Iridium Communications Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company provides global satellite voice and data services and was preparing to launch its next-generation Iridium NEXT constellation. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $101.9 | $102.5 | $198.9 | $200.6 |
| Operating income | $42.3 | $29.7 | $75.8 | $58.1 |
| Operating margin | 41.5% | 29.0% | 38.1% | 29.0% |
| Net income | $26.0 | $15.0 | $47.0 | $31.6 |
| Net income attributable to common stockholders | $22.1 | $12.2 | $39.3 | $27.0 |
| Basic / diluted EPS | $0.23 / $0.21 | $0.14 / $0.14 | $0.41 / $0.38 | $0.33 / $0.32 |
- Q2 service revenue rose 2% to $78.0 million, while subscriber equipment revenue fell 8% to $18.8 million and engineering/support revenue declined 14% to $5.1 million. Six-month total revenue decreased 1% year over year.
- For the first half, commercial subscribers increased by 51,000 to 701,000: M2M subscribers rose 15% to 342,000, while commercial voice and data subscribers reached 359,000. Commercial revenue was nearly flat; lower voice/data usage and the weaker Russian ruble offset M2M growth.
- Government service revenue increased to $18.0 million in Q2 and $36.0 million for the first half, principally from an automatic price increase under the U.S. government EMSS contract. Equipment sales were lower, primarily due to handset unit volume.
- Operating income improved despite slightly lower revenue. Lower depreciation and amortization, equipment costs and service costs contributed; net income also benefited from a more favorable comparison in other income/expense than in 2014.
- Six-month operating cash flow was $92.7 million (2014: $91.2 million). Capital expenditures were $174.2 million (2014: $108.1 million); investing cash outflow was $191.7 million. Financing provided $86.9 million, versus $254.6 million in 2014, which included equity issuance proceeds. Cash and cash equivalents declined $12.4 million to $198.9 million.
- At June 30, cash and cash equivalents were $198.9 million, marketable securities $278.0 million and restricted cash $88.6 million. Credit Facility borrowings were $1.393 billion, with $406.9 million unused. The minimum restricted debt-service reserve was $88.5 million and is scheduled to rise to $189.0 million in 2017.
Changes, outlook and material items
- Management estimated Iridium NEXT design, build, launch and related infrastructure costs through 2017 at approximately $3 billion. It expected first launches to begin in December 2015 and constellation deployment to finish in 2017. Thales contract payments totaled $1.421 billion by June 30, 2015.
- Management anticipated continued growth in commercial billable subscribers, full-year 2015 government service revenue above 2014, and 2015 engineering/support revenue growth. No numerical earnings or revenue guidance was provided.
- Management extended estimated useful lives of the existing satellites to align with the evolving Iridium NEXT deployment schedule. The estimate changes reduced depreciation expense by $3.3 million in Q2 and $6.3 million in the first half versus the prior-year periods. Completion of amortization on certain acquired intangible assets also reduced expense. These estimate changes materially supported reported earnings and affect comparability.
- The warranty provision fell by $4.6 million year over year for the first half; management cited fewer Iridium Pilot returns, lower repair costs and revised expected returns. A $1.4 million reserve reduction in Q2 affected both the quarter and first-half results.
- Iridium had placed more than 60% of planned launch insurance coverage, but did not expect to secure all required coverage before the first launch. The Credit Facility requires coverage for all eight launches three months before the first launch; the company was seeking a lender waiver to place remaining coverage in installments. Failure to obtain a waiver could trigger default and acceleration rights. Insurance has deductibles/self-insurance provisions and does not cover lost revenue.
- The company reported compliance with the operational EBITDA covenant at June 30, 2015 and a debt-to-equity ratio of 0.48:1. It stated that liquidity sources should be sufficient for at least 12 months, while warning that covenant restrictions, project cost overruns, insufficient internally generated cash or unavailable additional funding could impair the program. Floating-rate debt creates interest-rate exposure; a 0.5 percentage-point LIBOR change was estimated to alter quarterly interest cost by about $0.2 million at the reported borrowing level.
- Management identified risks involving satellite development and deployment, launch/in-orbit failures and insurance, access to credit, hosted-payload funding and Aireon execution, network continuity, competition, regulation, currency movements, suppliers and reliance on significant customers. No material adverse impact from pending claims was expected; the filing reported no legal proceedings. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Progress on the launch-insurance placement and lender waiver, including the practical effect of policy deductibles and spare-satellite coverage.
- Iridium NEXT schedule, remaining funding needs, actual costs versus the approximately $3 billion estimate, and remaining Credit Facility capacity and covenant headroom.
- Whether subscriber growth converts into service revenue and whether declining ARPU, handset sales and Russian-ruble weakness persist.
- The contribution of useful-life revisions and warranty-reserve changes to earnings, and the future depreciation profile as Iridium NEXT enters service.
- Preferred-stock dividend burden and potential dilution: diluted weighted-average shares rose to 123.2 million in Q2 from 95.7 million a year earlier, reflecting convertible preferred stock and other dilutive instruments.