Iridium Communications Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Iridium provides global satellite voice and data services through a low-Earth-orbit network; it reported approximately 782,000 billable subscribers, up 6% year over year. The U.S. government was its largest customer, representing 23% of 2015 revenue.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $411.4 million | $408.6 million |
| Operating income | $73.8 million | $122.9 million |
| Operating margin | 17.9% | 30.1% |
| Net income | $7.1 million | $75.0 million |
| Net income (loss) attributable to common stockholders | $(8.3) million; $(0.09) per share | $62.7 million; $0.71 per share |
| Cash provided by operating activities | $217.5 million | $214.9 million |
| Cash used in investing activities | $(439.4) million | $(626.3) million |
| Capital expenditures | $494.8 million | $441.1 million |
| Cash and cash equivalents | $185.7 million | $211.2 million |
| Marketable securities | $203.3 million | $261.1 million |
| Credit Facility borrowings | $1,521.8 million | $1,291.4 million |
| Current assets / current liabilities | $481.7 million / $101.6 million | $573.1 million / $102.4 million |
Operating and net margins are calculated from reported revenue and income. Gross margin is not presented as a clear consolidated metric in the filing. The 2015 net-income figure includes an $87.0 million non-cash goodwill impairment charge; preferred dividends resulted in a loss attributable to common stockholders despite positive consolidated net income.
Material changes versus 2014
- Revenue increased 0.7%. Service revenue rose 2.5% to $317.0 million, while subscriber equipment revenue fell 5.8% to $73.6 million.
- Government service revenue rose $9.5 million, principally from scheduled price increases under the EMSS contract. Commercial voice and data revenue declined $4.9 million amid lower airtime usage; commercial M2M revenue increased $2.9 million as subscribers grew.
- Operating income declined 40% and net income declined 91%. The goodwill impairment was the primary unusual operating charge; the tax provision also increased $24.5 million to $66.0 million, contributing to a 90.3% effective tax rate.
- Depreciation and amortization fell $20.9 million, partly because Iridium extended estimates of the current satellites’ useful lives to align with the Iridium NEXT deployment schedule.
- Operating cash flow was broadly stable, while capital expenditures increased by $53.7 million. Investing cash outflow was lower mainly because the company sold more marketable securities.
Outlook, risks and unusual items
- Iridium NEXT: Management expected launches to begin in July 2016 and constellation deployment to finish in 2017. Estimated design, construction, launch and related infrastructure costs through 2017 were approximately $3 billion. The company expected to draw the full $1.8 billion Credit Facility by late 2016.
- Funding and liquidity: Management stated that available liquidity was expected to cover requirements for at least 12 months. The plan also relies on cash on hand, operating cash flow, hosted-payload receipts and potential Iridium PRIME proceeds. The company cautioned that cost overruns, weaker cash flows, or failure to meet Credit Facility borrowing conditions could require additional financing or delay the program.
- Debt and covenants: At year-end, $278.2 million remained undrawn; the required debt-service reserve was $91.0 million. Iridium reported covenant compliance and a debt-to-equity ratio, as defined by the facility, of 0.52 to 1. The facility is secured by substantially all company and domestic subsidiary assets and restricts, among other things, dividends and additional indebtedness.
- Contract and payload exposure: The five-year, fixed-price U.S. government EMSS contract runs through October 2018 and management expected 2016 government service revenue to exceed 2015. The government may terminate the contract for convenience. Aireon’s ability to deliver the expected hosted-payload cash flows depends on technical, commercial, regulatory and funding milestones; the FAA had not contracted for operational service.
- Operational and regulatory risks: The current satellites have exceeded original design lives; launch delays or failures, satellite outages, regulatory approvals, and insurance availability could disrupt service or increase costs. The FCC license for the current constellation had been extended through January 31, 2018, and Iridium NEXT licensing remained pending.
- De-orbit rights: The U.S. government, Boeing and Motorola Solutions have contractual rights to require de-orbiting in specified circumstances. The filing notes that certain triggering conditions for government rights had already occurred, though management considered exercise remote.
- Q4 unusual item: The fourth quarter recorded the $87.0 million goodwill impairment after a decline in share price and market capitalization; quarterly operating loss was $48.5 million and net loss was $69.4 million.
- The company reported no material pending legal proceedings. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Iridium NEXT launch timing, total cost, launch insurance, and the availability of funding after the Credit Facility is fully drawn.
- Whether cash generation, hosted-payload receipts and covenant headroom are sufficient to support remaining construction and launch payments.
- Trends in commercial airtime usage and ARPU, subscriber growth by service category, and the expected effect on service revenue and margins.
- Aireon’s funding and customer commitments, including progress toward operational regulatory approvals and any FAA contract.
- Satellite reliability and service continuity, and the status of FCC licenses and contractual de-orbit rights.
- The effect of preferred-stock dividends and potential conversion on cash available to common shareholders and per-share results.