Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for Iridium Communications Inc. The filing is unique as it documents the consummation of a business combination on September 29, 2009, where the registrant (formerly GHL Acquisition Corp.) acquired Iridium Holdings LLC. Consequently, the consolidated statements of operations and cash flows for the period reflect only the pre-acquisition activities of the shell company, while the balance sheet reflects the assets and liabilities of the acquired satellite communications business. Iridium provides global mobile voice and data communications services via satellite.
Key Financial Metrics
Consolidated Results (Pre-Acquisition Shell Company):
- Net Loss: $39.4 million for the nine months ended September 30, 2009 (driven primarily by a $34.1 million non-cash loss on the change in fair value of warrants).
- Operating Expenses: $6.9 million for the nine months ended September 30, 2009, primarily professional fees related to the acquisition.
- Cash and Cash Equivalents: $136.6 million as of September 30, 2009.
- Total Assets: $796.7 million (includes acquired assets).
- Total Liabilities: $184.1 million.
- Stockholders' Equity: $612.6 million.
Predecessor Results (Iridium Holdings LLC - Nine Months Ended Sept 29, 2009):
- Total Revenue: $242.9 million (down 0.5% from the prior year period).
- Net Income: $53.3 million.
- Operating Profit: $65.4 million.
- Operating Cash Flow: $64.2 million provided by operating activities.
- Subscriber Base: Approximately 359,000 subscribers (a 12.2% increase year-over-year).
Material Changes vs. Prior Period
The most significant change is the Acquisition of Iridium Holdings on September 29, 2009. Total consideration was approximately $436.0 million, consisting of 29.4 million shares of common stock ($333.4 million), $77.1 million in cash, and a deferred tax benefit payment of $25.5 million.
- Balance Sheet Impact: The acquisition resulted in a step-up in the carrying value of inventory ($11.1 million increase), property and equipment ($332.4 million increase), and intangible assets ($87.8 million increase). Goodwill of $75.5 million was recorded.
- Debt Repayment: Upon closing, the company paid off all outstanding amounts under Iridium's credit facilities ($113.6 million).
- Revenue Trend (Predecessor): While total revenue remained relatively flat, subscriber equipment revenue decreased by 32.3% due to economic downturns and lower unit prices. This was offset by a 23.7% increase in commercial services revenue and a 14.8% increase in government services revenue.
Guidance, Outlook, and Risks
Outlook and Capital Needs: Management anticipates that future growth rates will be slower than historical rates due to economic conditions and market maturation. The company estimates the aggregate cost to design, build, and launch the next-generation constellation, Iridium NEXT, will be approximately $2.7 billion. While the company expects to fund a majority of these costs from internal cash flows, secondary payloads, and warrant proceeds, it will require additional debt or equity financing.
Key Risks and Contingencies:
- De-Orbit Rights: The U.S. government, Boeing, and Motorola hold unilateral rights to require the de-orbit of the satellite constellation upon specific events (e.g., bankruptcy, failure to maintain insurance, or change of control).
- Motorola Dispute: Motorola has asserted a claim for approximately $34.0 million related to the acquisition under the Transition Services Agreement and Note Agreement. The company is in discussions regarding this matter.
- Financing Risk: Failure to secure financing for Iridium NEXT could delay or impair the business plan. The global economic crisis has tightened credit markets.
- Operational Risks: The current satellite constellation has exceeded its original design life. Six satellites have failed in orbit since 2001, and one was lost in a collision with a Russian satellite in February 2009.
- Customer Concentration: The U.S. government represents a significant portion of revenue (approx. 23% for the nine-month period). The two largest commercial customers accounted for 23% of revenue.
Investor Verification Checklist
- Verify the status and potential resolution of the $34.0 million claim asserted by Motorola regarding the acquisition.
- Confirm the timeline and financing strategy for the $2.7 billion Iridium NEXT project, given the current credit market environment.
- Monitor the de-orbit rights held by the U.S. government, Boeing, and Motorola, specifically regarding insurance requirements and the 2009 deadline extension.
- Assess the impact of the step-up in asset values on future depreciation and amortization expenses, which will increase compared to predecessor periods.
- Review the subscriber growth trends and ARPU (Average Revenue Per User) to gauge the effectiveness of the shift from equipment sales to service revenue.