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IRDM > SEC Filings for IRDM > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for IRIDIUM COMMUNICATIONS INC.

Form 10-Q for IRIDIUM COMMUNICATIONS INC.


2-Nov-2012

Quarterly Report


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, 2011, filed on March 6, 2012 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 discussed under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed on March 6, 2012, and in this Form 10-Q, 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.

Background

We were initially formed in 2007 as GHL Acquisition Corp., a special purpose acquisition company. We acquired, directly and indirectly, all the outstanding equity of Iridium Holdings LLC, or Iridium Holdings, in a transaction accounted for as a business combination on September 29, 2009. We refer to this transaction as the Acquisition. We refer to Iridium Holdings, together with its direct and indirect subsidiaries, as Iridium. In accounting for the Acquisition, we were deemed the legal and accounting acquirer and Iridium the legal and accounting acquiree. On September 29, 2009, as a result of the Acquisition, we changed our name to Iridium Communications Inc.

Overview of Our Business

We are engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites. We are the second largest provider of satellite-based mobile voice and data communications services based on revenue, and the only commercial provider of communications services offering 100% global coverage. Our satellite network provides communications services to regions of the world where existing wireless or wireline networks do not exist or are impaired, including extremely remote or rural land areas, airways, open oceans, 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. We provide these services using our constellation of in-orbit satellites and related ground infrastructure, including a primary commercial gateway. We utilize an interlinked, mesh architecture to route traffic across the satellite constellation using radio frequency crosslinks. This unique architecture minimizes the need for 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 72 service providers, 177 value-added resellers, or VARs, and 53 value-added manufacturers, who either sell 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 for our products and services targeting specific vertical markets.

At September 30, 2012, we had approximately 595,000 billable subscribers worldwide, an increase of 17% from approximately 508,000 billable subscribers at September 30, 2011. We have a diverse customer base, with end-users in the following key business areas: land-based handset; maritime; aviation; machine-to-machine, or M2M; and government.

We expect a higher proportion of our future revenue will be derived from service revenue than in the past. Revenues from providing voice and data service historically have generated higher gross margins than sales of subscriber equipment.

We are currently devoting a substantial part of our resources to develop Iridium NEXT, our next-generation satellite constellation, and on hardware and software upgrades to our ground infrastructure in preparation for Iridium NEXT, the development of new product and service offerings, upgrades to our current services, and upgrades to our information technology systems. We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2017 to be approximately $3 billion. We believe our $1.8 billion loan facility, or the Credit Facility, together with internally generated cash flows, including cash flows from hosted payloads and proceeds from our recent sale of convertible preferred stock, will be sufficient to fully fund the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through early 2017. As of October 31, 2012, we had borrowed a total of $598.9 million under the Credit Facility. For more information about our sources of funding, refer to "Liquidity and Capital Resources."

Recent Developments

Amendment of Credit Facility

In August 2012, we entered into a supplemental agreement, or the Supplemental Agreement, with the syndicate of bank lenders, or the Lenders, under the Credit Facility. The Supplemental Agreement amended and restated the Credit Facility. The Supplemental Agreement authorizes us to fund and operate Aireon for the purpose of establishing a space-based automatic dependent surveillance-broadcast, or ADS-B, business for global aviation monitoring. Specifically, the Supplemental Agreement excludes Aireon from the group of companies (we and our material subsidiaries) that are obligors under the Credit Facility and from our consolidated financial results for purposes of calculating compliance with the financial covenants. The Supplemental Agreement allows us to make a $12.5 million investment in Aireon, the injection of up to $10 million worth of airtime credits into Aireon as provided for in Aireon's agreement with Harris Corporation to build the ADS-B system payloads, if needed, and an additional investment of up to $15 million raised from issuances of our common equity. The Supplemental Agreement requires us to use any net distributions that we receive from Aireon to repay the debt under the Credit Facility and to issue the Lenders a security interest in our ownership interest in Aireon.

The Supplemental Agreement also includes revised financial covenant levels to reflect changes in timing of expected receipts of cash flows from secondary payloads and other changing business conditions and revised launch and backup launch requirements consistent with the amendment to our launch services agreement with Space Exploration Technologies Corp., or SpaceX, described below. The amendment to the Credit Facility does not modify the principal amount, interest rates, repayment dates, or maturity of the Credit Facility. The Supplemental Agreement required us to raise $100 million through a combination of the issuance of convertible preferred or common equity and warrant exercises by April 30, 2013. We satisfied this requirement primarily through the sale of our 7.00% Series A Cumulative Convertible Preferred Stock, or Series A Preferred Stock, as described below. We also received $9.1 million from the exercise of warrants during the three months ended September 30, 2012.

SpaceX

Effective in August 2012, we entered into an amendment to our launch services agreement with SpaceX. The amendment reduced the number of contracted launches and increased the number of satellites to be carried on each launch vehicle. The amendment also reduced the maximum price under the original SpaceX agreement from $492.0 million to $453.1 million.

Private Placement of Series A Convertible Preferred Stock

On October 3, 2012, we issued 1,000,000 shares of our Series A Preferred Stock in a private offering. The sale price to the initial purchaser, equal to $96.85 per share, reflected an aggregate initial purchaser discount of $3.2 million. Upon settlement of the private offering in October 2012, we received proceeds of $96.7 million, which were net of the $3.2 million initial purchaser discount and $0.2 million of offering costs. We intend to use the net proceeds of the private offering to help fund the construction and deployment of Iridium NEXT and for other general corporate purposes.

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends when, as and if declared from, and including, the date of original issue at a rate of 7.00% per annum of the $100 liquidation preference per share (equivalent to an annual rate of $7.00 per share). Dividends will be payable quarterly in arrears, beginning on December 15, 2012. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series A Preferred Stock will rank senior to our common stock with respect to dividend rights and rights upon our liquidation, dissolution or winding-up. Holders of Series A Preferred Stock will generally have no voting rights except for limited voting rights if we fail to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances.

Holders of Series A Preferred Stock may convert some or all of their outstanding Series A Preferred Stock initially at a conversion rate of 10.6022 shares of common stock per $100 liquidation preference, which is equivalent to an initial conversion price of approximately $9.43 per share of common stock, subject to adjustment in certain events. Except as otherwise provided, the Series A Preferred Stock will be convertible only into shares of our common stock.

On or after October 3, 2017, we may, at our option, convert some or all of the Series A Preferred Stock into that number of shares of our common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to October 3, 2017, the holders of Series A Preferred Stock will have a special right to convert some or all of the Series A Preferred Stock into shares of our common stock in the event of fundamental changes described in the Certificate of Designations for the Series A Preferred Stock, subject to specified conditions and limitations. In certain circumstances, we may also elect to settle conversions in cash as a result of these fundamental changes.

Private Warrant Exchange

In September 2012, we entered into privately negotiated warrant exchange agreements with funds managed by T2 Partners Management, L.P. ("T2"), the largest holder of our outstanding common stock purchase warrants with an exercise price of $7.00 per share, or $7.00 Warrants. Pursuant to these exchange agreements, we issued 562,370 new shares of our common stock in exchange for 3,374,220 of the $7.00 Warrants held by the T2 funds (equivalent to approximately 0.1667 common shares for every $7.00 Warrant tendered), representing approximately 27% of the outstanding $7.00 Warrants.

Tender Offer for Warrant Exchange

On October 2, 2012, we initiated a tender offer to exchange the remaining outstanding $7.00 Warrants for shares of our common stock. We offered holders of $7.00 Warrants one share of common stock for every six of the $7.00 Warrants tendered (equivalent to approximately 0.1667 common shares for every $7.00 Warrant tendered). The offer period ends on November 6, 2012.

Restatement to Correct Errors

Management has determined that its financial statements and related disclosures as of and for each of the years ended December 31, 2009, 2010 and 2011, and the quarters ended December 31, 2009 through December 31, 2011, or the Previously Issued Financial Statements, should be restated because they contained errors. In addition, management has concluded that one of these errors arose from a material weakness related to the internal controls over the accounting for income taxes that was not identified in the Report of Management on Internal Control over Financial Reporting as of December 31, 2011 included in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. As a result, our consolidated financial statements for the years ended December 31, 2009, 2010 and 2011 included in the Company's Annual Reports on Form 10-K and for the quarterly periods ended March 31, June 30, and September 30, 2010 and 2011 included in its Quarterly Reports on Form 10-Q and the reports of Ernst & Young LLP on (i) the consolidated financial statements as of and for the years ended December 31, 2009, 2010 and 2011 and (ii) internal control over financial reporting as of December 31, 2009, 2010 and 2011 should no longer be relied upon.

The errors in the Previously Issued Financial Statements pertained to certain components of our provision for income taxes related to deferred income taxes of a non-operating foreign subsidiary and recognition of expense related to the fee for the undrawn portion of our Credit Facility in the incorrect period. Both of these errors are non-cash in nature.

Management intends to restate the Previously Issued Financial Statements to correct these errors by amending our Annual Report on Form 10-K for the year ended December 31, 2011 subsequent to the filing of this report. The discussion of our financial condition and results of operations as of and for the quarters and years ended December 31, 2009, 2010 and 2011, included in our Annual Report on Form 10-K for the year ended December 31, 2011, will also be amended as part of that filing. The financial statements for the three and nine months ended September 30, 2011 and the balance sheet as of December 31, 2011 included in this report have been restated for the impact of these errors on the previously reported interim financial results.

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 the U.S. Department of Defense, or DoD, disaster and relief agencies and emergency first responders;

· a broad and expanding 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 receipt of licenses to sell our services in additional countries.

Nonetheless, we face a number of challenges and uncertainties in operating our business, including:

· our ability to develop Iridium NEXT and related ground infrastructure, and to develop products and services for Iridium NEXT, including our ability to continue to access the Credit Facility to meet our future capital requirements for the design, build and launch of the Iridium NEXT satellites;

· our ability to obtain sufficient internally generated cash flows, including cash flows from hosted payloads, to fund a portion of the costs associated with Iridium NEXT and support ongoing business;

· our ability to successfully fund, develop and market the space-based ADS-B global aviation monitoring service to be developed and deployed by Aireon and carried as a hosted payload on the Iridium NEXT system;

· our ability to maintain the health, capacity, control and level of service of our existing satellite network until and during the transition to Iridium NEXT;

· changes in general economic, business and industry conditions;

· 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;

· changes in demand from U.S. government customers, particularly the DoD;

· our ability to successfully negotiate a new contract with the DoD when it expires in 2013;

· market acceptance of our products;

· 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 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 for a substantial portion of our revenue, where the loss or decline in business with any of these customers may negatively impact our revenue and increase in our bad debt expense.

Comparison of Our Results of Operations for the Three Months Ended September 30, 2012 and 2011

For purposes of comparing our results of operations for the three months ended September 30, 2012 and 2011, the results of operations for the three months ended September 30, 2011 have been restated due to the identification of non-cash errors as described above under the caption "Restatement to Correct Errors." The errors we identified affected the provision for income taxes for the three months ended September 30, 2011. The errors and their restatement did not impact revenues, operating expenses, or operating income as previously reported.

                                                 Three Months Ended September 30,
                                                     % of Total                     % of Total              Change
($ in thousands)                       2012           Revenue          2011          Revenue        Dollars       Percent
Revenue:
Services                            $    71,403               71 %   $  69,361               68 %   $  2,042             3 %
Subscriber equipment                     26,371               26 %      25,909               25 %        462             2 %
Engineering and support services          2,667                3 %       6,854                7 %     (4,187 )         (61 )%
Total revenue                           100,441              100 %     102,124              100 %     (1,683 )          (2 )%

Operating expenses:
Cost of services (exclusive of
depreciation and amortization)           14,000               14 %      17,770               17 %     (3,770 )         (21 )%
Cost of subscriber equipment             14,194               14 %      13,793               14 %        401             3 %
Research and development                  3,623                4 %       3,122                3 %        501            16 %
Selling, general and
administrative                           16,452               16 %      16,457               16 %         (5 )           0 %
Depreciation and amortization            20,484               20 %      26,784               26 %     (6,300 )         (24 )%
Total operating expenses                 68,753               68 %      77,926               76 %     (9,173 )         (12 )%
Operating income                    $    31,688               32 %   $  24,198               24 %   $  7,490            31 %

Revenue

Total revenue decreased by 2% to $100.4 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The decrease was primarily due to a decrease in revenue from government-sponsored engineering and support contracts. The decrease in revenue was partially offset by a 17% year-over-year increase in billable subscribers and an increase in sales volume of subscriber equipment.

Service Revenue



                                                    Three Months Ended September 30, 2012                          Three Months Ended September 30, 2011                                  Change
                                                                                                     (Revenue in millions and subscribers in thousands)
                                                                    Billable                                                       Billable                                              Billable
                                             Revenue             Subscribers (1)           ARPU (2)         Revenue             Subscribers (1)           ARPU (2)       Revenue        Subscribers         ARPU
Commercial voice                          $        45.2                       333         $       46     $        44.8                       305         $       50     $      0.4                28     $       (4 )
Commercial M2M data                                10.9                       213                 18               8.3                       154                 19            2.6                59             (1 )
Total Commercial                                   56.1                       546                                 53.1                       459                               3.0                87
Government voice                                   14.5                        35                136              15.7                        38                140           (1.2 )              (3 )           (4 )
Government M2M data                                 0.8                        14                 19               0.6                        11                 19            0.2                 3              -
Total Government                                   15.3                        49                                 16.3                        49                              (1.0 )               -
Total                                     $        71.4                       595                        $        69.4                       508                        $      2.0                87

(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.

Service revenue increased by 3% for the three months ended September 30, 2012, compared to the prior year period, primarily due to growth in billable subscribers partially offset by decreases in ARPU for voice services.

Commercial voice revenue increased principally due to an increase in revenue from prepaid services and subscriber growth in higher ARPU Iridium OpenPort®, our broadband data maritime service. The decrease in commercial voice ARPU was due to a decline in average minutes of use per post-paid subscriber. Future growth in commercial voice revenue may be negatively affected by reductions in non-U.S. defense spending and deployed non-U.S. troop levels. Commercial M2M data revenue growth was driven principally by an increase in the billable subscriber base.

Government voice revenue decreased principally due to a reduction in billable subscribers and ARPU. Government voice ARPU decreased due to a higher proportion of billable subscribers on lower priced plans for Netted Iridium®, a service that provides beyond-line-of-sight, push-to-talk tactical radio service for user-defined groups. The increase in government M2M data revenue was driven primarily by billable subscriber growth. Government M2M data ARPU remained flat at $19. We expect government voice ARPU to be lower for the full year 2012 as compared to 2011 as usage of lower priced Netted Iridium continues to grow as a percentage of overall government voice subscribers. Future government voice and M2M data billable subscribers and revenue may be negatively affected by reductions in U.S. defense spending and deployed troop levels, with a corresponding decrease in subscribers under our agreements with the U.S. government. These agreements account for a majority of our government services revenue. In addition, our agreement with the U.S. government expires in 2013. Future government voice and M2M data revenues will be dependent upon our ability to negotiate a favorable new agreement with the U.S. government.

Engineering and Support Service Revenue

Engineering and support service revenue decreased 61% for the three months ended September 30, 2012 compared to the prior year period due to a decline in scope of work for government-sponsored contracts.

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) decreased 21% for three months ended September 30, 2012 from the prior year period due to a decline in scope of work for government-sponsored contracts with corresponding impacts to revenue and cost of services.

Depreciation and Amortization

Depreciation and amortization expense decreased 24% for the three months ended September 30, 2012 from the prior year period. During the second quarter of 2012, we updated our analysis of the current satellite constellation's health and the remaining useful life. Based on the results of this analysis, we estimate that our current constellation of satellites will be operational for longer than previously expected. As a result, the estimated useful life of the current constellation was extended and is consistent with the expected deployment of Iridium NEXT. The extension of the estimated useful life resulted in a decline in depreciation expense of $6.5 million for the three months ended September 30, 2012 as compared to the prior period. We will continue to evaluate the useful life of our current constellation of satellites on an ongoing basis through full deployment and activation of Iridium NEXT. The decline in depreciation expense was partially offset by a $2.0 million impairment charge that we recorded during the third quarter of 2012 as a result of having lost communication with one of our in-orbit satellites.

Other Income (Expense)

Undrawn Credit Facility Fees

Commitment fees on the undrawn portion of the Credit Facility were $2.5 million for the three months ended September 30, 2012 compared to $3.1 million for the prior year period. The decrease of the commitment fee on the undrawn portion is directly proportionate to the increase in the amounts borrowed under the Credit Facility as we finance the development of Iridium NEXT.

Provision for Income Taxes

For the three months ended September 30, 2012, our income tax provision was $11.7 million compared to $9.4 million for the restated prior year period. This increase principally resulted from the 2012 increase in net income offset by the 2010 provision to return adjustments recorded in the third quarter of 2011. Our effective tax rate was 39.6% for the three months ended September 30, 2012 compared to 43.9% for the restated three months ended September 30, 2011. The . . .

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