Iridium Communications Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; dollar amounts below are in millions unless noted. The company provides global satellite-based voice and data communications and was deploying its Iridium NEXT constellation, with completion expected in 2018.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $111.6 | $109.2 | $216.0 | $213.4 |
| Operating income | $35.7 | $41.7 | $91.3 | $85.0 |
| Operating margin | 32% | 38% | 42% | 40% |
| Net income | $24.8 | $26.9 | $62.7 | $55.4 |
| Net margin | 22% | 25% | 29% | 27% |
| Common-stockholder diluted EPS | $0.20 | $0.22 | $0.49 | $0.45 |
| Operating cash flow | Not presented separately for the quarter | $119.9 | $108.8 | |
| Capital expenditures | Not presented separately for the quarter | $168.2 | $156.8 |
- Q2 service revenue rose 4% to $86.6; subscriber equipment revenue fell 7% to $18.8, while engineering and support revenue rose 15% to $6.1.
- Commercial billable subscribers reached 821,000, up 78,000 year over year. M2M data subscribers grew 20%; government service revenue was unchanged at $22.0. Total billable subscribers were over 912,000, up 11% year over year.
- At June 30, cash and cash equivalents were $335.2, marketable securities $21.3, and restricted cash $135.3. Cash and equivalents plus marketable securities totaled $356.5, versus $410.5 at December 31, 2016. Current assets were $463.0 and current liabilities $208.1.
- Credit Facility borrowings were $1.8 billion gross, reported net of $111.6 in deferred financing costs. The facility was fully drawn in February 2017. The company reported a $135.0 minimum debt-service reserve requirement and said the reserve must be fully funded to $189.0 by March 2019.
- Six-month cash used in investing was $150.3; financing used $5.5. Property and equipment received but unpaid was $152.7, an important working-capital and commitment item.
Changes versus prior period and unusual items
- Q2 revenue increased 2%, but operating income fell 14% and net income fell 8%. Higher depreciation and amortization and Iridium NEXT insurance costs outweighed revenue growth; lower income-tax expense partly offset the impact.
- First-half net income increased 13%, despite operating expenses rising $10.5. The increase included a nonrecurring $14.2 gain from terminating prior Boeing agreements, alongside M2M revenue growth; higher depreciation and insurance costs partly offset the benefit.
- Depreciation and amortization rose 57% in Q2 and 31% in the first half, primarily as Iridium NEXT satellites and Russian gateway assets entered service. Cost of services increased with satellite insurance and gateway operating costs.
- Preferred-stock cash dividends were suspended for five quarters beginning with the June 15, 2017 payment under the credit-facility amendments. The unpaid cumulative amounts remain relevant to common-stockholder earnings calculations.
Outlook, financing, and risks
- Management expected Iridium NEXT deployment to finish in 2018, anticipated continued commercial subscriber growth through the rest of 2017, and expected hosting and data revenue to increase as more NEXT satellites enter service. Such revenue was immaterial in the reported periods.
- Post-quarter amendments dated July 26, 2017 deferred about $100 million of Thales milestones to bills of exchange due March 2019, with interest at a specified benchmark plus 1.4%. The amendments also modified delay-damage arrangements; management expected no delay-related cash payments absent substantial future delays.
- The amended credit facility delayed $54 million of 2017 reserve contributions and provided for a $33 million refund, with a possible additional $11 million refund subject to a projected-cash threshold. Aireon hosting fees up to $50 million would be placed in a restricted account under specified access conditions; excess amounts would support the reserve and Thales bills.
- Aireon payment timing is uncertain: its sales to air navigation service providers, including the FAA, were delayed, and it was seeking capital. Management warned that inadequate internal cash flow or higher program costs could require external funding, which may not be available on acceptable terms, and could force deployment delays. Management nevertheless believed liquidity sources were sufficient for at least 12 months.
- Other material execution risks include launch/deployment and satellite-transfer performance, partial self-insurance and uninsured satellite-loss exposure, and Kosmotras’s inability to obtain launch permission, which could put amounts already paid at risk. The U.S. government EMSS contract expires in October 2018 and pricing is then subject to renegotiation.
- The company reported compliance with applicable measured financial covenants at June 30, 2017, including a 0.51 debt-to-equity ratio; it had no available cure amount at that measurement date. A covenant breach or other default could permit lenders to accelerate the debt and foreclose on pledged assets. No material legal proceedings were reported, and the filing reported no material changes to previously disclosed risk factors.
Key investor verification points
- Track Iridium NEXT launch cadence, satellite acceptance and deployment costs against the 2018 completion target.
- Confirm Aireon’s financing, customer contracts, and timing and amount of hosting-fee payments; assess the related reserve-account restrictions.
- Reconcile the $152.7 million of equipment received but unpaid with near-term cash needs, Thales bills, SpaceX obligations, and the March 2019 reserve-funding requirement.
- Monitor covenant headroom, cash generation, debt service, and whether management’s stated 12-month liquidity outlook remains supportable.
- Separate recurring earnings from the $14.2 million Boeing gain and assess the ongoing effects of rising depreciation and NEXT insurance costs.
- Verify the five-quarter preferred-dividend suspension and the EMSS contract renewal and pricing outcome ahead of its October 2018 expiration.