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IRDM > SEC Filings for IRDM > Form 10-K/A on 20-Nov-2012All Recent SEC Filings

Show all filings for IRIDIUM COMMUNICATIONS INC.

Form 10-K/A for IRIDIUM COMMUNICATIONS INC.


20-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis has been updated to reflect the restatement of the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 and the Consolidated Balance Sheets as of December 31, 2011 and 2010. The restatement increased the income tax benefit and decreased net loss by $2.1 million for the year ended December 31, 2009; increased the undrawn credit facility fee included in other expenses by $1.0 million, increased income tax expense by $1.8 million, and decreased net income by $2.8 million for the year ended December 31, 2010; and decreased the undrawn credit facility fee included in other expenses by $1.0 million, decreased income tax expense by $0.4 million, and increased net income by $1.4 million for the year ended December 31, 2011. For a more detailed description of the restatement, refer to Note 3 - Restatement of Consolidated Financial Statements in the notes to our consolidated financial statements in Item 8 of this Form 10-K/A. You should read the following discussion along with our consolidated financial statements and the consolidated financial statements of Iridium Holdings LLC (our predecessor entity) included in this Form 10-K/A.

Background

We were initially formed in 2007 as GHL Acquisition Corp., a special purpose acquisition company. We acquired all the outstanding equity in 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, GHL Acquisition Corp. was deemed the legal and accounting acquirer and Iridium the legal and accounting acquiree. On September 29, 2009, we changed our name to Iridium Communications Inc.

Restatement of Previously Issued Financial Statements

The financial data presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations includes the effect of the restatement, as described in Note 3 - Restatement of Consolidated Financial Statements in the notes to our consolidated financial statements in Item 8 of this Form 10-K/A, of our results as of and for the years ended December 31, 2011, 2010 and 2009. The following tables summarize the effect of the restatement for the years ended December 31, 2011, 2010 and 2009.

                                               Year Ended December 31, 2011
                                        As Filed          Adjustments      Restated
                                          (In thousands, except per share data)
     Total revenue                    $     384,307      $           -     $ 384,307
     Total operating income           $      77,001      $           -     $  77,001
     Other income (expense):
     Undrawn credit facility fees     $     (13,524 )    $       1,000     $ (12,524 )
     Total other income (expense)     $     (12,420 )    $       1,000     $ (11,420 )
     Income before income taxes       $      64,581      $       1,000     $  65,581
     Provision for income taxes       $     (24,900 )    $         354     $ (24,546 )
     Net income                       $      39,681      $       1,354     $  41,035
     Comprehensive income             $      39,366      $       1,354     $  40,720
     Net income per share - basic     $        0.55      $        0.02     $    0.57
     Net income per share - diluted   $        0.54      $        0.02     $    0.56




                                               Year Ended December 31, 2010
                                        As Filed          Adjustments      Restated
                                          (In thousands, except per share data)
     Total revenue                    $    348,173       $           -     $ 348,173
     Total operating income           $     37,360       $           -     $  37,360
     Other income (expense):
     Undrawn credit facility fees     $     (2,368 )     $      (1,000 )   $  (3,368 )
     Total other income (expense)     $     (1,748 )     $      (1,000 )   $  (2,748 )
     Income before income taxes       $     35,612       $      (1,000 )   $  34,612
     Provision for income taxes       $    (12,921 )     $      (1,750 )   $ (14,671 )
     Net income                       $     22,691       $      (2,750 )   $  19,941
     Comprehensive income             $     22,759       $      (2,750 )   $  20,009
     Net income per share - basic     $       0.32       $       (0.04 )   $    0.28
     Net income per share - diluted   $       0.31       $       (0.04 )   $    0.27




                                              Year Ended December 31, 2009
                                       As Filed          Adjustments      Restated
                                         (In thousands, except per share data)
      Total revenue                  $      75,989      $           -     $  75,989
      Total operating loss           $     (13,175 )    $           -     $ (13,175 )
      Total other income (expense)   $     (32,865 )    $           -     $ (32,865 )
      Income before income taxes     $     (46,040 )    $           -     $ (46,040 )
      Benefit from income taxes      $       1,654      $       2,147     $   3,801
      Net loss                       $     (44,386 )    $       2,147     $ (42,239 )
      Comprehensive loss             $     (44,364 )    $       2,147     $ (42,217 )
      Net loss per share - basic     $       (0.82 )    $        0.04     $   (0.78 )
      Net loss per share - diluted   $       (0.82 )    $        0.04     $   (0.78 )

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 true 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-ocean, 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 using our constellation of in-orbit satellites and related ground infrastructure. 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 approximately 75 service providers, 174 value-added resellers, or VARs, and 56 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 December 31, 2011, we had approximately 523,000 billable subscribers worldwide, an increase of 96,000 or 22% from approximately 427,000 billable subscribers at December 31, 2010. We have a diverse customer base, including end-users in the following vertical markets: land-based handset; maritime; aviation; machine-to-machine, or M2M; and government.

We recognize revenue from both the sale of equipment and the provision of services. We expect a higher proportion of our future revenue will be derived from services. Voice and M2M data service revenue have historically generated higher gross margins than subscriber equipment revenue.

We are currently devoting a substantial part of our resources to develop Iridium NEXT, our next-generation satellite constellation, along with the development of new product and service offerings, upgrades to our current services, hardware and software upgrades to maintain our ground infrastructure and upgrades to our business systems. We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related ground infrastructure upgrades through 2017 to be approximately $3 billion. We believe our credit facility, described below, together with internally generated cash flow, including potential cash flows from hosted payloads and the proceeds from our outstanding stock purchase warrants, will be sufficient to fully fund the aggregate costs associated with the design, build and launch of Iridium NEXT and related ground infrastructure upgrades through 2017. For more information about our sources of funding, see "Liquidity and Capital Resources."

Full Scale Development and Launch Services Agreements

In June 2010, we executed a primarily fixed price full scale development contract, or FSD, with Thales Alenia Space France, or Thales, for the design and manufacture of satellites for Iridium NEXT. The total price under the FSD will be approximately $2.2 billion, and we expect our payment obligations under the FSD to extend into the third quarter of 2017. As of December 31, 2011, we had made total payments of $454.6 million to Thales, which were classified within property and equipment, net, in the accompanying consolidated balance sheet.

In March 2010, we entered into an agreement with Space Exploration Technologies Corp., or SpaceX, to secure SpaceX as the primary launch services provider for Iridium NEXT, which we refer to as the SpaceX Agreement. The SpaceX Agreement, as amended, has a maximum price of $492.0 million for eight launches, each of which can carry nine satellites. As of December 31, 2011, we had made total payments of $43.9 million to SpaceX, which were classified within property and equipment, net, in the accompanying consolidated balance sheet as of December 31, 2011.

In June 2011, we entered into an agreement with International Space Company Kosmotras, or Kosmotras, as a supplemental launch services provider for Iridium NEXT. The agreement provides for the purchase of up to six launches and six additional launch options. Each launch can carry two satellites. If we purchase all six launches, we will pay Kosmotras a total of approximately $184.3 million. If we do not purchase any launches by March 31, 2013, the agreement will terminate, and our payments to Kosmotras, including in respect of pre-launch development work, non-recurring milestone payments already completed at that time and termination fees, would be approximately $15.1 million. As of December 31, 2011, we had made aggregate payments of $11.2 million to Kosmotras which were capitalized as construction in progress within property and equipment, net in the accompanying consolidated balance sheet.

Credit Facility

On October 4, 2010, we entered into a $1.8 billion loan facility, or the Credit Facility, with a syndicate of bank lenders. Ninety-five percent of our obligations under the Credit Facility are insured by Compagnie Franηaise d'Assurance pour le Commerce Extιrieur, or COFACE. The Credit Facility consists of two tranches, with draws and repayments applied pro rata in respect of each tranche:

• Tranche A - $1,537,500,000 at a fixed rate of 4.96%; and

• Tranche B - $262,500,000 at a floating rate equal to the London Interbank Offer Rate, or LIBOR, plus 1.95%.

In connection with each draw made under the Credit Facility, we borrow an additional amount equal to 6.49% of such draw to cover the premium for the COFACE insurance. We also pay a commitment fee of 0.80% per year, in semi-annual installments, on any undrawn portion of the Credit Facility. Funds drawn under the Credit Facility will be used for (i) 85% of the costs under the FSD for the design and manufacture of Iridium NEXT, (ii) the premium for the COFACE insurance and (iii) the payment of a portion of interest during a portion of the construction and launch phase of Iridium NEXT.

Scheduled semi-annual principal repayments will begin six months after the earlier of (i) the successful deployment of a specified number of Iridium NEXT satellites or (ii) September 30, 2017. During this repayment period, interest will be paid on the same date as the principal repayments. Prior to the repayment period, interest payments are due on a semi-annual basis in April and October. Interest expense incurred during the year ended December 31, 2011 was $11.9 million. All interest costs incurred related to the Credit Facility are capitalized during the construction period of the assets; accordingly we capitalized $11.9 million related to interest incurred in 2011. We pay interest on each semi-annual due date through a combination of a cash payment and a deemed additional loan. The $11.9 million in interest incurred during the year ended December 31, 2011 consisted of $3.6 million payable in cash, of which $2.7 million was paid during the year and $0.9 million was accrued at year end, and $8.3 million payable by deemed loans, of which $6.3 million was paid during the year and $2.0 million was accrued at year end. The Credit Facility will mature seven years after the start of the principal repayment period. In addition, we are required to maintain minimum cash reserve levels for debt service, which are classified as restricted cash on the accompanying consolidated balance sheet. Minimum debt service reserve levels are estimated as follows (in millions):

                            At December 31,    Amount

                            2012              $     54
                            2013                    81
                            2014                   108
                            2015                   135
                            2016                   162
                            2017                   189

The required minimum debt service reserve level at December 31, 2011 was $27.0 million. Obligations under the Credit Facility are guaranteed by us and our subsidiaries that are obligors under the Credit Facility. Our obligations are secured on a senior basis by a lien on substantially all of our assets and those of the other obligors.

We may not prepay any borrowings prior to December 31, 2015. If, on that date, a specified number of Iridium NEXT satellites have been successfully launched and we have adequate time and resources to complete the Iridium NEXT constellation on schedule, we may prepay the borrowings without penalty. In addition, following the completion of the Iridium NEXT constellation, we may prepay the borrowings without penalty. Any amounts repaid may not be reborrowed. We must repay the loans in full upon (i) a delisting of our common stock, (ii) a change in control of our company or our ceasing to own 100% of any of the other obligors or (iii) the sale of all or substantially all of our assets. We must apply all or a portion of specified capital raising proceeds, insurance proceeds and condemnation proceeds to the prepayment of the loans. The Credit Facility includes customary representations, events of default, covenants and conditions precedent to drawing of funds.

The financial covenants include:

• a minimum cash requirement;

• a minimum debt to equity ratio level;

• maximum capital expenditure levels;

• minimum consolidated operational earnings before interest, taxes, depreciation and amortization levels;

• minimum cash flow requirements from customers who have hosted payloads on our satellites;

• minimum debt service reserve levels;

• a minimum debt service coverage ratio level; and

• maximum leverage levels.

The covenants also place limitations on our ability and that of our subsidiaries to carry out mergers and acquisitions, dispose of assets, grant security interests, declare, make or pay dividends, enter into transactions with affiliates, fund payments under the FSD from our own resources, incur debt, or make loans, guarantees or indemnities. We were in compliance with all covenants as of December 31, 2011.

As of December 31, 2011, we had borrowed $417.1 million under the Credit Facility. The unused portion of the Credit Facility as of December 31, 2011 was approximately $1.4 billion. We recognized the semi-annual commitment fee on the undrawn portion of the Credit Facility of $13.5 million, which is included in other income (expense) in the accompanying consolidated statement of operations for the year ended December 31, 2011.

Settlement of Motorola Litigation

On October 1, 2010, we entered into a settlement agreement with Motorola, Inc., or Motorola, pursuant to which the parties settled the litigation previously filed by Motorola against Iridium Satellite LLC, or Iridium Satellite, and Iridium Holdings in Illinois. On the same date, the parties entered into a series of other agreements. Pursuant to these several agreements, we agreed to pay Motorola an aggregate of $46.0 million to repay debt of $15.4 million otherwise due in 2010, and $14.9 million in consideration of expanded intellectual property licenses, the conversion of existing intellectual property licenses from being royalty-based to prepaid, the transfer to us of ownership of certain intellectual property rights, and $15.7 million for the termination of Motorola's rights to distributions and payments based on the value of our company upon certain "triggering events" and mutual releases of claims. Of the total $46.0 million, we paid $23.0 million contemporaneously with the execution of the settlement agreement and the remaining $23.0 million was reflected in a promissory note. In December 2010, we paid $0.8 million to Motorola, which was applied against the promissory note principal. In May 2011, we paid $23.6 million to Motorola Solutions, Inc., Motorola's successor, in full satisfaction of the outstanding balance of its promissory note including accrued interest. Total interest expense under the note payable totaled approximately $1.4 million and was capitalized to construction in progress.

Material Trends and Uncertainties

Iridium's 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 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 in additional countries.

As we continue the Iridium business, we face a number of challenges and uncertainties, 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 and proceeds from our outstanding stock purchase warrants, to fund a portion of the costs associated with Iridium NEXT and support ongoing business;

• our ability to maintain the health, capacity, control and level of service of our existing satellite network through 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;

• our ability to maintain our relationship with U.S. government customers, particularly the DoD;

• 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.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates including those related to revenue recognition, useful lives of property and equipment, long-lived assets, goodwill and other intangible assets, inventory, income taxes, stock-based compensation, warranty expenses and other estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The accounting policies we believe to be most critical to understanding our financial results and condition and that require complex and subjective management judgments are discussed below. Our accounting policies are more fully described in Note 2 in Item 8 "Financial Statements and Supplementary Data." Please see the notes to our consolidated financial statements for a full discussion of these significant accounting policies.

Revenue Recognition

For revenue arrangements with multiple elements that include guaranteed minimum orders and where we determine, based on judgment, that the elements qualify as separate units of accounting, we allocate the guaranteed minimum arrangement price among the various contract elements based on each element's relative selling price. The selling price used for each deliverable is based on vendor specific objective evidence when available, third-party evidence when vendor-specific evidence is not available, or the estimated selling price when neither vendor-specific evidence nor third-party evidence is available. We determine vendor specific objective evidence of selling price by assessing sales prices of subscriber equipment, airtime and other services when they are sold to customers on a stand-alone basis. We recognize revenue for each element based on the specific characteristics of that element.

We recognize revenue for the sale of prepaid airtime when services are rendered or if the likelihood of the redemption by the customer becomes remote. The likelihood of redemption is based on historical redemption patterns. If future results are not consistent with these historical patterns, and therefore actual usage results are not consistent with our estimates or assumptions, we may be exposed to changes to earned and unearned revenue that could be material.

Revenue associated with certain fixed-price engineering services arrangements is recorded when the services are rendered, typically on a proportional performance method of accounting based on the Company's estimate of total costs expected to complete the contract, and the related costs are expensed as incurred. We recognize revenue on cost-plus-fee arrangements to the extent of actual costs incurred plus an estimate of the applicable fees earned, where such estimated fees are determined using a proportional performance method calculation. If actual results are not consistent with our estimates or assumptions, we may be exposed to changes to earned and unearned revenue that could be material to our results of operations.

Stock-Based Compensation

We account for stock-based compensation, which consists of stock options and restricted stock units, based on the grant date estimated fair value. In the case of restricted stock units, grant date fair value is equal to the closing price of our common stock on the date of grant. In the case of stock options, grant date fair value is calculated using the Black-Scholes option pricing model. We recognize stock-based compensation on a straight-line basis over the requisite service period. The Black-Scholes option pricing model requires various judgmental assumptions, including expected volatility and expected term. If any of the assumptions used in the Black-Scholes option pricing model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those awards expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly.

Warranty Expenses

We estimate a provision for product returns under our standard warranty policies when it is probable that a loss has been incurred. A warranty liability is maintained based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. If actual results are not consistent with our estimates or assumptions, we may be exposed to changes to cost of subscriber equipment sales that could be material to our results of operations.

Income Taxes

We account for income taxes using the asset and liability approach. This approach requires that we recognize deferred tax assets and liabilities based on differences between the financial statement bases and tax bases of our assets and liabilities. Significant judgment is required in the calculation of our tax provision and the resulting tax liabilities as well as the realizability of our deferred tax assets that arise from temporary differences between the tax and financial statement recognition. As part of our financial reporting process, we must assess the likelihood that our deferred tax assets can be recovered. A valuation allowance is established to reduce deferred tax assets to the amounts we expect to realize in the future. We also recognize tax assets related to uncertain tax positions only when we estimate that it is "more likely than not" that the position will be sustainable based on its technical merits. If actual results are not consistent with our estimates and assumptions, this may result in material changes to our income tax provision (benefit).

Recoverability of Long-Lived Assets

We assess the recoverability of long-lived assets when indicators of impairment exist. We assess the possibility of impairment by comparing the carrying amounts of the assets to the estimated undiscounted future cash flows expected to be generated by those assets. If we determine that an asset is impaired, we estimate the impairment loss by determining the excess of the assets' carrying amount over its estimated fair value. Estimated fair value is based on market prices, when available, or various other valuation techniques. These techniques often include estimates and assumptions with respect to future cash flows and incremental borrowing rates. If actual results are not consistent with our estimates and assumptions, we may be exposed to impairment losses that could be . . .

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