Iridium Communications Inc.
Iridium Communications Inc. (Form: 10-Q, Received: 10/31/2013 07:01:09)
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 

 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2013
 
OR
 
¨
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)
 

 
DELAWARE
 
26-1344998
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
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 October 28, 2013 was 76,660, 401 .
 
 
 
 
 
IRIDIUM COMMUNICATIONS INC.
TABLE OF CONTENTS
Item No.
 
Page
 
 
 
 
Part I. Financial Information
 
 
 
 
 
 
 
Financial Statements
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
3
 
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income
 
4
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
5
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
6
 
 
 
 
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
14
 
 
 
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
25
 
 
 
 
ITEM 4.
Controls and Procedures
 
26
 
 
 
 
PART II. Other Information
 
 
 
 
 
 
ITEM 1.
Legal Proceedings
 
26
 
 
 
 
ITEM 1A.
Risk Factors
 
26
 
 
 
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
28
 
 
 
 
ITEM 3.
Defaults Upon Senior Securities
 
28
 
 
 
 
ITEM 4.
Mine Safety Disclosures
 
28
 
 
 
 
ITEM 5.
Other Information
 
28
 
 
 
 
ITEM 6.
Exhibits
 
28
 
 
 
 
 
Signatures
 
29
 
2

 
PART I.
 
Iridium Communications Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
196,997
 
$
254,418
 
Marketable securities
 
 
73,325
 
 
-
 
Accounts receivable, net
 
 
64,550
 
 
56,135
 
Inventory
 
 
28,188
 
 
26,335
 
Deferred tax assets, net
 
 
9,743
 
 
21,160
 
Income tax receivable
 
 
909
 
 
4,302
 
Prepaid expenses and other current assets
 
 
4,767
 
 
4,816
 
Total current assets
 
 
378,479
 
 
367,166
 
Property and equipment, net
 
 
1,451,311
 
 
1,210,693
 
Restricted cash
 
 
81,215
 
 
54,233
 
Other assets
 
 
7,708
 
 
2,912
 
Intangible assets, net
 
 
60,715
 
 
70,502
 
Deferred financing costs
 
 
127,205
 
 
123,796
 
Goodwill
 
 
87,039
 
 
87,039
 
Total assets
 
$
2,193,672
 
$
1,916,341
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
9,156
 
$
13,834
 
Accrued expenses and other current liabilities
 
 
39,968
 
 
26,704
 
Interest payable
 
 
16,912
 
 
5,359
 
Deferred revenue
 
 
44,244
 
 
42,755
 
Total current liabilities
 
 
110,280
 
 
88,652
 
Accrued satellite operations and maintenance expense, net of current portion
 
 
16,723
 
 
17,727
 
Credit facility
 
 
936,290
 
 
751,787
 
Deferred tax liabilities, net
 
 
184,776
 
 
167,821
 
Other long-term liabilities
 
 
20,433
 
 
13,796
 
Total liabilities
 
 
1,268,502
 
 
1,039,783
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
 
 
Series A Preferred Stock, $0.0001 par value, 1,000 shares authorized,
    issued and outstanding
 
 
-
 
 
-
 
Common stock, $0.001 par value, 300,000 shares authorized, 76,660
    and 76,461 shares issued and outstanding, respectively
 
 
77
 
 
76
 
Additional paid-in capital
 
 
800,879
 
 
793,511
 
Retained earnings
 
 
124,992
 
 
83,328
 
Accumulated other comprehensive loss, net of taxes
 
 
(778)
 
 
(357)
 
Total stockholders' equity
 
 
925,170
 
 
876,558
 
Total liabilities and stockholders' equity
 
$
2,193,672
 
$
1,916,341
 
 
See notes to unaudited condensed consolidated financial statements
 
 
3

 
Iridium Communications Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
$
75,381
 
$
71,403
 
$
215,569
 
$
206,736
 
Subscriber equipment
 
 
20,253
 
 
26,371
 
 
57,399
 
 
71,825
 
Engineering and support services
 
 
4,935
 
 
2,667
 
 
11,474
 
 
12,675
 
Total revenue
 
 
100,569
 
 
100,441
 
 
284,442
 
 
291,236
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
 
 
14,776
 
 
14,000
 
 
43,458
 
 
47,991
 
Cost of subscriber equipment
 
 
15,550
 
 
14,194
 
 
39,563
 
 
40,828
 
Research and development
 
 
3,125
 
 
3,623
 
 
6,525
 
 
12,741
 
Selling, general and administrative
 
 
18,290
 
 
16,452
 
 
55,054
 
 
52,570
 
Depreciation and amortization
 
 
19,377
 
 
20,484
 
 
56,205
 
 
63,056
 
Total operating expenses
 
 
71,118
 
 
68,753
 
 
200,805
 
 
217,186
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
29,451
 
 
31,688
 
 
83,637
 
 
74,050
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income, net
 
 
557
 
 
399
 
 
1,835
 
 
588
 
Undrawn credit facility fees
 
 
(1,886)
 
 
(2,488)
 
 
(6,002)
 
 
(7,849)
 
Other expense, net
 
 
(1,101)
 
 
(67)
 
 
(3,366)
 
 
(6)
 
Total other expense
 
 
(2,430)
 
 
(2,156)
 
 
(7,533)
 
 
(7,267)
 
Income before income taxes
 
 
27,021
 
 
29,532
 
 
76,104
 
 
66,783
 
Provision for income taxes
 
 
(10,436)
 
 
(11,693)
 
 
(29,172)
 
 
(18,863)
 
Net income
 
 
16,585
 
 
17,839
 
 
46,932
 
 
47,920
 
Series A Preferred Stock dividends
 
 
1,750
 
 
-
 
 
5,250
 
 
-
 
Net income attributable to common stockholders
 
$
14,835
 
$
17,839
 
$
41,682
 
$
47,920
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
 
76,962
 
 
74,376
 
 
76,877
 
 
73,738
 
Weighted average shares outstanding - diluted
 
 
87,591
 
 
76,131
 
 
87,532
 
 
75,886
 
Net income attributable to common stockholders per share - basic
 
$
0.19
 
$
0.24
 
$
0.54
 
$
0.65
 
Net income attributable to common stockholders per share - diluted
 
$
0.19
 
$
0.23
 
$
0.54
 
$
0.63
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
16,585
 
$
17,839
 
$
46,932
 
$
47,920
 
Foreign currency translation adjustments, net of tax
 
 
(94)
 
 
5
 
 
(355)
 
 
(80)
 
Unrealized gain (loss) on marketable securities, net of tax
 
 
219
 
 
-
 
 
(66)
 
 
-
 
Comprehensive income
 
$
16,710
 
$
17,844
 
$
46,511
 
$
47,840
 
 
See notes to unaudited condensed consolidated financial statements
 
 
4

 
Iridium Communications Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
144,332
 
$
132,715
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
 
 
(263,445)
 
 
(221,343)
 
Purchases of marketable securities
 
 
(100,794)
 
 
-
 
Sales and maturities of marketable securities
 
 
26,904
 
 
-
 
Investment in equity method affiliate
 
 
(5,000)
 
 
-
 
Net cash used in investing activities
 
 
(342,335)
 
 
(221,343)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Borrowings under credit facility
 
 
184,503
 
 
171,805
 
Payment of deferred financing fees
 
 
(11,704)
 
 
(11,980)
 
Change in restricted cash - Credit Facility
 
 
(26,982)
 
 
(27,062)
 
Proceeds from exercise of stock options and warrants
 
 
15
 
 
9,143
 
Payment of offering costs
 
 
-
 
 
(245)
 
Payment of Series A Preferred Stock dividends
 
 
(5,250)
 
 
-
 
Net cash provided by financing activities
 
 
140,582
 
 
141,661
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
(57,421)
 
 
53,033
 
Cash and cash equivalents, beginning of period
 
 
254,418
 
 
136,366
 
Cash and cash equivalents, end of period
 
$
196,997
 
$
189,399
 
 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
 
 
 
Interest paid
 
$
5,096
 
$
2,907
 
Income taxes paid (refunded)
 
$
(2,947)
 
$
351
 
 
 
 
 
 
 
 
 
Supplemental disclosure of non-cash investing activities:
 
 
 
 
 
 
 
Property and equipment received but not paid for yet
 
$
6,382
 
$
2,821
 
Interest capitalized but not paid
 
$
16,912
 
$
11,317
 
Capitalized amortization of deferred financing costs
 
$
8,294
 
$
2,182
 
Capitalized paid-in-kind interest
 
$
11,667
 
$
6,677
 
Capitalized stock-based compensation
 
$
996
 
$
547
 
 
See notes to unaudited condensed consolidated financial statements
 
 
5

 
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”). While the Company believes that the disclosures are adequate to make the information not misleading, these interim condensed consolidated financial statements should be read in conjunction with the 2012 annual consolidated financial statements and notes included in its Form 10-K filed with the SEC on March 5, 2013.

2. Significant Accounting Policies
 
Property and Equipment
 
Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
 
Satellites
estimated useful life
Ground system
5 - 7 years
Equipment
3 - 5 years
Internally developed software and purchased software
3 - 7 years
Building
39 years
Building improvements
estimated useful life
Leasehold improvements
shorter of useful life or remaining lease term
 
The estimated useful lives of the Company’s satellites are the remaining period of expected use for each satellite. Satellites are depreciated on a straight-line basis through the earlier of the estimated remaining useful life or the date they are expected to be replaced by Iridium NEXT satellites. Based on the current launch schedule, the Company expects Iridium NEXT satellites to begin deployment in early 2015, with the final launch expected to occur by mid-2017.
 
Repairs and maintenance costs are expensed as incurred.
  
Warranty Expense
 
The Company provides the first end-user purchaser of its subscriber equipment a warranty for one to five years from the date of purchase by such first end-user, depending on the product. The Company maintains a warranty reserve based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties, including equipment replacements, repairs, freight, and program administration, are recorded as cost of subscriber equipment in the accompanying condensed consolidated statements of operations and comprehensive income. Due to an increase in the warranty provision related to projected higher warranty claims and other warranty-related initiatives for the Iridium Pilot ® terminals, the Company recorded an additional $ 5.5 million to the warranty provision during the nine months ended September 30, 2013. Changes in the warranty reserve during the nine months ended September 30, 2013 were as follows:
 
 
6

 
 
 
Nine Months Ended
 
 
 
September 30, 2013
 
 
 
(in thousands)
 
Balance at beginning of the period
 
$
4,050
 
Provision
 
 
9,524
 
Utilization
 
 
(4,707)
 
Balance at end of the period
 
$
8,867
 
 
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, deposits and other current assets, accounts receivable, accounts payable, 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:
 
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
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
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
As of September 30, 2013 and December 31, 2012, the carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses, deposits and other current assets, accounts receivable, accounts payable, accrued expenses and other current liabilities and other obligations) approximate their fair values because of their short-term nature. The fair value of the Company’s investments in money market funds approximates their carrying value; such instruments are classified as Level 1 and are included in cash and cash equivalents on the condensed consolidated balance sheet.   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 condensed consolidated balance sheet.
 
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.

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. The cash and cash equivalents balance as of December 31, 2012 consisted of cash deposited in institutional money market funds and regular interest bearing and non-interest bearing depository accounts. In 2013, the Company began making investments in commercial paper and government-issued debt securities with original maturities within ninety days of purchase. These investments, along with cash deposited in institutional money market funds, regular interest bearing and non-interest bearing depository accounts, are classified as cash and cash equivalents as of September 30, 2013 on the condensed consolidated balance sheet. The following table summarizes the Company’s cash and cash equivalents as of September 30, 2013 and December 31, 2012:
 
 
7

 
 
 
 
September 30,
 
December 31,
 
Recurring Fair
 
 
 
2013
 
2012
 
Value Measurement
 
 
 
(in thousands)
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Cash
 
$
91,911
 
$
166,326
 
 
 
Money market funds
 
 
88,589
 
 
88,092
 
Level 1
 
Commercial paper
 
 
14,496
 
 
-
 
Level 2
 
Government-issued debt securities
 
 
2,001
 
 
-
 
Level 2
 
Total Cash and cash equivalents
 
$
196,997
 
$
254,418
 
 
 
 
Restricted Cash
 
The Company is required to maintain a minimum cash reserve for debt service related to its $ 1.8 billion loan facility (the “Credit Facility”). As of September 30, 2013 and December 31, 2012, the Company’s restricted cash balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $ 81.2 million and $ 54.2 million, respectively.
 
Marketable Securities
 
Marketable securities as of September 30, 2013 consisted of corporate and foreign fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale as of September 30, 2013 and are included in current assets on the condensed consolidated balance sheet. 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 realized gains on the sale of marketable securities for the three or nine months ended September 30, 2013. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that no other-than-temporary declines in value existed at September 30, 2013. The Company did not have any marketable securities at December 31, 2012. The following table summarizes the Company’s marketable securities as of September 30, 2013:
 
 
 
September 30,
 
Recurring Fair
 
 
 
2013
 
Value Measurement
 
 
 
(in thousands)
 
 
 
Marketable securities:
 
 
 
 
 
 
Fixed-income debt securities
 
$
57,109
 
Level 2
 
Commercial paper
 
 
16,216
 
Level 2
 
Total Marketable securities
 
$
73,325
 
 
 
 
The following table presents the contractual maturities of the fixed income debt securities and commercial paper held as of September 30, 2013 :
 
 
 
Amortized
 
Unrealized
 
Estimated
 
 
 
Cost
 
Gain (Loss)
 
Fair Value
 
 
 
(in thousands)
 
Fixed-income debt securities:
 
 
 
 
 
 
 
 
 
 
Mature within one year
 
$
5,953
 
$
2
 
$
5,955
 
Mature after one year and within three years
 
 
51,264
 
 
(110)
 
 
51,154
 
Commercial paper:
 
 
 
 
 
 
 
 
 
 
Mature within one year
 
 
16,216
 
 
-
 
 
16,216
 
Total
 
$
73,433
 
$
(108)
 
$
73,325
 
 
The Company’s gross and net-of-tax unrealized loss on marketable securities for the nine months ended September 30, 2013 was approximately $ 108,000 and $66,000, respectively. The change in unrealized loss on marketable securities, net of tax, is included within comprehensive income on the condensed consolidated statements of operations and comprehensive income.
 
 
8

 
4. Commitments and Contingencies
 
Commitments
 
Thales
 
In June 2010, the Company executed a primarily fixed-price full-scale development contract (the “FSD”) with Thales Alenia Space France (“Thales”) for the design and build of satellites for Iridium NEXT, the Company’s next-generation satellite constellation. The total price under the FSD is $ 2.2 billion, and the Company expects payment obligations under the FSD to extend into the third quarter of 2017. As of September 30, 2013, the Company had made aggregate payments of $ 993.6 million to Thales, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet.
 
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 (the “SpaceX Agreement”). In August 2012, the Company entered into an amendment to the SpaceX Agreement (the “SpaceX Amendment”). The SpaceX Amendment reduced the number of contracted launches and increased the number of satellites to be carried on each launch vehicle. The maximum price under the SpaceX Amendment is $ 453.1 million. As of September 30, 2013, the Company had made aggregate payments of $ 65.1 million to SpaceX, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet.
 
Kosmotras
 
In June 2011, the Company entered into an agreement with International Space Company Kosmotras (“Kosmotras”) as a supplemental launch service provider for Iridium NEXT (the “Kosmotras Agreement”). The Kosmotras Agreement provides for the purchase of up to six launches with options to purchase additional launches. Each launch can carry two satellites. In June 2013, the Company exercised an option for one launch to carry the first two Iridium NEXT satellites; if the Company does not exercise any additional options, the total cost under the contract including this single launch will be $ 51.8 million. Prior to December 31, 2013, the Company may exercise its remaining option to purchase up to five additional launches. If all six launches are purchased, the Company will pay Kosmotras a total of $ 184.3 million. As of September 30, 2013, the Company had made aggregate payments of $ 18.3 million to Kosmotras, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. The remaining amounts owed under the contract will be paid through 2015 or 2016, depending on the number of launches purchased and the launch schedule .
 
Operating Leases
 
The Company leases land, office space, and office and computer equipment under noncancelable operating lease agreements. In the first quarter of 2013, the Company renewed the lease term for its technical support center (the “TSC”) located in Chandler, Arizona. The lease for the TSC was extended from 2014 to 2024 . Future minimum lease payments, by year and in the aggregate, under the noncancelable operating lease starting in 2014 for the TSC are as follows:
 
 
 
Operating
 
Year ending December 31,
 
Lease
 
 
 
(In thousands)
 
2014
 
$
359
 
2015
 
 
730
 
2016
 
 
755
 
2017
 
 
779
 
2018
 
 
804
 
Thereafter
 
 
4,621
 
Total
 
$
8,048
 
 
 
9

 
Credit Facility
 
In October 2010, the Company entered into the Credit Facility with a syndicate of bank lenders (the “Lenders”). The Credit Facility was subsequently amended and restated  in August 2012. The Company had borrowed an aggregate total of $ 936.3 million as of September 30, 2013. The unused portion of the Credit Facility as of September 30, 2013 was $ 863.7 million. Pursuant to the Credit Facility, the Company maintains a minimum cash reserve for repayment. As of September 30, 2013, the minimum required cash reserve balance was $ 81.0 million. This amount is included in restricted cash in the accompanying condensed consolidated balance sheet. This minimum cash reserve requirement will increase over the term of the Credit Facility and will be $ 189.0 million at the beginning of the repayment period, which is expected to begin in 2017.
 
Interest costs incurred under the Credit Facility were $ 10.3 million and $ 28.2 million for the three and nine months ended September 30, 2013, respectively. All interest costs incurred related to the Credit Facility have been capitalized during the construction period of the Iridium NEXT assets. The Company pays interest on each semi-annual due date through a combination of a cash payment and a deemed additional loan. The $10.3 million in interest incurred during the three months ended September 30, 2013 consisted of $ 3.1 million payable in cash and $ 7.2 million payable by deemed loans. The $28.2 million in interest incurred during the nine months ended September 30, 2013 consisted of $ 8.6 million payable in cash of which $ 3.5 million was paid during the period and $ 5.1 million was accrued at period-end, and $ 19.6 million payable by deemed loans, of which $ 7.9 million was paid during the period and $ 11.7 million was accrued at period-end. Total interest payable associated with the Credit Facility was $ 16.8 million and is included in interest payable in the accompanying condensed consolidated balance sheet as of September 30, 2013.
 
The Company also pays a commitment fee of 0.80 % per year, in semi-annual installments, on any undrawn portion of the Credit Facility. The total commitment fee payable on the undrawn portion of the Credit Facility was $ 3.8 million and is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2013.
 
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. Stock-Based Compensation
 
The Company accounts for stock-based compensation at fair value. The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is equal to the closing price of the underlying common stock on the grant date. The fair value of an award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or performance period and is classified in the condensed consolidated statements of operations and comprehensive income in a manner consistent with the classification of the recipient’s compensation. Stock-based awards to non-employee consultants are expensed at their fair value as services are provided according to the terms of their agreements and are classified in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.
 
During 2012, the Company’s stockholders approved a stock incentive plan (the “2012 Stock Incentive Plan”) to provide stock-based awards, including nonqualified stock options, incentive stock options, restricted stock and other equity securities, as incentives and rewards for employees, consultants and non-employee directors. As of September 30, 2013, 13,416,019 shares of common stock were authorized for issuance as awards under the 2012 Stock Incentive Plan.
 
Members of the Company’s board of directors elected to receive a portion of their 2013 annual compensation in the form of equity awards, in an aggregate amount of approximately 68,000 stock options and 112,000 RSUs. These stock options and RSUs were granted in January 2013 and vest through the end of 2013, with 25 % vesting on the last day of each calendar quarter. The estimated aggregate grant-date fair value of the stock options was $ 0.2 million. The estimated aggregate grant-date fair value of the RSUs was $ 0.8 million.
 
 
10

 
During the three months ended September 30, 2013, the Company granted approximately 92,000 stock options to its employees. During the nine months ended September 30, 2013, the Company granted approximately 1,226,000 stock options, 523,000 service-based RSUs, and 228,000 performance-based RSUs to its employees. Employee stock options and service-based RSUs generally vest over a four -year service period with 25 % vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter. The performance-based RSUs were awarded to the Company’s executives. Vesting of the performance-based RSUs is dependent upon the Company’s achievement of defined performance goals over a two-year measurement period. The number of performance-based RSUs that will ultimately vest may range from 0 % to 150 % of the original grant based on the level of achievement of the performance goals. If the Company achieves the performance goals, 50 % of the RSU awards will vest at the end of two years and the remaining 50 % will vest at the end of the third year. The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. The estimated aggregate grant-date fair value of the stock options granted to employees during the three months ended September 30, 2013 was $ 0.3 million. The estimated aggregate grant-date fair values of the stock options, service-based RSUs, and performance-based RSUs granted to employees during the nine months ended September 30, 2013 were $ 3.2 million, $ 3.2 million, and $ 1.4 million, respectively.
 
During the nine months ended September 30, 2013, the Company granted 45,000 stock options to non-employee consultants. The consultant options vest over a two -year period with ratable quarterly vesting. Expense related to stock options granted to non-employees is recognized over the vesting period of the award, which is the period during which services are rendered. At each vest date, the value of these options is re-measured. The aggregate estimated grant-date fair value of the consultant stock options was approximately $ 0.1 million.

6. Equity Instruments
 
$7.00 Warrants
 
In connection with the Company’s initial public offering in February 2008, the Company sold 40.0  million units at a price of $ 10.00 per unit. Each unit consisted of one share of common stock and one common stock purchase warrant (a “$ 7.00 Warrant”). Each $7.00 Warrant entitled the holder to purchase from the Company one share of common stock at a price of $ 7.00 per share.
 
During 2012, the Company issued 1.3 million shares of common stock resulting from the exercise of 1.3 million $7.00 Warrants. The Company received proceeds of $ 9.1 million as a result of these warrant exercises.
 
During 2012, the Company entered into privately negotiated warrant exchange agreements with the largest holder of the outstanding $7.00 Warrants. Pursuant to these agreements, the Company issued 562,370 new shares of its common stock in exchange for 3,374,220 of the $7.00 Warrants (equivalent to approximately 0.1667 common shares for every $7.00 Warrant tendered), representing approximately 27 % of the outstanding $7.00 Warrants.
 
In addition, during 2012, the Company initiated and completed a tender offer to exchange outstanding $7.00 Warrants for shares of its own common stock (the “2012 Tender Offer”). The Company offered holders of its $ 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). As a result of the 2012 Tender Offer, the Company issued an aggregate of 1,386,941 shares of its common stock in exchange for an aggregate of 8,321,433 of the $ 7.00 Warrants.
 
On February 14, 2013, the remaining 655,499 outstanding and unexercised $ 7.00 Warrants expired in accordance with their terms. 
 
$11.50 Warrants
 
On September 29, 2009, in connection with the acquisition of Iridium Holdings LLC, holders of approximately 14.4  million $7.00 Warrants exchanged their existing warrants for new warrants to purchase the Company’s common stock at an exercise price of $ 11.50 per share (the “$ 11.50 Warrants”).
 
The Company may redeem each of the $11.50 Warrants at a price of $ 0.01 upon 30 days prior notice, provided that the warrants are exercisable and the registration statement covering the common stock issuable upon exercise of the warrants remains effective and available, and provided further that such redemption can only be made if the closing price of the common stock is at least $18.00 per share for any 20 trading days within a 30-trading-day period ending on the third day prior to the date on which notice of redemption is given. If the registration statement is not still effective at the time of exercise, the holders of the $11.50 Warrants will not be entitled to exercise the warrants, and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle any such warrant exercise. Consequently, the $11.50 Warrants may expire unexercised and unredeemed. The number of shares of the Company’s common stock issuable upon the exercise of each $11.50 Warrant is subject to adjustment from time to time upon the occurrence of specified events. As of September 30, 2013, 277,021 of the $ 11.50 Warrants remained outstanding. Any remaining outstanding $11.50 Warrants will expire in February 2015 .
 
Series A Cumulative Convertible Perpetual Preferred Stock
 
The Company is authorized to issue 2.0 million shares of preferred stock with a par value of $ 0.0001 per share. In the fourth quarter of 2012, the Company issued 1.0 million shares of its 7.00 % Series A Cumulative Convertible Perpetual Preferred Stock (the “Series A Preferred Stock”) in a private offering. The Company received proceeds of $ 96.5 million from the sale of the Series A Preferred Stock, net of the aggregate $ 3.5 million in initial purchaser discount and additional offering costs. The Company intends to use the net proceeds of the private offering to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes. The remaining 1.0 million authorized shares of preferred stock remain undesignated and unissued as of September 30, 2013.
 
 
11

 
Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends 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 are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. 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 ranks senior to the Company’s common stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding-up. Holders of Series A 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 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).
 
In 2012, the Company paid $ 1.4 million in cash dividends to its holders of Series A Preferred Stock. In March 2013, June 2013, and September 2013, the Company paid cash dividends of $ 1.75 million to holders of the Series A Preferred Stock. As of September 30, 2013, holders of the Series A Preferred Stock have accrued $ 0.3 million in cash dividends, which is included within accrued expenses and other current liabilities on the consolidated balance sheet.
 
On or after October 3, 2017, the Company may, at its option, convert some or all of the Series A Preferred Stock into the number of shares of 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 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, the Company may also elect to settle conversions in cash as a result of these fundamental changes.

7. Net Income Per Share
 
The computations of basic and diluted net income per share are set forth as follows:
 
 
 
Three Months Ended September 30,
 
 
 
2013
 
2012
 
 
 
(in thousands, except per share data)
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
14,835
 
$
17,839
 
Net income allocated to participating securities
 
 
(11)
 
 
(11)
 
Numerator for basic net income per share
 
 
14,824
 
 
17,828
 
Dividends on Series A Preferred Stock
 
 
1,750
 
 
-
 
Numerator for diluted net income per share
 
$
16,574
 
$
17,828
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per share - weighted
    average outstanding common shares
 
 
76,962
 
 
74,376
 
Dilutive effect of warrants
 
 
-
 
 
1,731
 
Dilutive effect of stock options
 
 
3
 
 
1
 
Dilutive effect of contingently issuable shares
 
 
24
 
 
23
 
Dilutive effect of Series A Preferred Stock
 
 
10,602
 
 
-
 
Denominator for diluted net income per share
 
 
87,591
 
 
76,131
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders per share - basic
 
$
0.19
 
$
0.24
 
Net income attributable to common stockholders per share - diluted
 
$
0.19
 
$
0.23
 
 
For the three months ended September 30, 2013, warrants to purchase 0.3  million shares of common stock and options to purchase 4.8  million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the three months ended September 30, 2013, 0.9  million unvested RSUs were excluded from the computation of basic and diluted net income per share.
 
 
12

 
 
For the three months ended September 30, 2012, warrants to purchase 0.3  million shares of common stock and options to purchase 4.3  million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the three months ended September 30, 2012, 0.6  million unvested RSUs were excluded from the computation of basic and diluted net income per share.
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
 
 
(in thousands, except per share data)
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
41,682
 
$
47,920
 
Net income allocated to participating securities
 
 
(48)
 
 
(47)
 
Numerator for basic net income per share
 
 
41,634
 
 
47,873
 
Dividends on Series A Preferred Stock
 
 
5,250
 
 
-
 
Numerator for diluted net income per share
 
$
46,884
 
$
47,873
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per share - weighted
    average outstanding common shares
 
 
76,877
 
 
73,738
 
Dilutive effect of warrants
 
 
1
 
 
2,092
 
Dilutive effect of stock options
 
 
-
 
 
8
 
Dilutive effect of contingently issuable shares
 
 
52
 
 
48
 
Dilutive effect of Series A Preferred Stock
 
 
10,602
 
 
-
 
Denominator for diluted net income per share
 
 
87,532
 
 
75,886
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders per share - basic
 
$
0.54
 
$
0.65
 
Net income attributable to common stockholders per share - diluted
 
$
0.54
 
$
0.63
 
 
For the nine months ended September 30, 2013, warrants to purchase 0.3  million shares of common stock and options to purchase 5.2  million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the nine months ended September 30, 2013, 0.9  million unvested RSUs were excluded from the computation of basic and diluted net income per share.
 
For the nine months ended September 30, 2012, warrants to purchase 0.3  million shares of common stock and options to purchase 4.1  million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the nine months ended September 30, 2012, 0.5  million unvested RSUs were excluded from the computation of basic and diluted net income per share.
 
 
13

 
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, 2012, filed on March 5, 2013 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, 2012 filed on March 5, 2013, 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 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 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 commercial end-users. 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 also recently announced a new planned service, Iridium PRIME SM , to host third-party payloads on stand-alone satellites within the Iridium NEXT satellite network, our next generation satellite constellation. The Iridium PRIME program is expected to reduce the complexity, delays and costs typically associated with building, launching and operating a satellite mission, while avoiding the timing constraints of a typical hosted payload program by offering customers dedicated satellites and a flexible launch schedule.
 
We sell our products and services to commercial end-users through a wholesale distribution network, encompassing 75 service providers, more than 185 value-added resellers, or VARs, and 55 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, 2013, we had approximately 655,000 billable subscribers worldwide, an increase of 10% from approximately 595,000 billable subscribers at September 30, 2012. We have a diverse customer base, with end-users in the following lines of business: land-based handset; machine-to-machine, or M2M; maritime; aviation; 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 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 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. Our funding plan for these costs includes the funds available under our $1.8 billion loan facility, or the Credit Facility, together with internally generated cash flows, including potential cash flows from hosted payloads and Iridium PRIME, and cash on hand. As discussed below in “Liquidity and Capital Resources,” we were in compliance with all our financial covenants as of September 30, 2013 and believe that our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next twelve months. As previously reported, we expect to need modifications to our Credit Facility for some financial covenants with measurement dates beyond the next twelve months.   For measurement dates beyond the next twelve months, we expect to need modifications to the Credit Facility from our lenders for our operational EBITDA covenant, primarily because of recent developments in our telephony business and challenges associated with our Iridium Pilot product, and our secondary payload cashflow covenant, primarily due to timing of payments.   In addition, developments in our business during the period covered by this report, including the recent slowdown in our handset business and higher projected warranty claims on our Iridium Pilot terminals, have reduced our estimates for operational EBITDA for the twelve months ending December 31, 2013 and June 30, 2014. Accordingly, to remove any uncertainty regarding our covenant compliance while we work to get the longer-term modifications in place, we requested and received a waiver from our Credit Facility lenders, providing us with additional headroom on our operational EBITDA covenant for those periods. As of October 28, 2013, we had borrowed a total of $936.3 million under the Credit Facility. For more information about our sources of funding and the anticipated modifications to our Credit Facility, refer to “Liquidity and Capital Resources” below.
   
 
14

 
Recent Developments
 
U.S. Government Contracts
 
We provide maintenance services for the U.S. Department of Defense, or DoD, gateway pursuant to our Gateway Maintenance and Support Services, or GMSS, contract managed by the DoD’s Defense Information Systems Agency, or DISA. We entered into the GMSS contract in April 2008.   This contract had a one-year base year and four additional one-year options exercisable at the election of the U.S. government.     The U.S. government exercised all of the options under the April 2008 contract and exercised its ability under federal acquisition regulations to extend the agreement for an additional six months.   During September 2013, and upon expiration of the April 2008 contract, we entered into a new GMSS contract.   This new agreement is structured similar to the April 2008 agreement and provides for a one-year base term and up to four additional one-year options exercisable at the election of the U.S. government. If the U.S. government elects to exercise all available one-year options, the total value of the contract is approximately $38.0 million. The U.S. government may terminate the GMSS contract, in whole or in part, at any time.
 
We provide Iridium airtime and airtime support to U.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services, or EMSS, contract managed by DISA. The EMSS contract, entered into in April 2008, provided for a one-year base term and four additional one-year options which were exercised at the election of the U.S. government. After the exercise of all available optional contract extensions, the EMSS contract as signed in April 2008 expired. Effective October 22, 2013, we executed a new five-year EMSS contract. Under the terms of this new agreement, authorized customers will continue to utilize Iridium airtime services, provided through the DoD’s dedicated gateway.   These services will include unlimited global secure and unsecure voice, low and high-speed data, paging, and Distributed Tactical Communications System, or DTCS, services for an unlimited number of DoD and other federal subscribers.   The fixed-price rates in each of the five contract years , which run from October 22 through the following October 21 of each year, are $64 million and $72 million in years one and two, respectively, and $88 million in each of the years three through five. While we sell airtime directly to the U.S. government for resale to end users, our hardware products are sold to U.S. government customers through our network of distributors, which typically integrate them with other products and technologies. Pursuant to federal acquisition regulations, the U.S. government may terminate the EMSS contract, in whole or in part, at any time.
 
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 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;
 
 
 
 
our ability to access the Credit Facility to meet our future capital requirements for the design, build and launch of the Iridium NEXT satellites, including our ability to negotiate modifications to the Credit Facility with our lenders and, if required by our lenders, to obtain additional external debt or equity financing;
 
 
 
 
our ability to obtain sufficient internally generated cash flows, including potential cash flows from hosted payloads and Iridium PRIME, to fund a portion of the costs associated with Iridium NEXT and support ongoing business;
 
 
 
 
Aireon LLC’s ability to successfully fund, develop and market its space-based automatic dependent surveillance-broadcast, or ADS-B, global aviation monitoring service to be 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 through the transition to Iridium NEXT;
 
 
15

 
 
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;
 
 
 
 
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 collectability of related accounts receivable.
 
Critical Accounting Policies and Estimates
 
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 asset’s 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 material to our results of operations.
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation and amortization. Property, equipment and intangible assets with finite lives are depreciated or amortized over their estimated useful lives. We apply judgment in determining the useful lives based on factors such as engineering data, our long-term strategy for using the assets, contractual terms related to the assets, laws and regulations that could impact the useful lives of the assets and other economic factors. In evaluating the useful lives of our satellites, we assess the current estimated operational life of the satellites, including the potential impact of environmental factors on the satellites, ongoing operational enhancements and software upgrades. Additionally, we review engineering data relating to the operation and performance of our satellite network.
 
We depreciate our satellites over the shorter of their potential operational life or the period of their expected use. The appropriateness of the useful lives is evaluated on a quarterly basis. Satellites are depreciated on a straight-line basis through the earlier of the estimated remaining useful life or the date they are expected to be replaced by Iridium NEXT satellites, which defines the period of their expected use, because we expect this will occur before the end of their operational lives. Based on the current launch schedule, we expect Iridium NEXT satellites to begin deployment in early 2015, with the final launch expected to occur by mid-2017. If actual operational results are not consistent with our estimates and assumptions, we may experience changes in depreciation and amortization expense that could be material to our results of operations. In the event there are changes to the launch schedule of Iridium NEXT satellites, the period of intended use for our current satellites could be impacted, also resulting in changes to depreciation and amortization expense that could be material to our results of operations.
 
Assets under construction primarily consist of costs incurred associated with the design, development and launch of the Iridium NEXT satellites, upgrades to our current infrastructure and ground systems and the internal software development costs. Once these assets are placed in service, they will then be depreciated using the straight-line method over their respective estimated useful lives. We capitalize interest on our Credit Facility during the construction period of Iridium NEXT. Capitalized interest is added to the cost of our next-generation satellites.
 
 
16

 
Comparison of Our Results of Operations for the Three Months Ended September 30, 2013 and 2012
 
 
 
Three Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
% of Total
 
 
 
 
 
% of Total
 
 
Change
 
($ in thousands)
 
2013
 
Revenue
 
 
2012
 
Revenue
 
 
Dollars
 
Percent
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
$
75,381
 
75
%
 
$
71,403
 
71
%
 
$
3,978
 
6
%
Subscriber equipment
 
 
20,253
 
20
%
 
 
26,371
 
26
%
 
 
(6,118)
 
(23)
%
Engineering and support services
 
 
4,935
 
5
%
 
 
2,667
 
3
%
 
 
2,268
 
85
%
Total revenue
 
 
100,569
 
100
%
 
 
100,441
 
100
%
 
 
128
 
0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
 
 
14,776
 
15
%
 
 
14,000
 
14
%
 
 
776
 
6
%
Cost of subscriber equipment
 
 
15,550
 
16
%
 
 
14,194
 
14
%
 
 
1,356
 
10
%
Research and development
 
 
3,125
 
3
%
 
 
3,623
 
4
%
 
 
(498)
 
(14)
%
Selling, general and administrative
 
 
18,290
 
18
%
 
 
16,452
 
16
%
 
 
1,838
 
11
%
Depreciation and amortization
 
 
19,377
 
19
%
 
 
20,484
 
20
%
 
 
(1,107)
 
(5)
%
Total operating expenses
 
 
71,118
 
71
%
 
 
68,753
 
68
%
 
 
2,365
 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
29,451
 
29
%
 
 
31,688
 
32
%
 
 
(2,237)
 
(7)
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income, net
 
 
557
 
1
%
 
 
399
 
0
%
 
 
158
 
40
%
Undrawn credit facility fees
 
 
(1,886)
 
(2)
%
 
 
(2,488)
 
(2)
%
 
 
602
 
(24)
%
Other expense, net
 
 
(1,101)
 
(1)
%
 
 
(67)
 
0
%
 
 
(1,034)
 
1,543
%
Total other expense
 
 
(2,430)
 
(2)
%
 
 
(2,156)
 
(2)
%
 
 
(274)
 
13
%
Income before income taxes
 
 
27,021
 
27
%
 
 
29,532
 
30
%
 
 
(2,511)
 
(9)
%
Provision for income taxes
 
 
(10,436)
 
(10)
%
 
 
(11,693)
 
(12)
%
 
 
1,257
 
(11)
%
Net income
 
$
16,585
 
17
%
 
$
17,839
 
18
%
 
$
(1,254)
 
(7)
%
 
Revenue
 
Total revenue remained relatively flat at $100.6 million for the three months ended September 30, 2013 compared to $100.4 million for the three months ended September 30, 2012. This slight increase in revenue was due to an increase in service revenue resulting primarily from a targeted increase in access fee pricing, a 10% year-over-year increase in billable subscribers, and an increase in government-sponsored engineering and support contracts. These increases were largely offset by a decrease in subscriber equipment revenue due to reduced handset  sales.
 
 
17

 
Service Revenue
 
 
 
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
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 and data
 
$
48.5
 
345
 
$
47
 
$
45.2
 
333
 
$
46
 
$
3.3
 
12
 
$
1
 
Commercial M2M data
 
 
12.8
 
259
 
 
17
 
 
10.9
 
213
 
 
18
 
 
1.9
 
46
 
 
(1)
 
Total Commercial
 
 
61.3
 
604
 
 
 
 
 
56.1
 
546
 
 
 
 
 
5.2
 
58
 
 
 
 
Government voice and data
 
 
13.1
 
32
 
 
135
 
 
14.5
 
35
 
 
136
 
 
(1.4)
 
(3)
 
 
(1)
 
Government M2M data
 
 
1.0
 
19
 
 
17
 
 
0.8
 
14
 
 
19
 
 
0.2
 
5
 
 
(2)
 
Total Government
 
 
14.1
 
51
 
 
 
 
 
15.3
 
49
 
 
 
 
 
(1.2)
 
2
 
 
 
 
Total Service Revenue
 
$
75.4
 
655
 
 
 
 
$
71.4
 
595
 
 
 
 
$
4.0
 
60
 
 
 
 
 
(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.
 
Commercial voice and data revenue increased principally due to an increase in access fee revenue resulting from targeted price increases, driving an increase in ARPU.   Also contributing to the increase in commercial voice and data revenue was an increase in billable subscribers. These increases were partially offset by declines in telephony usage. For the remainder of 2013, growth in commercial voice and data revenue may be negatively affected by our recently addressed product issues related to our Iridium OpenPort ® service. Commercial M2M data revenue growth was driven principally by an increase in billable subscribers. We anticipate continued growth in billable commercial subscribers for the remainder of 2013.
 
Government voice and data revenue decreased principally due to a reduction in telephony billable subscribers, a higher ARPU service. Also contributing to this decline was 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, offset by a decline in average data usage, negatively impacting ARPU.   As discussed above, in October 2013, we executed a new EMSS contract with DISA. While this contract will have a favorable impact on our fourth quarter 2013 results, compared to the year ago period, we still anticipate a slight decline in government service revenue for the full-year 2013 compared to 2012.  
 
Subscriber Equipment Revenue
 
Subscriber equipment revenue decreased 23%, or $6.1 million, for the three months ended September 30, 2013 compared to the prior year period. This decline was primarily due to lower handset sales.
 
Engineering and Support Service Revenue
 
Engineering and support service revenue increased by $2.3 million, or 85%, for the three months ended September 30, 2013 compared to the prior year period due the execution of government-sponsored engineering and support contracts in the third quarter of 2013 related to gateway modernization efforts as we transition to Iridium NEXT capabilities. We anticipate an increase in the scope of work for government contracts during the remainder of 2013, resulting in overall growth in engineering and support service revenue compared to the prior year period.
 
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 $0.8 million, or 6%, for the three months ended September 30, 2013 from the prior year period primarily due to an increase in scope of work for government-sponsored contracts.
 
 
18

 
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 $1.4 million, or 10%, for the three months ended September 30, 2013 compared to the prior year period. This increase was primarily due a $3.6 million warranty expense recorded during the three months ended September 30, 2013 related to projected higher warranty claims and other warranty-related initiatives for the Iridium Pilot terminals. This increase was partially offset by the decrease in handset sales as discussed above.
 
Research and Development
 
Research and development expenses decreased by $0.5 million, or 14%, for the three months ended September 30, 2013 compared to the prior year period primarily due to decreases in Iridium NEXT research and development projects.
 
Selling, General and Administrative
 
Selling, general and administrative expenses increased by $1.8 million, or 11%, for the three months ended September 30, 2013 compared to the prior year period primarily due to an increase in employee-related costs and professional fees.
 
Depreciation and Amortization
 
Depreciation and amortization expense decreased $1.1 million, or 5%, for the three months ended September 30, 2013 from the prior year period. The decline in depreciation expense was due to a $2.0 million impairment charge that we recorded during 2012 as a result of having lost communication with one of our in-orbit satellites. This decrease was partially offset by an increase in depreciation expense resulting from an increase in property and equipment compared to the prior year.
 
Other Income (Expense)
 
Undrawn Credit Facility Fees
 
Commitment fees on the undrawn portion of the Credit Facility were $1.9 million for the three months ended September 30, 2013 compared to $2.5 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.
 
Other Expense, Net
 
Other expense, net, was $1.1 million for the three months ended September 30, 2013 compared to less than $0.1 million for the prior year period. This change primarily resulted from our share of the loss from our equity method investment in Aireon LLC, or Aireon. Following NAV CANADA’s purchase of Aireon preferred membership interests in the fourth quarter of 2012, Aireon is accounted for as an equity method investment within our financial statements, and our investment is included within other assets on the consolidated balance sheet. Prior to NAV CANADA’s investment, we consolidated Aireon’s results with our results as a wholly owned subsidiary. As our equity investment in Aireon did not commence until the fourth quarter of 2012, there were no similar amounts during the three months ended September 30, 2012.
 
Provision for Income Taxes
 
For the three months ended September 30, 2013, our income tax provision was $10.4 million compared to $11.7 million for the prior year period. The change in the income tax provision is primarily related to the decrease in our income before income taxes compared to the prior year period.
 
Net Income
 
Net income was $16.6 million for the three months ended September 30, 2013, a decrease of $1.3 million, from the prior year period. This decline in net income was driven by a $2.4 million increase in operating expenses, largely due to increases in employee-related costs and Iridium Pilot warranty expenses incurred during the period, and a $1.0 million increase in other expenses, net, driven by our share of the loss from our equity method investment in Aireon.   These decreases to net income were partially offset by a $1.3 million decline in the provision for income taxes, primarily related to the decrease in our income before income taxes compared to the prior year period.
 
 
19

 
Comparison of Our Results of Operations for the Nine Months Ended September 30, 2013 and 2012
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
 
 
% of Total
 
 
 
 
 
% of Total
 
 
Change
 
($ in thousands)
 
2013
 
Revenue
 
 
2012
 
Revenue
 
 
Dollars
 
Percent
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
$
215,569
 
76
%
 
$
206,736
 
71
%
 
$
8,833
 
4
%
Subscriber equipment
 
 
57,399
 
20
%
 
 
71,825
 
25
%
 
 
(14,426)
 
(20)
%
Engineering and support services
 
 
11,474
 
4
%
 
 
12,675
 
4
%
 
 
(1,201)
 
(9)
%
Total revenue
 
 
284,442
 
100
%
 
 
291,236
 
100
%
 
 
(6,794)
 
(2)
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation
    and amortization)
 
 
43,458
 
15
%
 
 
47,991
 
17
%
 
 
(4,533)
 
(9)
%
Cost of subscriber equipment
 
 
39,563
 
14
%
 
 
40,828
 
14
%
 
 
(1,265)
 
(3)
%
Research and development
 
 
6,525
 
2
%
 
 
12,741
 
4
%
 
 
(6,216)
 
(49)
%
Selling, general and administrative
 
 
55,054
 
20
%
 
 
52,570
 
18
%
 
 
2,484
 
5
%
Depreciation and amortization
 
 
56,205
 
20
%
 
 
63,056
 
22
%
 
 
(6,851)
 
(11)
%
Total operating expenses
 
 
200,805
 
71
%
 
 
217,186
 
75
%
 
 
(16,381)
 
(8)
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
83,637
 
29
%
 
 
74,050
 
25
%
 
 
9,587
 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income, net
 
 
1,835
 
1
%
 
 
588
 
0
%
 
 
1,247
 
212
%
Undrawn credit facility fees
 
 
(6,002)
 
(2)
%
 
 
(7,849)
 
(3)
%
 
 
1,847
 
(24)
%
Other expense, net
 
 
(3,366)
 
(2)
%
 
 
(6)
 
0
%
 
 
(3,360)
 
56,000
%
Total other expense
 
 
(7,533)
 
(3)
%
 
 
(7,267)
 
(3)
%
 
 
(266)
 
4
%
Income before income taxes
 
 
76,104
 
27
%
 
 
66,783
 
22
%
 
 
9,321
 
14
%
Provision for income taxes
 
 
(29,172)
 
(10)
%
 
 
(18,863)
 
(6)
%
 
 
(10,309)
 
55
%
Net income
 
$
46,932
 
17
%
 
$
47,920
 
16
%
 
$
(988)
 
(2)
%
 
Revenue
 
Total revenue decreased 2% to $284.4 million for the nine months ended September 30, 2013 compared $291.2 million for the nine months ended September 30, 2012. The decrease was primarily due to a decrease in equipment handset sales and a decrease in revenue from government-sponsored engineering and support contracts. These decreases in revenue were partially offset by a targeted increase in access fee pricing and an increase in service revenue due to a 10% year-over-year increase in billable subscribers.
 
 
20

 
Service Revenue
 
 
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September  30, 2012
 
Change
 
 
 
(Revenue in millions and subscribers in thousands)
 
 
 
 
 
Billable
 
 
 
 
 
 
 
Billable