Iridium Communications Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Iridium provides global mobile satellite voice and data services and related equipment; it reported approximately 850,000 billable subscribers at year-end, up 9% year over year.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $433.6 million | $411.4 million |
| Operating income / margin | $176.4 million / 40.7% | $73.8 million / 17.9% |
| Net income | $111.0 million | $7.1 million |
| Net income per common share, diluted | $0.89 | $(0.09) |
| Cash from operating activities | $225.2 million | $217.5 million |
| Capital expenditures | $405.7 million | $494.8 million |
- Revenue grew 5%. Services revenue was $334.8 million, or 77% of total revenue; subscriber equipment contributed $74.2 million and engineering and support services $24.6 million.
- Approximate net margin was 25.6%. The significant year-over-year earnings increase reflects, in particular, the absence of the $87.0 million non-cash goodwill impairment recorded in 2015.
- At year-end, cash and cash equivalents were $371.2 million, marketable securities $39.3 million, and restricted cash $113.1 million. Current assets were $516.8 million and current liabilities $83.2 million.
- Credit Facility principal was $1.778 billion at December 31, 2016; the remaining $22.2 million was drawn in February 2017, bringing the facility to its $1.8 billion limit. Contractual principal repayments are scheduled to begin in 2018. The facility is secured by substantially all company and domestic-subsidiary assets.
Changes versus the prior comparable period
- Revenue increased $22.3 million, led by a $12.9 million increase in government service revenue under the U.S. government contract and a $5.0 million increase in commercial M2M revenue.
- Commercial M2M subscribers increased 15%; commercial voice and data revenue was essentially flat, as lower telephony airtime usage was offset by OpenPort and push-to-talk services.
- Government service revenue rose to $88.0 million, primarily from a scheduled contract price increase. U.S. government revenue represented approximately 25% of total revenue, compared with 23% in 2015.
- Fourth-quarter revenue was $107.4 million versus $106.4 million in Q4 2015; net income was $24.1 million versus a $69.4 million net loss, which included the 2015 goodwill impairment.
- Operating cash flow increased $7.7 million, while capital expenditures remained substantial. Net cash used in investing activities was $242.4 million, down from $439.4 million, partly because of marketable-security sales and lower Iridium NEXT expenditures.
Outlook, commentary, risks and unusual items
- Iridium NEXT is the central investment priority. The company estimated design, build, launch and related infrastructure costs through 2018 at approximately $3 billion. Ten NEXT satellites launched in January 2017; the company expected deployment to finish in 2018.
- Management said available liquidity should cover requirements for at least 12 months, but the funding plan depends on cash on hand, internally generated cash and hosted-payload receipts after the credit facility was fully drawn. The company disclosed that Aireon hosting payments were expected to be delayed and that it was discussing payment deferrals with lenders and Thales. Any proposed deferrals were conditional; the filing does not establish that these terms had been finalized.
- Aireon’s ability to fund hosting payments depends on raising capital and developing customers for its space-based aircraft-surveillance service, including potential FAA business. Aireon had not secured a commercial operational contract with the FAA. The filing cites $234 million in hosting fees and potential data-service fees of up to approximately $20 million annually once operational.
- Other key risks include satellite failures or launch delays, aging first-generation satellites, launch-provider uncertainty (Kosmotras had not obtained permission to launch), and the possibility that the U.S. government or Motorola Solutions could require first-generation satellites to be de-orbited under specified conditions.
- The U.S. government is a significant customer: the five-year EMSS contract provides $88 million annually through October 2018, but the government may terminate it for convenience. Credit-facility covenants restrict borrowing, capital allocation and dividends; the company reported covenant compliance at year-end, but no available cure amount.
- In November 2016, Iridium agreed to bring most satellite operations and maintenance personnel in-house effective January 2017. The filing identifies a $14.4 million gain from derecognizing a legacy Boeing-related liability as a result of terminating the prior agreement.
- Management revised estimated useful lives of first-generation satellites as the NEXT deployment schedule was refined. This reduced 2016 depreciation expense; the estimated effect increased basic and diluted earnings per share by $0.04 and $0.03, respectively. Two satellites ceased operations in Q2 2016, resulting in $0.3 million of impairment charges.
Important facts for investors to verify
- Progress, schedule and remaining cost of Iridium NEXT, including launch performance and compatibility during the transition.
- Timing and collectability of Aireon hosting and data-service payments, its remaining investor funding, and any FAA or other customer contracts.
- Liquidity after the credit facility was fully drawn: cash use, debt-service reserve requirements, proposed deferrals, covenant headroom and debt repayment timing.
- Renewal and terms of first-generation satellite liability and de-orbit insurance, and whether any party exercises de-orbit rights.
- Continuation of the U.S. government contracts and the effect of that customer concentration on revenue.