Iridium Communications Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Iridium provides global mobile voice and data communications through a low-Earth-orbit satellite network. Unless otherwise noted, financial amounts below are in millions of dollars; 2011 comparatives were restated.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $100.4 | $102.1 | $291.2 | $289.3 |
| Operating income | $31.7 | $24.2 | $74.1 | $61.2 |
| Operating margin | 31.5% | 23.7% | 25.4% | 21.2% |
| Net income | $17.8 | $12.0 | $47.9 | $32.6 |
| Diluted EPS | $0.23 | $0.16 | $0.63 | $0.44 |
- Q3 revenue fell 2%, as lower engineering and support revenue more than offset growth in service and equipment revenue. Nine-month revenue rose 1%; service revenue grew 6% while engineering and support revenue declined 41%.
- Billable subscribers were approximately 595,000 at quarter-end, up 17% from 508,000 a year earlier. Service revenue growth reflected subscriber growth, particularly in commercial M2M; voice ARPU declined.
- Operating income increased despite slightly lower Q3 revenue, helped by lower operating expenses. Depreciation and amortization fell 24% in Q3 and 15% year to date, substantially because Iridium extended the estimated useful life of its existing satellite constellation.
- The useful-life estimate change reduced depreciation expense by $6.5 million in Q3 and $13.1 million year to date, increasing EPS by $0.05 and $0.12, respectively. A $2.0 million satellite impairment charge partially offset the quarterly depreciation reduction.
- Nine-month cash from operations was $132.7 million, versus $131.9 million. Capital expenditures were $221.3 million, compared with $240.3 million; financing provided $141.7 million. Cash increased by $53.0 million to $189.4 million.
- At September 30, cash and cash equivalents were $189.4 million and restricted cash was $54.2 million. The latter included a minimum debt-service reserve of approximately $54.0 million. Borrowings under the $1.8 billion credit facility were $588.9 million, with approximately $1.2 billion undrawn. Total liabilities were $864.1 million.
Material changes, outlook and risks
- Iridium NEXT: The company estimated approximately $3 billion of costs for design, construction and launch and related infrastructure through 2017. Management expected the credit facility, internally generated cash, potential hosted-payload cash flows and preferred-stock proceeds to fund the program through early 2017, but warned that additional financing could be needed if cash flows fall short or costs rise. Management said liquidity sources were expected to meet requirements for at least the next 12 months.
- Credit facility and Aireon: An August amendment permitted specified investment in Aireon, revised covenants and launch requirements, and required the company to raise $100 million through equity issuance and warrant exercises by April 30, 2013. The requirement was met primarily through the subsequent preferred-stock financing. Aireon distributions must be used to repay facility debt; lenders received a security interest in Iridium’s Aireon ownership.
- Subsequent financing: On October 3, 2012, Iridium issued 1 million shares of 7.00% Series A cumulative convertible preferred stock, receiving $96.7 million net. The shares carry cumulative cash dividends and are initially convertible at approximately $9.43 per common share. This financing occurred after quarter-end and is not included in September 30 cash.
- Launch commitments: The August SpaceX amendment reduced the maximum contract price from $492.0 million to $453.1 million by reducing launches and increasing satellites per launch. Iridium had paid Thales $634.5 million toward its $2.2 billion Iridium NEXT contract by quarter-end. Kosmotras provides a supplemental launch option; the company’s decision deadline was March 31, 2013.
- Satellite and customer exposure: The company lost communication with one in-orbit satellite during Q3 and reported that fewer than 66 current satellites were fully functioning at any time. The existing constellation must remain commercially serviceable through the Iridium NEXT transition. The U.S. government is a significant customer; its service contracts extend through March 2013, and renewal terms and defense-spending levels could affect revenue.
- Restatement and controls: Iridium said financial statements for 2009–2011 and certain quarterly periods should no longer be relied upon and planned to amend its 2011 Form 10-K. Errors involved foreign-subsidiary deferred taxes and timing of undrawn credit-facility fees; the errors were non-cash. Management identified a material weakness in tax accounting controls and expanded review procedures using internal staff and third-party tax professionals.
- Other stated risks include credit-facility covenant compliance and access to future draws, funding and execution of Iridium NEXT, Aireon’s ability to fund its hosted payload, satellite and launch failures, insurance availability, competition, regulation, and reliance on distributors and key suppliers. The filing reported no material pending legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Review the amended 2011 Form 10-K and subsequent disclosures for the full restatement, its control implications, and progress in remediating the material weakness.
- Track Iridium NEXT spending, launch schedule, cost changes, facility covenant compliance, borrowing availability and debt-service reserve requirements.
- Assess whether Aireon can secure funding and customers and generate the hosted-payload cash flows assumed in the company’s funding plans.
- Monitor satellite health, service continuity and replacement capacity, as well as the timing and outcome of the U.S. government contract renewal.
- Check the effects of the preferred stock’s dividend and conversion terms, later warrant exchanges, and any resulting cash needs or common-share dilution.