309,883   $ 957,867  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Certain totals may not add due to the effects of rounding)

 

35


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and their notes included elsewhere in this Quarterly Report. See “Forward-Looking Statements” for a discussion of factors that could cause our future financial condition and results of operations to be different from those discussed below.

Overview

We operate the world’s largest satellite services business, providing a critical layer in the global communications infrastructure. We provide diversified communications services to the world’s leading media companies, fixed and wireless telecommunications operators, data networking service providers for enterprise and mobile applications in the air and on the seas, multinational corporations, and internet service providers. We are also the leading provider of commercial satellite capacity to the U.S. government and other select military organizations and their contractors.

Our customers use our Global Network for a broad range of applications, from global distribution of content for media companies to providing the transmission layer for commercial aeronautical consumer broadband connectivity, to enabling essential network backbones for telecommunications providers in high-growth emerging regions.

Our network solutions are critical components of our customers’ infrastructures and business models. Generally, our customers need the specialized connectivity that satellites provide so long as they are in business or pursuing their mission. In recent years, mobility services providers have contracted for services on our fleet that support broadband connections for passengers on commercial flights and cruise ships, connectivity that in some cases is only available through our network. In addition, our satellite neighborhoods provide our media customers with efficient and reliable broadcast distribution that maximizes audience reach, a benefit that is difficult for terrestrial services to match. In developing regions, our satellite solutions provide higher reliability than is available from local terrestrial telecommunications services in many regions and allow our customers to reach geographies that they would otherwise be unable to serve.

Terminated Combination Agreement with OneWeb and Share Purchase Agreement with SoftBank

In February 2017, Intelsat entered into a combination agreement (as amended, the “Combination Agreement”) with WorldVu Satellites Limited (“OneWeb”), which provided for a combination of the businesses of Intelsat and OneWeb pursuant to a merger (the “OneWeb Combination”), and Intelsat entered into a share purchase agreement (as amended, the “Share Purchase Agreement”) with SoftBank Group Corp. (“SoftBank”), which provided for a cash investment by SoftBank in exchange for shares of Intelsat (the “SoftBank Investment” and, together with the OneWeb Combination, the “OneWeb/SoftBank Transactions”). The consummation of the OneWeb/SoftBank Transactions was conditioned on the successful completion of debt exchange offers for certain outstanding notes of Intelsat Jackson, Intelsat Luxembourg and ICF. In June 2017, Intelsat announced that the debt exchange offers had expired without sufficient tenders having been received, and Intelsat subsequently received termination notices from OneWeb and SoftBank terminating the Combination Agreement and Share Purchase Agreement, respectively.

 

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Results of Operations

Three Months Ended September 30, 2016 and 2017

The following table sets forth our comparative statements of income for the periods shown with the increase (decrease) and percentage changes, except those deemed not meaningful (“NM”), between the periods presented (in thousands, except percentages):

 

     Three Months
Ended
     Three Months
Ended
     Three Months Ended
September 30, 2016
Compared to
Three Months Ended
September 30, 2017
 
     September 30,
2016
     September 30,
2017
     Increase
(Decrease)
     Percentage
Change
 

Revenue

   $ 542,727      $ 538,759      $ (3,968      (1 )% 

Operating expenses:

           

Direct costs of revenue (excluding depreciation and amortization)

     88,460        78,111        (10,349      (12

Selling, general and administrative

     58,948        47,873        (11,075      (19

Depreciation and amortization

     174,909        178,742        3,833        2  
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     322,317        304,726        (17,591      (5
  

 

 

    

 

 

    

 

 

    

Income from operations

     220,410        234,033        13,623        6  

Interest expense, net

     243,039        261,834        18,795        8  

Gain (loss) on early extinguishment of debt

     219,560        (4,565      (224,125      NM  

Other income, net

     324        1,797        1,473        NM  
  

 

 

    

 

 

    

 

 

    

Income (loss) before income taxes

     197,255        (30,569      (227,824      NM  

Provision for (benefit from) income taxes

     650        (1,153      (1,803      NM  
  

 

 

    

 

 

    

 

 

    

Net income (loss)

     196,605        (29,416      (226,021      NM  

Net income attributable to noncontrolling interest

     (983      (996      13        1  
  

 

 

    

 

 

    

 

 

    

Net income (loss) attributable to Intelsat S.A.

   $ 195,622      $ (30,412    $ (226,034      NM  
  

 

 

    

 

 

    

 

 

    

Revenue

We earn revenue primarily by providing services to our customers using our satellite transponder capacity. Our customers generally obtain satellite capacity from us by placing an order pursuant to one of several master customer service agreements. On-network services are comprised primarily of services delivered on our owned network infrastructure, as well as commitments for third-party capacity, generally long-term in nature, which we integrate and market as part of our owned infrastructure. In the case of third-party services in support of government applications, the commitments for third-party capacity are shorter and matched to the government contracting period, and thus remain classified as off-network services. Off-network services can include transponder services and other satellite-based transmission services, such as mobile satellite services (“MSS”), which are sourced from other operators, often in frequencies not available on our network. Under the category Off-Network and Other Revenues, we also include revenues from consulting and other services.

 

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The following table sets forth our comparative revenue by service type, with Off-Network and Other Revenues shown separately from On-Network Revenues, for the periods shown (in thousands, except percentages):

 

     Three Months
Ended

September 30,
2016
     Three Months
Ended

September 30,
2017
     Increase
(Decrease)
     Percentage
Change
 

On-Network Revenues

           

Transponder services

   $ 388,372      $ 383,316      $ (5,056      (1 )% 

Managed services

     103,034        111,835        8,801        9  

Channel

     1,873        1,407        (466      (25
  

 

 

    

 

 

    

 

 

    

Total on-network revenues

     493,279        496,558        3,279        1  

Off-Network and Other Revenues

           

Transponder, MSS and other off-network services

     39,365        33,594        (5,771      (15

Satellite-related services

     10,083        8,607        (1,476      (15
  

 

 

    

 

 

    

 

 

    

Total off-network and other revenues

     49,448        42,201        (7,247      (15
  

 

 

    

 

 

    

 

 

    

Total

   $ 542,727      $ 538,759      $ (3,968      (1 )% 
  

 

 

    

 

 

    

 

 

    

Total revenue for the three months ended September 30, 2017 decreased by $4.0 million, or 1%, as compared to the three months ended September 30, 2016. By service type, our revenues increased or decreased due to the following:

On-Network Revenues:

 

    Transponder services—an aggregate decrease of $5.1 million, primarily due to a $10.4 million decrease in revenue from network services customers, partially offset by a $4.9 million increase in revenue from media customers. The network services decline was primarily due to non-renewals and contraction of services for enterprise and wireless infrastructure in the Latin America, Europe, and Asia-Pacific regions. The decline in network services customer revenues was partially offset by revenue recovery from a customer in Latin America. The increase in media revenue resulted primarily from growth in direct-to-home (“DTH”) television services in Africa, partially offset by non-renewals and termination of services related in part to the end of life of certain satellites. Our sector is undergoing a period of increased supply across all regions; the resulting competitive environment is causing pricing pressure in certain regions and applications, primarily with respect to our network services business, and we expect this to continue to impact our business negatively in the near to mid-term.

 

    Managed services—an aggregate increase of $8.8 million, largely due to an increase of $13.5 million in revenue related to advanced payments forfeited and fees paid by a customer upon partial termination of services and an increase of $4.3 million in revenue from network services customers for broadband solutions for maritime mobility and aero applications. These increases were partially offset by a decrease of $4.9 million in revenue from our network services customers for point-to-point trunking applications, which are switching to fiber alternatives, and a decrease of $3.8 million in managed services for our government applications, primarily related to the previously announced termination of a contract.

 

    Channel—an aggregate decrease of $0.5 million related to a continued decline due to the migration of international point-to-point satellite traffic to fiber optic cable, a trend we expect will continue.

Off-Network and Other Revenues:

 

    Transponder, MSS and other off-network services—an aggregate decrease of $5.8 million, primarily due to decreases in services for government applications, largely related to sales of customer premises equipment that occurred in 2016, partially offset by increased revenue from third-party services for a media customer.

 

    Satellite-related services—an aggregate decrease of $1.5 million, primarily resulting from decreased revenue from support for third-party satellites and the previously announced termination of a government contract.

Operating Expenses

Direct Costs of Revenue (Excluding Depreciation and Amortization)

Direct costs of revenue decreased by $10.3 million, or 12%, to $78.1 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The decrease was primarily due to the following:

 

    a decrease of $8.2 million largely due to lower costs of sales for customer premises equipment related to our government customer set and declines in costs of our satellite-related services business, and of our off-network fixed satellite services and managed services purchased in support of our government business; and

 

    a decrease of $1.4 million in staff-related expenses.

 

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Selling, General and Administrative

Selling, general and administrative expenses decreased by $11.1 million, or 19%, to $47.9 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The decrease was primarily due to the following:

 

    a decrease of $8.0 million in bad debt expense largely in the Latin America region; and

 

    a decrease of $2.3 million in staff-related expenses.

Depreciation and Amortization

Depreciation and amortization expense increased by $3.8 million, or 2%, to $178.7 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. Significant items impacting depreciation and amortization included:

 

    an increase of $18.8 million in depreciation expense resulting from the impact of satellites placed in service; and

 

    an increase of $3.5 million in depreciation expense resulting from the impact of certain ground segment assets placed in service; partially offset by

 

    a decrease of $17.0 million in depreciation expense due to the timing of certain satellites becoming fully depreciated; and

 

    a decrease of $1.6 million in amortization expense primarily due to changes in the pattern of consumption of amortizable intangible assets, as these assets primarily include acquired backlog, which relates to contracts covering varying periods that expire over time, and acquired customer relationships, for which the value diminishes over time.

Interest Expense, Net

Interest expense, net consists of gross interest expense, offset by interest income earned and the amount of interest we capitalize related to assets under construction. Interest expense, net increased by $18.8 million, or 8%, to $261.8 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The increase in interest expense, net was principally due to:

 

    an increase of $12.3 million in interest expense primarily driven by our new debt issuances with higher interest rates, partially offset by certain debt repurchases and exchanges in 2016 and 2017; and

 

    an increase of $6.3 million from lower capitalized interest, primarily resulting from decreased levels of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $12.3 million for the three months ended September 30, 2017. The non-cash interest expense was due to the amortization of deferred financing fees and the amortization and accretion of discounts and premiums.

Gain (Loss) on Early Extinguishment of Debt

Loss on early extinguishment of debt was $4.6 million for the three months ended September 30, 2017, as compared to a gain of $219.6 million for the three months ended September 30, 2016. The loss of $4.6 million was associated with the repurchase of $1.5 billion aggregate principal amount of Intelsat Jackson’s 7.25% Senior Notes due 2019 (the “2019 Jackson Notes”) in July 2017 (see—Liquidity and Capital Resources—Long-Term Debt). The gain of $219.6 million was associated with the repurchase of $673.5 million aggregate principal amount of Intelsat Jackson’s outstanding 6.625% Senior Notes due 2022 (the “2022 Jackson Notes”). The respective loss and gain consisted of the difference between the carrying value of the debt repurchased and the total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt premium, if applicable, and unamortized debt issuance costs.

Other Income (Expense), Net

Other income, net was $1.8 million for the three months ended September 30, 2017, as compared to $0.3 million for the three months ended September 30, 2016. The variance of $1.5 million was primarily due to a $1.5 million increase in income mainly related to our business conducted in Brazilian reais.

 

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Provision for Income Taxes

Income tax benefit increased by $1.8 million to $1.2 million for the three months ended September 30, 2017, as compared to income tax expense of $0.7 million for the three months ended September 30, 2016. The increase was principally due to lower income in the three months ended September 30, 2017.

Cash paid for income taxes, net of refunds, totaled $11.4 million and $3.9 million for the three months ended September 30, 2017 and 2016, respectively.

Net Income (Loss) Attributable to Intelsat S.A.

Net loss attributable to Intelsat S.A was $30.4 million for the three months ended September 30, 2017, as compared to net income attributable to Intelsat S.A. of $195.6 million for the three months ended September 30, 2016. The change reflects the various items discussed above.

Nine Months Ended September 30, 2016 and 2017

The following table sets forth our comparative statements of income for the periods shown with the increase (decrease) and percentage changes, except those deemed not meaningful (“NM”), between the periods presented (in thousands, except percentages):

 

     Nine Months
Ended
     Nine Months
Ended
     Nine Months Ended
September 30, 2016
Compared to
Nine Months Ended
September 30, 2017
 
     September 30,
2016
     September 30,
2017
     Increase
(Decrease)
     Percentage
Change
 

Revenue

   $ 1,637,353      $ 1,610,472      $ (26,881      (2 )% 

Operating expenses:

           

Direct costs of revenue (excluding depreciation and amortization)

     254,334        242,003        (12,331      (5

Selling, general and administrative

     175,244        152,343        (22,901      (13

Depreciation and amortization

     520,869        535,384        14,515        3  
  

 

 

    

 

 

    

 

 

    

Total operating expenses

     950,447        929,730        (20,717      (2
  

 

 

    

 

 

    

 

 

    

Income from operations

     686,906        680,742        (6,164      (1

Interest expense, net

     694,937        756,180        61,243        9  

Gain (loss) on early extinguishment of debt

     350,962        (4,109      (355,071      NM  

Other income (expense), net

     (1,084      3,814        4,898        NM  
  

 

 

    

 

 

    

 

 

    

Income (loss) before income taxes

     341,847        (75,733      (417,580      NM  

Provision for income taxes

     11,538        10,125        (1,413      (12
  

 

 

    

 

 

    

 

 

    

Net income (loss)

     330,309        (85,858      (416,167      NM  

Net income attributable to noncontrolling interest

     (2,932      (2,919      (13      (0
  

 

 

    

 

 

    

 

 

    

Net income (loss) attributable to Intelsat S.A.

   $ 327,377      $ (88,777    $ (416,154      NM  
  

 

 

    

 

 

    

 

 

    

 

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Revenue

The following table sets forth our comparative revenue by service type, with Off-Network and Other Revenues shown separately from On-Network Revenues, for the periods shown (in thousands, except percentages):

 

     Nine Months
Ended

September 30,
2016
     Nine Months
Ended

September 30,
2017
     Increase
(Decrease)
     Percentage
Change
 

On-Network Revenues

           

Transponder services

   $ 1,163,185      $ 1,158,364      $ (4,821      (0 )% 

Managed services

     310,470        311,381        911        0  

Channel

     7,200        4,100        (3,100      (43
  

 

 

    

 

 

    

 

 

    

Total on-network revenues

     1,480,855        1,473,845        (7,010      (0

Off-Network and Other Revenues

           

Transponder, MSS and other off-network services

     121,441        103,088        (18,353      (15

Satellite-related services

     35,057        33,539        (1,518      (4
  

 

 

    

 

 

    

 

 

    

Total off-network and other revenues

     156,498        136,627        (19,871      (13
  

 

 

    

 

 

    

 

 

    

Total

   $ 1,637,353      $ 1,610,472      $ (26,881      (2 )% 
  

 

 

    

 

 

    

 

 

    

Total revenue for the nine months ended September 30, 2017 decreased by $26.9 million, or 2%, as compared to the nine months ended September 30, 2016. By service type, our revenues increased or decreased due to the following:

On-Network Revenues:

 

    Transponder services—an aggregate decrease of $4.8 million, primarily due to a $45.3 million decrease in revenue from network services customers, partially offset by a $38.5 million increase in revenue from media customers and a $2.0 million increase from government customers. The network services decline was mainly due to non-renewals and lower pricing on renewing wide-beam services for enterprise and wireless infrastructure related to activity from customers in the Africa, Europe, Asia-Pacific, and Middle East regions. The increase in media revenue resulted primarily from growth in DTH television services in Latin America and Africa and certain collections of customer contracts, partially offset by declines in the North America, Europe and Middle East regions. Our sector is undergoing a period of increased supply across all regions; the resulting competitive environment is causing pricing pressure in certain regions and applications, primarily with respect to our network services business, and we expect this to continue to impact our business negatively in the near to mid-term.

 

    Managed services—an aggregate increase of $0.9 million, largely due to an increase of $17.7 million in revenue from network services customers for broadband services for maritime mobility and aero applications as well as a net increase of $5.3 million in managed video solutions in large part due to advanced payments forfeited and fees paid by a customer upon partial termination of services. This increase was partially offset by a decrease of $11.4 million primarily from network services customers for point-to-point trunking applications, which are switching to fiber alternatives, a decrease of $6.1 million in managed services for our government applications primarily due to the previously announced termination of a contract and a $3.6 million decrease in occasional video services.

 

    Channel—an aggregate decrease of $3.1 million related to a continued decline due to the migration of international point-to-point satellite traffic to fiber optic cable, a trend we expect will continue.

Off-Network and Other Revenues:

 

    Transponder, MSS and other off-network services—an aggregate decrease of $18.4 million, primarily due to the previously announced termination of a government contract, partially offset by increased revenue from third-party services for a media customer.

 

    Satellite-related services— an aggregate decrease of $1.5 million, primarily resulting from the previously announced termination of a government contract and decreased revenue from support for third-party satellites.

 

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Operating Expenses

Direct Costs of Revenue (Excluding Depreciation and Amortization)

Direct costs of revenue decreased by $12.3 million, or 5%, to $242.0 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The decrease was primarily due to the following:

 

    a decrease of $22.4 million largely due to lower costs of sales for customer premises equipment and lower third-party costs for off-network services associated with our government business; and

 

    a decrease of $2.5 million in staff-related expenses; partially offset by

 

    an increase of $6.6 million due to increases in direct costs associated with capacity provided through an Intelsat payload on a third-party satellite.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $22.9 million, or 13%, to $152.3 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The decrease was primarily due to the following:

 

    a decrease of $32.0 million in bad debt expense primarily related to two customers in the Latin America region; and

 

    a decrease of $5.7 million in staff-related expenses; partially offset by

 

    an increase of $14.8 million in professional fees primarily due to our liability management initiatives and other costs related to the OneWeb/SoftBank Transactions referred to above.

Depreciation and Amortization

Depreciation and amortization expense increased by $14.5 million, or 3%, to $535.4 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. Significant items impacting depreciation and amortization included:

 

    an increase of $67.5 million in depreciation expense resulting from the impact of satellites placed in service; and

 

    an increase of $4.0 million in depreciation expense resulting from the impact of certain ground segment assets placed in service; partially offset by

 

    a decrease of $50.1 million in depreciation expense due to the timing of certain satellites becoming fully depreciated; and

 

    a decrease of $4.7 million in amortization expense primarily due to changes in the pattern of consumption of amortizable intangible assets, as these assets primarily include acquired backlog, which relates to contracts covering varying periods that expire over time, and acquired customer relationships, for which the value diminishes over time.

Interest Expense, Net

Interest expense, net increased by $61.2 million, or 9%, to $756.2 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The increase in interest expense, net was principally due to:

 

    an increase of $29.4 million in interest expense primarily driven by our new debt issuances with higher interest rates, partially offset by certain debt repurchases and exchanges in 2016 and 2017; and

 

    an increase of $30.1 million from lower capitalized interest, primarily resulting from decreased levels of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $36.2 million for the nine months ended September 30, 2017. The non-cash interest expense was due to the amortization of deferred financing fees and the amortization and accretion of discounts and premiums.

Gain (Loss) on Early Extinguishment of Debt

Loss on early extinguishment of debt was $4.1 million for the nine months ended September 30, 2017, compared to a gain of $351.0 million for the nine months ended September 30, 2016. The loss of $4.1 million is primarily associated with the repurchase of $1.5 billion aggregate principal amount of the 2019 Jackson Notes in July 2017 (see—Liquidity and Capital Resources—Long-Term Debt). The gain of $351.0 million was associated with repurchases of 2022 Jackson Notes. The respective loss and gain consisted of the difference between the carrying value of the debt repurchased and total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt premium, if applicable, and unamortized debt issuance costs.

 

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Other Income (Expense), Net

Other income, net was $3.8 million for the nine months ended September 30, 2017, as compared to other expense, net of $1.1 million for the nine months ended September 30, 2016. The variance of $4.9 million was primarily due to a $4.3 million decrease in expense mainly related to our business conducted in Brazilian reais.

Provision for Income Taxes

Income tax expense decreased by $1.4 million, or 12% to $10.1 million for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The decrease was principally due to lower income in the nine months ended September 30, 2017.

Cash paid for income taxes, net of refunds, totaled $30.4 million and $18.0 million for the nine months ended September 30, 2017 and 2016, respectively.

Net Income (Loss) Attributable to Intelsat S.A.

Net loss attributable to Intelsat S.A was $88.8 million for the nine months ended September 30, 2017, as compared to net income attributable to Intelsat S.A. of $327.4 million for the nine months ended September 30, 2016. The change reflects the various items discussed above.

EBITDA

EBITDA consists of earnings before net interest, loss (gain) on early extinguishment of debt, taxes and depreciation and amortization. Given our high level of leverage, refinancing activities are a frequent part of our efforts to manage our costs of borrowing. Accordingly, we consider loss (gain) on early extinguishment of debt an element of interest expense. EBITDA is a measure commonly used in the fixed satellite services sector, and we present EBITDA to enhance the understanding of our operating performance. We use EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. However, EBITDA is not a measure of financial performance under U.S. GAAP, and our EBITDA may not be comparable to similarly titled measures of other companies. EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) determined in accordance with U.S. GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities determined in accordance with U.S. GAAP, as an indicator of cash flows, or as a measure of liquidity.

A reconciliation of net income (loss) to EBITDA for the periods shown is as follows (in thousands):

 

     Three Months
Ended
September 30,
2016
     Three Months
Ended
September 30,
2017
     Nine Months
Ended
September 30,
2016
     Nine Months
Ended
September 30,
2017
 

Net income (loss)

   $ 196,605      $ (29,416    $ 330,309      $ (85,858

Add (Subtract):

           

Interest expense, net

     243,039        261,834        694,937        756,180  

Loss (gain) on early extinguishment of debt

     (219,560      4,565        (350,962      4,109  

Provision for (benefit from) income taxes

     650        (1,153      11,538        10,125  

Depreciation and amortization

     174,909        178,742        520,869        535,384  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 395,643      $ 414,572      $ 1,206,691      $ 1,219,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

In addition to EBITDA, we calculate a measure called Adjusted EBITDA to assess the operating performance of Intelsat S.A. Adjusted EBITDA consists of EBITDA of Intelsat S.A. as adjusted to exclude or include certain unusual items, certain other operating expense items and certain other adjustments as described in the table and related footnotes below. Our management believes that the

 

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presentation of Adjusted EBITDA provides useful information to investors, lenders and financial analysts regarding our financial condition and results of operations because it permits clearer comparability of our operating performance between periods. By excluding the potential volatility related to the timing and extent of non-operating activities, such as impairments of asset value and other non-recurring items, our management believes that Adjusted EBITDA provides a useful means of evaluating the success of our operating activities. We also use Adjusted EBITDA, together with other appropriate metrics, to set goals for and measure the operating performance of our business, and it is one of the principal measures we use to evaluate our management’s performance in determining compensation under our incentive compensation plans. Adjusted EBITDA measures have been used historically by investors, lenders and financial analysts to estimate the value of a company, to make informed investment decisions and to evaluate performance. Our management believes that the inclusion of Adjusted EBITDA facilitates comparison of our results with those of companies having different capital structures.

Adjusted EBITDA is not a measure of financial performance under U.S. GAAP and may not be comparable to similarly titled measures of other companies. Adjusted EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) determined in accordance with U.S. GAAP, as an indicator of our operating performance, as an alternative to cash flows from operating activities determined in accordance with U.S. GAAP, as an indicator of cash flows, or as a measure of liquidity.

A reconciliation of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA is as follows (in thousands):

 

     Three Months
Ended
September 30,
2016
     Three Months
Ended
September 30,
2017
     Nine Months
Ended
September 30,
2016
     Nine Months
Ended
September 30,
2017
 

Net income (loss)

   $ 196,605      $ (29,416    $ 330,309      $ (85,858
  

 

 

    

 

 

    

 

 

    

 

 

 

Add (Subtract):

           

Interest expense, net

     243,039        261,834        694,937        756,180  

Loss (gain) on early extinguishment of debt

     (219,560      4,565        (350,962      4,109  

Provision for (benefit from) income taxes

     650        (1,153      11,538        10,125  

Depreciation and amortization

     174,909        178,742        520,869        535,384  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     395,643        414,572        1,206,691        1,219,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Add :

           

Compensation and benefits(1)

     4,855        4,494        18,028        13,848  

Non-recurring and other non-cash items(2)

     4,375        1,385        8,564        14,417  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 404,873      $ 420,451      $ 1,233,283      $ 1,248,205  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects non-cash expenses incurred relating to our equity compensation plans.
(2) Reflects certain non-recurring gains and losses and non-cash items, including the following: costs associated with development activities; professional fees related to our liability management initiatives in 2016 and 2017; professional fees associated with the OneWeb/SoftBank Transactions referred to above; severance, retention and relocation payments; and other various non-recurring expenses. These costs were partially offset by non-cash income related to the recognition of deferred revenue on a straight-line basis for certain prepaid capacity service contracts.

 

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B. Liquidity and Capital Resources

Overview

We are a highly leveraged company and our contractual obligations, commitments and debt service requirements over the next several years are significant. At September 30, 2017, the aggregate principal amount of our debt outstanding not held by affiliates was $14.5 billion. Our interest expense, net for the nine months ended September 30, 2017 was $756.2 million, which included $36.2 million of non-cash interest expense. We also expect to make significant capital expenditures in 2017 and future years, as set forth below in—Capital Expenditures.

Our primary source of liquidity is and will continue to be cash generated from operations as well as existing cash. At September 30, 2017, cash and cash equivalents were approximately $580.7 million. In addition, $17.5 million of restricted cash was included within current assets on the condensed consolidated balance sheet as compensating balances against certain letters of credit outstanding.

We currently expect to use cash on hand, cash flows from operations, and refinancing of our third party debt to fund our most significant cash outlays, including debt service requirements and capital expenditures, in the next twelve months and beyond, and expect such sources to be sufficient to fund our requirements over that time and beyond. In past years, our cash flows from operations and cash on hand have been sufficient to fund interest obligations ($894.5 million and $870.4 million in 2015 and 2016, respectively) and significant capital expenditures ($724.4 million and $714.6 million in 2015 and 2016, respectively). Our total capital expenditures are expected to range from $500 million to $550 million in 2017, $400 million to $475 million in 2018 and $400 million to $500 million in 2019. However, an inability to generate sufficient cash flow to satisfy our debt service obligations or to refinance our obligations on commercially reasonable terms would have an adverse effect on our business, financial position, results of operations and cash flows, as well as on our and our subsidiaries’ ability to satisfy their obligations in respect of their respective debt. We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants, and make payments on our indebtedness. We also continually evaluate ways to simplify our capital structure and opportunistically extend our maturities and reduce our costs of debt. In addition, we may from time to time retain any future earnings or use cash to purchase, repay, redeem or retire any of our outstanding debt securities in privately negotiated or open market transactions, by tender offer or otherwise.

Cash Flow Items

Our cash flows consisted of the following for the periods shown (in thousands):

 

     Nine Months
Ended
September 30,
2016
     Nine Months
Ended
September 30,
2017
 

Net cash provided by operating activities

   $ 595,995      $ 442,092  

Net cash used in investing activities

     (631,149      (415,126

Net cash provided by (used in) financing activities

     820,764 &nb