Iridium Communications Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 1, 2013. Financial amounts below are in millions of dollars unless otherwise noted.
Business context
Iridium provides global satellite voice and data services and sells subscriber equipment through a wholesale distribution network. It reported approximately 647,000 billable subscribers at quarter-end, up 12% from 576,000 a year earlier. The company is investing heavily in Iridium NEXT, its next-generation satellite constellation.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $94.7 | $97.3 | $183.9 | $190.8 |
| Operating income | $28.8 | $28.3 | $54.2 | $42.4 |
| Operating margin | 30.5% | 29.1% | 29.5% | 22.2% |
| Net income | $15.4 | $17.7 | $30.3 | $30.1 |
| Net income attributable to common stockholders | $13.7 | $17.7 | $26.8 | $30.1 |
| Basic earnings per share | $0.18 | $0.24 | $0.35 | $0.41 |
- Service revenue increased 4% in both the quarter and first half, to $71.4 million and $140.2 million, respectively. Growth reflected subscriber gains, partly offset by lower average revenue per user (ARPU).
- Equipment revenue fell 17% in Q2 and 18% for the first half, mainly on lower Iridium 9555 handset sales. Engineering and support revenue declined 30% and 35%, respectively, due to reduced government contract work.
- Six-month operating income rose 28%, helped by lower operating expenses, including reduced R&D and depreciation and amortization. Net income was nearly flat as the income tax provision increased to $18.7 million from $7.2 million.
- Q2 cost of subscriber equipment included a $1.9 million increase to the warranty provision, reflecting projected higher Iridium Pilot claims and higher cost per claim.
Cash flow, balance sheet and funding
- Six-month operating cash flow was $100.3 million, versus $89.4 million. Investing cash outflow was $236.1 million, including $151.7 million of capital expenditures, net purchases of marketable securities, and a $5.0 million Aireon investment. Financing cash inflow was $78.3 million.
- Cash and cash equivalents were $196.8 million at June 30, down from $254.4 million at year-end; marketable securities were $78.8 million. Restricted cash was $67.7 million, including a required $67.5 million debt-service reserve.
- Credit Facility borrowings were $853.6 million, with $946.4 million unused. Total liabilities were $1.17 billion. Management reported compliance with facility covenants at June 30, including a 0.42-to-1 debt-to-equity ratio and $212.2 million of available cash as defined by the facility.
- Management estimated Iridium NEXT and related infrastructure costs through 2017 at approximately $3 billion. The funding plan includes up to $1.8 billion under the Credit Facility, cash on hand and internally generated cash, including potential hosted-payload proceeds. Capitalized facility interest and deemed loan amounts also add to project costs and debt.
Changes, outlook and material risks
- Operating outlook: The filing gives no formal numerical earnings or revenue guidance. Management anticipated continued growth in commercial billable subscribers and an increased scope of government engineering work during the rest of 2013. It noted commercial voice and data growth could be affected by defense spending and troop reductions and Iridium OpenPort product issues.
- Government contracts: The EMSS airtime and GMSS maintenance contracts were scheduled to expire September 30, 2013; Iridium was negotiating renewals. The government is not required to guarantee a minimum user base and may terminate either contract.
- Iridium NEXT: Deployment was expected to begin in early 2015, with final launches by mid-2017. The company had paid Thales $902.1 million, SpaceX $65.1 million and Kosmotras $11.2 million by June 30. It exercised a Kosmotras option for one launch; further options could increase total contract costs.
- Liquidity and covenants: Although management expected available liquidity to cover at least the next 12 months, it expected to need lender modifications to certain Credit Facility covenants with measurement dates beyond that period. Lender agreement is not assured; additional financing might be required and could be unavailable on acceptable terms. Failure to meet borrowing conditions could restrict access to the facility and jeopardize NEXT funding.
- Other notable items: Higher taxes reduced Q2 net income; management cited state net operating loss realizability and reduced benefit from Arizona law changes. A 2012 useful-life estimate change for the existing satellite constellation lowered first-half 2013 depreciation. Aireon became an equity-method investment, with $2.3 million of first-half equity-method expense. Series A preferred dividends were $3.5 million for the first half and reduced income attributable to common holders; conversion could materially dilute common shares.
- Management reported no material legal proceedings, no material changes in internal control during the quarter, and effective disclosure controls. It stated that it had no material off-balance-sheet arrangements.
Key facts investors should verify
- Whether DISA renewed EMSS and GMSS contracts, and the resulting revenue, user and pricing terms.
- Progress, schedule, total cost and financing for Iridium NEXT, including lender covenant modifications and hosted-payload funding assumptions.
- Subscriber growth and ARPU trends by commercial and government service, and ongoing handset sales and Iridium Pilot warranty claims.
- Credit Facility covenant headroom, restricted-cash requirements and the growth in borrowings from capitalized or paid-in-kind interest.
- Tax assumptions, satellite useful-life estimates, and the potential common-share dilution associated with Series A preferred stock and equity awards.