Iridium Communications Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results are compared with the corresponding 2015 periods. Iridium provides global mobile voice and data services over a satellite network and was preparing to deploy its next-generation Iridium NEXT constellation.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $109.2M | $101.9M | $213.4M | $198.9M |
| Operating income | $41.7M | $42.3M | $85.0M | $75.8M |
| Net income | $26.9M | $26.0M | $55.4M | $47.0M |
| Net income attributable to common stockholders | $23.0M | $22.1M | $47.7M | $39.3M |
| Basic / diluted EPS | $0.24 / $0.22 | $0.23 / $0.21 | $0.50 / $0.45 | $0.41 / $0.38 |
Q2 revenue rose 7%, while operating income was down slightly; operating margin was approximately 38%, versus 42% a year earlier. For the first half, revenue increased 7%, operating income 12%, and net income 18%; operating margin was approximately 40%, versus 38%. Service revenue, the largest category, was $83.5M in Q2 (up 7%) and $163.3M for the half (up 6%). The filing attributes much of government-service growth to a contractual price increase under the U.S. government EMSS contract.
- Cash flow: First-half operating cash flow was $108.8M, versus $92.7M. Capital expenditures were $156.8M, versus $174.2M, implying operating cash flow less capex of negative $48.0M, compared with negative $81.5M in 2015. Investing cash outflow was $30.0M, substantially lower year over year mainly because of net marketable-securities sales. Financing cash inflow was $102.0M, including $129.4M of credit-facility borrowings.
- Liquidity: At June 30, cash and cash equivalents were $367.0M and marketable securities were $76.1M; restricted cash was $102.2M. Total current assets were $536.9M and current liabilities $85.6M.
- Debt: Credit-facility borrowings were $1.651B before $132.1M of deferred financing costs, or $1.519B net on the balance sheet. Undrawn availability was $148.7M. The debt-service reserve requirement was $102.0M and is scheduled to rise to $189.0M in 2017. Credit-facility interest costs are capitalized during construction of Iridium NEXT.
- Other: First-half preferred dividends paid were $7.7M. Billable subscribers were approximately 823,000, up 7% year over year. Commercial subscribers totaled 743,000 (up 42,000), including 384,000 M2M subscribers; government subscribers were 80,000.
Material changes and unusual items
- Q2 total operating expenses increased 13% to $67.5M, outpacing revenue growth. Higher subscriber-equipment costs and SG&A were partly offset by lower R&D. First-half operating expenses rose 4% to $128.4M.
- Government service revenue increased $4.0M in Q2 and $8.0M in the first half, primarily from the EMSS contract price increase. Commercial M2M revenue growth reflected subscriber gains; handset airtime weakness partly offset commercial voice and data growth.
- Management extended the estimated useful lives of current satellites to align with the refined Iridium NEXT deployment schedule, reducing first-half depreciation by about $0.4M versus 2015. Two in-orbit satellites ceased operating in Q2; Iridium recorded a $0.3M impairment and had no spare satellite available in the respective orbital plane.
- Cash and cash equivalents increased by $181.3M from year-end 2015, while marketable securities declined from $203.3M to $76.1M. The company adopted debt-issuance-cost presentation guidance retrospectively, deducting financing costs from debt; this changed balance-sheet presentation, not reported earnings or cash flows.
Outlook, risks and contingencies
- Management expected the first Iridium NEXT launch in September 2016, with operational satellite launches expected to be completed in 2017. The estimated cost of design, construction, launches and related ground upgrades through early 2018 was approximately $3B. The company expected the credit facility to be fully drawn in late 2016 and planned to fund subsequent invoices and interest with cash, marketable securities and internally generated cash flows.
- Management anticipated continued growth in commercial billable subscribers for the remainder of 2016. The filing provides no specific revenue or earnings guidance.
- Funding depends in part on hosted-payload receipts, particularly from Aireon. Aireon was seeking capital and sales contracts, including with air navigation service providers; delayed or partial payments could require changes to Iridium’s funding plan. Iridium said it was discussing reserve-payment relief with lenders and milestone-payment timing with Thales, and could consider temporarily suspending preferred dividends. Management believed liquidity would cover at least 12 months if Aireon paid as contracted or funding-plan adjustments succeeded.
- Key risks include Iridium NEXT launch and execution, access to remaining credit-facility funds and compliance with covenants, hosted-payload cash flows, satellite-network continuity, and the inability of Kosmotras to obtain launch permission to date. The company had obtained insurance for specified early launches and was arranging further coverage.
- The company reported compliance with specified credit-facility covenants at the latest measurement dates and no available cure amount at June 30, 2016. It warned that covenant breach or default could permit lenders to demand repayment; it said it was unlikely to have funds to repay the facility early. No material pending legal proceedings were identified, and the filing reported no material change to annual-report risk factors.
Investor verification points
- Confirm launch milestones, launch-provider arrangements, insurance coverage, and whether Iridium NEXT costs remain within the approximately $3B estimate.
- Monitor Aireon’s funding, customer contracts and timing of hosted-payload payments, alongside any resulting changes to Iridium’s liquidity plan or preferred dividends.
- Track credit-facility drawdown, covenant compliance, the rising debt-service reserve requirement and the financing plan after expected facility exhaustion.
- Assess whether subscriber growth and service revenue can offset equipment-cost and SG&A increases, and whether the satellite-life estimate remains appropriate following satellite losses and NEXT deployment.