Telesat(TSAT) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited interim financial statements and management's analysis of Telesat Corporation's financial performance and condition Financial Statements This section presents Telesat Corporation's unaudited interim consolidated financial statements, including income, balance sheets, cash flows, and detailed notes Unaudited Interim Condensed Consolidated Statements of Income (Loss) Telesat reported a net income of $519.9 million for Q2 2023, driven by C-band clearing gains and debt repurchase gains Consolidated Statements of Income (Loss) Highlights (in thousands of CAD) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $179,752 | $186,614 | $363,174 | $372,383 | | Operating Income | $422,973 | $77,432 | $503,209 | $145,799 | | Other operating gains (losses), net | $344,890 | $(23) | $344,913 | $(53) | | Gain on repurchase of debt | $153,390 | $85,886 | $153,390 | $106,916 | | Gain (loss) on foreign exchange | $66,931 | $(98,834) | $77,067 | $(62,687) | | Net Income (Loss) | $519,940 | $(4,375) | $548,573 | $56,255 | | Diluted Net Income (Loss) per Share | $10.06 | $(0.16) | $10.82 | $0.96 | Unaudited Interim Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $6.55 billion, liabilities decreased to $4.20 billion, and shareholders' equity rose to $2.35 billion Consolidated Balance Sheet Highlights (in thousands of CAD) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,964,045 | $1,788,288 | | Total Assets | $6,548,507 | $6,479,593 | | Long-term Indebtedness | $3,454,003 | $3,850,081 | | Total Liabilities | $4,197,225 | $4,643,891 | | Total Shareholders' Equity | $2,351,282 | $1,835,702 | | Total Liabilities and Shareholders' Equity | $6,548,507 | $6,479,593 | Unaudited Interim Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $102.3 million for H1 2023, while investing and financing activities resulted in net cash outflows Consolidated Statements of Cash Flows Highlights (in thousands of CAD) | Cash Flow Activity (Six months ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $102,349 | $69,179 | | Net cash (used in) generated from investing activities | $(66,744) | $31,374 | | Net cash (used in) generated from financing activities | $(163,213) | $(93,733) | | Changes in cash and cash equivalents | $(160,793) | $32,657 | | Cash and cash equivalents, end of period | $1,516,999 | $1,482,250 | Notes to the Unaudited Interim Condensed Consolidated Financial Statements These notes detail accounting policies, segment revenue, C-band clearing income, debt, share capital, and subsequent events including the Lightspeed constellation agreement - The company operates as a single segment providing satellite-based services, categorized into Broadcast, Enterprise, and Consulting[25] - In June 2023, the company accrued $344.9 million (US**$259.6 million**) for Phase II accelerated C-band spectrum clearing, with proceeds expected later in 2023[37] - During Q2 2023, Telesat repurchased $312.2 million in principal of various notes for $159.1 million, resulting in a gain of $153.4 million[50][51] - Subsequent to the reporting period, on August 10, 2023, the company entered into a LEO Satellite Design and Supply Agreement with MDA Ltd. for approximately $2.1 billion to manufacture the Telesat Lightspeed constellation[115] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting increased net income from C-band clearing and debt repurchase gains, alongside liquidity, debt, and Lightspeed program progress Operating Highlights Key operational achievements include significant debt repurchases, C-band clearing, LEO 3 satellite launch, and securing full funding for the Lightspeed program - From April 1, 2023, to August 10, 2023, the company repurchased US**$296.0 million** in principal of various notes for US**$156.9 million**[131][132] - Completed Phase II C-band clearing, making Telesat eligible for an accelerated relocation payment of US**$259.6 million**[133][134] - Successfully launched the LEO 3 demonstration satellite in July 2023 to continue customer and vendor testing[135] - Contracted MDA Ltd. to build the Telesat Lightspeed LEO satellites and announced the program is fully funded through global service delivery, with launches to commence in mid-2026[115][136] Results of Operations Q2 2023 revenue decreased by 3.7% to $179.8 million, while net income surged to $519.9 million due to C-band clearing and debt repurchase gains Revenue by Service (in millions of CAD) | Service | Q2 2023 | Q2 2022 | % Change | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Broadcast | $86.3 | $89.6 | (3.7)% | $171.9 | $186.6 | (7.9)% | | Enterprise | $90.4 | $94.3 | (4.1)% | $185.5 | $179.7 | 3.2% | | Consulting and other | $3.1 | $2.8 | 11.8% | $5.8 | $6.1 | (4.9)% | | Total Revenue | $179.8 | $186.6 | (3.7)% | $363.2 | $372.4 | (2.5)% | - Q2 operating expenses decreased to $51.6 million from $58.9 million year-over-year, primarily due to an $8.5 million reduction in non-cash share-based compensation[166][167] - Q2 interest expense rose to $68.6 million from $49.7 million year-over-year, driven by higher interest rates on the floating-rate Term Loan B facility[170][171] - Contracted revenue backlog was approximately $1.6 billion as of June 30, 2023[188] Liquidity and Capital Resources As of June 30, 2023, Telesat had $1.52 billion in cash and short-term investments, with sufficient liquidity for operations and Lightspeed constellation funding - As of June 30, 2023, the company had $1,517.0 million of cash and short-term investments and US**$200.0 million** of borrowing availability[191] - Cash from operating activities for the first six months of 2023 was $102.3 million, a $33.2 million increase from the prior year, mainly due to lower income taxes paid[192] - The company may continue to repay, repurchase, or refinance its existing debt depending on market conditions and liquidity[201] - As of June 30, 2023, the company was in compliance with all financial covenants of its debt agreements[221] Non-IFRS Measures This section reconciles non-IFRS measures, reporting Q2 2023 Adjusted EBITDA at $138.7 million and a compliant Consolidated Total Secured Debt to Consolidated EBITDA ratio of 5.03:1.00 Adjusted EBITDA Reconciliation (in millions of CAD) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $519.9 | $(4.4) | $548.6 | $56.3 | | Adjustments (Taxes, Interest, FX, etc.) | $(381.2) | $150.8 | $(271.0) | $235.7 | | Adjusted EBITDA | $138.7 | $146.4 | $277.6 | $292.0 | | Adjusted EBITDA Margin | 77.1% | 78.4% | 76.4% | 78.4% | - Consolidated EBITDA for Covenant Purposes for the twelve months ended June 30, 2023, was $590.2 million[256] - As of June 30, 2023, the Consolidated Total Secured Debt to Consolidated EBITDA ratio was 5.03:1.00, compliant with the covenant requirement of being less than 5.75:1.00[258] Quantitative and Qualitative Disclosures About Market Risk This section discusses market risks, including credit, foreign exchange, and interest rate risks, particularly concerning U.S. dollar-denominated debt - The company is exposed to foreign exchange risk, with a 5% change in the USD/CAD exchange rate estimated to impact net income by $172.9 million due to its U.S. dollar-denominated indebtedness[233] - The company is exposed to interest rate risk on its variable-rate debt; a 0.25% change in interest rates would impact net income by $1.3 million for the quarter[240] PART II. OTHER INFORMATION This section provides updates on legal proceedings, risk factors, and other corporate information Legal Proceedings No material developments in legal proceedings have occurred since the last annual report, including a Brazilian tax dispute - There have been no material developments in legal proceedings since the filing of the Annual Report on Form 20-F for the fiscal year ended December 31, 2022[290] Risk Factors No material changes to risk factors since the last annual report, but specific risks for the Lightspeed constellation are highlighted - Key risks for the Telesat Lightspeed constellation include inflation, funding conditions, technological challenges, supply chain disruptions, and competition from other LEO systems[292] Other Information Janet Yeung was appointed to the Board of Directors on August 2, 2023, replacing Jason Caloras - Janet Yeung was appointed to the Board of Directors on August 2, 2023, replacing the resigning Jason Caloras[297]