Iridium Communications Inc. — Q3 2013 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2013. Iridium provides global mobile voice and data services through a satellite network and sells equipment through distributors. It reported approximately 655,000 billable subscribers, up 10% year over year. The company is investing heavily in Iridium NEXT, its next-generation satellite constellation.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $100.6m | $100.4m | $284.4m | $291.2m |
| Operating income | $29.5m | $31.7m | $83.6m | $74.1m |
| Operating margin | 29.3% | 31.5% | 29.4% | 25.4% |
| Net income | $16.6m | $17.8m | $46.9m | $47.9m |
| Net income attributable to common stockholders per share, basic | $0.19 | $0.24 | $0.54 | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $144.3m | $132.7m |
For Q3, service revenue rose 6% to $75.4m, while subscriber equipment revenue fell 23% to $20.3m; engineering and support revenue increased 85% to $4.9m. For the nine months, service revenue increased 4% to $215.6m, offset by a 20% decline in equipment revenue to $57.4m and a 9% decline in engineering and support revenue to $11.5m. Net income attributable to common stockholders was $14.8m in Q3 and $41.7m year to date, after preferred dividends.
Nine-month capital expenditures were $263.4m, primarily for Iridium NEXT. Investing cash outflow was $342.3m, including net purchases of marketable securities and a $5.0m investment in an equity-method affiliate. Financing cash inflow was $140.6m. Cash and cash equivalents declined to $197.0m from $254.4m at year-end 2012; marketable securities were $73.3m and restricted cash was $81.2m.
At September 30, the company had $936.3m borrowed under its $1.8bn credit facility, with $863.7m unused. Total assets were $2.19bn and total liabilities $1.27bn. The filing reports compliance with financial covenants at quarter-end and available cash, as defined by the facility, of $204.5m.
Material changes versus comparable periods
- Q3 revenue was essentially flat; service and government engineering work offset lower handset sales. Q3 operating income decreased 7% and net income decreased 7% year over year.
- Nine-month revenue declined 2%, mainly because of lower handset sales and reduced government-sponsored engineering work. Operating income increased 13%, as lower operating expenses—particularly depreciation and amortization and R&D—more than offset the revenue decline. Net income declined 2%, in part because income tax expense rose.
- Iridium recorded $5.5m of additional warranty provision in the first nine months for projected higher Iridium Pilot terminal claims and related initiatives, including $3.6m in Q3.
- Depreciation and amortization declined year over year, reflecting the extended estimated useful life of the existing satellite constellation and the absence of a $2.0m satellite impairment charge recorded in 2012.
Outlook, risks and unusual items
- Management estimated Iridium NEXT and related infrastructure costs through 2017 at approximately $3bn. It expected deployment to begin in early 2015, with final launches by mid-2017.
- Management said available liquidity should meet requirements for at least the next 12 months, but expected to seek lender modifications to certain credit-facility covenants for measurement dates beyond that period. Due to lower projected operational EBITDA—associated with handset weakness and Iridium Pilot warranty issues—the company obtained a waiver providing additional operational EBITDA covenant headroom for the 12 months ending December 31, 2013 and June 30, 2014.
- The company warned that lender modifications are not assured and that additional financing may be needed if internally generated cash flows, hosted-payload revenue or Iridium PRIME proceeds fall short, or project costs exceed expectations. Failure to meet facility conditions could restrict borrowing and jeopardize funding for Iridium NEXT.
- In October 2013, Iridium signed a new five-year U.S. government EMSS contract with fixed annual rates of $64m, $72m and $88m for the first, second and each of the final three years. The government may terminate the contract for convenience. A new GMSS contract has a one-year base term and four optional one-year extensions. Management anticipated a slight decline in full-year 2013 government service revenue despite expected Q4 benefit from the new EMSS contract.
- Other notable items include $3.4m of nine-month other expense, primarily Iridium’s share of Aireon’s loss, and $5.3m of Series A preferred dividends paid during the nine months. No material legal proceedings were reported. Management stated disclosure controls were effective.
- Principal business risks include execution and funding of Iridium NEXT, covenant compliance, existing satellite-network reliability, warranty claims, distributor dependence, competition, and reliance on U.S. government contracts. The U.S. government represented 19% of revenue in the quarter and nine-month period.
Important facts for investors to verify
- Progress and cost outlook for Iridium NEXT, including launch timing and remaining contractual commitments: $2.2bn under the Thales development contract and up to $453.1m under the SpaceX launch agreement.
- Status and terms of requested longer-term credit-facility covenant modifications, the waiver’s coverage, and available borrowing capacity.
- Whether handset demand and Iridium Pilot warranty claims improve, and the effect on operating EBITDA and cash generation.
- Performance and renewal or termination risk of the U.S. government contracts, and the funding and commercial prospects for Aireon and Iridium PRIME.
- Liquidity available for operations after accounting for restricted cash, ongoing Iridium NEXT spending, facility debt service and preferred dividends.