Iridium Communications Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results; amounts below are in U.S. dollars unless noted. Iridium provides global mobile voice and data communications through a low-Earth-orbit satellite network. The filing reports approximately 576,000 billable subscribers, up 21% from a year earlier.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $97.3 million | $95.9 million | $190.8 million | $187.2 million |
| Operating income | $28.3 million | $20.7 million | $42.4 million | $37.0 million |
| Operating margin | 29% | 22% | 22% | 20% |
| Net income | $17.7 million | $11.7 million | $30.1 million | $20.0 million |
| Diluted earnings per share | $0.23 | $0.16 | $0.40 | $0.27 |
Q2 service revenue rose 5% to $68.5 million; subscriber equipment revenue rose 9% to $23.9 million; engineering and support revenue fell 44% to $4.9 million. For the first half, service revenue increased 7% to $135.3 million, equipment revenue decreased 2% to $45.5 million, and engineering and support revenue declined 31% to $10.0 million. Commercial M2M subscriber growth contributed to service growth, while voice ARPU declined. Government service revenue was lower year over year.
First-half operating cash flow was $89.4 million, versus $84.1 million. Capital expenditures were $186.7 million, versus $170.9 million; operating cash flow less capital expenditures was therefore negative $97.3 million. Financing provided $127.6 million, mainly from $150.9 million of credit-facility borrowings. Cash and cash equivalents ended the period at $166.7 million, up from $136.4 million at year-end 2011; restricted cash was $40.7 million.
At June 30, the company had borrowed $568.0 million under its $1.8 billion credit facility, with approximately $1.2 billion unused. The required debt-service cash reserve was $40.5 million and is expected to increase to $189.0 million when repayments are expected to begin in 2017. Management stated liquidity sources were expected to cover requirements for at least the next 12 months, subject to borrowing conditions and other uncertainties.
Material changes and notable items
- Operating income increased 36% in Q2 and 14% for the first half, despite modest total-revenue growth. Lower depreciation was a significant contributor: the company extended the estimated useful life of its existing satellite constellation after reassessing its condition. The estimate change reduced depreciation expense by $6.6 million and increased basic and diluted EPS by $0.05 for both reported 2012 periods.
- First-half income tax expense was $7.2 million, down from $10.1 million; the effective tax rate was approximately 19.2%, versus 33.5%. A $5.2 million tax benefit related to Arizona tax-law changes was a principal factor. Q2 tax expense was $8.1 million, versus $6.2 million.
- First-half subscriber-equipment costs included a $1.2 million warranty provision for production issues with the Iridium Extreme handset. The warranty reserve was $5.0 million at June 30. Q2 SG&A also included a $0.7 million increase in bad-debt expense related to a potentially uncollectible receivable.
- Iridium NEXT construction drove capital spending. The company estimated design, build, launch, and related infrastructure costs through 2017 at approximately $3 billion. It had paid Thales $611.4 million, SpaceX $43.9 million, and Kosmotras $11.2 million by June 30; these amounts were capitalized.
- After quarter-end, Iridium amended its SpaceX launch agreement, reducing the maximum price from $492.0 million to $453.1 million. An August amendment to the credit facility authorized specified investments and support for Aireon, revised covenant and launch provisions, and required the company by April 30, 2013 to raise preferred or common equity approximately equal to any unexercised $7.00 warrants. The amendment did not change facility principal, interest rates, repayment dates, or maturity.
Outlook, risks, and contingencies
The company expected to fund Iridium NEXT with up to $1.8 billion of facility borrowings and the balance from internally generated cash flow, hosted-payload receipts, and warrant or replacement equity proceeds. As of June 30, full exercise of outstanding $7.00 warrants would have generated $95.6 million; the filing cautions that warrants may not be exercised and replacement equity may not be available. No specific consolidated revenue or earnings guidance is provided.
Aireon, a subsidiary developing a space-based ADS-B air-traffic monitoring service, was designated the primary hosted-payload customer. Iridium expected approximately $200 million in one-time hosting fees during 2014–2017 if the project proceeds, plus data-fee revenue and a retained interest. Aireon’s ability to raise funds and develop a market for its service is uncertain. Iridium’s exposure under the Harris agreement is not a parent-company payment guarantee, but it intended to provide up to $10 million of airtime credits if needed.
Key risks include access to further credit-facility draws and covenant compliance; meeting the equity-raising requirement tied to unexercised warrants; Iridium NEXT cost, schedule, launch, and execution risks; the health of the current satellite network during transition; Aireon’s funding and commercial success; and government spending and contract renewal. The U.S. government agreement expires in 2013, and the filing identifies successful renegotiation as important. The company noted possible customer receivable collection risk. It reported no material legal proceedings, no material off-balance-sheet arrangements, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Iridium NEXT remains on budget and schedule, and whether total costs stay near the approximately $3 billion estimate.
- Facility covenant compliance, continued borrowing availability, and completion of the required equity raise by April 30, 2013.
- Aireon’s financing, payload development, customer demand, and ability to deliver expected hosting and data-fee cash flows.
- Renewal terms for the U.S. government agreement expiring in 2013, alongside government subscriber trends and voice ARPU.
- Whether the longer satellite useful-life estimate remains supportable and how future depreciation compares after this accounting-estimate benefit.
- Resolution of Iridium Extreme production issues and collection of the receivable identified as potentially uncollectible.