Document


 
 
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 July, 2019
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  ý             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):  ☐
 
  
INTELSAT S.A.
Quarterly Report for the three and six months ended June 30, 2019
 
  
 
 


1



TABLE OF CONTENTS
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
 
 

2



INTRODUCTION
In this Quarterly Report on Form 6-K, or 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., Intelsat Holdings’ direct wholly-owned subsidiary, (4) the term “Intelsat Luxembourg” refers to Intelsat (Luxembourg) S.A., Intelsat Investments’ direct wholly-owned subsidiary, (5) the term "Intelsat Envision" refers to Intelsat Envision Holdings LLC, Intelsat Luxembourg's direct wholly-owned subsidiary, (6) the terms “Intelsat Connect” and “ICF” refer to Intelsat Connect Finance S.A., Intelsat Envision's direct wholly-owned subsidiary, (7) the term “Intelsat Jackson” refers to Intelsat Jackson Holdings S.A., Intelsat Connect’s direct wholly-owned subsidiary, (8) the term “Intelsat US LLC” refers to Intelsat US LLC (formerly known as Intelsat Corporation), Intelsat Jackson’s indirect wholly-owned subsidiary and (9) the term “Intelsat General” refers to Intelsat General Communications LLC (formerly known as 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.
This Quarterly Report is incorporated by reference into our Registration Statement on Form F-3 (File No. 333-228580) filed with the U.S. Securities and Exchange Commission on November 28, 2018.
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 on Form 6-K and oral statements made from time to time by our representatives constitute forward-looking statements that do not directly or exclusively relate to historical facts. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements as long as they are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements.
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. Examples of these forward-looking statements include, but are not limited to, statements regarding the following: our expectations as to the impact of the loss of Intelsat 29e on our business and financial outlook; our belief as to the likelihood of the cause of the failure of Intelsat 29e occurring on our other satellites; our intention to leverage our satellite launches and maximize the value of our spectrum rights, including the pursuit of partnerships to optimize new satellite business cases and the exploration of joint use of certain spectrum with the wireless sector in certain geographies; our expectations as to the potential timing of a final U.S. Federal Communications Commission (“FCC”) ruling with respect to our C-band joint-use proposal; the trends that we believe will impact our revenue and operating expenses in the future; and our expected capital expenditures in 2019 and during the next several years.
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

3



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, 2018, the political, economic, regulatory 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;
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;
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.

4



PART I. FINANCIAL INFORMATION
 
Item 1.    Financial Statements
INTELSAT S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
December 31, 2018
 
June 30, 2019
 
 
 
(unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
485,120

 
$
825,984

Restricted cash
22,037

 
22,189

Receivables, net of allowances of $28,542 in 2018 and $30,177 in 2019
271,393

 
255,272

Contract assets
45,034

 
57,585

Prepaid expenses and other current assets
24,075

 
22,803

Total current assets
847,659

 
1,183,833

Satellites and other property and equipment, net
5,511,702

 
4,914,111

Goodwill
2,620,627

 
2,620,627

Non-amortizable intangible assets
2,452,900

 
2,452,900

Amortizable intangible assets, net
311,103

 
293,927

Contract assets, net of current portion
96,108

 
88,420

Other assets
401,414

 
468,136

Total assets
$
12,241,513

 
$
12,021,954

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
108,101

 
$
90,612

Taxes payable
5,679

 
3,619

Employee related liabilities
29,696

 
31,321

Accrued interest payable
284,649

 
283,834

Contract liabilities
137,746

 
130,554

Deferred satellite performance incentives
35,261

 
34,159

Other current liabilities
59,080

 
62,671

Total current liabilities
660,212

 
636,770

Long-term debt
14,028,352

 
14,444,097

Contract liabilities, net of current portion
1,131,319

 
1,122,211

Deferred satellite performance incentives, net of current portion
210,346

 
168,035

Deferred income taxes
82,488

 
81,875

Accrued retirement benefits, net of current portion
133,735

 
126,605

Other long-term liabilities
77,670

 
170,773

Shareholders’ deficit:
 
 


Common shares; nominal value $0.01 per share
1,380

 
1,407

Paid-in capital
2,551,471

 
2,557,970

Accumulated deficit
(6,606,426
)
 
(7,240,579
)
Accumulated other comprehensive loss
(43,430
)
 
(59,402
)
Total Intelsat S.A. shareholders’ deficit
(4,097,005
)
 
(4,740,604
)
Noncontrolling interest
14,396

 
12,192

Total liabilities and shareholders’ deficit
$
12,241,513

 
$
12,021,954

See accompanying notes to unaudited condensed consolidated financial statements.

5



INTELSAT S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Revenue
$
537,714

 
$
509,407

 
$
1,081,496

 
$
1,037,856

Operating expenses:
 
 
 
 
 
 
 
Direct costs of revenue (excluding depreciation and amortization)
76,479

 
95,447

 
159,049

 
200,852

Selling, general and administrative
49,865

 
55,855

 
110,147

 
107,513

Depreciation and amortization
173,615

 
163,808

 
340,073

 
334,902

Satellite impairment loss

 
381,565

 

 
381,565

Total operating expenses
299,959

 
696,675

 
609,269

 
1,024,832

Income (loss) from operations
237,755

 
(187,268
)
 
472,227

 
13,024

Interest expense, net
303,150

 
320,680

 
585,604

 
637,282

Gain on early extinguishment of debt
22,085

 

 
22,149

 

Other income (expense), net
(2,836
)
 
(28,671
)
 
1,595

 
(27,259
)
Loss before income taxes
(46,146
)
 
(536,619
)
 
(89,633
)
 
(651,517
)
Provision for (benefit from) income taxes
(306
)
 
(7,507
)
 
22,056

 
(2,364
)
Net loss
(45,840
)
 
(529,112
)
 
(111,689
)
 
(649,153
)
Net income attributable to noncontrolling interest
(988
)
 
(610
)
 
(1,940
)
 
(1,191
)
Net loss attributable to Intelsat S.A.
$
(46,828
)
 
$
(529,722
)
 
$
(113,629
)
 
$
(650,344
)
Net loss per common share attributable to Intelsat S.A.:
 
 
 
 
 
 
 
Basic
$
(0.38
)
 
$
(3.76
)
 
$
(0.93
)
 
$
(4.65
)
Diluted
$
(0.38
)
 
$
(3.76
)
 
$
(0.93
)
 
$
(4.65
)
See accompanying notes to unaudited condensed consolidated financial statements.

6



INTELSAT S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Net loss
$
(45,840
)
 
$
(529,112
)
 
$
(111,689
)
 
$
(649,153
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Defined benefit retirement plans:
 
 
 
 
 
 
 
Reclassification adjustment for amortization of unrecognized prior service credits, net of tax included in other income (expense), net
(2
)
 
(626
)
 
(4
)
 
(1,252
)
Reclassification adjustment for amortization of unrecognized actuarial loss, net of tax included in other income (expense), net
938

 
735

 
1,876

 
1,471

Adoption of ASU 2018-02 (see Note 14—Income Taxes)

 

 

 
(16,191
)
Marketable securities:
 
 
 
 
 
 
 
Reclassification adjustment for pension assets’ gains, net of tax included in other income (expense), net

 

 
(351
)
 

Other comprehensive income (loss)
936

 
109

 
1,521

 
(15,972
)
Comprehensive loss
(44,904
)
 
(529,003
)
 
(110,168
)
 
(665,125
)
Comprehensive income attributable to noncontrolling interest
(988
)
 
(610
)
 
(1,940
)
 
(1,191
)
Comprehensive loss attributable to Intelsat S.A.
$
(45,892
)
 
$
(529,613
)
 
$
(112,108
)
 
$
(666,316
)
See accompanying notes to unaudited condensed consolidated financial statements.

7



INTELSAT S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(in thousands, except where otherwise noted)
 
Common
 
 
 
 
 
 
 
 
 
 
 
Shares
(in millions)
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Intelsat S.A. Shareholders’ Deficit
 
Noncontrolling
Interest
Balance at December 31, 2017
119.6

 
$
1,196

 
$
2,173,367

 
$
(5,894,659
)
 
$
(87,774
)
 
$
(3,807,870
)
 
$
19,306

Net income (loss)

 

 

 
(66,801
)
 

 
(66,801
)
 
952

Dividends paid to noncontrolling interests

 

 

 

 

 

 
(2,601
)
Share-based compensation
1.0

 
10

 
2,074

 

 

 
2,084

 

Postretirement/pension liability adjustment, net of tax

 

 

 

 
936

 
936

 

Other comprehensive income, net of tax of ($0.2) million

 

 

 

 
(351
)
 
(351
)
 

Adoption of ASU 2014-09

 

 

 
(281,741
)
 

 
(281,741
)
 

Adoption of ASU 2016-16

 

 

 
169,579

 

 
169,579

 

Balance at March 31, 2018
120.6

 
$
1,206

 
$
2,175,441

 
$
(6,073,622
)
 
$
(87,189
)
 
$
(3,984,164
)
 
$
17,657

Net income (loss)

 

 

 
(46,828
)
 

 
(46,828
)
 
988

Dividends paid to noncontrolling interests

 

 

 

 

 

 
(1,424
)
Share-based compensation
0.6

 
6

 
3,272

 

 

 
3,278

 

Equity offering and 2025 Convertible Notes offering
15.5

 
155

 
368,149

 

 

 
368,304

 

Postretirement/pension liability adjustment, net of tax

 

 

 

 
936

 
936

 

Balance at June 30, 2018
136.7

 
$
1,367

 
$
2,546,862

 
$
(6,120,450
)
 
$
(86,253
)
 
$
(3,658,474
)
 
$
17,221


See accompanying notes to unaudited condensed consolidated financial statements.

8



INTELSAT S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(in thousands, except where otherwise noted)
 
Common
 
 
 
 
 
 
 
 
 
 
 
Shares
(in millions)
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Loss
 
Total Intelsat S.A. Shareholders’ Deficit
 
Noncontrolling
Interest
Balance at December 31, 2018
138.0

 
$
1,380

 
$
2,551,471

 
$
(6,606,426
)
 
$
(43,430
)
 
$
(4,097,005
)
 
$
14,396

Net income (loss)

 

 

 
(120,622
)
 

 
(120,622
)
 
580

Dividends paid to noncontrolling interests

 

 

 

 

 

 
(1,925
)
Share-based compensation
2.6

 
26

 
2,913

 

 

 
2,939

 

Postretirement/pension liability adjustment, net of tax

 

 

 

 
110

 
110

 

Adoption of ASU 2018-02 (see Note 14—Income Taxes)

 

 

 
16,191

 
(16,191
)
 

 

Balance at March 31, 2019
140.6

 
$
1,406

 
$
2,554,384

 
$
(6,710,857
)
 
$
(59,511
)
 
$
(4,214,578
)
 
$
13,051

Net income (loss)

 

 

 
(529,722
)
 

 
(529,722
)
 
610

Dividends paid to noncontrolling interests

 

 

 

 

 

 
(1,469
)
Share-based compensation
0.1

 
1

 
3,586

 

 

 
3,587

 

Postretirement/pension liability adjustment, net of tax

 

 

 

 
109

 
109

 

Balance at June 30, 2019
140.7

 
$
1,407

 
$
2,557,970

 
$
(7,240,579
)
 
$
(59,402
)
 
$
(4,740,604
)
 
$
12,192


See accompanying notes to unaudited condensed consolidated financial statements.



9



INTELSAT S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Cash flows from operating activities:
 
 
 
Net loss
$
(111,689
)
 
$
(649,153
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
340,073

 
334,902

Provision for doubtful accounts
2,505

 
6,528

Foreign currency transaction loss
5,803

 
786

Loss on disposal of assets
17

 
171

Satellite impairment loss

 
381,565

Share-based compensation
2,877

 
6,291

Deferred income taxes
(31,774
)
 
(5,113
)
Amortization of discount, premium, issuance costs and related costs
25,135

 
20,353

Gain on early extinguishment of debt
(22,149
)
 

Amortization of actuarial loss and prior service credits for retirement benefits
2,448

 
224

Unrealized (gains) losses on derivatives and investments
(29,372
)
 
52,348

Sales-type lease

 
7,064

Other non-cash items
(783
)
 
(109
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(43,114
)
 
10,170

Prepaid expenses, contract and other assets
1,915

 
(8,907
)
Accounts payable and accrued liabilities
22,280

 
(1,458
)
Accrued interest payable
172

 
(815
)
Deferred revenue and contract liabilities
(17,700
)
 
(16,593
)
Accrued retirement benefits
(9,009
)
 
(7,130
)
Other long-term liabilities
465

 
2,441

Net cash provided by operating activities
138,100

 
133,565

Cash flows from investing activities:
 
 
 
Payments for satellites and other property and equipment (including capitalized interest)
(120,419
)
 
(158,504
)
Purchase of investments
(8,500
)
 
(13,424
)
Capital contributions to unconsolidated affiliates
(23,239
)
 
(338
)
Proceeds from insurance settlements
5,709

 

Other proceeds from satellites
3,750

 
3,750

Net cash used in investing activities
(142,699
)
 
(168,516
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
402,500

 
400,000

Repayments of long-term debt
(669,910
)
 

Debt issuance costs
(12,683
)
 
(4,612
)
Proceeds from stock issuance, net of stock issuance costs
224,250

 

Principal payments on deferred satellite performance incentives
(13,668
)
 
(15,195
)
Dividends paid to noncontrolling interest
(4,025
)
 
(3,394
)
Proceeds from exercise of employee stock options
2,485

 
235

Other financing activities
384

 
296

Net cash provided by (used in) financing activities
(70,667
)
 
377,330

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(3,173
)
 
(1,363
)
Net change in cash, cash equivalents and restricted cash
(78,439
)
 
341,016

Cash, cash equivalents, and restricted cash beginning of period
541,391

 
507,157

Cash, cash equivalents, and restricted cash end of period
$
462,952

 
$
848,173


10



Supplemental cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
533,141

 
$
561,031

Income taxes paid, net of refunds
40,017

 
6,751

Supplemental disclosure of non-cash investing activities:
 
 
 
Accrued capital expenditures
$
10,250

 
$
3,822

Capitalization of deferred satellite performance incentives
28,161

 


See accompanying notes to unaudited condensed consolidated financial statements.

11



INTELSAT S.A.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2019
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, 2018 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, 2018 on file with the U.S. Securities and Exchange Commission ("SEC").
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.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our condensed consolidated balance sheets to the total sum of these amounts reported in our condensed consolidated statements of cash flows (in thousands):
 
 
As of December 31, 2018
 
As of June 30, 2019
Cash and cash equivalents
 
$
485,120

 
$
825,984

Restricted cash
 
22,037

 
22,189

Cash, cash equivalents and restricted cash
 
$
507,157

 
$
848,173

Restricted cash represents legally restricted amounts being held as a compensating balance for certain outstanding letters of credit.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842"), which supersedes the lease accounting requirements in ASC 840, Leases ("ASC 840"). The guidance in ASC 842 increases transparency and comparability by recognizing substantially all leases on the balance sheet and disclosing key information about leasing arrangements. Under the new standard, a lessee recognizes on its balance sheet a right-of-use (“ROU”) asset and a lease liability for leases. The FASB issued several amendments to the standard, clarifying aspects of the guidance for both lessees and lessors and providing an alternative transition method (the “effective date method”).
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842)—Codification Improvements, to increase stakeholders’ awareness of the amendments the FASB made related to ASC 842 and to expedite these improvements. The amendments clarify the FASB’s original intent regarding transition disclosures related to ASC 250, Accounting Changes and Error Corrections, by explicitly providing an exception to the paragraph 250-10-50-3 interim disclosure requirements in the ASC 842 transition disclosure requirements. The amendments should be applied as of the date ASC 842 is first applied, using the same transition methodology elected. We adopted ASU 2019-01 on January 1, 2019 along with the adoption of ASC 842.

12



We describe below our accounting policy changes related to leases as a result of adopting ASC 842. Our accounting policies and reported amounts with respect to the fiscal year ended December 31, 2018 and prior were not affected by the adoption of ASC 842.
We adopted ASC 842 effective January 1, 2019 using the effective date method and applied the package of practical expedients included therein. Under the package of practical expedients, we did not reassess (a) whether expired or existing contracts contain a lease under the new definition of a lease, (b) lease classification for expired or existing leases, and (c) whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. We also applied the practical expedients for lessees and lessors to exempt short-term leases and to combine lease and non-lease components of a contract. By applying ASC 842 at the adoption date, as opposed to at the beginning of the earliest period presented, our reporting for periods prior to January 1, 2019 continues to be in accordance with ASC 840.
We determine if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
Operating and finance lease ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term, at the commencement date. For leases in which the implicit rate is not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such option. ROU assets include unpaid lease payments and exclude lease incentives and initial direct costs incurred. For our operating leases, we recognize lease expense for minimum lease payments on a straight-line basis over the lease term, and for our finance leases, we recognize interest expense on the lease liability using the effective interest method and amortization of the ROU assets on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally combined, consistent with our election of the practical expedient. For lease agreements entered into or reassessed after the adoption of ASC 842 in which the Company is the lessee, the Company accounts for the lease components (e.g. fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g. common-area maintenance costs and managed service contracts) as a single lease component for all classes of underlying assets. Leases in which the Company is the lessor are also evaluated for lease and non-lease components. In the event a sales-type lease is identified, this component is accounted for separately from lease and non-lease components that meet the practical expedient to be combined. Judgment is required in determining the allocation between lease components and also between the lease and non-lease components, as the non-lease components are the predominant components of the combined components. ASC 606 (as defined herein) is applied to the combined lease and non-lease components. Leases with an expected term of 12 months or less are not accounted for on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
The adoption of ASC 842 and related amendments resulted in the recording of ROU assets, current lease liabilities and long-term lease liabilities of approximately $88.7 million, $11.4 million and $103.0 million, respectively, as of January 1, 2019, which are included in other assets, other current liabilities and other long-term liabilities, respectively, on our condensed consolidated balance sheets. The difference between the additional ROU assets and lease liabilities, net of the deferred tax impact, was related to unamortized lease incentives received and accrued lease payments outstanding as of January 1, 2019. The standard did not have a material impact on our condensed consolidated statements of operations and statements of cash flows.
Refer to Note 13—Leases, for the required disclosures related to leases.
We adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2019. See Note 14—Income Taxes.
Recently Issued Accounting Pronouncements
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 requires 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. The scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, includes financial assets measured at amortized cost basis, including net investments in leases arising from sales-type and direct financing leases. The scope does not specifically address receivables arising from operating leases. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments to clarify certain aspects of the accounting for credit losses, hedging activities and financial instruments. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief which allows

13



companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for existing financial assets on an instrument-by-instrument basis that (1) were previously recorded at amortized cost, (2) are within the scope of the credit losses guidance in Subtopic 326-20, (3) are eligible for the fair value option under ASC 825, Financial Instruments and (4) are not held-to-maturity debt securities. Both ASU 2016-13 and ASU 2018-19 are effective for interim and annual periods beginning after December 15, 2019 for the Company, on a modified retrospective basis. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. As we have not yet adopted ASU 2016-13, the effective dates and transition requirements for ASU 2019-04 and ASU 2019-05 are the same as ASU 2016-13. We are in the process of evaluating the impact that ASU 2016-13, ASU 2018-19, ASU 2019-04 and ASU 2019-05 will have on our consolidated financial statements and associated disclosures.
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 will measure impairment using the difference between the carrying amount and the fair value of the reporting unit, if required.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, as part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 modifies disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement, and is effective for all entities for interim and annual periods beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is allowed for any removed or modified disclosures upon issuance of ASU 2018-13 and delayed adoption for the additional disclosures until their effective date. We are in the process of evaluating the impact that ASU 2018-13 will have on our consolidated financial statements and associated disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)—Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, as part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-14 modifies and clarifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove certain disclosure requirements and require additional disclosures including the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period, the projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets, and the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. ASU 2018-14 is effective for public business entities for fiscal years ending after December 15, 2020, on a retrospective basis to all periods presented with early adoption allowed. We are in the process of evaluating the impact that ASU 2018-14 will have on our consolidated financial statements and associated disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to improve current U.S. GAAP by clarifying the accounting for implementation costs of a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement (hosting arrangement) that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments require costs for implementation activities in the application development stage to be capitalized depending on the nature of the costs, and costs incurred during the preliminary project and post-implementation stages to be expensed as the activities are performed. ASU 2018-15 also requires the entity (customer) to expense capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, and the entity (customer) to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, as well as to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, with early adoption allowed. We are in the process of evaluating the impact that ASU 2018-15 will have on our consolidated financial statements and associated disclosures.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808)—Clarifying the Interaction between Topic 808 and Topic 606, to clarify the interaction between ASC 808, Collaborative Arrangements ("ASC 808") and ASC 606, Revenue from Contracts with Customers ("ASC 606"). ASU 2018-18 is effective for public business entities for fiscal years

14



beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption allowed. ASU 2018-18 can be applied retrospectively to the date of initial application of ASC 606, with cumulative effect of initially applying the amendments in this update adjusted to the opening balance of retained earnings of the later of the earliest annual period presented and the annual period that includes the date of the entity's initial application of ASC 606. The amendments in ASU 2018-18 can be applied to all contracts or only to contracts that are not completed at the date of initial application of ASC 606. We are in the process of evaluating the impact that ASU 2018-18 will have on our consolidated financial statements and associated disclosures.
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 June 30, 2019, there were 140.7 million common shares issued and outstanding.
Note 3 Revenue
(a) Revenue Recognition
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.
For each service type, the price per unit in our contracts is generally fixed for each defined time period. While the number of units or price per unit in our multi-year contracts may be different by year or another time period, the number of units and price per unit are fixed for each defined time period and the total contract price is fixed. To determine the proper revenue recognition method for contracts, we evaluate whether two or more services should be combined and accounted for as a single performance obligation. Our specific revenue recognition policies are as follows:
Satellite Utilization Charges. The Company’s contracts for satellite utilization services often contain multiple service orders for the provision of capacity on or over different beams, satellites, frequencies, geographies or time periods. Under each separate service order, the Company’s satellite services, comprised of transponder services, managed services, channel services, and occasional use managed services, are delivered in a series of time periods that are distinct from each other and have the same pattern of transfer to the customer. In each period, the Company’s obligation is to make those services available to the customer. Throughout each service period, the Company provides services that are able to be used continuously, and the customer simultaneously receives and consumes the benefits provided by the Company. We believe that, given our services are stand-ready obligations that are available continuously, the passage of time most faithfully reflects our satisfaction of the performance obligation. We also have certain obligations, including providing spare or substitute capacity if available, in the event of satellite service failure under certain long-term agreements. While we are generally not obligated to refund satellite utilization payments previously made, credits may be granted for sustained service outages in certain circumstances.
Similar to satellite utilization charges, we have determined that the customer simultaneously receives and consumes benefits provided by the Company for satellite related consulting and technical services, tracking, telemetry and commanding services (“TT&C”) and in-orbit backup services, as detailed below. Therefore, we believe that the passage of time most faithfully reflects our satisfaction of the performance obligation for these services:
Satellite Related Consulting and Technical Services. We recognize revenue from the provision of consulting services as those services are performed. We recognize revenue for consulting services with specific performance obligations, such as transfer orbit support services or training programs over the service period.
TT&C. We earn TT&C services revenue from providing operational services to other satellite owners and from certain customers on our satellites. TT&C agreements entered into in connection with our satellite utilization contracts are typically for the period of the related service agreement. We recognize this revenue over the term of the service agreement.
In-Orbit Backup Services. We provide back-up transponder capacity that is held on reserve for certain customers on agreed-upon terms. We recognize revenues for in-orbit protection services over the term of the related agreement.
Revenue Share Arrangements. We recognize revenues under revenue share agreements for satellite-related services either on a gross or net basis in accordance with principal versus agent considerations.

15



We occasionally sell products or services individually or in some combination to our customers. When products or services are sold together, we allocate revenue for each performance obligation based on each obligation’s relative selling price. In these arrangements, revenue for products is recognized when the transfer of control passes to the customer, while service revenue is recognized over the service term.

Contract Assets
Contract assets include unbilled amounts typically resulting from sales under our long-term contracts when the total contract value is recognized on a straight-line basis and the revenue recognized exceeds the amount billed to the customer.

Contract Liabilities
Contract liabilities consist of advance payments and collections in excess of revenue recognized and deferred revenue. Our contracts at times contain prepayment terms that range from one month to one year in advance of providing the service. As a practical expedient, we do not need to adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period of time between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. For a small subset of contracts with advance payments that contain prepayment terms greater than one year and up to fifteen years, we assess whether a significant financing component exists by considering the difference between the amount of promised consideration and the cash selling price of the promised services. The prepayment amount is generally based on a standard methodology that discounts the total of the standard monthly charges over the service term to determine the prepayment amount, resulting in a difference between the amount of promised consideration and the cash selling price of the promised services. The Company considers the timing difference between payment and the promised transfer of services, combined with the Company’s incremental borrowing rates, to determine whether a significant financing component exists. When a significant financing component exists, the amount of revenue recognized exceeds the amount of cash received from the customer. After receiving cash from the customer but prior to the Company providing services, the Company records additional contract liabilities as well as offsetting interest expense to reflect the upfront financing the Company is effectively receiving from the customer. Once the Company begins providing services, additional interest expense is recorded each period using the effective interest method, as well as corresponding additional revenue, which is recognized ratably over the service period.
For the three months ended June 30, 2018 and 2019, we recognized revenue of $57.9 million and $55.3 million, respectively, and for the six months ended June 30, 2018 and 2019, we recognized revenue of $136.2 million and $145.5 million, respectively, that were included in the contract liability balances as of January 1, 2018 and 2019, respectively. In addition, the total amount of consideration included in contract assets as of January 1, 2018 and 2019 that became unconditional for the six months ended June 30, 2018 and 2019 was $11.1 million and $9.1 million, respectively.

Assets Recognized from the Costs to Obtain a Customer Contract
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that our sales incentive program meets the requirements to be capitalized due to the incremental nature of the costs and the expectation that the Company will recover such costs. The assets recognized from the costs to obtain a customer contract are amortized over a period that is consistent with the transfer to the customer of the services to which the asset relates. We capitalized $1.5 million and $2.0 million for our sales incentive program and amortized $1.7 million and $1.7 million for the three months ended June 30, 2018 and 2019, respectively, and we capitalized $3.0 million and $4.0 million for our sales incentive program and amortized $2.9 million and $3.5 million for the six months ended June 30, 2018 and 2019, respectively.

Contract Modifications
Contracts are often modified to account for changes in contract specifications or requirements. We consider contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights and obligations of either party. Most of our contract modifications are for goods and services that are distinct from the existing contract, as they consist of additional months of service priced at the Company’s standalone selling prices of the additional services and are therefore treated as separate contracts. For contract modifications that do not result in additional distinct goods or services, the effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue.


16



Significant Judgments
We occasionally enter into certain contracts in which the customer makes payments in advance of services to be delivered, which may be years in the future. The reasons for the prepayments in these contracts vary, but generally can be either for the customer’s benefit or for the Company’s benefit (such as the ability to use the cash received from the customer to pay for the construction of a satellite asset). The determination of whether contracts with a prepayment provision contain a significant financing component requires judgment. The Company makes this determination based on various factors, including the differences between the amount of promised consideration and cash selling prices, the length of time between payment and the transfer of services and prevailing interest rates in the market.
While most satellite utilization contracts contain multiple performance obligations for each transponder service on different satellites, the service period for the different satellite utilization performance obligations is generally the same time period. In the event that the time period for multiple performance obligations is not the same, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised good or service underlying such performance obligation. Judgment is required to determine the standalone selling price for each distinct performance obligation. In order to estimate standalone selling prices, we use an adjusted market assessment approach which involves an evaluation of the market and an estimate of the price that our customers are willing to pay, or an expected cost plus a margin approach.
When more than one party is involved in providing goods or services to a customer, we generally recognize the transaction on a gross basis due to the level of control that we have prior to the transfer of the good or service. These arrangements include instances where we procure equipment from vendors and sell to third-party customers, when we enter into revenue sharing arrangements with other parties and when we purchase capacity for voice, data and video services provided by third-party commercial satellite operators for which the desired frequency type or geographic coverage is not available on Intelsat’s network. Our third-party capacity arrangements (off-network) are more significant and, in determining whether we are the principal or the agent in these arrangements, we consider whether or not we control the service before it is transferred to the customer. In this determination, we consider the definition of control as set forth in ASC 606-10-25-25. When we purchase satellite transponder capacity from a third party, we have the ability to direct the use of and obtain substantially all of the remaining benefits from the purchased capacity. We obtain the right to the service to be performed by the third party, which gives the Company the ability to direct that party to provide the service to the customer on the Company’s behalf. No other third party can direct the use of or obtain any benefits from the capacity.
We also considered the factors in ASC 606-10-55-39 in the Company’s determination of control. In the vast majority of cases, when we resell capacity to third party customers, we are primarily responsible for the fulfillment of the services and acceptability of the service. Additionally, the Company has full discretion in establishing the pricing for transponder services with the customer and assumes the credit risk associated with capacity purchased from the third party. In the event the service is not acceptable to the customer, we are required to identify an alternative solution. Based on these considerations, we have concluded that we are the principal in the transaction for these arrangements. When these factors are not met, the Company recognizes revenue for third-party capacity arrangements on a net basis.
Judgment is required in determining whether we are the principal or the agent in transactions involving third parties.

Remaining Performance Obligations
Our remaining performance obligation is our expected future revenue under existing customer contracts and includes both cancelable and non-cancelable contracts. Our remaining performance obligation was approximately $7.3 billion as of June 30, 2019, approximately 89% of which related to contracts that were non-cancelable and approximately 11% of which related to contracts that were cancelable subject to substantial termination fees. We assess the contract term of our cancelable contracts as the full stated term of the contract assuming each contract is not canceled since the termination penalty upon cancellation is substantive. As of June 30, 2019, the weighted average remaining customer contract life was approximately 4.3 years. Approximately 31%24%, and 45% of our total remaining performance obligation as of June 30, 2019 is expected to be recognized as revenue during 2019 and 2020, 2021 and 2022, and 2023 and thereafter, respectively. The amount included in the remaining performance obligation represents the full-service charge for the duration of the contract and does not include termination fees. The amount of the termination fees, which is not included in the remaining performance obligation amount, is generally calculated as a percentage of the remaining performance obligation associated with the contract. In certain cases of breach for non-payment or customer financial distress or bankruptcy, we may not be able to recover the full value of certain contracts or termination fees. Our remaining performance obligation includes 100% of the remaining performance obligation of our consolidated ownership interests, which is consistent with the accounting for our ownership interest in these entities.
(b) 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. Our revenues are disaggregated by billing region, service type and customer set. Revenue by region is based on the locations of

17



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 following table disaggregates revenue by billing region (in thousands, except percentages):
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2019
North America
$
276,366

 
51
%
 
$
264,643

 
52
%
 
$
555,022

 
51
%
 
$
533,013

 
51
%
Europe
64,008

 
12
%
 
64,513

 
13
%
 
128,624

 
12
%
 
125,789

 
12
%
Latin America and Caribbean
71,793

 
13
%
 
60,866

 
12
%
 
142,864

 
13
%
 
126,343

 
12
%
Africa and Middle East
67,979

 
13
%
 
61,686

 
12
%
 
138,719

 
13
%
 
124,106

 
12
%
Asia-Pacific
57,568

 
11
%
 
57,699

 
11
%
 
116,267

 
11
%
 
128,605

 
12
%
Total
$
537,714

 
100
%
 
$
509,407

 
100
%
 
$
1,081,496

 
100
%
 
$
1,037,856

 
100
%
The following table disaggregates revenue by type of service (in thousands, except percentages):
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2019
On-Network Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transponder services
$
392,337

 
73
%
 
$
369,586

 
73
%
 
$
788,034

 
73
%
 
$
746,870

 
72
%
Managed services
98,543

 
18
%
 
91,335

 
18
%
 
199,225

 
18
%
 
184,536

 
18
%
Channel
1,132

 
%
 
585

 
%
 
2,316

 
%
 
1,276

 
%
Total on-network revenues
492,012

 
92
%
 
461,506

 
91
%
 
989,575

 
92
%
 
932,682

 
90
%
Off-Network and Other Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transponder, MSS and other off-network services
36,647

 
7
%
 
37,717

 
7
%
 
71,629

 
7
%
 
87,575

 
8
%
Satellite-related services
9,055

 
2
%
 
10,184

 
2
%
 
20,292

 
2
%
 
17,599

 
2
%
Total off-network and other revenues
45,702

 
8
%
 
47,901

 
9
%
 
91,921

 
8
%
 
105,174

 
10
%
Total
$
537,714

 
100
%
 
$
509,407

 
100
%
 
$
1,081,496

 
100
%
 
$
1,037,856

 
100
%
By customer application, our revenues from network services, media, government and satellite-related services for the three months ended June 30, 2018 were $198.5 million, $234.2 million, $98.5 million and $6.5 million, respectively, as compared to $185.2 million, $223.5 million, $93.3 million and $7.5 million, respectively, for the three months ended June 30, 2019. Revenues for network services, media, government and satellite-related services for the six months ended June 30, 2018 were $397.1 million, $473.5 million, $195.8 million and $15.1 million, respectively, as compared to $389.4 million, $449.5 million, $186.5 million and $12.4 million, respectively, for the six months ended June 30, 2019.
Approximately 11% and 14% of our revenue was derived from our largest customer during each of the three and six months ended June 30, 2018 and 2019, respectively. Our ten largest customers accounted for approximately 37% and 40% of our revenue during each of the three and six months ended June 30, 2018 and 2019, respectively.
Note 4 Net Loss per Share
Basic net loss per common share attributable to Intelsat S.A. ("EPS") is computed by dividing net loss attributable to Intelsat S.A.’s common shareholders by the weighted average number of common shares outstanding during the periods.

18



The following table sets forth the computation of basic and diluted net loss per share attributable to Intelsat S.A.:
 
(in thousands, except per share data or where otherwise noted)
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Numerator:
 
 
 
 
 
 
 
Net loss
$
(45,840
)
 
$
(529,112
)
 
$
(111,689
)
 
$
(649,153
)
Net income attributable to noncontrolling interest
(988
)
 
(610
)
 
(1,940
)
 
(1,191
)
Net loss attributable to Intelsat S.A.
(46,828
)
 
(529,722
)
 
(113,629
)
 
(650,344
)
Net loss attributable to common shareholders
(46,828
)
 
(529,722
)
 
(113,629
)
 
(650,344
)
Numerator for Basic EPS - net loss attributable to common shareholders
(46,828
)
 
(529,722
)
 
(113,629
)
 
(650,344
)
Numerator for Diluted EPS
(46,828
)
 
(529,722
)
 
(113,629
)
 
(650,344
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding (in millions)
124.3

 
140.7

 
122.1

 
139.8

Diluted weighted average shares outstanding (in millions)
124.3

 
140.7

 
122.1

 
139.8

Basic net loss per common share attributable to Intelsat S.A.
$
(0.38
)
 
$
(3.76
)
 
$
(0.93
)
 
$
(4.65
)
Diluted net loss per common share attributable to Intelsat S.A.
$
(0.38
)
 
$
(3.76
)
 
$
(0.93
)
 
$
(4.65
)
In June 2018, Intelsat S.A. completed an offering of $402.5 million aggregate principal amount of its 4.5% Convertible Senior Notes due 2025 (the "2025 Convertible Notes"). We do not expect to settle the principal amount of the 2025 Convertible Notes in cash, and we therefore use the if-converted method for calculating any potential dilutive effect of the conversion on diluted net income per share, if applicable. The 2025 Convertible Notes are eligible for conversion depending upon the trading price of our common shares and under other conditions set forth in the indenture governing the 2025 Convertible Notes (the "2025 Indenture") until December 15, 2024, and thereafter without regard to any conditions. See Note 11—Long-Term Debt for additional information on the conversion conditions.
Due to a net loss for each of the three and six months ended June 30, 2018 and 2019, 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 0.9 million (consisting of common shares issuable pursuant to share-based compensation plans) for both the three and six months ended June 30, 2018, and 27.2 million and 26.9 million (consisting of common shares issuable pursuant to share-based compensation plans and the conversion of the 2025 Convertible Notes) for the three and six months ended June 30, 2019, respectively.
Note 5 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.
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 three months ended June 30, 2018 and 2019, compensation expense was $1.6 million and $3.6 million, respectively. During the six months ended June 30, 2018 and 2019, compensation expense was $2.9 million and $6.3 million, respectively.
Time-based RSUs
We granted 0.7 million time-based RSUs during the six months ended June 30, 2019. The majority of these RSUs vest over three years from the date of grant in equal annual installments.
Performance-based RSUs
We granted 0.3 million performance-based RSUs during the six months ended June 30, 2019. 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, which is based on our relative shareholder return percentile ranking versus the S&P 900 Index as defined in the grant agreement.

19



Note 6 Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosure ("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.
The following tables present assets measured and recorded at fair value in our condensed consolidated balance sheets on a recurring basis and their corresponding level within the fair value hierarchy (in thousands), excluding long-term debt (see Note 11—Long-Term Debt). No transfers between Level 1, Level 2 and Level 3 fair value measurements occurred during the six months ended June 30, 2019.
 
 
 
 
Fair Value Measurements as of December 31, 2018
 
Description
As of December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
Marketable securities(1)
$
4,700

 
$
4,700

 
$

 
$

 
Undesignated interest rate cap contracts(2)
33,086

 

 
33,086

 

 
Preferred stock warrant(3)
4,100

 

 

 
4,100

 
Total assets
$
41,886


$
4,700


$
33,086


$
4,100

 
 
 
 
 
 
 
 
 
Fair Value Measurements as of June 30, 2019
 
Description
As of June 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
Marketable securities(1)
$
5,101

 
$
5,101

 
$

 
$

 
Undesignated interest rate cap contracts(2)
6,447

 

 
6,447

 

 
Preferred stock warrant(3)
247

 

 

 
247

 
Total assets
$
11,795


$
5,101


$
6,447


$
247

 
(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 marketable securities was $4.6 million at December 31, 2018 and $4.3 million at June 30, 2019. We sold marketable securities with a cost basis of $0.1 million during both of the three months ended June 30, 2018 and 2019, and $0.3 million and $0.4 million for the six months ended June 30, 2018 and 2019, respectively, and we recorded a nominal gain on the sales for all periods, which is included in other income (expense), net in our condensed consolidated statements of operations.
(2)
The valuation of our interest rate derivative instruments reflects the fair value of premiums paid, taking into account observable inputs including current interest rates, the market expectation for future interest rate volatility and current creditworthiness of the counterparties. As a result, we have determined that the valuation in its entirety is classified as Level 2 within the fair value hierarchy.
(3)
We valued the warrant using a valuation technique that reflects the risk-free interest rate, time to maturity and volatility of comparable companies. We identified the inputs used to calculate the fair value as Level 3 inputs and concluded that the valuation in its entirety is classified as Level 3 within the fair value hierarchy.


20



The following table presents a reconciliation of the preferred stock warrant which is measured and recorded at fair value on a recurring basis using Level 3 inputs (in thousands):
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2019
Balance as of beginning of period
$
4,100

 
$
3,192

 
$
4,100

 
$
4,100

Unrealized loss included in other income (expense), net

 
(2,945
)
 

 
(3,853
)
Balance as of end of period
$
4,100

 
$
247

 
$
4,100

 
$
247


Certain assets such as goodwill, tangible assets, intangible assets and investments without readily determinable fair values are recorded at fair value in the period in which they are initially recognized, and such fair value may be adjusted in subsequent periods if an event occurs or circumstances change that indicate that the asset may be impaired. During each of the three and six months ended June 30, 2019, we recorded impairment charges on certain investments without readily determinable fair values. See Note 9—Investments for additional information related to these fair value measurements.
Note 7 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 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 six months ended June 30, 2019, we made cash contributions to the defined benefit retirement plan of $3.0 million. We anticipate that our remaining contributions to the defined benefit retirement plan in 2019 will be approximately $1.3 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 2019 will be approximately $3.1 million.
Included in accumulated other comprehensive loss at June 30, 2019 was $92.6 million ($61.2 million, net of tax) that has not yet been recognized in net periodic benefit cost.
The following tables show the components of net periodic benefit cost (income) during the three and six months ended June 30, 2018 and 2019 (in thousands). These amounts are recognized in other income (expense), net in the condensed consolidated statements of operations:
 
Pension Benefits
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Interest cost
$
3,607

 
$
3,848

 
$
7,214

 
$
7,695

Expected return on plan assets
(6,121
)
 
(5,873
)
 
(12,240
)
 
(11,745
)
Amortization of unrecognized net loss
1,327

 
1,055

 
2,653

 
2,111

Net periodic benefit cost (income)
$
(1,187
)
 
$
(970
)
 
$
(2,373
)
 
$
(1,939
)

 
Other Postretirement Benefits
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Interest cost
$
663

 
$
383

 
$
1,326

 
$
766

Amortization of unrecognized prior service credits
(2
)
 
(636
)
 
(4
)
 
(1,272
)
Amortization of unrecognized net gain
(101
)
 
(307
)
 
(201
)
 
(615
)
Net periodic benefit cost (income)
$
560

 
$
(560
)
 
$
1,121

 
$
(1,121
)

21



(b) Other Retirement Plans
We maintain a defined contribution retirement plan qualified under the provisions of Section 401(k) of the Internal Revenue Code. We recognized compensation expense for this plan of $2.0 million and $2.2 million during the three months ended June 30, 2018 and 2019, respectively, and $4.1 million and $4.3 million for the six months ended June 30, 2018 and 2019, 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 8 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,
2018
 
As of
June 30,
2019
Satellites and launch vehicles
$
10,786,802

 
$
10,356,276

Information systems and ground segment
894,796

 
931,273

Buildings and other
273,155

 
275,216

Total cost
11,954,753

 
11,562,765

Less: accumulated depreciation
(6,443,051
)
 
(6,648,654
)
Total
$
5,511,702

 
$
4,914,111


Satellites and other property and equipment are stated at historical cost, except for 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, 2018 and June 30, 2019 included construction-in-progress of $371.3 million and $449.7 million, respectively. These amounts relate primarily to satellites under construction and related launch services. Interest costs of $5.7 million and $8.8 million were capitalized for the three months ended June 30, 2018 and 2019, respectively, and $16.8 million and $17.1 million were capitalized for the six months ended June 30, 2018 and 2019, respectively. Additionally, depreciation expense was $164.0 million and $155.2 million for the three months ended June 30, 2018 and 2019, respectively, and $320.8 million and $317.7 million for the six months ended June 30, 2018 and 2019, 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) Satellite Launches
Horizons 3e, a satellite owned by a joint venture between the Company and JSAT International, Inc. ("JSAT"), was successfully launched on September 25, 2018 and completes the Intelsat EpicNG constellation. Horizons 3e brings high-throughput satellite solutions in both C- and Ku-bands to broadband, mobility and government customers in the Asia-Pacific Ocean region from its orbital slot at 169ºE. Horizons 3e is the first Intelsat EpicNG satellite to feature a multiport amplifier that enables power portability across all Ku-band spot beams. This enhanced, advanced digital payload features full beam interconnectivity in three commercial bands and significant upgrades to power, efficiency and coverage flexibility. Horizons 3e entered into service in January 2019.
Intelsat 38, a customized Ku-band payload positioned on a third-party satellite, was successfully launched on September 25, 2018. Intelsat 38 replaced Intelsat 12 at the 45ºE location and hosts direct-to-home platforms for Central and Eastern Europe as well as the Asia-Pacific region. The satellite also provides connectivity for corporate networks and government applications in Africa. Intelsat 38 entered into service in January 2019.
(c) Significant Anomalies
In April 2019, the Intelsat 29e satellite (in service since 2016) experienced an anomaly that resulted in a total loss of the satellite. In accordance with our existing satellite anomaly contingency plans, we restored service for most Intelsat 29e customers on other satellites in our network, as well as on third-party satellites. We recorded a non-cash impairment charge of $381.6 million in the second quarter of 2019, of which $377.9 million related to the write off of the carrying value of the satellite and associated deferred performance incentive obligations and $3.7 million related to prepaid regulatory fees.

22



A failure review board comprised of the satellite’s manufacturer, Boeing Satellite Systems, Inc., the Company and external independent experts was convened to complete a comprehensive analysis of the cause of the anomaly. The board concluded that the anomaly was either caused by a harness flaw in conjunction with an electrostatic discharge event related to solar weather activity, or the impact of a micrometeoroid.
Note 9 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”), which are discussed in further detail below, including our analyses of the primary beneficiary determination as required under ASC 810, Consolidation ("ASC 810"). We also own noncontrolling investments recognized under the measurement alternative, discussed further below.
(a) Horizons Holdings
Horizons Holdings is a joint venture with JSAT that consists of two investments: Horizons-1 Satellite LLC and Horizons-2 Satellite LLC. 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 in return utilize capacity from the joint venture.
We have determined that this joint venture meets the criteria of a VIE under 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 ASC 810, as the primary beneficiary, we consolidate Horizons Holdings within our consolidated financial statements. Total assets of Horizons Holdings were $28.8 million and $24.5 million as of December 31, 2018 and June 30, 2019, respectively. Total liabilities were nominal as of both December 31, 2018 and June 30, 2019.
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 $5.5 million and $8.1 million as of December 31, 2018 and June 30, 2019, respectively.
(b) Horizons-3 Satellite LLC
On November 4, 2015, we entered into a new joint venture agreement with JSAT. The joint venture, Horizons 3, was formed for the purpose of developing, launching, managing, operating and owning a high performance satellite 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. Amounts payable to JSAT related to the revenue sharing agreement, net of applicable fees and commissions, from the Horizons 3 satellite was $2.3 million as of June 30, 2019 with no comparable amount as of December 31, 2018.
We have determined that this joint venture meets the criteria of a VIE under ASC 810; however, 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. The investment balance, which is equivalent to our maximum exposure to loss, was $109.9 million and $110.2 million as of December 31, 2018 and June 30, 2019, respectively. The investment balance exceeds our equity in the net assets of Horizons 3 by $11.9 million and $12.0 million as of December 31, 2018 and June 30, 2019, respectively. This basis difference represents the capitalized interest that we incurred in relation to financing our investment and we recognize it as a reduction of our equity in earnings of Horizons 3 on a straight-line basis over the life of the satellite. We recognized a nominal amount of equity in earnings of Horizons 3 in other income (expense), net for each of the three and six months ended June 30, 2018 and 2019.
In connection with our investment in Horizons 3, we entered into a capital contribution and subscription agreement, which required 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 $41.2 million during the year ended December 31, 2018. We are no longer required to make capital contributions and therefore no comparable amounts were recorded during the six months ended June 30, 2019. 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

23



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.
The Horizons 3e satellite entered into service in January 2019. The Company purchases satellite capacity and related services from the Horizons 3 joint venture, and then sells that capacity to its customers. We incurred direct costs of revenue related to these purchases of $5.6 million and $9.2 million during the three and six months ended June 30, 2019, respectively. The Company also sells managed ground network services to the Horizons 3 joint venture and provides program management services for a fee. We recorded a nominal gain related to the provision of these services during each of the three and six months ended June 30, 2019. On the condensed consolidated balance sheet as of June 30, 2019, $0.5 million due from Horizons 3 was included in receivables and $1.9 million due to Horizons 3 was included in accounts payable and accrued liabilities.
(c) Investments Without Readily Determinable Fair Values
Our investments without readily determinable fair values recorded in other assets in our condensed consolidated balance sheets had a total carrying value of $73.7 million and $54.3 million as of December 31, 2018 and June 30, 2019, respectively, consisting of six separate noncontrolling investments in both periods.
We evaluated these investments as of June 30, 2019 for indicators of impairment and concluded that certain of our noncontrolling investments were impaired, primarily based on third-party valuations, private transactions and internal projections of future profitability based on Level 3 inputs. As a result, we recorded an impairment charge of $29.0 million during each of the three and six months ended June 30, 2019.
Note 10 Goodwill and Other Intangible Assets
The carrying amount of goodwill consists of the following (in thousands):
 
As of
December 31,
2018
 
As of
June 30,
2019
Goodwill
$
6,780,827

 
$
6,780,827

Accumulated impairment losses
(4,160,200
)
 
(4,160,200
)
Net carrying amount
$
2,620,627

 
$
2,620,627


The carrying amounts of acquired intangible assets not subject to amortization consist of the following (in thousands):
 
As of
December 31,
2018
 
As of
June 30,
2019
Orbital locations
$
2,387,700

 
$
2,387,700

Trade name
65,200

 
65,200

We account for goodwill and other non-amortizable intangible assets in accordance with ASC 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 amounts and accumulated amortization of acquired intangible assets subject to amortization consist of the following (in thousands):
 
As of December 31, 2018
 
As of June 30, 2019
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Backlog and other
$
743,760

 
$
(701,445
)
 
$
42,315

 
$
743,760

 
$
(707,325
)
 
$
36,435

Customer relationships
534,030

 
(265,242
)
 
268,788

 
534,030

 
(276,538
)
 
257,492

Total
$
1,277,790


$
(966,687
)

$
311,103


$
1,277,790


$
(983,863
)

$
293,927

Intangible assets are amortized based on the expected pattern of consumption. Amortization expense was $9.6 million and $8.6 million for the three months ended June 30, 2018 and 2019, respectively, and $19.2 million and $17.2 million for the six months ended June 30, 2018 and 2019, respectively.
Note 11 Long-Term Debt

24



The carrying values and fair values of our notes payable and long-term debt were as follows (in thousands):
 
As of December 31, 2018
 
As of June 30, 2019
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Intelsat S.A.:
 
 
 
 
 
 
 
4.5% Convertible Senior Notes due June 2025
$
402,500

 
$
590,427

 
$
402,500

 
$
555,953

Unamortized prepaid debt issuance costs and discount on 4.5% Convertible Senior Notes
(149,083
)
 

 
(141,452
)
 

Total Intelsat S.A. obligations
253,417

 
590,427

 
261,048

 
555,953

Intelsat Luxembourg:
 
 
 
 
 
 
 
7.75% Senior Notes due June 2021
421,219

 
381,203

 
421,219

 
406,476

Unamortized prepaid debt issuance costs on 7.75% Senior Notes
(2,062
)
 

 
(1,667
)
 

8.125% Senior Notes due June 2023
1,000,000

 
765,000

 
1,000,000

 
775,000

Unamortized prepaid debt issuance costs on 8.125% Senior Notes
(7,256
)
 

 
(6,562
)
 

12.5% Senior Notes due November 2024
403,350

 
376,807

 
403,350

 
368,458

Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes
(198,620
)
 

 
(192,021
)
 

Total Intelsat Luxembourg obligations
1,616,631


1,523,010


1,624,319


1,549,934

Intelsat Connect Finance:
 
 
 
 
 
 
 
9.5% Senior Notes due February 2023
1,250,000

 
1,062,500

 
1,250,000

 
1,112,500

Unamortized prepaid debt issuance costs and discount on 9.5% Senior Notes
(34,904
)
 

 
(31,413
)
 

Total Intelsat Connect Finance obligations
1,215,096


1,062,500


1,218,587


1,112,500

Intelsat Jackson:
 
 
 
 
 
 
 
9.5% Senior Secured Notes due September 2022
490,000

 
556,150

 
490,000

 
568,400

Unamortized prepaid debt issuance costs and discount on 9.5% Senior Secured Notes
(14,545
)
 

 
(12,918
)
 

8% Senior Secured Notes due February 2024
1,349,678

 
1,390,168

 
1,349,678

 
1,403,665

Unamortized prepaid debt issuance costs and premium on 8% Senior Secured Notes
(4,671
)
 

 
(4,295
)
 

5.5% Senior Notes due August 2023
1,985,000

 
1,717,025

 
1,985,000

 
1,806,350

Unamortized prepaid debt issuance costs on 5.5% Senior Notes
(10,859
)
 

 
(9,806
)
 

9.75% Senior Notes due July 2025
1,485,000

 
1,488,713

 
1,885,000

 
1,929,769

Unamortized prepaid debt issuance costs on 9.75% Senior Notes
(18,230
)
 

 
(21,799
)
 

8.5% Senior Notes due October 2024
2,950,000

 
2,832,000

 
2,950,000

 
2,920,500

Unamortized prepaid debt issuance costs and premium on 8.5% Senior Notes
(15,310
)
 

 
(13,984
)
 

Senior Secured Credit Facilities due November 2023
2,000,000

 
1,940,000

 
2,000,000

 
1,982,500

Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities
(26,965
)
 

 
(24,622
)
 

Senior Secured Credit Facilities due January 2024
395,000

 
395,988

 
395,000

 
395,988

Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities
(1,933
)
 

 
(1,771
)
 

6.625% Senior Secured Credit Facilities due January 2024
700,000

 
694,750

 
700,000

 
705,250

Unamortized prepaid debt issuance costs and discount on Senior Secured Credit Facilities
(3,427
)
 

 
(3,137
)
 

Total Intelsat Jackson obligations
11,258,738


11,014,794


11,662,346


11,712,422

Eliminations:
 
 
 
 
 
 
 

25



8.125% Senior Notes of Intelsat Luxembourg due June 2023 owned by Intelsat Jackson
(111,663
)
 
(85,422
)
 
(111,663
)
 
(86,539
)
Unamortized prepaid debt issuance costs on 8.125% Senior Notes
810

 

 
733

 

12.5% Senior Notes of Intelsat Luxembourg due November 2024 owned by Intelsat Connect Finance, Intelsat Jackson and Intelsat Envision
(403,245
)
 
(376,708
)
 
(403,245
)
 
(368,362
)
Unamortized prepaid debt issuance costs and discount on 12.5% Senior Notes
198,568

 

 
191,972

 

Total eliminations:
(315,530
)

(462,130
)

(322,203
)

(454,901
)
Total Intelsat S.A. long-term debt
$
14,028,352


$
13,728,601


$
14,444,097


$
14,475,908

The fair value for publicly traded instruments is determined using quoted market prices, and the fair value for non-publicly traded instruments 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 ASC 820, except our senior secured credit facilities and our 2025 Convertible Notes, the inputs for which are classified as Level 2.
Intelsat S.A. 2025 Convertible Notes
In June 2018, we completed an offering of $402.5 million aggregate principal amount of 2025 Convertible Notes. These notes are guaranteed by Intelsat Envision. The net proceeds from the 2025 Convertible Notes offering were used to repurchase debt of Intelsat S.A.’s subsidiaries and for other general corporate purposes. The 2025 Convertible Notes mature on June 15, 2025 unless earlier repurchased, converted or redeemed, as set forth in the 2025 Indenture. Holders may elect to convert their notes depending upon the trading price of our common shares and under other conditions set forth in the 2025 Indenture until December 15, 2024, and thereafter without regard to any conditions. The initial conversion rate is 55.0085 common shares per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $18.18 per common share, subject to customary adjustments, and will be increased upon the occurrence of specified events set forth in the 2025 Indenture. We may redeem the 2025 Convertible Notes at our option, on or after June 15, 2022, and prior to the forty-second scheduled trading day preceding the maturity date, in whole or in part, depending upon the trading price of our common shares as set forth in the optional redemption provisions in the 2025 Indenture or in the event of certain developments affecting taxation with respect to the 2025 Convertible Notes. Based on the closing price of our common shares of $19.45 on June 28, 2019, the if-converted value of the 2025 Convertible Notes was greater than the aggregate principal amount.
In accounting for the transaction, the 2025 Convertible Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component is $149.4 million, which is also recognized as a discount on the 2025 Convertible Notes and represents the value assigned to the conversion option which was determined by deducting the fair value of the liability component from the par value of the 2025 Convertible Notes. The $149.4 million equity component is included in additional paid-in capital on our consolidated balance sheets as of both December 31, 2018 and June 30, 2019 and will not be remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount was recorded as a discount on the 2025 Convertible Notes and will be amortized to interest expense over the contractual term of the 2025 Convertible Notes at an effective interest rate of 13%.
We incurred debt issuance costs of $12.7 million related to the 2025 Convertible Notes, which were allocated to the liability and equity components based on their relative values. Issuance costs attributable to the liability component were $7.3 million and will be amortized to interest expense using the effective interest method over the contractual term of the 2025 Convertible Notes. Issuance costs attributable to the equity component were netted against the equity component in additional paid-in capital.
Interest expense related to the 2025 Convertible Notes was as follows (in thousands):
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2019
Coupon interest
$
654

 
$
4,528

 
$
654

 
$
9,056

Amortization of discount and prepaid debt issuance costs
501

 
3,878

 
501

 
7,632

Total interest expense
$
1,155

 
$
8,406

 
$
1,155

 
$
16,688

Intelsat Jackson Senior Secured Credit Agreement

26



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 $500.0 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.
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 rate 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 were (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 were determined as specified in the Intelsat Jackson Secured Credit Agreement, as amended by the Second Jackson Credit Agreement Amendment, and the LIBOR was not to 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 June 2017, Intelsat Jackson terminated all remaining commitments under its revolving credit facility.
On November 27, 2017, Intelsat Jackson entered into a Third Amendment and Joinder Agreement (the “Third Jackson Credit Agreement Amendment”), which further amended the Intelsat Jackson Secured Credit Agreement. The Third Jackson Credit Agreement Amendment extended the maturity date of $2.0 billion of the existing floating rate B-2 Tranche of term loans (the “B-3 Tranche Term Loans”), to November 27, 2023, subject to springing maturity in the event that certain series of Intelsat Jackson’s senior notes are not refinanced prior to the dates specified in the Third Jackson Credit Agreement Amendment. The B-3 Tranche Term Loans have an applicable interest rate margin of 3.75% for LIBOR loans and 2.75% for base rate loans (at Intelsat Jackson’s election as applicable).

The B-3 Tranche Term Loans were subject to a prepayment premium of 1.00% of the principal amount for any voluntary prepayment of, or amendment or modification in respect of, the B-3 Tranche Term Loans prior to November 27, 2018 in connection with prepayments, amendments or modifications that have the effect of reducing the applicable interest rate margin on the B-3 Tranche Term Loans, subject to certain exceptions. The Third Jackson Credit Agreement Amendment also (i) added a provision requiring that, beginning with the fiscal year ending December 31, 2018, Intelsat Jackson apply a certain percentage of its Excess Cash Flow (as defined in the Third Jackson Credit Agreement Amendment), if any, after operational needs for each fiscal year towards the repayment of outstanding term loans, subject to certain deductions, (ii) amended the most-favored nation provision with respect to the incurrence of certain indebtedness by Intelsat Jackson and its restricted subsidiaries, and (iii) amended the covenant limiting the ability of Intelsat Jackson to make certain dividends, distributions and other restricted payments to its shareholders based on its leverage level at that time.
On December 12, 2017, Intelsat Jackson further amended the Intelsat Jackson Secured Credit Agreement by entering into a Fourth Amendment and Joinder Agreement (the “Fourth Jackson Credit Agreement Amendment”), which, among other things, (i) permitted Intelsat Jackson to establish one or more series of additional incremental term loan tranches if the proceeds thereof are used to refinance an existing tranche of term loans, and (ii) added a most-favored nation provision applicable to the B-3 Tranche Term Loans for further extensions of the existing floating rate B-2 Tranche Term Loans under certain circumstances.
On January 2, 2018, Intelsat Jackson entered into a Fifth Amendment and Joinder Agreement (the “Fifth Jackson Credit Agreement Amendment”), which further amended the Intelsat Jackson Secured Credit Agreement. The Fifth Jackson Credit Agreement Amendment refinanced the remaining $1.095 billion B-2 Tranche Term Loans, through the creation of (i) a new incremental floating rate tranche of term loans with a principal amount of $395.0 million (the “B-4 Tranche Term Loans”), and (ii) a new incremental fixed rate tranche of term loans with a principal amount of $700.0 million (the “B-5 Tranche Term Loans”). The maturity date of both the B-4 Tranche Term Loans and the B-5 Tranche Term Loans is January 2, 2024, subject to springing

27



maturity in the event that certain series of Intelsat Jackson’s senior notes are not refinanced or repaid prior to the dates specified in the Fifth Jackson Credit Agreement Amendment. The B-4 Tranche Term Loans have an applicable interest rate margin of 4.50% per annum for LIBOR loans and 3.50% per annum for base rate loans (at Intelsat Jackson’s election as applicable). We entered into interest rate cap contracts in December 2017 and amended them in May 2018 to mitigate the risk of interest rate increases on the B-4 Tranche Term Loans. The B-5 Tranche Term Loans have an interest rate of 6.625% per annum. The Fifth Jackson Credit Agreement Amendment also specified make-whole and prepayment premiums applicable to the B-4 Tranche Term Loans and the B-5 Tranche Term Loans at various dates.
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 following a further amendment in November 2018 includes one financial covenant: 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 such financial measure is defined in the Intelsat Jackson Secured Credit Agreement. Intelsat Jackson was in compliance with this financial maintenance covenant ratio with a consolidated secured debt to consolidated EBITDA ratio of 2.88 to 1.00 as of June 30, 2019.
2019 Debt Transaction
June 2019 Intelsat Jackson Senior Notes Add-On Offering
In June 2019, Intelsat Jackson completed an add-on offering of $400.0 million aggregate principal amount of its 9.75% Senior Notes due 2025. The 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. The net proceeds from the add-on offering are expected to be used for working capital and general corporate purposes, which may include, among other things, the funding of capital expenditures, future strategic transactions and repayment of our indebtedness.
Note 12 Derivative Instruments and Hedging Activities
Interest Rate Cap Contracts
As of December 31, 2018 and June 30, 2019, we held interest rate cap contracts with an aggregate notional value of $2.4 billion which mature in February 2021. These interest rate cap contracts, which were entered into in 2017 and amended in 2018, are designed to mitigate our risk of interest rate increases on the floating rate portion of our senior secured credit facilities (see Note 11—Long-Term Debt). The contracts have not been designated for hedge accounting treatment in accordance with ASC 815, Derivatives and Hedging ("ASC 815"), and the changes in fair value of these instruments, net of payments received, are recognized in the condensed consolidated statements of operations during the period of change. We received $0.1 million and $7.2 million in settlement payments related to the interest rate cap contracts for the six months ended June 30, 2018 and 2019, respectively.

28



Preferred Stock Warrant
During 2017, we were issued a warrant to purchase preferred shares of one of our investments. We concluded that the warrant is a free standing derivative in accordance with ASC 815.
The following table sets forth the fair value of our derivatives by category (in thousands):
Derivatives not designated as hedging
instruments
 
Classification
 
As of
December 31,
2018
 
As of
June 30,
2019
Interest rate cap contracts
 
Other assets
 
$
33,086

 
$
6,447

Preferred stock warrant
 
Other assets
 
4,100

 
247

Total derivatives
 
 
 
$
37,186

 
$
6,694

The following table sets forth the effect of the derivative instruments in our condensed consolidated statements of operations (in thousands): 
Derivatives not designated as hedging
instruments
 
Classification
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2019
Interest rate cap contracts
 
Gain (loss) included in interest expense, net
 
$
6,950

 
$
(10,861
)
 
$
28,469

 
$
(19,479
)
Preferred stock warrant
 
Loss included in other income (expense), net
 

 
(2,945
)
 

 
(3,853
)
Total gain (loss) on derivative financial instruments
 
$
6,950

 
$
(13,806
)
 
$
28,469

 
$
(23,332
)
Note 13 Leases
Lessee
We lease corporate and branch offices, various facilities, land and equipment, specifically third-party teleport and circuit/dark fiber. Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one year to fifteen years. The exercise of lease renewal options is at our sole discretion. Considering the nature of our business and ongoing technology upgrades relating to the services we provide, we determined that the likelihood of exercising a renewal on any leased property and equipment is uncertain. Therefore, we do not generally include the renewal period in the expected lease terms. Some of our leases may include options to terminate the leases within six months of inception. Our lease agreements generally do not include options to purchase the leased property. The depreciable life of leasehold improvements is limited by the expected lease term in the absence of a transfer of title or purchase option reasonably certain of exercise.
Certain of our lease agreements include rental payments with escalation provisions as defined in the contracts. These escalation provisions are included in the calculation of the present value of the lease payments for purposes of determining the value of the respective ROU asset and lease liability. Our lease agreements do not contain any material residual value guarantees or materially restrictive covenants. We rent, license or sublease certain office space and land to third parties. Our sublease portfolio consists mainly of property operating leases for office space within our McLean, Virginia U.S. administrative headquarters office building.

29



The following table sets forth supplemental balance sheet information related to ROU assets and lease liabilities (in thousands):
 
 
Classification
 
As of June 30, 2019
Assets
 
 
 
 
Operating
 
Other assets
 
$
90,661

Finance
 
Other assets(1)
 
3,659

Total leased assets
 
 
 
$
94,320

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
    Operating
 
Other current liabilities
 
$
13,007

    Finance
 
Other current liabilities
 
1,620

Long-term
 
 
 
 
    Operating
 
Other long-term liabilities
 
105,248

    Finance
 
Other long-term liabilities
 
8,541

Total lease liabilities
 
 
 
$
128,416

 
 
(1)
Net of accumulated amortization of $60.
The following table sets forth supplemental information related to the components of lease expense (in thousands):
 
 
Classification
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost
 
Direct costs of revenue
 
$
3,638

 
$
7,133

Operating lease cost
 
Selling, general and administrative expenses
 
1,536

 
3,094

Finance lease cost
 
 
 
 
 
 
    Amortization of leased assets
 
Depreciation and amortization
 
59

 
63

    Interest on lease liabilities
 
Interest expense, net
 
167

 
219

Sublease income
 
Other income (expense), net
 
(322
)
 
(566
)
Net lease cost
 
 
 
$
5,078

 
$
9,943

The following table sets forth future minimum lease payments together with the present value of lease liabilities under leases as of June 30, 2019 for the remainder of 2019 through 2024 and thereafter (in thousands):
 
 
Operating Leases
 
Finance Leases
 
Total
2019 (excluding the six months ended June 30, 2019)
 
$
10,508

 
$
955

 
$
11,463

2020
 
19,828