Business context and reporting period
Iridium Communications Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. It provides global mobile voice and data services through a 66-satellite low-earth-orbit network, serving commercial, government and consumer markets. The company reported approximately 739,000 billable subscribers at year-end, up 11% year over year. The filing also presents unaudited fourth-quarter results.
Financial performance and condition
- Revenue: $408.6 million, up 7% from $382.6 million in 2013. Services contributed $309.4 million (76%); equipment $78.2 million (19%); engineering and support $21.0 million (5%).
- Profitability: Operating income was $122.9 million, a 30.1% operating margin, versus $109.9 million and 28.7% in 2013. Net income was $75.0 million, up 20%; diluted EPS was $0.69 versus $0.71. After preferred dividends, net income attributable to common stockholders was $62.7 million.
- Revenue drivers: Service revenue grew 6%, supported by subscriber growth and the new U.S. government airtime contract. Commercial M2M service revenue rose 19% to $58.4 million; commercial voice and data revenue was nearly flat at $185.5 million. Equipment revenue increased 7%.
- Cash flow and investment: Operating cash flow was $214.9 million, up from $183.0 million. Capital expenditures were $441.1 million, mainly for Iridium NEXT; net cash used in investing was $626.3 million. Financing provided $438.8 million, including equity proceeds and facility borrowings.
- Liquidity: Cash and cash equivalents were $211.2 million and marketable securities $261.1 million at year-end. Restricted cash for debt service was $86.1 million. Current assets were $573.1 million versus current liabilities of $102.4 million. Management said available liquidity should cover requirements for at least 12 months.
- Debt and capital: Credit Facility borrowings were $1.291 billion, with $508.6 million undrawn. The facility is secured by substantially all company and domestic-subsidiary assets; principal repayment is expected to begin after specified deployment milestones or September 2017. The company raised approximately $98.9 million net from common-stock offerings and $120.8 million net from Series B preferred stock in 2014.
Material changes versus the prior comparable period
- Revenue increased $25.9 million, led by $17.3 million growth in service revenue and higher equipment and engineering revenue.
- Operating income rose 12%; net income increased $12.5 million. Lower taxes and depreciation helped, while higher R&D and the absence of a $10 million hosted-payload deposit recognized in 2013 partly offset gains.
- R&D expense increased 58% to $17.6 million, primarily for Iridium NEXT and faster-data development. Depreciation and amortization declined 3%, including a $3.8 million benefit from extending estimated useful lives of current satellites.
- Three satellites were lost in 2014; the company recorded a $2.2 million impairment charge and said in-orbit spares were available. The current constellation has exceeded its original design life.
- Cash and marketable securities rose, while debt increased from $1.039 billion to $1.291 billion. Share count also increased following the 2014 equity offerings.
Outlook, risks and unusual items
- Management expected Iridium NEXT launches to begin in the second half of 2015 and deployment to finish in 2017. Estimated design, build, launch and infrastructure costs through 2017 were approximately $3 billion. The first launch had been delayed from the originally planned first quarter of 2015 because of satellite software-development delays.
- Management expected 2015 government service revenue to exceed 2014 and anticipated growth in engineering and support revenue as government-contract work expanded.
- Funding depends on the $1.8 billion Credit Facility, cash and marketable securities, operating cash flow and potential hosted-payload and Iridium PRIME proceeds. Full facility utilization was expected by early 2016. The filing warns that lower cash generation, cost overruns, covenant issues or unavailable financing could delay or impair NEXT deployment.
- Aireon is a key hosted-payload and cash-flow dependency. Its service is under development; it had no FAA service contract, and future investor funding tranches were conditional. The company disclosed expected Aireon hosting fees of $200 million and data-service fees of up to approximately $20 million annually once operational.
- The U.S. government represented about 21% of 2014 revenue. Its major service contracts may be terminated, and the government, Boeing or Motorola Solutions have specified rights to require de-orbit of the current constellation. Management considered exercise of those rights remote, but disclosed that relevant triggering conditions already existed.
- Launch and in-orbit insurance for NEXT was not yet fully placed; failure to meet facility insurance requirements could require a lender waiver. Other material risks include aging satellites, launch and manufacturing delays, distributor and supplier concentration, foreign-market regulation and currency exposure, and reliance on third-party intellectual property.
- The Kappa Digital patent suit was subject to a joint motion to dismiss without prejudice in February 2015; the plaintiff retained the right to refile. The filing did not provide a clear estimate of potential loss.
Important facts for investors to verify
- Progress, timing, total cost and insurance coverage for Iridium NEXT, including launch schedule and lender borrowing conditions.
- Whether Aireon completes development, secures customer commitments (particularly from the FAA), meets funding conditions and pays expected hosting and data fees.
- Satellite constellation reliability through the transition, and the status of government, Boeing and Motorola de-orbit rights and required insurance renewals.
- Operating cash generation, debt-service reserve requirements, covenant headroom and the start and terms of facility repayments.
- Execution of the 2015 government-service and engineering-revenue outlook, alongside subscriber growth, ARPU trends and commercial service margins.
- Potential dilution and preferred-stock dividend obligations: 2014 offerings increased common shares, and Series A and B preferred dividends are cumulative and senior to common stock.
- Auditor and controls status: Ernst & Young issued unqualified opinions on the financial statements and internal controls as of year-end 2014.