Iridium Communications Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Iridium provides global satellite voice and data services, subscriber equipment, and engineering services. It was replacing its first-generation constellation with Iridium NEXT; 60 of 65 launched NEXT satellites were in service at quarter-end.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $136.8m | $116.5m | $390.8m | $332.6m |
| Operating income | $6.0m | $38.1m | $41.8m | $129.4m |
| Net income (loss) | $(12.9)m | $29.3m | $(5.8)m | $92.0m |
| Common-stockholder diluted EPS | $(0.13) | $0.23 | $(0.13) | $0.72 |
Revenue grew 17% in Q3 and 18% for the nine-month period. Service revenue rose 18% in Q3, led by commercial voice/data, IoT, and hosted payload services; subscriber equipment revenue increased 20%. Government service revenue was $22.0m in Q3 and $66.0m year to date, unchanged from the comparable periods. Engineering and support revenue was flat in Q3 but down 18% year to date.
Operating margin fell to approximately 4% in Q3 from 33% and to 11% year to date from 39%. Higher depreciation and amortization—up $39.2m in Q3 and $94.4m year to date—primarily reflected NEXT satellites entering service. Interest expense also increased as less interest was capitalized during construction and the company issued new notes. The nine-month comparison additionally includes a $14.2m Boeing-related gain in 2017 that did not recur.
Cash, debt, and liquidity
- Cash and cash equivalents were $381.5m at September 30, 2018; restricted cash was $190.9m, largely held in the debt-service reserve account. Total cash, cash equivalents, and restricted cash were $572.4m.
- Nine-month operating cash flow was $225.5m, versus $203.2m. Investing cash use was $282.3m, including $294.7m of capital expenditures; financing cash provided was $241.6m, including proceeds from the notes offering.
- Gross debt was $2.134bn: $1.774bn under the credit facility and $360m of senior unsecured notes. The notes bear 10.25% interest and mature April 2023. Credit-facility borrowings mature in 2024 as scheduled, but may accelerate to October 2022 if the notes remain outstanding then.
- Management said liquidity sources should cover requirements for at least 12 months. The credit facility requires minimum available cash, financial ratios, capital-expenditure limits, and $200m in Aireon hosting fees by December 2023. The company reported covenant compliance at quarter-end.
Outlook, risks, and unusual items
- Management expected to launch the final 10 NEXT satellites in December 2018 and complete deployment in 2018. It anticipated continued commercial subscriber growth and full-year subscriber equipment revenue above 2017; no quantified revenue or earnings guidance was provided.
- The U.S. government EMSS contract, at a fixed $88m annual rate, was extended through April 2019. Iridium had begun discussions on a replacement contract, which it expected to enter into in 2019.
- Aireon’s hosting-fee collectability had been uncertain. Following a July amendment specifying staged payments and an updated assessment, Iridium recognized $10.2m of cumulative hosting-services revenue; it had received $8.1m by quarter-end. Contractual hosting-fee receipts are subject to credit-facility prepayment provisions.
- Iridium issued $360m of notes, used part of the proceeds to repay Thales bills of exchange, and recorded a $4.0m debt-extinguishment loss. Maryland tax-law changes increased the year-to-date tax provision by $8.5m. Adoption of the new revenue standard reduced opening retained earnings by $15.7m; management described the current-period income-statement impact as immaterial.
- Key risks include substantial leverage and debt-service demands, covenant breach or acceleration, completion and performance of NEXT, satellite failure and insurance limits, Aireon’s ability to pay, reliance on government customers and wholesale distribution, and regulatory restrictions in some markets. NEXT insurance includes self-insurance and deductibles and does not cover lost revenue.
Important facts for investors to verify
- Whether the final NEXT launch and deployment were completed as planned, and the resulting satellite availability and depreciation burden.
- Whether Aireon makes scheduled hosting payments and Iridium satisfies the $200m hosting-fee covenant and related cash-sweep terms.
- Progress and terms of the replacement EMSS contract before the extension expires in April 2019.
- Cash generation, capital spending, interest costs, debt maturities, and continued compliance with credit-facility covenants.
- Whether subscriber and equipment growth, and Iridium Certus development, translate into sustained operating profitability.