Iridium Communications Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. The company provides global satellite voice, data and IoT services through a low-Earth-orbit network and wholesale distribution partners.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $523.0 million | $448.0 million |
| Service revenue | $406.8 million | $349.7 million |
| Operating income | $41.7 million; 8.0% margin | $115.5 million; 25.8% margin |
| Net income (loss) | $(13.4) million | $233.9 million |
| Operating cash flow | $263.7 million | $259.6 million |
| Capital expenditures | $391.4 million | $400.1 million |
| Cash and cash equivalents | $273.4 million | $285.9 million |
| Gross debt | $2,044.9 million | Not stated here on a comparable gross basis |
- Revenue increased 17%. Commercial services revenue rose 22% to $318.7 million; subscriber equipment revenue increased 27% to $97.8 million. U.S. government service revenue remained $88.0 million.
- Billable subscribers reached approximately 1.121 million, up 16%. Commercial IoT subscribers rose 27% to 647,000; commercial voice and data subscribers were 361,000.
- Operating margin fell as depreciation and amortization rose 78% to $218.2 million, principally as more Iridium NEXT satellites entered service. Interest expense, net, shifted to $62.4 million expense from $4.3 million income as less construction interest was capitalized and the company issued high-cost notes.
- The 2017 net income comparison benefited from a $114.3 million tax benefit, primarily tied to the Tax Act, and a $14.2 million Boeing-related gain. Thus, the year-over-year net-income decline does not reflect operating performance alone.
- Fourth-quarter 2018 revenue was $132.2 million; operating loss was $0.1 million and net loss was $7.6 million.
Liquidity, debt and capital structure
- Operating cash flow was $263.7 million, while investing activities used $378.9 million and financing activities provided $193.5 million. Capital expenditure cash outflow was $391.4 million, reflecting the ongoing Iridium NEXT investment.
- Cash and cash equivalents were $273.4 million; an additional $191.9 million was restricted in the debt-service reserve account. The company reported $273.4 million of available cash under its credit agreement and said it expected liquidity to cover requirements for at least 12 months.
- Debt comprised $1,684.9 million gross under the Credit Facility and $360.0 million of senior unsecured notes. The notes bear 10.25% interest and mature April 2023. If notes remain outstanding October 15, 2022, Credit Facility maturity accelerates from September 2024 to that date.
- Credit Facility covenants require, among other things, minimum available cash of $25 million and at least $200 million of Aireon hosting fees by December 2023. The company reported compliance at year-end; leverage was 5.9x and debt-service coverage was 3.4x.
- Series B preferred dividends were suspended for five quarters beginning with the June 2018 payment under the amended Credit Facility; accumulated unpaid dividends continue to accrue. The company does not expect to pay common-stock dividends in the foreseeable future.
Material developments, outlook and risks
- Iridium NEXT replacement was completed in February 2019, after year-end; remaining construction and launch payments extended into 2019. The approximately $3 billion program was expected to have less than $100 million of costs remaining at December 31, 2018.
- Iridium Certus broadband service launched in January 2019. Management views commercial service growth, including Certus and IoT, as a central opportunity, but the filing gives no specific revenue or earnings guidance. Management cautions that future growth may be slower than historical growth.
- The $88 million annual Enhanced Mobile Satellite Services government contract was extended through April 2019. The company expected to reach a new agreement before expiration, but renewal and terms were not assured. U.S. government revenue was 20% of total revenue in 2018, down from 24% in 2017.
- Aireon is a material opportunity and execution risk: the company recognized $40.5 million of hosted-payload and other data-service revenue in 2018. Aireon hosting fees are subject to collection and contract milestones; certain receipts must prepay the Credit Facility. The FAA planned operational trials of Aireon beginning in 2020.
- Key risks include substantial leverage and refinancing needs, satellite failure and limited insurance beyond the required initial coverage period, dependence on government contracts and distributors, competition and technology shifts, regulatory and spectrum constraints, and international, cybersecurity and supply-chain risks. First-generation satellite de-orbit work was expected to continue through 2019.
- The company adopted the new revenue standard in 2018, recording a $15.7 million reduction to opening retained earnings; it reported an immaterial impact on 2018 results. The new lease standard took effect January 1, 2019, with an estimated $30.4 million increase to assets and liabilities and no material expected effect on results or liquidity.
Most important facts for investors to verify
- Progress and commercial uptake of Certus, including service revenue, terminal availability and customer adoption.
- Renewal terms and continuity of the U.S. government airtime and gateway-support contracts.
- Aireon’s ability to meet hosting-fee and customer milestones, and the timing and amount of related debt prepayments.
- Cash generation after Iridium NEXT completion, covenant headroom, interest burden and the plan to refinance or repay the notes before the 2022 acceleration trigger.
- Satellite constellation performance, remaining de-orbit obligations and insurance coverage as required protection expires.