Business context and reporting period
Iridium Communications Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provides global mobile voice and data communications through its satellite network and is investing in Iridium NEXT, its next-generation constellation. Billable subscribers were approximately 705,000, up 9% year over year.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $102.5 | $94.7 | $200.6 | $183.9 |
| Operating income | $29.7 | $28.8 | $58.1 | $54.2 |
| Operating margin | 29% | 30% | 29% | 29% |
| Net income | $15.0 | $15.4 | $31.6 | $30.3 |
| Net income attributable to common stockholders | $12.2 | $13.7 | $27.0 | $26.8 |
| Basic / diluted EPS attributable to common stockholders | $0.14 / $0.14 | $0.18 / $0.18 | $0.33 / $0.32 | $0.35 / $0.35 |
- Q2 revenue growth reflected services of $76.2 million, equipment of $20.3 million and engineering and support services of $6.0 million. For the first half, services were $149.6 million, equipment $40.5 million and engineering and support $10.4 million.
- Six-month operating cash flow was $91.2 million, versus $100.3 million a year earlier. Capital expenditures were $108.1 million, down from $151.7 million; operating cash flow less capital expenditures was approximately negative $16.9 million.
- Six-month investing cash flow was negative $195.8 million, including securities purchases and capital expenditures. Financing provided $254.6 million, principally reflecting $219.7 million of net proceeds from common and Series B preferred stock offerings.
- At June 30, cash and cash equivalents were $336.3 million and marketable securities were $164.2 million. Restricted cash was $83.6 million. Current assets were $616.4 million and current liabilities $102.3 million.
- Credit Facility borrowings were $1.084 billion, with $715.6 million unused. The company reported a $386.1 million available cash balance under the facility definition and a 0.39:1 debt-to-equity ratio; it reported compliance with applicable covenants. Facility debt-service reserves are scheduled to rise to $189 million in 2017.
- Total liabilities were $1.439 billion. Interest costs under the Credit Facility are capitalized during construction; a portion of interest is paid through additional deemed borrowing. Preferred stock carries cumulative dividends: Series A at 7.00% and Series B at 6.75%.
Material changes versus comparable periods
- Q2 revenue increased 8%; first-half revenue increased 9%. Commercial service growth was supported by subscriber gains and a change in prepaid airtime policy. Commercial M2M subscribers increased 18% year over year. Government service revenue benefited from the new fixed-price EMSS contract.
- Operating income rose 3% in Q2 and 7% in the first half, but operating margin was flat to lower. Research and development expense increased 167% in Q2 and 99% for the first half, primarily for Iridium NEXT and faster terminal data speeds. Depreciation also rose as NEXT-compatible ground infrastructure was added.
- Q2 net income declined 3%, while first-half net income increased 4%. Q2 other expense increased to $3.8 million, primarily from Iridium’s share of Aireon losses; the investment balance had reached zero, and further losses would not be recognized until specified recovery conditions are met.
- Common-stockholder earnings and EPS were affected by preferred dividends and higher weighted-average shares. Common shares outstanding rose to 93.1 million from 76.7 million at December 31, 2013, following equity offerings.
Outlook, commentary and risks
- Management estimated approximately $3 billion of Iridium NEXT and related infrastructure costs through 2017. Funding is expected from the $1.8 billion Credit Facility, cash and marketable securities, and internally generated cash flows, including potential hosted-payload and Iridium PRIME proceeds. Management stated liquidity was expected to be sufficient for at least the next 12 months.
- Management expected continued commercial subscriber growth for the remainder of 2014 and expected full-year government service revenue, subscriber equipment revenue and engineering and support revenue to exceed 2013 levels. No specific full-year revenue or earnings guidance was provided in the filing text.
- A May 2014 Credit Facility amendment revised financial covenants and deferred $76 million of scheduled reserve contributions until 2017. The amendment became effective after the company raised the required equity proceeds. It released $11 million from restricted cash during Q2.
- Key risks include Iridium NEXT development, launch and funding costs; continued access to Credit Facility borrowings and covenant compliance; generating sufficient internal and hosted-payload cash flows; maintaining the existing satellite network during transition; reliance on Aireon’s execution and ability to pay hosting fees; competition, regulation, supplier concentration, reliance on wholesale distributors and significant customers, and reliance on a primary commercial gateway and network operations center.
- The company reported no material legal proceedings, no defaults upon senior securities, and effective disclosure controls. It was evaluating the effect of the new revenue recognition standard, which becomes effective for the company in fiscal 2017.
Important facts for investors to verify
- Iridium NEXT spending, launch schedule and total funding needs against the estimated $3 billion program cost and remaining Credit Facility capacity.
- Facility covenant headroom, future debt-service reserve requirements, and the availability and terms of any additional funding if cash flows or project costs diverge from expectations.
- Whether subscriber, government-contract and equipment revenue trends continue, and how increased R&D, depreciation and service-delivery costs affect margins.
- Aireon’s funding, commercial progress and hosting-fee capacity, as well as the potential accounting treatment of further losses.
- The dilution and ongoing dividend implications of common and convertible preferred offerings, including the additional 504,413 Baron shares scheduled for issuance in August 2014.