Iridium Communications Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results; it is an annual filing, not a standalone quarterly report. Amounts below are in U.S. dollars.
Business context
Iridium provides global mobile voice and data services through a low-Earth-orbit satellite network. It reported approximately 664,000 billable subscribers at year-end, up 9% from 2012. Commercial services, equipment sales, and U.S. government services were the principal revenue streams. The U.S. government accounted for about 19% of 2013 revenue.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $382.6 million | $383.5 million |
| Service revenue | $292.1 million | $273.5 million |
| Subscriber equipment revenue | $73.3 million | $93.9 million |
| Operating income / margin | $109.9 million / 28.7% | $105.1 million / 27.4% |
| Net income | $62.5 million | $64.6 million |
| Net income per common share, diluted | $0.71 | $0.83 |
| Cash from operating activities | $183.0 million | $174.0 million |
| Capital expenditures | $403.5 million | $441.7 million |
FY 2013 net margin was approximately 16.3%, versus 16.9% in 2012. The filing does not present a consolidated gross-margin figure in the cited results. Fourth-quarter 2013 revenue was $98.2 million, operating income $26.3 million, and net income $15.6 million; the comparable 2012 quarter recorded $92.3 million, $31.0 million, and $16.7 million, respectively. Diluted EPS was $0.18 versus $0.19.
At year-end, cash and cash equivalents were $186.3 million, marketable securities $76.6 million, and restricted cash $81.2 million. Credit Facility borrowings were $1.039 billion, with $760.8 million undrawn. Total liabilities were $1.370 billion and stockholders’ equity $939.5 million. The company reported $204.0 million of available cash under the facility’s definition and a debt-to-equity ratio of 0.48.
Material changes versus the prior comparable period
- Revenue was nearly flat: service revenue grew 7% to $292.1 million, while equipment revenue fell 22%, principally reflecting lower handset sales.
- Commercial service revenue increased 10% to $232.9 million. Commercial subscribers rose by 53,000 to 613,000; M2M growth was partly offset by lower M2M average revenue per user.
- Operating income increased 5%, helped by lower depreciation and R&D expense. Net income declined 3%, primarily because income tax expense rose to $47.9 million from $30.4 million.
- Operating cash flow increased $9.0 million, while investing cash outflow rose to $485.8 million. Financing cash inflow fell to $234.7 million, partly because 2012 included $96.5 million of preferred-stock proceeds.
- Cash and cash equivalents fell by $68.1 million during 2013. Property and equipment increased to $1.576 billion, largely reflecting Iridium NEXT construction.
Outlook, commentary, and significant risks
- Management expected 2014 government service revenue to exceed 2013, with growth also expected in engineering and support revenue. It anticipated M2M revenue growth alongside declining M2M ARPU. These are management expectations, not guarantees.
- The new five-year U.S. government EMSS contract, effective October 22, 2013, has fixed annual fees of $64 million, $72 million, then $88 million in each of the final three years. The government may terminate the contract; the separate gateway-maintenance contract also has government-controlled renewal options.
- Iridium NEXT was estimated to cost approximately $3 billion through 2017. The first launch, previously expected in Q1 2015, was expected to move to Q2 2015 due to satellite-software delays. Funding depends on the Credit Facility, cash generation, hosted-payload receipts, and additional capital raising; management expected lender covenant modifications and additional capital.
- Management received lender waivers that supported covenant compliance at December 31, 2013, while negotiating longer-term changes. Reduced operational EBITDA estimates and later-than-expected Aireon hosted-payload payments heightened financing and covenant risk. Management stated liquidity was sufficient for at least the next 12 months.
- Iridium Pilot terminals had higher-than-expected failure rates in 2012–2013, primarily associated with a power-amplifier component. The company said the issue was addressed by mid-2013, but recorded an additional $6.9 million of warranty expense in 2013; the warranty reserve rose to $8.9 million.
- The existing satellite fleet had exceeded its original design life. A satellite was lost in January 2014; the company expected a $0.9 million impairment in Q1 2014. Risks also include launch delays or failures, aging-satellite outages, dependence on a primary commercial gateway, and contractual rights held by the U.S. government, Boeing, and Motorola Solutions to require de-orbiting under specified circumstances.
- Other notable item: a favorable litigation result led to recognition of a previously deferred $10 million hosted-payload customer deposit in 2013. The filing reports no material pending legal proceeding. The financial statements and internal controls received unqualified audit opinions; management said controls were effective at year-end, while disclosing a prior income-tax control weakness that had resulted in restatements.
Important facts for investors to verify
- Progress on Credit Facility amendments, covenant headroom, and the timing and terms of any required equity or debt financing.
- Iridium NEXT cost, production and launch schedule, and the ability of the current constellation to provide service during the transition.
- Aireon’s funding, milestone conditions, hosted-payload payment timing, and commercial/regulatory progress.
- Whether commercial service growth can offset handset-equipment weakness and lower M2M ARPU, and whether Pilot warranty costs stabilize.
- Exposure to the U.S. government and major distributors, including termination, renewal, and distribution-effort risks.