Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2018
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33963
Iridium Communications Inc.
(Exact name of registrant as specified in its charter)
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DELAWARE | | 26-1344998 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
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1750 Tysons Boulevard, Suite 1400, McLean, Virginia | | 22102 |
(Address of principal executive offices) | | (Zip code) |
703-287-7400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | x | | | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | | Smaller reporting company | ¨ |
Emerging growth company | ¨ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of July 24, 2018 was 110,752,560.
IRIDIUM COMMUNICATIONS INC.
TABLE OF CONTENTS
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ITEM 1. | | | | |
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ITEM 1A. | | | | |
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ITEM 2. | | | | |
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ITEM 3. | | | | |
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ITEM 5. | | | | |
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ITEM 6. | | | | |
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PART I.
Iridium Communications Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
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| | June 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | |
Assets | | |
| | |
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Current assets: | | |
| | |
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Cash and cash equivalents | | $ | 176,105 |
| | $ | 285,873 |
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Marketable securities | | 199,839 |
| | 11,753 |
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Accounts receivable, net | | 74,719 |
| | 68,031 |
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Inventory | | 20,212 |
| | 20,068 |
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Prepaid expenses and other current assets | | 25,048 |
| | 25,347 |
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Total current assets | | 495,923 |
| | 411,072 |
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Property and equipment, net | | 3,334,758 |
| | 3,210,162 |
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Restricted cash and cash equivalents | | 189,797 |
| | 102,384 |
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Intangible assets, net | | 49,250 |
| | 50,019 |
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Other assets | | 10,153 |
| | 8,414 |
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Total assets | | $ | 4,079,881 |
| | $ | 3,782,051 |
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Liabilities and stockholders' equity | | |
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Current liabilities: | | |
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Short-term credit facility | | $ | 108,000 |
| | $ | 85,500 |
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Accounts payable | | 25,725 |
| | 43,100 |
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Accrued expenses and other current liabilities | | 40,503 |
| | 32,215 |
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Interest payable | | 31,775 |
| | 15,021 |
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Deferred revenue | | 21,692 |
| | 38,390 |
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Total current liabilities | | 227,695 |
| | 214,226 |
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Long-term credit facility, net | | 1,571,665 |
| | 1,618,055 |
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Long-term senior unsecured notes, net | | 350,450 |
| | — |
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Deferred income tax liabilities, net | | 260,643 |
| | 246,170 |
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Deferred revenue, net of current portion | | 58,565 |
| | 47,612 |
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Other long-term liabilities | | 4,150 |
| | 59,519 |
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Total liabilities | | 2,473,168 |
| | 2,185,582 |
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Commitments and contingencies | |
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Stockholders' equity: | | |
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Series A preferred stock, $0.0001 par value, 1,000 shares authorized and issued; | | | | |
zero and 1,000 shares outstanding at June 30, 2018 and December 31, 2017 | | — |
| | — |
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Series B preferred stock, $0.0001 par value, 500 shares authorized, | | |
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issued and outstanding | | — |
| | — |
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Common stock, $0.001 par value, 300,000 shares authorized, 110,750 and | | |
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98,203 shares issued and outstanding at June 30, 2018 and December 31, 2017 | | 111 |
| | 98 |
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Additional paid-in capital | | 1,091,116 |
| | 1,081,373 |
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Retained earnings | | 522,150 |
| | 518,794 |
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Accumulated other comprehensive loss, net of tax | | (6,664 | ) | | (3,796 | ) |
Total stockholders' equity | | 1,606,713 |
| | 1,596,469 |
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Total liabilities and stockholders' equity | | $ | 4,079,881 |
| | $ | 3,782,051 |
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See notes to unaudited condensed consolidated financial statements.
Iridium Communications Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Revenue: | | |
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Services | | $ | 103,966 |
| | $ | 86,623 |
| | $ | 193,708 |
| | $ | 168,396 |
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Subscriber equipment | | 25,865 |
| | 18,844 |
| | 51,647 |
| | 35,958 |
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Engineering and support services | | 5,100 |
| | 6,137 |
| | 8,724 |
| | 11,676 |
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Total revenue | | 134,931 |
| | 111,604 |
| | 254,079 |
| | 216,030 |
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Operating expenses: | | |
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Cost of services (exclusive of depreciation | | |
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and amortization) | | 22,644 |
| | 21,368 |
| | 41,596 |
| | 38,326 |
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Cost of subscriber equipment | | 15,619 |
| | 10,868 |
| | 30,833 |
| | 20,972 |
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Research and development | | 5,566 |
| | 3,014 |
| | 10,149 |
| | 6,241 |
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Selling, general and administrative | | 24,266 |
| | 20,411 |
| | 46,761 |
| | 39,628 |
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Depreciation and amortization | | 50,491 |
| | 20,201 |
| | 88,956 |
| | 33,708 |
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Total operating expenses | | 118,586 |
| | 75,862 |
| | 218,295 |
| | 138,875 |
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Gain on Boeing transaction | | — |
| | — |
| | — |
| | 14,189 |
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Operating income | | 16,345 |
| | 35,742 |
| | 35,784 |
| | 91,344 |
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Other income (expense): | | |
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Interest income (expense), net | | (12,985 | ) | | 832 |
| | (17,150 | ) | | 1,665 |
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Other income (expense), net | | 65 |
| | (56 | ) | | 102 |
| | (143 | ) |
Total other income (expense), net | | (12,920 | ) | | 776 |
| | (17,048 | ) | | 1,522 |
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Income before income taxes | | 3,425 |
| | 36,518 |
| | 18,736 |
| | 92,866 |
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Income tax expense | | (7,843 | ) | | (11,740 | ) | | (11,682 | ) | | (30,140 | ) |
Net income (loss) | | (4,418 | ) | | 24,778 |
| | 7,054 |
| | 62,726 |
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Series A preferred stock dividends, declared and paid excluding cumulative dividends | | — |
| | — |
| | 1,750 |
| | 1,750 |
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Series B preferred stock dividends, declared and paid excluding cumulative dividends | | — |
| | — |
| | 2,109 |
| | 2,109 |
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Series A preferred stock dividends, undeclared | | — |
| | 1,750 |
| | — |
| | 1,750 |
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Series B preferred stock dividends, undeclared | | 2,109 |
| | 2,109 |
| | 2,109 |
| | 2,109 |
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Net income (loss) attributable to common stockholders | | $ | (6,527 | ) | | $ | 20,919 |
| | $ | 1,086 |
| | $ | 55,008 |
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Weighted average shares outstanding - basic, excluding | | | | | | | | |
Series A preferred stockholders through the conversion | | | | | | | | |
date of March 20, 2018 | | 111,111 |
| | 97,989 |
| | 105,927 |
| | 97,424 |
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Weighted average shares outstanding - diluted | | 111,111 |
| | 126,943 |
| | 109,405 |
| | 126,659 |
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Net income (loss) attributable to common stockholders per share - basic | | $ | (0.06 | ) | | $ | 0.21 |
| | $ | 0.01 |
| | $ | 0.56 |
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Net income (loss) attributable to common stockholders per share - diluted | | $ | (0.06 | ) | | $ | 0.20 |
| | $ | 0.01 |
| | $ | 0.49 |
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Comprehensive income (loss): | | |
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Net income (loss) | | $ | (4,418 | ) | | $ | 24,778 |
| | $ | 7,054 |
| | $ | 62,726 |
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Foreign currency translation adjustments, net of tax | | (3,003 | ) | | (1,448 | ) | | (2,911 | ) | | 799 |
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Unrealized gain (loss) on marketable securities, net of tax | | 55 |
| | (3 | ) | | 42 |
| | (7 | ) |
Comprehensive income (loss) | | $ | (7,366 | ) | | $ | 23,327 |
| | $ | 4,185 |
| | $ | 63,518 |
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See notes to unaudited condensed consolidated financial statements.
Iridium Communications Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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| | Six Months Ended June 30, |
| | 2018 | | 2017 |
Cash flows from operating activities: | | |
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Net cash provided by operating activities | | $ | 141,088 |
| | $ | 119,866 |
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Cash flows from investing activities: | | |
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Capital expenditures | | (215,031 | ) | | (168,172 | ) |
Purchases of marketable securities | | (201,293 | ) | | — |
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Sales and maturities of marketable securities | | 13,266 |
| | 17,901 |
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Net cash used in investing activities | | (403,058 | ) | | (150,271 | ) |
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Cash flows from financing activities: | | |
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Borrowings under the Credit Facility | | — |
| | 22,207 |
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Payments on the Credit Facility | | (26,131 | ) | | — |
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Borrowings under the senior unsecured notes | | 360,000 |
| | — |
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Extinguishment of the Thales bills of exchange | | (59,936 | ) | | — |
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Payment of deferred financing fees | | (20,440 | ) | | (1,533 | ) |
Proceeds from exercise of stock options | | 2,996 |
| | 1,572 |
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Tax payment upon settlement of stock awards | | (1,512 | ) | | (1,753 | ) |
Payment of Series A preferred stock dividends | | (7,000 | ) | | (1,750 | ) |
Payment of Series B preferred stock dividends | | (8,427 | ) | | (2,109 | ) |
Net cash provided by financing activities | | 239,550 |
| | 16,634 |
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Effect of exchange rate changes on cash and cash equivalents | | 65 |
| | (71 | ) |
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Net decrease in cash and cash equivalents | | (22,355 | ) | | (13,842 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | | 388,257 |
| | 484,306 |
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Cash, cash equivalents, and restricted cash, end of period | | $ | 365,902 |
| | $ | 470,464 |
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Supplemental cash flow information: | | |
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Interest paid | | $ | 37,529 |
| | $ | 42,458 |
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Income taxes paid, net | | $ | 501 |
| | $ | 1,312 |
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Supplemental disclosure of non-cash investing activities: | | |
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Property and equipment received but not yet paid for | | $ | 20,574 |
| | $ | 152,722 |
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Interest capitalized but not yet paid | | $ | 17,138 |
| | $ | 14,272 |
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Capitalized amortization of deferred financing costs | | $ | 10,983 |
| | $ | 10,600 |
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Capitalized stock-based compensation | | $ | 1,131 |
| | $ | 1,561 |
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Cost basis investment for settlement of accounts receivable | | $ | 1,761 |
| | $ | — |
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See notes to unaudited condensed consolidated financial statements.
Iridium Communications Inc.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation and Principles of Consolidation
Iridium Communications Inc. (the “Company”) has prepared its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of (i) the Company, (ii) its wholly owned subsidiaries, and (iii) all less than wholly owned subsidiaries that the Company controls. All material intercompany transactions and balances have been eliminated.
In the opinion of management, the condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018.
2. Significant Accounting Policies
Adopted Accounting Pronouncements
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), that supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 9 for more detail on the Company's accounting policy with respect to revenue recognition.
Effective January 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. The adoption of ASU 2016-15 did not have a material effect on the Company’s consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. The Company intends to apply the new guidance on the effective date of January 1, 2019. Reporting organizations are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company established a project team in order to analyze the effect of the standard on its leases by reviewing its current accounting policies to identify potential differences which would result from applying the requirements of the new standard to its leases. The Company currently anticipates utilizing the practical expedient to address all current operating leases for which it is the lessor. The Company is currently evaluating the effect ASU 2016-02 may have on its future condensed consolidated financial statements and related disclosures, but a lease liability and related right-of-use asset will be recognized for operating lease arrangements where the Company is the lessee.
Fair Value Measurements
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts receivable, accounts payable and accrued expenses and other current liabilities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. The fair value hierarchy consists of the following tiers:
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• | Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; |
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• | Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
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• | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses and other current liabilities) approximate their fair values because of their short-term nature. The fair value of the Company’s investments in money market funds approximates its carrying value; such instruments are classified as Level 1 and are included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.
The fair value of the Company’s investments in commercial paper and short-term U.S. agency securities with original maturities of less than ninety days approximates their carrying value; such instruments are classified as Level 2 and are included in cash and cash equivalents on the accompanying condensed consolidated balance sheets. The fair value of the Company’s investments in fixed-income debt securities and commercial paper with original maturities of greater than ninety days are obtained using similar investments traded on active securities exchanges and are classified as Level 2. For fixed income securities that do not have quoted prices in active markets, the Company uses third-party vendors to price its debt securities resulting in classification as Level 2. All fixed-income securities are included in marketable securities on the accompanying condensed consolidated balance sheets.
3. Cash and Cash Equivalents, Restricted Cash and Marketable Securities
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. These investments, along with cash deposited in institutional money market funds, commercial paper, regular interest bearing and non-interest bearing depository accounts, are classified as cash and cash equivalents in the accompanying condensed consolidated balance sheet. The following table summarizes the Company’s cash and cash equivalents:
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| | June 30, 2018 | | December 31, 2017 | | Recurring Fair Value Measurement |
| | (in thousands) | | |
Cash and cash equivalents: | | |
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Cash | | $ | 20,112 |
| | $ | 24,092 |
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Money market funds | | 142,684 |
| | 251,950 |
| | Level 1 |
Commercial paper | | 13,309 |
| | 9,831 |
| | Level 2 |
Total cash and cash equivalents | | $ | 176,105 |
| | $ | 285,873 |
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Restricted Cash and Cash Equivalents
The Company is required to maintain a minimum cash reserve within a debt service reserve account ("DSRA") for debt service related to its $1.8 billion credit facility (as amended to date, the “Credit Facility”) (see Note 5). As of June 30, 2018 and December 31, 2017, the Company’s restricted cash and cash equivalents balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $189.7 million and $102.3 million, respectively.
Marketable Securities
Marketable securities consist of fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale and are included in marketable securities within current assets in the accompanying condensed consolidated balance sheets. All investments are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of other comprehensive income or loss. The specific identification method is used to determine the cost basis of the marketable securities sold. There were no material realized gains or losses on the sale of marketable securities for the six months ended June 30, 2018 and 2017. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that any decline in fair value of its investments is temporary at June 30, 2018 as the Company does not intend to sell these securities, and it is not likely that the Company will be required to sell the securities, before the recovery of their amortized cost basis.
The following tables summarize the Company’s marketable securities:
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| | June 30, 2018 | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Recurring Fair Value Measurement |
| | (in thousands) | | |
Fixed-income debt securities | | $ | 15,679 |
| | $ | 19 |
| | $ | (5 | ) | | $ | 15,693 |
| | Level 2 |
Commercial paper | | 6,440 |
| | — |
| | — |
| | 6,440 |
| | Level 2 |
U.S. treasuries | | 177,679 |
| | 30 |
| | (3 | ) | | 177,706 |
| | Level 2 |
Total marketable securities | | $ | 199,798 |
| | $ | 49 |
| | $ | (8 | ) | | $ | 199,839 |
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| | December 31, 2017 | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Recurring Fair Value Measurement |
| | (in thousands) | | |
Fixed-income debt securities | | $ | 9,520 |
| | $ | 2 |
| | $ | (15 | ) | | $ | 9,507 |
| | Level 2 |
U.S. treasuries | | 2,249 |
| | — |
| | (3 | ) | | 2,246 |
| | Level 2 |
Total marketable securities | | $ | 11,769 |
| | $ | 2 |
| | $ | (18 | ) | | $ | 11,753 |
| | |
The following table presents the contractual maturities of the Company’s marketable securities:
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| | June 30, 2018 | | December 31, 2017 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (in thousands) |
Mature within one year | | $ | 199,798 |
| | $ | 199,839 |
| | $ | 11,519 |
| | $ | 11,504 |
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Mature after one year and within three years | | — |
| | — |
| | 250 |
| | 249 |
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Total | | $ | 199,798 |
| | $ | 199,839 |
| | $ | 11,769 |
| | $ | 11,753 |
|
4. Commitments and Contingencies
Commitments
Thales
In June 2010, the Company executed a primarily fixed-price full scale development contract ("FSD") with Thales Alenia Space France ("Thales") for the design and build of its Iridium® NEXT satellites. The total price under the FSD is $2.3 billion, and the Company expects payment obligations under the FSD to continue through 2018. As of June 30, 2018, the Company had made aggregate payments of $2.1 billion to Thales, of which $1.5 billion were financed from borrowings under the Credit Facility, and were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet.
On March 9, 2018, the Company and Thales entered into Amendment 32 to the FSD, pursuant to which the Company and Thales unwound the changes made in Amendment 29, which allowed for the deferral of certain milestone payments totaling $100.0 million through the issuance of bills of exchange. Amendment 32 became effective on March 21, 2018 upon the receipt of proceeds from a senior unsecured notes offering (see Note 5). The Company utilized a portion of the proceeds from the
senior unsecured notes to prepay in full the $59.9 million of amounts due under outstanding bills of exchange and will not utilize any new bills of exchange to defer future milestones under the FSD. In connection with the prepayment of the Thales bills of exchange, for the three and six months ended June 30, 2018, the Company recorded a $4.0 million loss on extinguishment of debt, included within interest expense, representing premiums paid and the write-off of unamortized debt issuance costs. The Company had no loss on extinguishment of debt recorded for the three and six months ended June 30, 2017.
SpaceX
In March 2010, the Company entered into an agreement with Space Exploration Technologies Corp. (“SpaceX”) to secure SpaceX as the primary launch services provider for Iridium NEXT (as amended to date, the “SpaceX Agreement”). The total price under the SpaceX Agreement for seven launches and a reflight option in the event of a launch failure is $453.1 million. The SpaceX Falcon 9 rocket is configured to carry ten Iridium NEXT satellites to orbit for each of these seven launches. In November 2016, the Company entered into an agreement for an eighth launch with SpaceX to launch five additional satellites and share the launch with GFZ German Research Centre for Geosciences (“GFZ”). This launch took place in May 2018. The total price under the SpaceX Agreement for the eighth launch was $61.9 million. GFZ paid Iridium $29.8 million to include in the launch NASA’s two Gravity Recovery and Climate Experiment Follow-On satellites. As of June 30, 2018, the Company had made aggregate payments of $486.4 million to SpaceX, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet.
Iridium NEXT Launch and In-Orbit Insurance
As further discussed below, the Company is required, pursuant to its Credit Facility, to obtain insurance covering the launch and first 12 months of operation of the Iridium NEXT satellites. The launch and in-orbit insurance the Company has obtained contains elements, consistent with the terms of the Credit Facility, of self-insurance and deductibles, providing reimbursement only after a specified number of satellite failures. As a result, a failure of one or more of the Iridium NEXT satellites, or the occurrence of equipment failures and other related problems, could constitute an uninsured loss or require the payment of additional premiums and could harm the Company’s financial condition. Furthermore, launch and in-orbit insurance does not cover lost revenue. The total premium for the Company’s current launch and in-orbit insurance is $121.0 million. As of June 30, 2018, the Company had made aggregate premium payments of $107.6 million.
Contingencies
From time to time, in the normal course of business, the Company is party to various pending claims and lawsuits. The Company is not aware of any such actions that it would expect to have a material adverse impact on its business, financial results or financial condition.
5. Debt
Credit Facility
In October 2010, the Company entered into its $1.8 billion credit facility with a syndicate of bank lenders, which was amended and restated on March 9, 2018 (as amended to date, the “Credit Facility”). As of June 30, 2018, the Company reported an aggregate total of $1,773.9 million in borrowings, including $94.2 million of deferred financing costs, for a net balance of $1,679.7 million in borrowings from the Credit Facility in the accompanying condensed consolidated balance sheet. Ninety-five percent of the Company's obligations under the Credit Facility are insured by Bpifrance Assurance Export S.A.S. ("BPIAE"). Future principal repayments with respect to the Credit Facility balance existing at June 30, 2018 by year and in the aggregate, are as follows:
|
| | | | |
| | Amount |
| | (In thousands) |
2018 | | $ | 54,000 |
|
2019 | | 126,000 |
|
2020 | | 216,000 |
|
2021 | | 306,000 |
|
2022 | | 306,000 |
|
Thereafter | | 765,869 |
|
Total credit facility commitments | | $ | 1,773,869 |
|
Unamortized deferred financing costs | | 94,204 |
|
Short-term credit facility | | 108,000 |
|
Long-term credit facility, net | | $ | 1,571,665 |
|
Under the terms of the Credit Facility, as of June 30, 2018, the Company is required to maintain a minimum cash reserve within the DSRA of $189.0 million, which is classified as restricted cash and cash equivalents on the accompanying condensed consolidated balance sheet. The Credit Facility is scheduled to mature in September 2024, subject to acceleration as described below.
As amended and restated, the Credit Facility allowed the Company to issue the Notes and (i) delayed a portion of the principal repayments scheduled under the Credit Facility for 2018, 2019 and 2020 into 2023 and 2024 pursuant to an amended repayment installment schedule, (ii) after funding of the DSRA back to $189.0 million, allowed the Company access to up to $87.0 million from the DSRA in the future if its projected cash level falls below $75.0 million, and (iii) adjusted the Company’s financial covenants, including eliminating covenants that required the Company to receive cash flows from hosted payloads and adding a covenant that requires the Company to receive $200.0 million in hosting fees from Aireon LLC, the Company's primary hosted payload customer, by December 2023. In the event that (a) the Company's cash balance exceeds $140.0 million after September 30, 2019 (subject to specified exceptions) or (b) the Company receives hosting fees from Aireon, the Company would be required pursuant to the Credit Facility to use 50% of such excess cash and up to $200.0 million of hosting fees to prepay the Credit Facility. In addition, if any of the Company's senior unsecured notes remain outstanding on October 15, 2022, which is six months prior to the scheduled maturity thereof, the maturity of all amounts remaining outstanding under the Credit Facility would be accelerated from September 30, 2024 to October 15, 2022. Fees incurred related to the amended and restated Credit Facility were $10.4 million, which were capitalized as deferred financing costs and will be amortized over the remaining term.
Interest costs incurred under the Credit Facility were $32.3 million and $53.7 million for the three and six months ended June 30, 2018, respectively, and $21.6 million and $42.8 million for the three and six months ended June 30, 2017, respectively. Interest costs include original issue discount amortization of $6.3 million and $12.8 million, for the three and six months ended June 30, 2018, respectively and $4.1 million and $10.6 million for the three and six months ended June 30, 2017, respectively. Scheduled semi-annual principal repayments began on April 3, 2018. During the repayment period, interest will be paid on the same date as the principal repayments. Interest expense in 2018 reflects the decrease in the credit facility interest being capitalized as the average balance of satellites in construction has decreased due to additional satellites being launched and placed in service. The Company was in compliance with all Credit Facility covenants as of June 30, 2018.
Senior Unsecured Notes
On March 21, 2018, the Company issued $360.0 million in senior unsecured notes (the "Notes") that bear interest at 10.25% per annum and mature on April 15, 2023. Interest is payable semi-annually on April 15 and October 15, beginning on October 15, 2018, and principal is repaid in full upon maturity. The proceeds of the Notes were used to prepay the outstanding Thales bills
of exchange, including premiums paid, of approximately $59.9 million issued pursuant to the FSD, replenish the DSRA under the Credit Facility to $189.0 million, and will be used to pay approximately $44.4 million in Thales milestones previously expected to be satisfied by the issuance of bills of exchange. The proceeds of the Notes also provided the Company with sufficient cash to meet its needs, including principal and interest payments under the Credit Facility. As of June 30, 2018, the Company reported an aggregate total of $360.0 million in borrowings, including $9.5 million of deferred financing costs, for a net balance of $350.5 million in borrowings from the Notes in the accompanying condensed consolidated balance sheet. The Notes contain covenant requirements that apply to certain permitted financing actions, and are no more restrictive than the covenants in the Credit Facility. The Company was in compliance with all covenant requirements of the Notes as of June 30, 2018.
The Company believes its liquidity sources will provide sufficient funds for it to meet its liquidity requirements for at least the next 12 months.
6. Boeing Insourcing Agreement
On January 3, 2017, the Company hired the majority of the employees and third party contractors who were responsible for the operations and maintenance of the Company’s satellite constellation and ground infrastructure pursuant to an Insourcing Agreement with The Boeing Company. The Company paid Boeing $5.5 million, of which $2.75 million was paid in each of December 2016 and December 2017. As a result, the Company and Boeing terminated their previous Operations and Maintenance Agreement (“O&M Agreement”) and Iridium NEXT Support Service Agreement and entered into a new Development Services Agreement (“DSA”) with a $6.0 million minimum annual commitment through 2021. Boeing no longer has a unilateral right to commence the de-orbit of the Company’s first-generation satellites. The acquisition of this assembled workforce was recorded as a definite-lived intangible asset in January 2017 and is being amortized over an estimated useful life of seven years. Additionally, by terminating the O&M Agreement, the Company recognized a $14.2 million gain in the first quarter of 2017, consisting of (i) the derecognition of a purchase accounting liability created when GHL Acquisition Corp. acquired Iridium Holdings LLC in 2009 related to the fair value of the contractual arrangement with Boeing as of that date, and (ii) the remainder of a credit resulting from a July 2010 Boeing contract amendment.
7. Stock-Based Compensation
In May 2017, the Company’s stockholders approved the amendment and restatement of the Company's 2015 Equity Incentive Plan (as so amended and restated, the “Amended 2015 Plan”), primarily to increase the number of shares available under the plan. As such, the Company registered with the SEC an additional 5,199,239 shares of common stock made available for issuance pursuant to the Amended 2015 Plan, bringing the total to 28,402,248 shares registered. Through June 30, 2018, the remaining aggregate number of shares of the Company's common stock available for future grants under the Amended 2015 plan was 13,255,896. The Amended 2015 Plan provides for the grant of stock-based awards, including nonqualified stock options, incentive stock options, restricted stock, restricted stock units ("RSUs"), stock appreciation rights and other equity securities as incentives and rewards for employees, consultants and non-employee directors of the Company and its affiliated entities. The number of shares of common stock available for issuance under the Amended 2015 Plan is reduced by (i) one share for each share of common stock issued pursuant to an appreciation award, such as a stock option or stock appreciation right with an exercise or strike price of at least 100% of the fair market value of the underlying common stock on the date of grant, and (ii) 1.8 shares for each share of common stock issued pursuant to any stock award that is not an appreciation award, also known as a “full value award.” The Amended 2015 Plan allows the Company to utilize a broad array of equity incentives and performance cash incentives in order to secure and retain the services of its employees, directors and consultants, and to provide long-term incentives that align the interests of its employees, directors and consultants with the interests of the Company’s stockholders. The Company accounts for stock-based compensation at fair value.
Stock Option Awards
The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The stock option awards granted to employees generally (i) have a term of ten years, (ii) vest over a four-year period with 25% vesting after the first year of service and the remainder vesting ratably on a quarterly basis thereafter, (iii) are contingent upon employment on the vesting date, and (iv) have an exercise price equal to the fair value of the underlying shares at the date of grant.
During the six months ended June 30, 2018 and 2017, the Company granted approximately 284,000 and 110,000 stock options, respectively, to its employees, with an estimated aggregate grant date fair value of $1.6 million and $0.5 million, respectively.
Restricted Stock Units
The RSUs granted to employees for service generally vest over a four-year period, with 25% vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter, subject to continued employment. The RSUs
granted to non-employee directors generally vest in full on the first anniversary of the grant date. Some RSUs granted to employees for performance vest upon the completion of defined performance goals, subject to continued employment. The Company’s RSUs are generally classified as equity awards because the RSUs will be paid in the Company's common stock upon vesting. The related compensation expense is recognized over the service period and is based on the grant date fair value of the Company's common stock and the number of shares expected to vest. The fair value of the awards is not remeasured at the end of each reporting period. The awards do not carry voting rights until they are vested and released in accordance with the terms of the award.
Service-Based RSUs
The majority of the annual compensation the Company provides to members of its board of directors is paid in the form of RSUs. In addition, certain members of the Company's board of directors elect to receive the remainder of their annual compensation, or a portion thereof, in the form of RSUs. An aggregate amount of approximately 110,000 and 96,000 service-based RSUs were granted to its directors as a result of these payments and elections during the six months ended June 30, 2018 and 2017, respectively, with an estimated grant date fair value of $1.3 million and $1.0 million, respectively.
During the six months ended June 30, 2018 and 2017, the Company granted approximately 900,000 and 964,000 service-based RSUs, respectively, to its employees, with an estimated aggregate grant date fair value of $10.7 million and $8.5 million, respectively.
In June 2018 and June 2017, the Company granted approximately 13,000 and 8,000 service-based RSUs, respectively, to non-employee consultants. The RSUs are generally subject to service-based vesting. The RSUs will vest 50% in June of the year after the grant and the remaining 50% will vest quarterly thereafter. The estimated aggregate grant date fair value of the RSUs granted to non-employee consultants during the six months ended June 30, 2018 and 2017 was $0.2 million and $0.1 million, respectively.
Performance-Based RSUs
In March 2018 and 2017, the Company granted approximately 474,000 and 1,190,000 performance-based RSUs to the Company’s executives and employees (the “Bonus RSUs”), with an estimated grant date fair value of $5.6 million and $10.5 million, respectively. Vesting of the Bonus RSUs is and was dependent upon the Company’s achievement of defined performance goals over a one-year period (fiscal year 2018 for the 2018 Bonus RSUs and fiscal year 2017 for the 2017 Bonus RSUs). The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. Management believes it is probable that certain of the 2018 Bonus RSUs will vest. The level of achievement, if any, of performance goals will be determined by the compensation committee of the Company’s board of directors and, if such goals are achieved, the 2018 Bonus RSUs will vest, subject to continued employment, in March 2019. A portion of the 2017 Bonus RSUs vested in March 2018 upon the determination of the level of achievement of the performance goals.
Additionally, during 2018 and 2017, the Company awarded approximately 134,000 and 173,000 performance-based RSUs, respectively, to the Company’s executives (the “Executive RSUs”). The estimated aggregate grant date fair value of the Executive RSUs was $1.6 million for the 2018 grants and $1.5 million for the 2017 grants. Vesting of the Executive RSUs is and was dependent upon the Company’s achievement of defined performance goals over a two-year period (fiscal years 2018 and 2019 for the Executive RSUs granted in 2018 and fiscal years 2017 and 2018 for the Executive RSUs granted in 2017). Management believes it is probable that the Executive RSUs will vest at least in part. The vesting of Executive RSUs will ultimately range from 0% to 150% of the number of shares underlying the Executive RSUs granted based on the level of achievement of the performance goals. If the Company achieves the performance goals, 50% of the Executive RSUs will vest on the second anniversary of the grant date, and the remaining 50% will vest on the third anniversary of the grant date, in each case subject to the executive's continued service as of the vesting date.
8. Equity Transactions
Preferred Stock
The Company is authorized to issue 2.0 million shares of preferred stock with a par value of $0.0001 per share. As described below, the Company issued 1.0 million shares of preferred stock in the fourth quarter of 2012 and 0.5 million shares of preferred stock in the second quarter of 2014. The remaining 0.5 million authorized shares of preferred stock remain undesignated and unissued as of June 30, 2018.
Series A Cumulative Perpetual Convertible Preferred Stock
In the fourth quarter of 2012, the Company issued 1.0 million shares of its 7.00% Series A Cumulative Perpetual Convertible Preferred Stock (the "Series A Preferred Stock") in a private offering. During the three months ended March 31, 2018, the Company's daily volume-weighted average stock price remained at or above $12.26 per share for a period of 20 out of 30 trading days, thereby allowing for the conversion of the Series A Preferred Stock at the election of the Company. On March 20, 2018, the Company converted all outstanding shares of its Series A Preferred Stock into shares of common stock, resulting in the issuance of 10,599,974 shares of common stock. The Company declared and paid all current and cumulative dividends to holders of record of Series A Preferred Stock as of March 8, 2018. As such, the Company paid cash dividends of zero and $7.0 million to the holders of the Series A Preferred Stock during the three and six months ended June 30, 2018, respectively. The Company paid cash dividends of zero and $1.8 million to holders of the Series A Preferred Stock during the three and six months ended June 30, 2017, respectively.
Series B Cumulative Perpetual Convertible Preferred Stock
In May 2014, the Company issued 500,000 shares of its 6.75% Series B Cumulative Perpetual Convertible Preferred Stock (the "Series B Preferred Stock") in an underwritten public offering at a price to the public of $250 per share. The purchase price received by the Company, equal to $242.50 per share, reflected an underwriting discount of $7.50 per share. The Company received proceeds of $120.8 million from the sale of the Series B Preferred Stock, net of the $3.8 million underwriter discount and $0.4 million of offering costs.
As of June 30, 2018, there were 500,000 shares of Series B Preferred Stock outstanding. Holders of Series B Preferred Stock are entitled to receive cumulative cash dividends at a rate of 6.75% per annum of the $250 liquidation preference per share (equivalent to an annual rate of $16.875 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. The Series B Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series B Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon the Company’s voluntary or involuntary liquidation, dissolution or winding-up. Holders of Series B Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series B Preferred Stock may convert some or all of their outstanding Series B Preferred Stock at an initial conversion rate of 33.456 shares of common stock per $250 liquidation preference, which is equivalent to an initial conversion price of approximately $7.47 per share of common stock (subject to adjustment in certain events).
In connection with the conversion of the Series A Preferred Stock described above, the Company declared and paid all current and cumulative dividends to holders of record of Series B Preferred Stock as of March 8, 2018. As such, the Company paid cash dividends of zero and $8.4 million to holders of the Series B Preferred Stock during the three and six months ended June 30, 2018, respectively. In compliance with the Credit Facility, subsequent to the dividend payment, the Company began the planned suspension of dividends to holders of the Series B Preferred Stock for five quarters, beginning with the dividend payment that would otherwise be required to be paid in June 2018. The Company paid cash dividends of zero and $2.1 million to holders of the Series B Preferred Stock during the three and six months ended June 30, 2017, respectively.
On or after May 15, 2019, the Company may, at its option, convert some or all of the Series B Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions, including (i) a daily volume-weighted average stock price of at least $11.15 per share over a period of 20 trading days in a 30-day period and (ii) the payment of cumulative dividends. In the event of certain specified fundamental changes, holders of the Series B Preferred Stock will have the right to convert some or all of their shares of Series B Preferred Stock into the greater of (i) a number of shares of the Company’s common stock as subject to adjustment plus the make-whole premium, if any, and (ii) a number of shares of the Company’s common stock equal to the lesser of (a) the liquidation preference divided by the market value of the Company’s common stock on the effective date of such fundamental change and (b) 81.9672 (subject to adjustment). In certain circumstances, the Company may elect to cash settle any conversions in connection with a fundamental change. Any suspended dividends are required to be paid prior to conversion by the Company.
9. Revenue
Effective January 1, 2018, the Company adopted ASU No. 2014-09. Under the new standard, the Company performs the following steps to determine the amount of revenue to be recognized: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the standard using the modified retrospective method with a cumulative effect adjustment recorded to opening retained earnings. This method required application of the new guidance at the beginning of the earliest comparative period presented for revenue agreements that were not substantially complete as of the date of adoption. The Company does not disclose the value of unsatisfied performance obligations because the majority of its contracts have expected lengths of one year or less. The Company did not retrospectively restate contracts with modifications prior to the earliest period presented, but instead reflected the aggregate effect of all modifications at transition.
The Company derives its revenue primarily as a wholesaler of satellite communications products and services. Pursuant to wholesale agreements, the Company sells its products and services to service providers who, in turn, sell the products and services to other distributors or directly to the end users. The primary types of revenue include (i) service revenue (access and usage-based airtime fees), (ii) subscriber equipment revenue, and (iii) revenue generated by providing engineering and support services to commercial and government customers.
Contracts with multiple performance obligations. At times, the Company sells services and equipment through arrangements that bundle equipment, airtime and other services. For these revenue arrangements when the Company sells services and equipment in bundled arrangements and determines that it has separate distinct performance obligations, the Company allocates the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, the Company estimates the amount to be allocated for each performance obligation based on observable market transactions or the residual approach. When the Company determines the performance obligations are not distinct, the Company recognizes revenue on a combined basis as the last obligation is satisfied. To the extent the Company's contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within the Company's contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, the Company evaluates the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, the Company includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at the end of each quarter.
Service revenue sold on a stand-alone basis. Service revenue is generated from the Company’s service providers through usage of its satellite system and through fixed monthly access fees per user charged to service providers. Revenue for usage is recognized when usage occurs. Revenue for fixed-per-user access fees is recognized over the usage period in which the services are provided to the end user. The Company sells prepaid services in the form of e-vouchers and prepaid cards. A liability is established equal to the cash paid upon purchase for the e-voucher or prepaid card. Under the new standard, the Company (i) recognizes revenue from the prepaid services upon the use of the e-voucher or prepaid card by the customer and (ii) estimates the expected revenue that will expire unused on an ongoing basis and recognizes this revenue in a manner consistent with the usage period. The Company does not offer refunds for unused prepaid services.
Services sold to the U.S. government. The Company provides airtime and airtime support to U.S. government and other authorized customers pursuant to the Enhanced Mobile Satellite Services (“EMSS”) contract managed by the Defense Information Systems Agency (“DISA”). Effective October 22, 2013, the Company executed a five-year EMSS contract, managed by DISA. Under the terms of this agreement, authorized customers continue to utilize airtime services, provided through the U.S. Department of Defense’s (“DoD”) dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast and Distributed Tactical Communications Services (“DTCS”) services for an unlimited number of DoD and other federal subscribers. The fixed-price rate for the remaining contract year, which runs through October 21, 2018, is $88 million per year. Under this contract, revenue is based on the annual fee for the fixed-price contract with unlimited subscribers, and is recognized on a straight-line basis over each contractual year. The U.S. government purchases its subscriber equipment from third-party distributors and not directly from the Company.
The following table summarizes the Company’s services revenue:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (in thousands) |
Commercial voice and data services | | $ | 48,712 |
| | $ | 44,203 |
| | $ | 92,442 |
| | $ | 85,849 |
|
Commercial IoT data services | | 20,835 |
| | 18,505 |
| | 40,618 |
| | 35,435 |
|
Hosted payload and other data services | | 12,419 |
| | 1,915 |
| | 16,648 |
| | 3,112 |
|
Government services | | 22,000 |
| | 22,000 |
| | 44,000 |
| | 44,000 |
|
Total services | | $ | 103,966 |
| | $ | 86,623 |
| | $ | 193,708 |
| | $ | 168,396 |
|
Subscriber equipment sold on a stand-alone basis. The Company recognizes subscriber equipment sales and the related costs at a point in time when title to the equipment (and the risks and rewards of ownership) passes to the customer, typically upon shipment. Customers do not have rights of return without prior consent from the Company.
Government engineering and support services. The Company provides maintenance services to the U.S. government’s dedicated gateway. This revenue is recognized ratably over the periods in which the services are provided; the related costs are expensed as incurred.
Other government and commercial engineering and support services. The Company also provides engineering services to assist customers in developing new technologies for use on the Company’s satellite system. The revenue associated with fixed fee contracts is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying its performance obligations. The Company does not include purchases of goods from a third party in its evaluation of costs incurred. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Revenue on cost-plus-fixed-fee contracts is recognized to the extent of estimated costs incurred plus the applicable fees earned. The Company considers fixed fees under cost-plus-fixed-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.
The following table summarizes the Company’s engineering and support services revenue:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | (in thousands) |
Commercial | | $ | 114 |
| | $ | 736 |
| | $ | 195 |
| | $ | 1,207 |
|
Government | | 4,986 |
| | 5,401 |
| | 8,529 |
| | 10,469 |
|
Total | | $ | 5,100 |
| | $ | 6,137 |
| | $ | 8,724 |
| | $ | 11,676 |
|
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the condensed consolidated balance sheet. The Company bills amounts under its agreed-upon contractual terms at periodic intervals (for services), upon shipment (for equipment), or upon achievement of contractual milestones or as work progresses (for engineering and support services). Billing may occur subsequent to revenue recognition, resulting in accounts receivable (contract assets). The Company may also receive payments from customers before revenue is recognized, resulting in deferred revenue (contract liabilities). The Company recognized revenue that was previously recorded as deferred revenue in the amounts of $16.3 million and $8.7 million for the three months ended June 30, 2018 and 2017, respectively, and $24.8 million and $16.0 million for the six months ended June 30, 2018 and 2017, respectively. The Company has also recorded costs of obtaining contracts expected to be recovered in prepaid expenses and other assets (contract assets or commissions), that are not separately disclosed on the condensed consolidated balance sheets. The commissions are recognized over the estimated prepaid usage period. The contract assets not separately disclosed are as follows:
|
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | (in thousands) |
Contract Assets: | | | | |
Commissions | | $ | 1,096 |
| | $ | 1,555 |
|
Other Contract Costs | | 3,862 |
| | 3,753 |
|
The primary impact of adopting ASU 2014-09 relates to the Company’s prepaid service revenue and associated breakage. Under the new standard, the Company now estimates the expected revenue that will expire unused on an ongoing basis and recognizes this revenue in a manner consistent with the usage period. Upon adoption, the contract liability - deferred revenue, associated with prepaid service revenue, was reduced by approximately $15.7 million as a result of the change to include a breakage estimate over the usage period.
Adopting the new standard had an immaterial impact on the Company’s financial statements. The impact of the implementation of the new revenue standard on the Company's condensed consolidated balance sheet, as compared to accounting under prior revenue guidance (Accounting Standards Codification ("ASC") Topic 605), was as follows:
|
| | | | | | | | | | | |
| June 30, 2018 |
| As reported | | Adjustment | | As adjusted |
| (in thousands) |
Prepaid expenses and other current assets | $ | 25,048 |
| | $ | 446 |
| | $ | 25,494 |
|
| | | | | |
Deferred revenue | 21,692 |
| | 19,781 |
| | 41,473 |
|
Deferred revenue, net of current portion | 58,565 |
| | (2,914 | ) | | 55,651 |
|
Other long-term liabilities | 4,150 |
| | (3,852 | ) | | 298 |
|
| | | | | |
Retained earnings | 522,150 |
| | (12,568 | ) | | 509,582 |
|
The impact of the implementation of the new standard on the Company's condensed consolidated statements of operations and comprehensive income was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 | | Six months ended June 30, 2018 |
| As reported | | Adjustment | | As adjusted | | As reported | | Adjustment | | As adjusted |
| (in thousands) |
Service revenue | $ | 103,966 |
| | (255 | ) | | 103,711 |
| | $ | 193,708 |
| | (1,182 | ) | | 192,526 |
|
| | | | | | | | | | | |
Cost of services | $ | 22,644 |
| | 37 |
| | 22,681 |
| | $ | 41,596 |
| | (63 | ) | | 41,533 |
|
| | | | | | | | | | | |
Income before income taxes | $ | 3,425 |
| | (292 | ) | | 3,133 |
| | $ | 18,736 |
| | (1,119 | ) | | 17,617 |
|
Income tax expense | (7,843 | ) | | 22 |
| | (7,821 | ) | | (11,682 | ) | | 288 |
| | (11,394 | ) |
Net income (loss) | $ | (4,418 | ) | | (270 | ) | | (4,688 | ) | | $ | 7,054 |
| | (831 | ) | | 6,223 |
|
10. Income Taxes
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 was effective for reporting periods that include December 22, 2017. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects of the Tax Act and recorded provisional amounts in its financial statements as of and for the year ended December 31, 2017, resulting in a net tax benefit of $150.9 million in that period. As the Company collects and prepares the necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company's provision for income taxes and effective tax rate in the period in which the adjustments are made. To date, management has not made any such adjustments to the provisional amounts for the remeasurement of deferred tax assets and liabilities and the deemed repatriation of certain foreign subsidiary earnings. The accounting for the tax effects of the Tax Act will be completed during 2018.
In April 2018, Maryland enacted the single sales factor method for apportioning income to the state to be phased in over five years commencing in 2018. This change results in higher future Maryland taxes for the Company, increasing its year-to-date income tax provision by $8.7 million for the impact on its existing deferred tax assets and liabilities. If the Company's current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly.
11. Net Income (Loss) Per Share
The Company calculates basic net income per share by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share takes into account the effect of potential dilutive common shares when the effect is dilutive. The effect of potential dilutive common shares, including common stock issuable upon exercise of outstanding stock options, is computed using the treasury stock method. The effect of potential dilutive common shares from the conversion of outstanding convertible preferred securities is computed using the as-if converted method at the stated conversion rate. As noted above, the Series A Preferred Stock was converted into shares of common stock on March 20, 2018. The RSUs granted to members of the Company’s board of directors contain non-forfeitable rights to dividends and therefore are considered to be participating securities in periods of net income. As a result, the calculation of basic and diluted net income per share excludes net income attributable to the unvested RSUs granted to the Company’s board of directors from the numerator and excludes the impact of the unvested RSUs granted to the Company’s board of directors from the denominator.
The computations of basic and diluted net income per share are as follows: |
| | | | | | | | |
| | Three Months Ended June 30, |
| | 2018 | | 2017 |
| | (in thousands, except per share data) |
Numerator: | | | | |
Net income (loss) attributable to common stockholders | | $ | (6,527 | ) | | $ | 20,919 |
|
Net income allocated to participating securities | | 6 |
| | (20 | ) |
Numerator for basic net income (loss) per share | | (6,521 | ) | | 20,899 |
|
Dividends on Series A Preferred Stock, excluding cumulative dividends | | — |
| | 1,750 |
|
Dividends on Series B Preferred Stock, excluding cumulative dividends | | — |
| | 2,109 |
|
Numerator for diluted net income (loss) per share | | $ | (6,521 | ) | | $ | 24,758 |
|
| | | | |
Denominator: | | | | |
Denominator for basic net income per share - weighted average outstanding common shares | | 111,111 |
| | 97,989 |
|
Dilutive effect of stock options | | — |
| | 1,571 |
|
Dilutive effect of contingently issuable shares | | — |
| | 54 |
|
Dilutive effect of Series A Preferred Stock | | — |
| | 10,602 |
|
Dilutive effect of Series B Preferred Stock | | — |
| | 16,727 |
|
Denominator for diluted net income per share | | 111,111 |
| | 126,943 |
|
Net income (loss) per share attributable to common stockholders - basic | | $ | (0.06 | ) | | $ | 0.21 |
|
Net income (loss) per share attributable to common stockholders - diluted | | $ | (0.06 | ) | | $ | 0.20 |
|
For the three months ended June 30, 2018, options to purchase 0.3 million shares of common stock were not included in the computation of diluted net loss per share, as the effect would be anti dilutive, and 0.7 million unvested performance-based RSUs were not included in the computation of basic and diluted net loss per share as certain performance criteria had not been satisfied. For the three months ended June 30, 2018, 16.7 million as-if converted shares of the Series B Preferred Stock were not included in the computation of diluted net loss per share, as the effect would be anti-dilutive. For the three months ended June 30, 2017, 1.8 million unvested non-performance based RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share, as the effect would be anti-dilutive, and 0.1 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria had not been satisfied.
For the three months ended June 30, 2018, $2.1 million in cumulative unpaid dividends to holders of the Series B Preferred Stock were not declared or accrued as a result of all cash dividends being suspended, but such amounts were deducted to arrive at net income attributable to common stockholders. For the three months ended June 30, 2017, $1.8 million and $2.1 million in cumulative unpaid dividends to holders of the Series A Preferred Stock and Series B Preferred Stock, respectively, were not declared or accrued as a result of all cash dividends being suspended, but such amounts were deducted to arrive at net income attributable to common stockholders.
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2018 | | 2017 |
| | (in thousands, except per share data) |
Numerator: | | | | |
Net income attributable to common stockholders | | $ | 1,086 |
| | $ | 55,008 |
|
Net income allocated to participating securities | | (1 | ) | | (55 | ) |
Numerator for basic net income per share | | 1,085 |
| | 54,953 |
|
Dividends on Series A Preferred Stock, excluding cumulative dividends | | — |
| | 3,500 |
|
Dividends on Series B Preferred Stock, excluding cumulative dividends | | — |
| | 4,218 |
|
Numerator for diluted net income per share | | $ | 1,085 |
| | $ | 62,671 |
|
| | | | |
Denominator: | | | | |
Denominator for basic net income per share - weighted average outstanding common shares | | 105,927 |
| | 97,424 |
|
Dilutive effect of stock options | | 2,347 |
| | 1,353 |
|
Dilutive effect of contingently issuable shares | | 1,131 |
| | 553 |
|
Dilutive effect of Series A Preferred Stock | | — |
| | 10,602 |
|
Dilutive effect of Series B Preferred Stock | | — |
| | 16,727 |
|
Denominator for diluted net income per share | | 109,405 |
| | 126,659 |
|
Net income per share attributable to common stockholders - basic | | $ | 0.01 |
| | $ | 0.56 |
|
Net income per share attributable to common stockholders - diluted | | $ | 0.01 |
| | $ | 0.49 |
|
For the six months ended June 30, 2018, options to purchase 0.3 million shares of common stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive, and 0.6 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria had not been satisfied. For the six months ended June 30, 2018, 4.6 million as-if converted shares of the Series A Preferred Stock and 16.7 million as-if converted shares of the Series B Preferred Stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive. For the six months ended June 30, 2017, 1.6 million unvested non-performance based RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share, as the effect would be anti-dilutive, and 0.6 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria had not been satisfied.
For the six months ended June 30, 2018, $2.1 million in cumulative unpaid dividends to holders of the Series B Preferred Stock were not declared or accrued as a result of all cash dividends being suspended, but such amounts were deducted to arrive at net income attributable to common stockholders. For the six months ended June 30, 2017, $1.8 million and $2.1 million in cumulative unpaid dividends to holders of the Series A Preferred Stock and Series B Preferred Stock, respectively, were not declared or accrued as a result of all cash dividends being suspended, but such amounts were deducted to arrive at net income attributable to common stockholders. For the six months ended June 30, 2017, options to purchase 0.1 million shares of common stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive.
12. Related Party Transactions
Aireon LLC
The Iridium NEXT constellation hosts the AireonSM system, which will provide a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast ("ADS-B") receivers on the Iridium NEXT satellites. Iridium formed Aireon LLC ("Aireon") in 2011, with subsequent investments from the air navigation service providers ("ANSPs") of Canada, Italy, Denmark, Ireland and the United Kingdom, to develop and market this service. Aireon has contracted to pay Iridium a fee to host the ADS-B receivers on Iridium NEXT, as well as data service fees for the delivery of the air traffic surveillance data over the Iridium NEXT system. Under this agreement with Aireon, Aireon will pay Iridium fees of $200.0 million to host the ADS-B receivers on Iridium NEXT (the "Hosting Agreement") and additional power fees of approximately $2.8 million per year, as well as data services fees of up to approximately $19.8 million per year for the delivery of the air traffic surveillance data over the Iridium NEXT system (the "Data Services Agreement"). The Aireon ADS-B receivers on the Iridium NEXT satellites are activated on an individual basis as the Iridium NEXT satellite begins carrying traffic.
At June 30, 2018, the Company had a fully diluted ownership stake in Aireon of approximately 35.7%, subject to certain redemption provisions contained in the Amended and Restated Limited Liability Company Agreement (the "Aireon LLC Agreement").
Under the Company's Hosting Agreement, the $200.0 million due is interest-bearing for amounts not paid on time. The Company had previously determined there was not sufficient support that Aireon will be able to make the payments due under the Hosting Agreement. As of June 30, 2018, the Company had received $8.1 million under the Hosting Agreement, all of which was received in the quarter ended June 30, 2018.
In July 2018, the Company and Aireon amended certain terms of the Hosting Agreement. As amended, the Company is scheduled to receive an additional payment of $6.4 million in December 2018 and semi-annual payments of $8.0 million beginning in 2019 until the hosting fees are paid in full, without any contingency relating to Aireon's ability to raise debt. Aireon continues to be obligated to pay the Company in full the remaining portion of the $200.0 million in hosting fees when they are able to raise debt to do so. As a result of the amendment and an updated financial collectability assessment, as of June 30, 2018, the Company recognized $6.9 million of revenue related to total cumulative hosting services rendered to date.
Under the Data Services Agreement, Aireon pays the Company monthly data service payments on a per satellite basis beginning on each satellite's in-service date. The Company recorded data service revenue from Aireon of $2.1 million and $3.6 million for the three and six months ended June 30, 2018, respectively. Revenues recorded for the three and six months ended June 30, 2017 were immaterial.
Under a services agreement, the Company also provides administrative services, including subleased office space to Aireon, which are paid monthly. Aireon receivables due to the Company under all agreements totaled $1.0 million and $0.6 million at June 30, 2018 and December 31, 2017, respectively.
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on February 22, 2018 with the Securities and Exchange Commission, or the SEC, as well as our condensed consolidated financial statements included in this Form 10-Q.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development or otherwise are not statements of historical fact. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. The important factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed on February 22, 2018, and in this Quarterly Report, could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview of Our Business
We are the only commercial provider of communications services offering true global coverage, connecting people, organizations and assets to and from anywhere, in real time. Our unique L-band satellite network provides reliable communications services to regions of the world where terrestrial wireless or wireline networks do not exist or are limited, including remote land areas, open ocean, airways, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters.
We provide voice and data communications services to businesses, the U.S. and foreign governments, non-governmental organizations and consumers via our satellite network, which has an architecture of 66 operational satellites with in-orbit spares and related ground infrastructure. We utilize an interlinked mesh architecture to route traffic across our satellite constellation using radio frequency crosslinks between satellites. This unique architecture minimizes the need for local ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence.
We sell our products and services to commercial end-users through a wholesale distribution network, encompassing approximately 150 service providers, approximately 230 value-added resellers, or VARs, and approximately 85 value-added manufacturers, or VAMs, which create and sell technology that uses the Iridium® network either directly to the end user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications using our products and services to target specific lines of business. We expect that demand for our services will increase as more applications are developed and deployed that utilize our technology.
At June 30, 2018, we had approximately 1,047,000 billable subscribers worldwide, representing an increase of 15% from approximately 912,000 billable subscribers at June 30, 2017. We have a diverse customer base, with end users in the following lines of business: land-based handset; Internet of Things, or IoT; maritime; aviation; and government.
We recognize revenue from both the sale of equipment and the provision of services. Over the past several years, an increasing proportion of our revenue has been derived from service revenue, including revenue from hosting and data services, and we expect that trend to continue.
We are in the process of replacing our first generation constellation with our Iridium NEXT satellite constellation, which we expect to complete in 2018, and which will use the same interlinked mesh architecture as our first-generation constellation, with 66 operational satellites, as well as in-orbit and ground spares. As of June 30, 2018, of the 55 Iridium NEXT satellites we have launched to date, 50 have been placed into service, 2 are being drifted to adjacent planes and 3 are in-orbit spares.
We have contracted with Thales Alenia Space France, or Thales, to construct the Iridium NEXT satellites, which are compatible with our first-generation constellation and current end-user equipment, so that as we launch Iridium NEXT satellites, we replace the first-generation satellites in our constellation without affecting the service to our end users. We plan to deploy 75 satellites on seven dedicated Falcon 9 rockets and one shared Falcon 9 rocket launched by Space Exploration Technologies Corporation, or SpaceX. We estimate the costs associated with the design, build and launch of Iridium NEXT and related ground infrastructure upgrades through 2018 to be approximately $3 billion. Our funding plan for these costs includes the substantial majority of the funds drawn under our $1.8 billion credit facility, or the Credit Facility, which was fully drawn as of
February 2017, together with cash on hand and internally generated cash flows, including contracted cash flows from hosted payloads.
The Iridium NEXT constellation will also host the AireonSM system to provide a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast, or ADS-B, receivers on the Iridium NEXT satellites. We formed Aireon LLC in 2011, with subsequent investments from the air navigation service providers, or ANSPs, of Canada, Italy, Denmark, Ireland and the United Kingdom, to develop and market this service. Aireon has contracted to provide the service to our co-investors in Aireon and other ANSPs. Aireon also plans to offer the service to other customers worldwide, including the U.S. Federal Aviation Administration, or FAA. Aireon has contracted to pay us a fee to host the ADS-B receivers on Iridium NEXT, and made an initial $8.1 million payment for a portion of its hosting fee to us. Aireon also pays us data service fees for the delivery of the air traffic surveillance data over the Iridium NEXT system on a per satellite basis, which will increase with the number of Iridium NEXT satellites placed into service. In addition, we have entered into an agreement with Harris Corporation, the manufacturer of the Aireon hosted payload, pursuant to which Harris pays us fees for the remaining hosted payload capacity which it has sold to its customers; Harris also pays us data service fees on behalf of these customers.
Recent Developments
Iridium NEXT
As described above, as of June 30, 2018, we had completed six out of eight scheduled Iridium NEXT launches. Our insurance program includes our ground spares and a prepaid relaunch right with SpaceX to self-insure a portion of our launch and in-orbit risks, as permitted under the Credit Facility. While we believe this has enabled us to obtain insurance at a substantially lower cost than would have been possible without the spares and relaunch right, if we use our spares to replace lost satellites, we could decide to purchase additional satellites to maintain a backup supply of spares. The cost of such additional spares is not included in the $3 billion estimated cost for the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2018.
Material Trends and Uncertainties
Our industry and customer base has historically grown as a result of:
| |
• | demand for remote and reliable mobile communications services; |
| |
• | increased demand for communications services by disaster and relief agencies and emergency first responders; |
| |
• | a broad wholesale distribution network with access to diverse and geographically dispersed niche markets; |
| |
• | a growing number of new products and services and related applications; |
| |
• | improved data transmission speeds for mobile satellite service offerings; |
| |
• | regulatory mandates requiring the use of mobile satellite services; |
| |
• | a general reduction in prices of mobile satellite services and subscriber equipment; and |
| |
• | geographic market expansion through the ability to offer our services in additional countries. |
Nonetheless, we face a number of challenges and uncertainties in operating our business, including:
| |
• | our ability to complete the deployment of Iridium NEXT; |
| |
• | our ability to develop and launch new and innovative products and services for Iridium NEXT; |
| |
• | Aireon LLC’s ability to successfully deploy and market its space-based ADS-B, global aviation monitoring service to be carried as a hosted payload on the Iridium NEXT system; |
| |
• | Aireon’s ability to pay in full its hosting fees to us; |
| |
• | our ability to maintain the health, capacity, control and level of service of our remaining first-generation satellites through the completion of Iridium NEXT; |
| |
• | changes in general economic, business and industry conditions, including the effects of currency exchange rates; |
| |
• | our reliance on a single primary commercial gateway and a primary satellite network operations center; |
| |
• | competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial-based cellular phone systems and related pricing pressures; |
| |
• | market acceptance of our products, including Iridium CertusSM; |
| |
• | regulatory requirements in existing and new geographic markets; |
| |
• | rapid and significant technological changes in the telecommunications industry; |
| |
• | reliance on our wholesale distribution network to market and sell our products, services and applications effectively; |
| |
• | reliance on single-source suppliers for the manufacture of most of our subscriber equipment and for some of the components required in the manufacture of our end-user subscriber equipment and our ability to purchase parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events; and |
| |
• | reliance on a few significant customers, particularly agencies of the U.S. government, for a substantial portion of our revenue, as a result of which the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable. |
Comparison of Our Results of Operations for the Three Months Ended June 30, 2018 and 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2018 | | % of Total Revenue | | 2017 | | % of Total Revenue | | Change |
($ in thousands) | | | | | | Dollars | | Percent |
Revenue: | | | | | | | | | | | | |
Services | | $ | 103,966 |
| | 77 | % | | $ | 86,623 |
| | 78 | % | | $ | 17,343 |
| | 20 | % |
Subscriber equipment | | 25,865 |
| | 19 | % | | 18,844 |
| | 17 | % | | 7,021 |
| | 37 | % |
Engineering and support services | | 5,100 |
| | 4 | % | | 6,137 |
| | 5 | % | | (1,037 | ) | | (17 | )% |
Total revenue | | 134,931 |
| | 100 | % | | 111,604 |
| | 100 | % | | 23,327 |
| | 21 | % |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Cost of services (exclusive of depreciation | | | | | | | | | | | | |
and amortization) | | 22,644 |
| | 17 | % | | 21,368 |
| | 19 | % | | 1,276 |
| | 6 | % |
Cost of subscriber equipment | | 15,619 |
| | 12 | % | | 10,868 |
| | 10 | % | | 4,751 |
| | 44 | % |
Research and development | | 5,566 |
| | 4 | % | | 3,014 |
| | 3 | % | | 2,552 |
| | 85 | % |
Selling, general and administrative | | 24,266 |
| | 18 | % | | 20,411 |
| | 18 | % | | 3,855 |
| | 19 | % |
Depreciation and amortization | | 50,491 |
| | 37 | % | | 20,201 |
| | 18 | % | | 30,290 |
| | 150 | % |
Total operating expenses | | 118,586 |
| | 88 | % | | 75,862 |
| | 68 | % | | 42,724 |
| | 56 | % |
Operating income | | 16,345 |
| | 12 | % | | 35,742 |
| | 32 | % | | (19,397 | ) | | (54 | )% |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income (expense), net | | (12,985 | ) | | (10 | )% | | 832 |
| | 1 | % | | (13,817 | ) | | (1,661 | )% |
Other income (expense), net | | 65 |
| | — | % | | (56 | ) | | — | % | | 121 |
| | (216 | )% |
Total other income (expense), net | | (12,920 | ) | | (10 | )% | | 776 |
| | 1 | % | | (13,696 | ) | | (1,765 | )% |
Income before income taxes | | 3,425 |
| | 2 | % | | 36,518 |
| | 33 | % | | (33,093 | ) | | (91 | )% |
Income tax expense | | (7,843 | ) | | (6 | )% | | (11,740 | ) | | (11 | )% | | 3,897 |
| | (33 | )% |
Net income (loss) | | $ | (4,418 | ) | | (4 | )% | | $ | 24,778 |
| | 22 | % | | $ | (29,196 | ) | | (118 | )% |
Revenue
Commercial Service Revenue
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | |
| | 2018 | | 2017 | | Change |
| | Revenue | | Billable Subscribers (1) | | ARPU (2) | | Revenue | | Billable Subscribers (1) | | ARPU (2) | | Revenue | | Billable Subscribers | | ARPU |
| | (Revenue in millions and subscribers in thousands) |
Commercial voice and data | | $ | 48.8 |
| | 364 |
| | $ | 45 |
| | $ | 44.1 |
| | 360 |
| | $ | 41 |
| | $ | 4.7 |
| | 4 |
| | $ | 4 |
|
Commercial IoT data | | 20.8 |
| | 576 |
| | 12 |
| | 18.6 |
| | 461 |
| | 14 |
| | 2.2 |
| | 115 |
| | (2 | ) |
Hosted payload and other data services | | 12.4 |
| | N/A |
| | | | 1.9 |
| | N/A |
| | | | 10.5 |
| | N/A |
| | |
Total Commercial | | $ | 82.0 |
| | 940 |
| | | | $ | 64.6 |
| | 821 |
| | | | $ | 17.4 |
| | 119 |
| | |
| |
(1) | Billable subscriber numbers shown are at the end of the respective period. |
| |
(2) | Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period. Billable subscriber and ARPU data is not applicable for hosted payload and other data service revenue items. |
For the three months ended June 30, 2018, commercial voice and data revenue increased by $4.7 million, or 10%, from the prior year period principally due to an increase in average revenue per unit resulting from certain price increases in access fees and growth in Iridium OpenPort® subscribers.
For the three months ended June 30, 2018, commercial IoT data revenue increased by $2.2 million, or 13%, from the prior year period primarily due to a 25% increase in commercial IoT data billable subscribers.
Hosted payload and other data service revenue increased by $10.5 million, or 549%, from the prior year primarily due to increased revenue recognition from hosting services related to Aireon, increased data services due to an increase in the number of Iridium NEXT satellites in orbit and increased satellite timing and location services.
We anticipate continued growth in billable commercial subscribers for the remainder of 2018.
Government Service Revenue
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2018 | | 2017 | | Change |
| | Revenue | | Billable Subscribers (1) | | Revenue | | Billable Subscribers (1) | | Revenue | | Billable Subscribers |
| | (Revenue in millions and subscribers in thousands) |
Government service revenue | | $ | 22.0 |
| | 107 |
| | $ | 22.0 |
| | 92 |
| | $ | — |
| | 15 |
|
| |
(1) | Billable subscriber numbers shown are at the end of the respective period. |
We provide Iridium airtime and airtime support to U.S. government and other authorized customers pursuant to a five-year EMSS contract executed in October 2013 and managed by DISA. Under the terms of this agreement, authorized customers utilize certain Iridium airtime services provided through the U.S. Department of Defense’s, or DoD’s, dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast, and Distributed Tactical Communications System, or DTCS, services for an unlimited number of DoD and other federal subscribers. The service fee under the EMSS contract is fixed at $88 million per year for the remainder of the term, and is not based on subscribers or usage, allowing an unlimited number of users access to such existing services. The EMSS contract expires in October 2018, although based on federal acquisition regulations, the government has the ability to unilaterally extend for an additional six months. We have begun discussions with the U.S. government on a new EMSS contract, which we expect to enter into later in 2018 or in 2019.
Subscriber Equipment Revenue
Subscriber equipment revenue increased by $7.0 million, or 37%, for the three months ended June 30, 2018 compared to the prior year period. This increase was primarily due to an increase in volume of handset sales.
We expect our full year subscriber equipment revenue for 2018 to exceed the prior year.
Engineering and Support Service Revenue
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | 2018 | | 2017 | | Change |
| | (Revenue in millions) |
Commercial | | 0.1 |
| | 0.7 |
| | $ | (0.6 | ) |
Government | | 5.0 |
| | 5.4 |
| | (0.4 | ) |
Total | | $ | 5.1 |
| | $ | 6.1 |
| | $ | (1.0 | ) |
Engineering and support service revenue decreased by $1.0 million, or 17%, for the three months ended June 30, 2018 compared to the prior year period, primarily as a result of decreased volume of contracted work.
Operating Expenses
Cost of Services (exclusive of depreciation and amortization)
Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services and cost of services for government and commercial engineering and support service revenue.
Cost of services (exclusive of depreciation and amortization) increased by $1.3 million, or 6%, for the three months ended June 30, 2018 from the prior year period, primarily as a result of in-orbit insurance costs from Iridium NEXT satellites placed into service during 2017 and through the first half of 2018.
We expect our in-orbit insurance expenses to remain consistent through 2018 as we place Iridium NEXT satellites into service throughout the launch campaign, which we expect to complete in 2018.
Cost of Subscriber Equipment
Cost of subscriber equipment includes the direct costs of equipment sold, which consist of manufacturing costs, allocation of overhead, and warranty costs.
Cost of subscriber equipment increased by $4.8 million, or 44%, for the three months ended June 30, 2018 compared to the prior year period primarily due to increased subscriber equipment revenue primarily from increased volume of handset sales and increased costs related to our Iridium CertusSM product.
Research and Development
Research and development expenses increased by $2.6 million, or 85%, for the three months ended June 30, 2018 compared to the prior year period due to increased spend on the development of Iridium CertusSM broadband to expand functionality on our Iridium NEXT satellites.
Selling, General and Administrative
Selling, general and administrative expenses that are not directly attributable to the sale of services or products include sales and marketing costs as well as employee-related expenses (such as salaries, wages, and benefits), legal, finance, information technology, facilities, billing and customer care expenses.
Selling, general and administrative expenses increased by $3.9 million, or 19%, for the three months ended June 30, 2018 compared to the prior year period, primarily due to an increase in employee-related expenses and professional fees, including an increase in stock appreciation rights expense resulting from an increase in the share price of our common stock.
Depreciation and Amortization
Depreciation and amortization expense increased by $30.3 million, or 150%, for the three months ended June 30, 2018 compared to the prior year period, primarily due to the Iridium NEXT satellites placed into service during 2017 and through the first half of 2018.
Other Expense
Interest Expense
Interest expense for the three months ended June 30, 2018 was $13.0 million, compared to interest income of $0.8 million for the prior year period. The increase in interest expense is primarily related to a decrease in the credit facility interest being capitalized as the average balance of satellites in construction has decreased as satellites are launched and placed into orbit.
Income Tax Expense
For the three months ended June 30, 2018, our income tax expense was $7.8 million, compared to $11.7 million for the prior year period. The decrease in income tax expense is primarily related to a decrease in net income before income taxes and the lower Federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017, or the Tax Act, compared to the prior year. This decrease is partially offset by a decrease in the state tax benefit in the current year compared to the prior year which primarily consists of a nonrecurring adjustment to our deferred tax assets and liabilities related to a Maryland law change enacted in the current period. See "Income Taxes" in Note 10 to our financial statements included in this report for more detail on our assessment of the Tax Act.
In April 2018, Maryland enacted the single sales factor method for apportioning income to the state to be phased in over five years commencing in 2018. This change results in higher future Maryland taxes increasing our year-to-date income tax provision by $8.7 million for the impact on our existing deferred tax assets and liabilities. The current period tax provision also includes the impact of this law change on the deferred tax assets and liabilities expected to be generated during the year. If our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly.
Net Income (Loss)
Net loss was $4.4 million for the three months ended June 30, 2018, compared to net income of $24.8 million for the prior year period, primarily resulting from the $30.3 million increase in depreciation and amortization expense, the $12.4 million increase in other operating expenses and the $13.8 million increase in interest expense, net, as described above, partially offset by the $23.3 million increase in total revenues and the $3.9 million decrease in income tax expense as described above.
Comparison of Our Results of Operations for the Six Months Ended June 30, 2018 and 2017
|
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2018 | | % of Total Revenue | | 2017 | | % of Total Revenue | | Change |
($ in thousands) | | | | | | Dollars | | Percent |
Revenue: | | | | | | | | | | | | |
Services | | $ | 193,708 |
| | 76 | % | | $ | 168,396 |
| | 78 | % | | $ | 25,312 |
| | 15 | % |
Subscriber equipment | | 51,647 |
| | 20 | % | | 35,958 |
| | 17 | % | | 15,689 |
| | 44 | % |
Engineering and support services | | 8,724 |
| | 4 | % | | 11,676 |
| | 5 | % | | (2,952 | ) | | (25 | )% |
Total revenue | | 254,079 |
| | 100 | % | | 216,030 |
| | 100 | % | | 38,049 |
| | 18 | % |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Cost of services (exclusive of depreciation | | | | | | | | | | | | |
and amortization) | | 41,596 |
| | 16 | % | | 38,326 |
| | 18 | % | | 3,270 |
| | 9 | % |
Cost of subscriber equipment | | 30,833 |
| | 12 | % | | 20,972 |
| | 10 | % | | 9,861 |
| | 47 | % |
Research and development | | 10,149 |
| | 4 | % | | 6,241 |
| | 3 | % | | 3,908 |
| | 63 | % |
Selling, general and administrative | | 46,761 |
| | 18 | % | | 39,628 |
| | 18 | % | | 7,133 |
| | 18 | % |
Depreciation and amortization | | 88,956 |
| | 35 | % | | 33,708 |
| | 16 | % | | 55,248 |
| | 164 | % |
Total operating expenses | | 218,295 |
| | 85 | % | | 138,875 |
| | 65 | % | | 79,420 |
| | 57 | % |
| | | | | | | | | | | | |
Gain on Boeing transaction | | — |
| | — | % | | 14,189 |
| | 7 | % | | (14,189 | ) | | (100 | )% |
| | | | | | | | | | | | |
Operating income | | 35,784 |
| | 15 | % | | 91,344 |
| | 42 | % | | (55,560 | ) | | (61 | )% |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income (expense), net | | (17,150 | ) | | (7 | )% | | 1,665 |
| | 1 | % | | (18,815 | ) | | (1,130 | )% |
Other income (expense), net | | 102 |
| | — | % | | (143 | ) | | — | % | | 245 |
| | (171 | )% |
Total other income (expense), net | | (17,048 | ) | | (7 | )% | | 1,522 |
| | 1 | % | | (18,570 | ) | | (1,220 | )% |
Income before income taxes | | 18,736 |
| | 8 | % | | 92,866 |
| | 43 | % | | (74,130 | ) | | (80 | )% |
Income tax expense | | (11,682 | ) | | (5 | )% | | (30,140 | ) | | (14 | )% | | 18,458 |
| | (61 | )% |
Net income | | $ | 7,054 |
| | 3 | % | | $ | 62,726 |
| | 29 | % | | $ | (55,672 | ) | | (89 | )% |
Revenue
Commercial Service Revenue
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | |
| | 2018 | | 2017 | | Change |
| | Revenue | | Billable Subscribers (1) | | ARPU (2) | | Revenue | | Billable Subscribers (1) | | ARPU (2) | | Revenue | | Billable Subscribers | | ARPU |
| | (Revenue in millions and subscribers in thousands) |
Commercial voice and data | | $ | 92.5 |
| | 364 |
| | $ | 43 |
| | $ | 85.8 |
| | 360 |
| | $ | 40 |
| | $ | 6.7 |
| | 4 |
| | $ | 3 |
|
Commercial IoT data | | 40.6 |
| | 576 |
| | 12 |
| | 35.5 |
| | 461 |
| | 14 |
| | 5.1 |
| | 115 |
| | |