Iridium Communications Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited supplemental results.
Business context
Iridium provides global mobile satellite voice and data services and equipment through a low-Earth-orbit constellation and wholesale distributor network. It reported approximately 611,000 billable subscribers at year-end, up 17% from 2011. The U.S. government was its largest single customer, representing approximately 20% of 2012 revenue.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $383.5 million | $384.3 million |
| Service revenue | $273.5 million | $262.3 million |
| Subscriber equipment revenue | $93.9 million | $94.7 million |
| Engineering and support revenue | $16.2 million | $27.3 million |
| Operating income | $105.1 million; 27.4% margin | $77.0 million; 20.0% margin |
| Net income | $64.6 million | $41.0 million |
| Diluted EPS | $0.83 | $0.56 |
| Cash from operations | $174.0 million | $183.5 million |
| Capital expenditures | $441.7 million | $359.4 million |
Revenue was nearly flat as service growth was offset by lower engineering and support revenue. Commercial service revenue rose with subscriber growth, but lower usage per subscriber reduced ARPU. Operating income improved partly because total operating expenses fell 9%; a longer estimated useful life for the existing satellites reduced 2012 depreciation by $19.6 million, increasing diluted EPS by $0.16. A $2.0 million satellite impairment partly offset that benefit.
Fourth-quarter 2012 revenue was $92.3 million, operating income $31.0 million, and net income $16.7 million (diluted EPS $0.19). In fourth-quarter 2011, the comparable figures were $95.0 million, $15.8 million, and $8.4 million (diluted EPS $0.11).
Year-end cash and cash equivalents were $254.4 million, with a further $54.2 million in restricted cash. Current assets were $367.2 million and current liabilities $88.7 million. Credit Facility borrowings were $751.8 million; approximately $1.0 billion remained undrawn. Cash used in investing activities was $443.5 million, primarily reflecting NEXT investment. Operating cash flow less capital expenditures was negative $267.6 million, a simple derived measure. The company said available liquidity was sufficient for at least the next 12 months, subject to borrowing conditions and forecast cash generation.
Material changes and financing
- Service revenue increased 4%; engineering and support revenue fell 41%, mainly because the scope of government-sponsored work declined. Management expected government engineering and support work to increase in 2013.
- Commercial service revenue increased 7%, while commercial subscribers grew 18%; lower usage per subscriber constrained revenue growth. Management anticipated further M2M subscriber growth in 2013, with lower M2M ARPU, and expected overall commercial voice subscriber and revenue growth.
- Iridium raised $96.5 million net from issuing 7% Series A cumulative convertible preferred stock and received $9.1 million from warrant exercises. Preferred dividends are cumulative; the securities are convertible and senior to common stock for dividends and liquidation distributions.
- The company extended the estimated useful life of its existing constellation after reassessing satellite health. The revised estimate reduced 2012 depreciation by $19.6 million.
- Management restated 2009–2011 financial statements after identifying errors involving deferred income taxes and undrawn credit-facility fees. A related material weakness in tax accounting controls was reported as remediated by year-end 2012; management and the auditor concluded controls were effective at December 31, 2012.
Outlook, risks and contingencies
- Iridium NEXT: Estimated design, build and launch costs, including related ground upgrades through 2017, were approximately $3 billion. Launches were expected to begin in early 2015. Funding depends on the credit facility, internally generated cash, hosted-payload receipts and equity proceeds. The filing identifies cost overruns, delays, launch or satellite failures, funding availability, and covenant compliance as key risks.
- Debt and liquidity: The $1.8 billion facility is secured by substantially all assets of the obligors and contains financial and operational covenants. Future draws depend on continued compliance. The company expected restricted debt-service reserves to rise from $54 million at year-end 2012 to $189 million by 2017.
- Government contracts: EMSS airtime and gateway maintenance contracts were due to expire March 31, 2013; the government elected to extend them through September 30, 2013. Renewal negotiations were ongoing. The contracts may be terminated by the government, and reported U.S. government revenue was 20% of total revenue in 2012.
- Aireon: The planned space-based ADS-B payload is a new technology and a potential source of hosted-payload cash flows. Its development, market acceptance, funding and conditional NAV CANADA investment tranches are uncertain. Failure to pay hosting costs could affect Iridium’s financing plan.
- Satellite and regulatory exposure: The existing satellites had exceeded original design lives; Iridium had experienced nine satellite losses since 2001, most recently in August 2012. The current constellation license was due to expire in November 2013, with renewal pending. Contractual parties may have specified rights to require de-orbiting; liability insurance was also due for renewal in December 2013.
- Other risks: The filing highlights distributor and customer concentration, competition and pricing pressure, reliance on key suppliers and Boeing, dependence on licensed technology, international regulatory restrictions, and reliance on a primary commercial gateway without a backup facility.
- Unusual operating item: A $1.2 million reserve for production deficiencies in the Iridium Extreme handset contributed to the 2012 warranty provision.
Important facts for investors to verify
- Progress and final cost outlook for Iridium NEXT, launch schedules, and availability of credit-facility draws.
- Renewal terms and revenue impact of the U.S. government EMSS and gateway maintenance contracts.
- Aireon development milestones, customer commitments, funding conditions and expected hosted-payload receipts.
- Satellite constellation performance, FCC license renewal, and renewal of required liability insurance.
- Whether subscriber growth translates into improved ARPU and operating cash flow, given substantial NEXT capital spending.
- Preferred-stock dividend obligations, potential conversion dilution, and continued effectiveness of remediated tax-accounting controls.