UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2017

2018

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

DELAWARE26-1344998
(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

x

Accelerated filer

¨

Non-accelerated filer

¨

(Do not check if a smaller reporting company)

Smaller reporting company

¨

Emerging growth company

¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No   x

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of July 24, 20172018 was 97,668,880.


110,752,560.



IRIDIUM COMMUNICATIONS INC.

TABLE OF CONTENTS

Item No.

Page

Item No.

Page

ITEM  2.

17

ITEM  3.

31

ITEM  4.

31

ITEM  1.

32

ITEM  1A.

32

ITEM  2.

32

ITEM  3.

32

ITEM  4.

32

ITEM  5.

32

ITEM  6.

32

33

2





PART I.
PART I.

Iridium Communications Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

June 30, 2017

 

 

December 31, 2016

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

335,199

 

 

$

371,167

 

Marketable securities

 

21,322

 

 

 

39,328

 

Accounts receivable, net

 

63,379

 

 

 

57,373

 

Inventory

 

20,422

 

 

 

18,204

 

Prepaid expenses and other current assets

 

22,660

 

 

 

30,698

 

Total current assets

 

462,982

 

 

 

516,770

 

Property and equipment, net

 

3,111,042

 

 

 

2,813,084

 

Restricted cash

 

135,265

 

 

 

113,139

 

Other assets

 

10,530

 

 

 

10,836

 

Intangible assets, net

 

50,784

 

 

 

45,796

 

Total assets

$

3,770,603

 

 

$

3,499,625

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

128,254

 

 

$

11,131

 

Accrued expenses and other current liabilities

 

28,920

 

 

 

23,840

 

Interest payable

 

14,272

 

 

 

14,136

 

Deferred revenue

 

36,641

 

 

 

34,087

 

Total current liabilities

 

208,087

 

 

 

83,194

 

Accrued satellite operations and maintenance expense, net

 

 

 

 

 

 

 

of current portion

 

-

 

 

 

13,138

 

Credit facility, net

 

1,688,420

 

 

 

1,657,145

 

Deferred income tax liabilities, net

 

390,974

 

 

 

361,656

 

Deferred revenue, net of current portion

 

37,503

 

 

 

36,417

 

Other long-term liabilities

 

33,075

 

 

 

4,317

 

Total liabilities

 

2,358,059

 

 

 

2,155,867

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Series A Preferred Stock, $0.0001 par value, 1,000 shares authorized,

 

 

 

 

 

 

 

issued and outstanding

 

-

 

 

 

-

 

Series B Preferred Stock, $0.0001 par value, 500 shares

 

 

 

 

 

 

 

authorized, issued and outstanding

 

-

 

 

 

-

 

Common stock, $0.001 par value, 300,000 shares authorized, 97,657

 

 

 

 

 

 

 

and 95,879 shares issued and outstanding, respectively

 

98

 

 

 

96

 

Additional paid-in capital

 

1,069,436

 

 

 

1,060,311

 

Retained earnings

 

347,664

 

 

 

288,797

 

Accumulated other comprehensive loss, net of tax

 

(4,654

)

 

 

(5,446

)

Total stockholders' equity

 

1,412,544

 

 

 

1,343,758

 

Total liabilities and stockholders' equity

$

3,770,603

 

 

$

3,499,625

 

  June 30, 2018 December 31, 2017
  (Unaudited)  
Assets  
  
Current assets:  
  
Cash and cash equivalents $176,105
 $285,873
Marketable securities 199,839
 11,753
Accounts receivable, net 74,719
 68,031
Inventory 20,212
 20,068
Prepaid expenses and other current assets 25,048
 25,347
Total current assets 495,923
 411,072
Property and equipment, net 3,334,758
 3,210,162
Restricted cash and cash equivalents 189,797
 102,384
Intangible assets, net 49,250
 50,019
Other assets 10,153
 8,414
Total assets $4,079,881
 $3,782,051
Liabilities and stockholders' equity  
  
Current liabilities:  
  
Short-term credit facility $108,000
 $85,500
Accounts payable 25,725
 43,100
Accrued expenses and other current liabilities 40,503
 32,215
Interest payable 31,775
 15,021
Deferred revenue 21,692
 38,390
Total current liabilities 227,695
 214,226
Long-term credit facility, net 1,571,665
 1,618,055
Long-term senior unsecured notes, net 350,450
 
Deferred income tax liabilities, net 260,643
 246,170
Deferred revenue, net of current portion 58,565
 47,612
Other long-term liabilities 4,150
 59,519
Total liabilities 2,473,168
 2,185,582
     
Commitments and contingencies 

 

     
Stockholders' equity:  
  
Series A preferred stock, $0.0001 par value, 1,000 shares authorized and issued;    
zero and 1,000 shares outstanding at June 30, 2018 and December 31, 2017 
 
Series B preferred stock, $0.0001 par value, 500 shares authorized,  
  
issued and outstanding 
 
Common stock, $0.001 par value, 300,000 shares authorized, 110,750 and  
  
98,203 shares issued and outstanding at June 30, 2018 and December 31, 2017 111
 98
Additional paid-in capital 1,091,116
 1,081,373
Retained earnings 522,150
 518,794
Accumulated other comprehensive loss, net of tax (6,664) (3,796)
Total stockholders' equity 1,606,713
 1,596,469
Total liabilities and stockholders' equity $4,079,881
 $3,782,051


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

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

$

86,623

 

 

$

83,486

 

 

$

168,396

 

 

$

163,309

 

Subscriber equipment

 

18,844

 

 

 

20,362

 

 

 

35,958

 

 

 

37,922

 

Engineering and support services

 

6,137

 

 

 

5,347

 

 

 

11,676

 

 

 

12,166

 

Total revenue

 

111,604

 

 

 

109,195

 

 

 

216,030

 

 

 

213,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and amortization)

 

21,368

 

 

 

16,448

 

 

 

38,326

 

 

 

32,351

 

Cost of subscriber equipment

 

10,868

 

 

 

11,859

 

 

 

20,972

 

 

 

22,322

 

Research and development

 

3,014

 

 

 

4,013

 

 

 

6,241

 

 

 

6,572

 

Selling, general and administrative

 

20,411

 

 

 

22,303

 

 

 

39,628

 

 

 

41,366

 

Depreciation and amortization

 

20,201

 

 

 

12,843

 

 

 

33,708

 

 

 

25,779

 

Total operating expenses

 

75,862

 

 

 

67,466

 

 

 

138,875

 

 

 

128,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on Boeing transaction

 

-

 

 

 

-

 

 

 

14,189

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

35,742

 

 

 

41,729

 

 

 

91,344

 

 

 

85,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

832

 

 

 

800

 

 

 

1,665

 

 

 

1,558

 

Undrawn credit facility fees

 

-

 

 

 

(368

)

 

 

(25

)

 

 

(871

)

Other income (expense), net

 

(56

)

 

 

333

 

 

 

(118

)

 

 

320

 

Total other income, net

 

776

 

 

 

765

 

 

 

1,522

 

 

 

1,007

 

Income before income taxes

 

36,518

 

 

 

42,494

 

 

 

92,866

 

 

 

86,014

 

Provision for income taxes

 

(11,740

)

 

 

(15,640

)

 

 

(30,140

)

 

 

(30,640

)

Net income

 

24,778

 

 

 

26,854

 

 

 

62,726

 

 

 

55,374

 

Series A Preferred Stock dividends, declared and paid

 

-

 

 

 

1,750

 

 

 

1,750

 

 

 

3,500

 

Series B Preferred Stock dividends, declared and paid

 

-

 

 

 

2,109

 

 

 

2,109

 

 

 

4,218

 

Series A Preferred Stock dividends, undeclared

 

1,750

 

 

 

-

 

 

 

1,750

 

 

 

-

 

Series B Preferred Stock dividends, undeclared

 

2,109

 

 

 

-

 

 

 

2,109

 

 

 

-

 

Net income attributable to common stockholders

$

20,919

 

 

$

22,995

 

 

$

55,008

 

 

$

47,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

97,989

 

 

 

95,913

 

 

 

97,424

 

 

 

95,782

 

Weighted average shares outstanding - diluted

 

126,943

 

 

 

123,465

 

 

 

126,659

 

 

 

123,227

 

Net income attributable to common stockholders per share - basic

$

0.21

 

 

$

0.24

 

 

$

0.56

 

 

$

0.50

 

Net income attributable to common stockholders per share - diluted

$

0.20

 

 

$

0.22

 

 

$

0.49

 

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

24,778

 

 

$

26,854

 

 

$

62,726

 

 

$

55,374

 

Foreign currency translation adjustments, net of tax

 

(1,448

)

 

 

1,068

 

 

 

799

 

 

 

2,935

 

Unrealized gain (loss) on marketable securities, net of tax

 

(3

)

 

 

138

 

 

 

(7

)

 

 

267

 

Comprehensive income

$

23,327

 

 

$

28,060

 

 

$

63,518

 

 

$

58,576

 

  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
Revenue:  
  
    
Services $103,966
 $86,623
 $193,708
 $168,396
Subscriber equipment 25,865
 18,844
 51,647
 35,958
Engineering and support services 5,100
 6,137
 8,724
 11,676
Total revenue 134,931
 111,604
 254,079
 216,030
         
Operating expenses:  
  
    
Cost of services (exclusive of depreciation  
  
    
and amortization) 22,644
 21,368
 41,596
 38,326
Cost of subscriber equipment 15,619
 10,868
 30,833
 20,972
Research and development 5,566
 3,014
 10,149
 6,241
Selling, general and administrative 24,266
 20,411
 46,761
 39,628
Depreciation and amortization 50,491
 20,201
 88,956
 33,708
Total operating expenses 118,586
 75,862
 218,295
 138,875
Gain on Boeing transaction 
 
 
 14,189
Operating income 16,345
 35,742
 35,784
 91,344
         
Other income (expense):  
  
��   
Interest income (expense), net (12,985) 832
 (17,150) 1,665
Other income (expense), net 65
 (56) 102
 (143)
Total other income (expense), net (12,920) 776
 (17,048) 1,522
Income before income taxes 3,425
 36,518
 18,736
 92,866
Income tax expense (7,843) (11,740) (11,682) (30,140)
Net income (loss) (4,418) 24,778
 7,054
 62,726
Series A preferred stock dividends, declared and paid excluding cumulative dividends 
 
 1,750
 1,750
Series B preferred stock dividends, declared and paid excluding cumulative dividends 
 
 2,109
 2,109
Series A preferred stock dividends, undeclared 
 1,750
 
 1,750
Series B preferred stock dividends, undeclared 2,109
 2,109
 2,109
 2,109
Net income (loss) attributable to common stockholders $(6,527) $20,919
 $1,086
 $55,008
Weighted average shares outstanding - basic, excluding        
Series A preferred stockholders through the conversion        
date of March 20, 2018 111,111
 97,989
 105,927
 97,424
Weighted average shares outstanding - diluted 111,111
 126,943
 109,405
 126,659
Net income (loss) attributable to common stockholders per share - basic $(0.06) $0.21
 $0.01
 $0.56
Net income (loss) attributable to common stockholders per share - diluted $(0.06) $0.20
 $0.01
 $0.49
Comprehensive income (loss):  
  
    
Net income (loss) $(4,418) $24,778
 $7,054
 $62,726
Foreign currency translation adjustments, net of tax (3,003) (1,448) (2,911) 799
Unrealized gain (loss) on marketable securities, net of tax 55
 (3) 42
 (7)
Comprehensive income (loss) $(7,366) $23,327
 $4,185
 $63,518



See notes to unaudited condensed consolidated financial statements.

4




Iridium Communications Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash provided by operating activities

$

119,866

 

 

$

108,835

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(168,172

)

 

 

(156,802

)

Purchases of marketable securities

 

-

 

 

 

(19,414

)

Sales and maturities of marketable securities

 

17,901

 

 

 

146,265

 

Net cash used in investing activities

 

(150,271

)

 

 

(29,951

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under the Credit Facility

 

22,207

 

 

 

129,431

 

Payment of deferred financing fees

 

(1,533

)

 

 

(8,158

)

Restricted cash deposits

 

(22,126

)

 

 

(11,094

)

Proceeds from exercise of stock options

 

1,572

 

 

 

80

 

Tax payment upon settlement of stock awards

 

(1,753

)

 

 

(586

)

Payment of Series A Preferred Stock dividends

 

(1,750

)

 

 

(3,500

)

Payment of Series B Preferred Stock dividends

 

(2,109

)

 

 

(4,218

)

Net cash provided by (used in) financing activities

 

(5,492

)

 

 

101,955

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(71

)

 

 

477

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(35,968

)

��

 

181,316

 

Cash and cash equivalents, beginning of period

 

371,167

 

 

 

185,665

 

Cash and cash equivalents, end of period

$

335,199

 

 

$

366,981

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

$

42,458

 

 

$

10,985

 

Income taxes paid, net

$

1,312

 

 

$

735

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

Property and equipment received but not paid for yet

$

152,722

 

 

$

5,388

 

Interest capitalized but not paid

$

14,272

 

 

$

13,314

 

Capitalized amortization of deferred financing costs

$

10,600

 

 

$

9,156

 

Capitalized paid-in-kind interest

$

253

 

 

$

25,136

 

Capitalized stock-based compensation

$

1,561

 

 

$

1,304

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

Dividends accrued on Series A Preferred Stock

$

292

 

 

$

292

 

Dividends accrued on Series B Preferred Stock

$

352

 

 

$

352

 

  Six Months Ended June 30,
  2018 2017
Cash flows from operating activities:  
  
Net cash provided by operating activities $141,088
 $119,866
     
Cash flows from investing activities:  
  
Capital expenditures (215,031) (168,172)
Purchases of marketable securities (201,293) 
Sales and maturities of marketable securities 13,266
 17,901
Net cash used in investing activities (403,058) (150,271)
     
Cash flows from financing activities:  
  
Borrowings under the Credit Facility 
 22,207
Payments on the Credit Facility (26,131) 
Borrowings under the senior unsecured notes 360,000
 
Extinguishment of the Thales bills of exchange (59,936) 
Payment of deferred financing fees (20,440) (1,533)
Proceeds from exercise of stock options 2,996
 1,572
Tax payment upon settlement of stock awards (1,512) (1,753)
Payment of Series A preferred stock dividends (7,000) (1,750)
Payment of Series B preferred stock dividends (8,427) (2,109)
Net cash provided by financing activities 239,550
 16,634
     
Effect of exchange rate changes on cash and cash equivalents 65
 (71)
     
Net decrease in cash and cash equivalents (22,355) (13,842)
Cash, cash equivalents, and restricted cash, beginning of period 388,257
 484,306
Cash, cash equivalents, and restricted cash, end of period $365,902
 $470,464
     
Supplemental cash flow information:  
  
Interest paid $37,529
 $42,458
Income taxes paid, net $501
 $1,312
     
Supplemental disclosure of non-cash investing activities:  
  
Property and equipment received but not yet paid for $20,574
 $152,722
Interest capitalized but not yet paid $17,138
 $14,272
Capitalized amortization of deferred financing costs $10,983
 $10,600
Capitalized stock-based compensation $1,131
 $1,561
Cost basis investment for settlement of accounts receivable $1,761
 $






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”). These condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the SEC on February 23, 2017.

22, 2018.


2. Significant Accounting Policies


Adopted Accounting Pronouncements


Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), that supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 9 for more detail on the Company's accounting policy with respect to revenue recognition.

Effective January 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. The adoption of ASU 2016-15 did not have a material effect on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In MarchFebruary 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation – Stock Compensation, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 addresses multiple changes that are primarily focused on income taxes and the presentation of taxes related to stock compensation, but also provides an option for two methods to account for forfeitures. The Company applied the new guidance effective January 1, 2017, as required. The requirements resulting from the adoption of ASU 2016-09 will be accounted for on a prospective basis.

The Company made an accounting policy election to continue estimating the number of awards that are expected to be forfeited, consistent with the Company’s prior practice.

The Company excluded the excess tax benefits and deficiencies component from the treasury stock method in the diluted earnings per share calculation. The change had an immaterial impact on the Company’s reported diluted earnings per share.

The Company recorded current excess tax benefits and tax deficiencies as income tax benefit (expense) in the consolidated statements of operations and comprehensive income. The change resulted in an excess tax benefit of $0.1 million and $1.0 million recorded in the provision for income taxes for the three and six months ended June 30, 2017, respectively.

The Company will present excess tax benefits as an operating activity on the condensed consolidated statement of cash flows rather than as a financing activity. Prior periods have not been adjusted.

There were no additional impacts on the Company’s financial statements, resulting from the adoption of ASU 2016-09 that required a retrospective or modified retrospective approach.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method are excluded from this new guidance. When evidence exists that the net realizable value of inventory is less than its cost, the Company will recognize the difference as a loss in earnings in the period the measurement occurs. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with International Financial Reporting Standards (IFRS). The Company applied the new guidance prospectively effective January 1, 2017, as required. The adoption had an immaterial impact on the Company’s condensed consolidated balance sheets, the condensed consolidated statements of operations and comprehensive income, and the condensed consolidated statements of cash flows as of and for the three and six months ended June 30, 2017.

6


Accounting Pronouncements Not Yet Adopted 

In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the standard including clarification on accounting for licenses of intellectual property, identifying performance obligations, and most recently, technical corrections on the interpretation of the new guidance. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 for public entities to be effective for annual and interim periods beginning after December 15, 2017. Early adoption would be permitted no earlier than the original effective date beginning after December 15, 2016. ASU 2014-09 becomes effective for the Company in the first quarter of fiscal 2018 and the Company anticipates adopting the standard using the full retrospective method, which will result in the presentation of prior reporting periods in a manner consistent with 2018. The cumulative effect of the standard will be recognized at the earliest reporting period shown.

The Company has established a project team in order to analyze the effect of the standard on its contracts by reviewing its current accounting policies and practices to identify potential differences which would result from applying the requirements of the new standard to its revenue contracts. The Company has aggregated its contracts into homogeneous revenue streams and is continuing to assess all potential effects of the standard. The Company anticipates a change to the recognition pattern of its prepaid revenue from expiration.  The Company currently recognizes unused prepaid revenue at the date the right to access the prepaid service has expired.  Under the new standard, the Company will estimate the expected revenue that will expire unused and recognize this revenue over the prepaid term. The Company is currently evaluating the impact on revenue from estimating prepaid revenue upon expiration and changing the term over which this revenue is recognized. The Company has not yet completed its review of the effect of this guidance on all revenue streams and, as a result, other changes from current U.S. GAAP may be identified.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to putrecord most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. This ASU isThe Company intends to apply the new guidance on the effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted and reportingdate of January 1, 2019. Reporting organizations are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company established a project team in order to analyze the effect of the standard on its leases by reviewing its current accounting policies to identify potential differences which would result from applying the requirements of the new standard to its leases. The Company currently anticipates utilizing the practical expedient to address all current operating leases for which it is the lessor. The Company is currently evaluating the effect ASU 2016-02 may have on its future condensed consolidated financial statements and related disclosures, but a lease liability and related right-of-use asset will be recognized for operating lease arrangements.  

In November 2016,arrangements where the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 will reduce diversity in the classification and presentation of changes in restricted cash in the statement of cash flows. This ASU is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period, and reporting organizations are required to use a retrospective transition method to each period presented. The Company is currently evaluating the effect ASU 2016-18 may have on its condensed consolidated statements of cash flows and related disclosures, but recognizing transfers between restricted and unrestricted cash accounts will not be reported as a cash flow.

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 replacement, repairs, freight and program administration, are recorded as cost of subscriber equipment in the accompanying condensed consolidated statements of operations and comprehensive income.

lessee.




Fair Value Measurements


The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts receivable, accounts payable and accrued expenses and other current liabilities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. The fair value hierarchy consists of the following tiers:


Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

7


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 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.


The carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses and other current liabilities) approximate their fair values because of their short-term nature. The fair value of the Company’s investments in money market funds approximates its carrying value; such instruments are classified as Level 1 and are included in cash and cash equivalents inon the accompanying condensed consolidated balance sheets.

The fair value of the Company’s investments in commercial paper and short-term U.S. agency securities with original maturities of less than ninety days approximates their carrying value; such instruments are classified as Level 2 and are included in cash and cash equivalents inon the accompanying condensed consolidated balance sheets.

The fair value of the Company’s investments in fixed-income debt securities and commercial paper with original maturities of greater than ninety days are obtained using similar investments traded on active securities exchanges and are classified as Level 2 and are included in marketable securities in the accompanying condensed consolidated balance sheets.2. For fixed income securities that do not have quoted prices in active markets, the Company uses third-party vendors to price its debt securities resulting in classification as Level 2.

Depreciation and Amortization

The Company calculates depreciation expense using the straight line method and evaluates the appropriateness of the useful life used on a quarterly basis or as events occur that require additional assessment. Throughout 2017 and 2016, the Company updated its estimate of the first-generation satellites’ remaining useful lives based All fixed-income securities are included in marketable securities on the continued refinement of the launch schedule, health of the first-generation constellation, and deployment plan for the Company’s next-generation satellite constellation (“Iridium NEXT”). As a result, the estimated useful lives of the satellites within the first-generation constellation were extended and are consistent with the expected deployment of Iridium NEXT. The Company will continue to evaluate the useful lives of its first-generation satellites on an ongoing basis through the full deployment of Iridium NEXT, which is expected to occur in 2018. The changes in estimate will also have an effect on future periods through the deployment of Iridium NEXT. The $7.5 million increase in depreciation expense for the six months ended June 30, 2017 compared to the same period of the prior year is primarily related to the addition of new assets, including Iridium NEXT satellites placed into service during the six-month period ended June 30, 2017 and assets related to the Russian gateway completed at the end of 2016, partially offset by the continued refinement in the estimated useful lives of the first-generation satellites.

accompanying condensed consolidated balance sheets.


3. Cash and Cash Equivalents, Restricted Cash and Marketable Securities


Cash and Cash Equivalents


The Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. These investments, along with cash deposited in institutional money market funds, commercial paper, regular interest bearing and non-interest bearing depository accounts, are classified as cash and cash equivalents in the accompanying condensed consolidated balance sheet. The following table summarizes the Company’s cash and cash equivalents:

 

June 30,

 

 

December 31,

 

 

Recurring Fair

 

2017

 

 

2016

 

 

Value Measurement

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

$

117,885

 

 

$

102,194

 

 

 

Money market funds

 

217,314

 

 

 

266,478

 

 

Level 1

Commercial paper

 

-

 

 

 

2,495

 

 

Level 2

Total cash and cash equivalents

$

335,199

 

 

$

371,167

 

 

 

  June 30, 2018 December 31, 2017 
Recurring Fair
Value Measurement
  (in thousands)  
Cash and cash equivalents:  
  
  
Cash $20,112
 $24,092
  
Money market funds 142,684
 251,950
 Level 1
Commercial paper 13,309
 9,831
 Level 2
Total cash and cash equivalents $176,105
 $285,873
  
Restricted Cash

and Cash Equivalents

The Company is required to maintain a minimum cash reserve within a debt service reserve account ("DSRA") for debt service related to its $1.8 billion loancredit facility (the(as amended to date, the “Credit Facility”) (see Note 4)5). As of June 30, 20172018 and December 31, 2016,2017, the Company’s restricted cash and cash equivalents balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $135.3$189.7 million and $113.1$102.3 million, respectively.

8




Marketable Securities

Marketable securities consist of fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale and are included in marketable securities within current assets in the accompanying condensed consolidated balance sheets. All investments are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of other comprehensive income or loss. The specific identification method is used to determine the cost basis of the marketable securities sold. There were no material realized gains or losses on the sale of marketable securities for the six months ended June 30, 20172018 and 2016.2017. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that theany decline in fair value of its investments is temporary at June 30, 20172018 as the Company does not intend to sell these securities, and it is not likely that the Company will be required to sell the securities, before the recovery of their amortized cost basis.

The following tables summarize the Company’s marketable securities:

 

As of June 30, 2017

 

 

 

 

Amortized

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Recurring Fair

 

Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

Value Measurement

 

(in thousands)

Fixed-income debt securities

$

17,075

 

 

$

6

 

 

$

(6

)

 

$

17,075

 

 

Level 2

U.S. treasury notes

 

4,251

 

 

 

-

 

 

 

(4

)

 

 

4,247

 

 

Level 2

Total marketable securities

$

21,326

 

 

$

6

 

 

$

(10

)

 

$

21,322

 

 

 

As of December 31, 2016

 

 

 

Amortized

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Recurring Fair

 June 30, 2018  

Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

Value Measurement

 
Amortized
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Estimated
Fair Value
 
Recurring Fair
Value Measurement

(in thousands)

 (in thousands) 

Fixed-income debt securities

$

30,037

 

 

$

14

 

 

$

(11

)

 

$

30,040

 

 

Level 2

 $15,679
 $19
 $(5) $15,693
 Level 2

U.S. treasury notes

 

9,283

 

 

 

7

 

 

 

(2

)

 

 

9,288

 

 

Level 2

Commercial paper 6,440
 
 
 6,440
 Level 2
U.S. treasuries 177,679
 30
 (3) 177,706
 Level 2

Total marketable securities

$

39,320

 

 

$

21

 

 

$

(13

)

 

$

39,328

 

 

 

 $199,798
 $49
 $(8) $199,839
  

  December 31, 2017  
  
Amortized
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Estimated
Fair Value
 
Recurring Fair
Value Measurement
  (in thousands)  
Fixed-income debt securities $9,520
 $2
 $(15) $9,507
 Level 2
U.S. treasuries 2,249
 
 (3) 2,246
 Level 2
Total marketable securities $11,769
 $2
 $(18) $11,753
  
The following table presents the contractual maturities of the Company’s marketable securities:

 

As of June 30, 2017

 

 

As of December 31, 2016

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

(in thousands)

 

Mature within one year

$

19,828

 

 

$

19,826

 

 

$

32,776

 

 

$

32,788

 

Mature after one year and within three years

 

1,498

 

 

 

1,496

 

 

 

6,544

 

 

 

6,540

 

Total

$

21,326

 

 

$

21,322

 

 

$

39,320

 

 

$

39,328

 

  June 30, 2018 December 31, 2017
  
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
  (in thousands)
Mature within one year $199,798
 $199,839
 $11,519
 $11,504
Mature after one year and within three years 
 
 250
 249
Total $199,798
 $199,839
 $11,769
 $11,753

4. Commitments and Contingencies


Commitments


Thales


In June 2010, the Company executed a primarily fixed-price full-scalefull scale development contract (the “FSD”("FSD") with Thales Alenia Space France (“Thales”("Thales") for the design and build of satellites forits Iridium NEXT.® NEXT satellites. The total price under the FSD is $2.3 billion, and the Company expects payment obligations under the FSD to extendcontinue through 2018, subject to payments using bills of exchange as described below.2018. As of June 30, 2017,2018, the Company had made aggregate payments of $1,826.8 million$2.1 billion to Thales, of which $1,511.4 million$1.5 billion were financed from borrowings under the Credit Facility, and which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. The Credit Facility was fully drawn in February 2017. Prior

On March 9, 2018, the Company and Thales entered into Amendment 32 to the Credit Facility being fully drawn,FSD, pursuant to which the Company usedand Thales unwound the Credit Facility to pay 85% of each invoice received from Thales under the FSD, with the remaining 15% funded from cash on hand. The Company currently pays 100% of each invoice received from Thales from cash and marketable securities on hand or the issuance of a bill of exchange, a French law instrument of indebtedness similar to a promissory note.  

On July 26, 2017, the Company entered into Amendments 28 and 29 to its FSD.  The Company signed Amendment 28 on May 18, 2017, but effectiveness was conditioned on the effectiveness of Amendment 29.  Amendment 28 revises the liquidated damages and other cost provisions regarding delays to the Iridium NEXT program.  Under Amendment 28, the Company agreed with Thales that liquidated damages for Thales production delays to date would be set at $30.0 million, with this amount to be used only to offset costs otherwise payable by the Company to Thales under the FSD with respect to past and future delays to the launch schedule from causes

9


other than Thales, at agreed upon rates. Any portion of the $30.0 million remaining at the completion of the launch campaign will be forgiven.  Liquidated damages owed to the Company from any future delays caused by Thales would remain payablechanges made in cash. Similarly, costs payable by the Company to Thales for non-Thales delays exceeding the $30.0 million would be payable in cash.  Unless there are substantial future delays to the Iridium NEXT program, the Company expects this arrangement will result in no cash payments due to delays by either party.

Amendment 29, provideswhich allowed for the deferral of payment by the Company of approximatelycertain milestone payments totaling $100.0 million through the issuance of bills of exchange. Amendment 32 became effective on March 21, 2018 upon the receipt of proceeds from a senior unsecured notes offering (see Note 5). The Company utilized a portion of the proceeds from the



senior unsecured notes to prepay in full the $59.9 million of amounts due under outstanding bills of exchange and will not utilize any new bills of exchange to defer future milestones under the FSD thatFSD. In connection with the Company expects to be completed in 2017 and 2018.  Under Amendment 29,prepayment of the Company will pay these milestones usingThales bills of exchange, due in March 2019, with interest at a specified base rate (LIBOR or SWAP, depending on the term of the bill of exchange) plus 1.4%, with the bills of exchange guaranteed by Bpifrance Assurance Export S.A.S. (“BPIAE”).  Amendment 29 also requires that the Company pay Thales for the BPIAE premium on the guarantee in the amount of $1.0 million in cash at signing plus 1.62% to be paid by bills of exchange on the same terms as stated above, on each bill of exchange to be issued.

The Company’s obligations to Thales that are currently scheduled to be paid, including the long-term bills of exchange, during the 12three and six months endingended June 30, 2018, and 2019 are in the amountsCompany recorded a $4.0 million loss on extinguishment of $323.2 million and $104.6 million, respectively, exclusive of fees and related interest. The timing of the Company’s obligations to Thales is based on current expectations regarding Thales’ manufacturing scheduledebt, included within interest expense, representing premiums paid and the targeted Space Exploration Technologies Corp. (“SpaceX”) launch schedule to completewrite-off of unamortized debt issuance costs. The Company had no loss on extinguishment of debt recorded for the Iridium NEXT constellation in 2018.

three and six months ended June 30, 2017.


SpaceX


In March 2010, the Company entered into an agreement with SpaceXSpace Exploration Technologies Corp. (“SpaceX”) to secure SpaceX as the primary launch services provider for Iridium NEXT (as amended to date, the “SpaceX Agreement”). The total price under the SpaceX Agreement for seven launches and a reflight option in the event of a launch failure is $468.1$453.1 million. The SpaceX Falcon 9 rocket is configured to carry ten Iridium NEXT satellites to orbit for each of these seven launches. In November 2016, the Company entered into an agreement for an eighth launch with SpaceX to launch five additional satellites and share the launch services with GFZ German Research Centre for Geosciences (“GFZ”). This launch took place in May 2018. The total price under this additional agreement withthe SpaceX Agreement for the eighth launch is $67.9was $61.9 million. GFZ will paypaid Iridium $31.8$29.8 million to shareinclude in the launch services to launch NASA’s two Gravity Recovery and Climate Experiment Follow-On satellites. As of June 30, 2017,2018, the Company had made aggregate payments of $420.4$486.4 million to SpaceX, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. Additionally, the Company received $22.9 million from GFZ as of June 30, 2017. The Company maintains a $1.5 million refundable deposit with SpaceX for the reservation of additional future launches, which is not included in the total contract price. The Company’s obligations to SpaceX that are currently scheduled to be paid during the 12 months ending June 30, 2018 and 2019 are in the amounts of $101.2 million and $14.4 million, respectively. The timing of the Company’s obligations to SpaceX is based on the targeted SpaceX launch schedule to complete the Iridium NEXT constellation in 2018.

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”). In June 2013, the Company exercised an option for one launch to carry 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. As of June 30, 2017, the Company had made aggregate payments of $36.8 million to Kosmotras, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. In June 2015, the Company agreed with Kosmotras to replace the remaining options with a new set of options to purchase up to six dedicated launches. Kosmotras has to date been unable to obtain permission to launch the Company’s satellites. If permission is not obtained, the Company may be unable to recover the amounts already paid to Kosmotras. The Company’s obligations to Kosmotras that are currently scheduled to be paid during the 12 months ending June 30, 2019 are $15.0 million. The timing of the Company’s obligations to Kosmotras is based on the earliest date the Company may include Kosmotras in its launch schedule.


Iridium NEXT Launch and In-Orbit Insurance

The


As further discussed below, the Company is required, pursuant to its Credit Facility, requires the Company to obtain insurance covering the launch and first 12 months of operation of the Iridium NEXT satellites. The launch and in-orbit insurance the Company has obtained contains elements, consistent with the terms of the Credit Facility, of self-insurance and deductibles, providing reimbursement only after a specified number of satellite failures. As a result, a failure of one or more of the Company’sIridium NEXT satellites, or the occurrence of equipment failures and other related problems, could constitute an uninsured loss or require the payment of additional premiums and could harm the Company’s financial condition. Furthermore, launch and in-orbit insurance does not cover lost revenue. The total premium for the Company’s current launch and in-orbit insurance is $118.2 million; as$121.0 million. As of June 30, 2017,2018, the Company had made aggregate premium payments of $48.9$107.6 million. The Company’s insurance premium obligations to be paid during the 12 months ending June 30, 2018 are $69.3 million. The timing of the majority of the contractual obligation payments is based on the targeted SpaceX launch schedule to complete the Iridium NEXT constellation in 2018.

10


Credit Facility

The Company estimates the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2018 to be approximately $3 billion. In October 2010, the Company entered into a $1.8 billion credit facility with a syndicate of bank lenders (as amended to date, the “Credit Facility”). As of June 30, 2017, the Company reported $1,688.4 million in borrowings from the credit facility in the accompanying condensed consolidated balance sheet, net of $111.6 million of deferred financing costs, for an aggregate total of $1.8 billion in borrowings. Pursuant to the Credit Facility, the Company maintains a minimum cash reserve for debt repayment in a debt service reserve account (the “DSRA”). As of June 30, 2017, the minimum required cash reserve balance was $135.0 million, which is classified as restricted cash in the accompanying condensed consolidated balance sheet.

On July 26, 2017, the Company amended and restated the Credit Facility by a supplemental agreement.  As amended, the Credit Facility delays $54.0 million of the Company’s 2017 DSRA contributions, provides a refund of $33.0 million in contributions made to date, and provides for a refund of an additional $11.0 million in contributions made to date in the event that the Company’s projected Available Cash (as defined in the Credit Facility) falls below $35.0 million on a three-month forward-looking basis through March 2019.  The delay and refunds are effective through the end of March 2019, at which time the DSRA must be fully funded to the previously agreed amount of $189.0 million.  The Credit Facility also requires that the Company establish a new restricted account to receive payment of hosting fees from Aireon.  Hosting fees up to $50.0 million would be placed in the restricted account, which the Company could access based on the same $35.0 million three-month forward-looking Available Cash threshold described above. Aireon hosting fees received in excess of the first $50 million would be distributed pro rata to replenish the DSRA and secure the Thales bills of exchange, as described above.  The Company will still need to receive a substantial payment of the Aireon hosting fees or make other financing arrangements by the end of the first quarter of 2019 in order to repay Thales and fully fund the DSRA.

The Credit Facility does not include any requirements that the Company raise additional equity, but requires the temporary suspension of dividend payments for five quarters on its Series A Preferred Stock and Series B Preferred Stock.  As previously announced, in anticipation of this requirement, the Company began this suspension with the dividend payments payable on June 15, 2017.

Prior to the Credit Facility being fully drawn, the Company paid interest on the outstanding principal balance under the Credit Facility on a semi-annual basis in April and October through a combination of a cash payment and a deemed additional loan. The Credit Facility was fully drawn in February 2017, and beginning in April 2017, interest is being paid in cash.  Interest costs incurred under the Credit Facility were $21.6 million and $42.8 million for the three and six months ended June 30, 2017, respectively, and $19.0 million and $37.2 million for the three and six months ended June 30, 2016, respectively. Scheduled semi-annual principal repayments will begin on March 31, 2018. During this repayment period, interest will be paid on the same date as the principal repayments. All interest costs incurred related to the Credit Facility have been capitalized during the construction period of the Iridium NEXT assets.  

The funding plan for the $3 billion in costs includes the substantial majority of the funds drawn under the Credit Facility, together with cash and marketable securities on hand, and internally generated cash flows, including contracted cash flows from hosted payloads.

While the contracted cash flows from the Company’s primary hosted payload customer, Aireon, are interest-bearing if not paid on time, the Company expects those hosted payload payments to be delayed. Aireon is working to secure contracts with the air navigation service providers, or ANSPs, including the FAA, for the sale of Aireon’s space-based automatic dependent surveillance-broadcast, or ADS-B, services. Aireon is currently seeking to raise the capital it will need to fund its continued operations and its hosted payload payments to the Company. Aireon’s ability to fund its hosted payload payments to the Company in the previously anticipated timeframe has been adversely affected by delays in its completion of sales to these ANSPs, which the Company believes results in part from delays in the development, construction and launch of the Iridium NEXT system.

There can be no assurance that internally generated cash flows, including those from hosting and data services on the Iridium NEXT satellites, will meet the Company’s current expectations. If sufficient cash flows are not generated, or if the cost of implementing Iridium NEXT or the other elements of the Company’s business plan are higher than anticipated, the Company may need further external funding. The ability to obtain additional funding may be adversely affected by a number of factors, including global economic conditions, and such funding may not be available on reasonable terms or at all. If the Company is not able to secure such funding in a timely manner, the ability to maintain the network, to design, build and launch Iridium NEXT and related ground infrastructure, products and services, and to pursue additional growth opportunities will be impaired, and the Company would likely need to delay some elements of the Iridium NEXT development. The Company’s liquidity and the ability to fund its liquidity requirements also depend on the Company’s future financial performance, which is subject to general economic, financial, regulatory and other factors that are beyond the Company’s control.

The Company believes that its liquidity sources will provide sufficient funds for it to meet its liquidity requirements for at least the next 12 months.

11


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. Boeing Insourcing Agreement

On November 28, 2016,Debt


Credit Facility

In October 2010, the Company entered into its $1.8 billion credit facility with a syndicate of bank lenders, which was amended and restated on March 9, 2018 (as amended to date, the “Credit Facility”). As of June 30, 2018, the Company reported an Insourcing Agreementaggregate total of $1,773.9 million in borrowings, including $94.2 million of deferred financing costs, for a net balance of $1,679.7 million in borrowings from the Credit Facility in the accompanying condensed consolidated balance sheet. Ninety-five percent of the Company's obligations under the Credit Facility are insured by Bpifrance Assurance Export S.A.S. ("BPIAE"). Future principal repayments with Boeing forrespect to the Credit Facility balance existing at June 30, 2018 by year and in the aggregate, are as follows:
  Amount
  (In thousands)
2018 $54,000
2019 126,000
2020 216,000
2021 306,000
2022 306,000
Thereafter 765,869
Total credit facility commitments $1,773,869
Unamortized deferred financing costs 94,204
Short-term credit facility 108,000
Long-term credit facility, net $1,571,665

Under the terms of the Credit Facility, as of June 30, 2018, the Company is required to maintain a minimum cash reserve within the DSRA of $189.0 million, which is classified as restricted cash and cash equivalents on the accompanying condensed consolidated balance sheet. The Credit Facility is scheduled to mature in September 2024, subject to acceleration as described below.

As amended and restated, the Credit Facility allowed the Company to hire, effectiveissue the Notes and (i) delayed a portion of the principal repayments scheduled under the Credit Facility for 2018, 2019 and 2020 into 2023 and 2024 pursuant to an amended repayment installment schedule, (ii) after funding of the DSRA back to $189.0 million, allowed the Company access to up to $87.0 million from the DSRA in the future if its projected cash level falls below $75.0 million, and (iii) adjusted the Company’s financial covenants, including eliminating covenants that required the Company to receive cash flows from hosted payloads and adding a covenant that requires the Company to receive $200.0 million in hosting fees from Aireon LLC, the Company's primary hosted payload customer, by December 2023. In the event that (a) the Company's cash balance exceeds $140.0 million after September 30, 2019 (subject to specified exceptions) or (b) the Company receives hosting fees from Aireon, the Company would be required pursuant to the Credit Facility to use 50% of such excess cash and up to $200.0 million of hosting fees to prepay the Credit Facility. In addition, if any of the Company's senior unsecured notes remain outstanding on October 15, 2022, which is six months prior to the scheduled maturity thereof, the maturity of all amounts remaining outstanding under the Credit Facility would be accelerated from September 30, 2024 to October 15, 2022. Fees incurred related to the amended and restated Credit Facility were $10.4 million, which were capitalized as deferred financing costs and will be amortized over the remaining term.

Interest costs incurred under the Credit Facility were $32.3 million and $53.7 million for the three and six months ended June 30, 2018, respectively, and $21.6 million and $42.8 million for the three and six months ended June 30, 2017, respectively. Interest costs include original issue discount amortization of $6.3 million and $12.8 million, for the three and six months ended June 30, 2018, respectively and $4.1 million and $10.6 million for the three and six months ended June 30, 2017, respectively. Scheduled semi-annual principal repayments began on April 3, 2018. During the repayment period, interest will be paid on the same date as the principal repayments. Interest expense in 2018 reflects the decrease in the credit facility interest being capitalized as the average balance of satellites in construction has decreased due to additional satellites being launched and placed in service. The Company was in compliance with all Credit Facility covenants as of June 30, 2018.

Senior Unsecured Notes

On March 21, 2018, the Company issued $360.0 million in senior unsecured notes (the "Notes") that bear interest at 10.25% per annum and mature on April 15, 2023. Interest is payable semi-annually on April 15 and October 15, beginning on October 15, 2018, and principal is repaid in full upon maturity. The proceeds of the Notes were used to prepay the outstanding Thales bills


of exchange, including premiums paid, of approximately $59.9 million issued pursuant to the FSD, replenish the DSRA under the Credit Facility to $189.0 million, and will be used to pay approximately $44.4 million in Thales milestones previously expected to be satisfied by the issuance of bills of exchange. The proceeds of the Notes also provided the Company with sufficient cash to meet its needs, including principal and interest payments under the Credit Facility. As of June 30, 2018, the Company reported an aggregate total of $360.0 million in borrowings, including $9.5 million of deferred financing costs, for a net balance of $350.5 million in borrowings from the Notes in the accompanying condensed consolidated balance sheet. The Notes contain covenant requirements that apply to certain permitted financing actions, and are no more restrictive than the covenants in the Credit Facility. The Company was in compliance with all covenant requirements of the Notes as of June 30, 2018.

The Company believes its liquidity sources will provide sufficient funds for it to meet its liquidity requirements for at least the next 12 months.

6. Boeing Insourcing Agreement

On January 3, 2017, the Company hired the majority of Boeingthe employees and third party contractors who were responsible for the operations and maintenance of the Company’s satellite constellation and ground infrastructure. Pursuantinfrastructure pursuant to thean Insourcing Agreement thewith The Boeing Company. The Company agreed to paypaid Boeing $5.5 million, of which $2.75 million was paid in each of December 2016 and the remaining $2.75 million will be paid in December 2017. Concurrent with the hiring of the assembled workforce on January 3, 2017,As a result, the Company and Boeing terminated their previous Operations and Maintenance Agreement (“O&M Agreement”) and Iridium NEXT Support Service Agreement and entered into a new Development Services Agreement (“DSA”) with a $6.0 million minimum annual commitment through 2021. As a result of these agreement terminations, Boeing no longer has a unilateral right to commence the de-orbit of the Company’s first-generation satellites. The acquisition of this assembled workforce was recorded as a definite-lived intangible asset in January 2017 and will beis being amortized over an estimated useful life of 7seven years. Additionally, by terminating the O&M Agreement, the Company recognized a $14.2 million gain fromin the first quarter of 2017, consisting of (i) the derecognition of a purchase accounting liability created fromwhen GHL Acquisition Corp.’s acquisition of acquired Iridium Holdings LLC in 2009 related to the fair value of the contractual arrangement with Boeing as of that date, and (ii) the remainder of a credit resulting from thea July 2010 Boeing O&M contract amendment.

6.


7. Stock-Based Compensation


In May 2017, the Company’s stockholders approved the amendment and restatement of the Company's 2015 Equity Incentive Plan (as so amended and restated, the “Amended 2015 Plan”), primarily to increase the number of shares available under the plan. As such, the Company registered with the SEC an additional 5,199,239 shares of common stock made available for issuance pursuant to the Amended 2015 Plan, bringing the total to 28,402,248 shares registered. Through June 30, 2018, the remaining aggregate number of shares of the Company's common stock available for future grants under the Amended 2015 plan was 13,255,896. The Amended 2015 Plan provides for the grant of stock-based awards, including nonqualified stock options, incentive stock options, restricted stock, restricted stock units ("RSUs"), stock appreciation rights and other equity securities as incentives and rewards for employees, consultants and non-employee directors of the Company and its affiliated entities. The number of shares of common stock available for issuance under the Amended 2015 Plan is reduced by (i) one share for each share of common stock issued pursuant to an appreciation award, such as a stock option or stock appreciation right with an exercise or strike price of at least 100% of the fair market value of the underlying common stock on the date of grant, and (ii) 1.8 shares for each share of common stock issued pursuant to any stock award that is not an appreciation award, also known as a “full value award.” The Amended 2015 Plan allows the Company to utilize a broad array of equity incentives and performance cash incentives in order to secure and retain the services of its employees, directors and consultants, and to provide long-term incentives that align the interests of its employees, directors and consultants with the interests of the Company’s stockholders. The Company accounts for stock-based compensation at fair value.

Stock Option Awards

The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The fair valuestock option awards granted to employees generally (i) have a term of restricted stock units (“RSUs”) isten years, (ii) vest over a four-year period with 25% vesting after the first year of service and the remainder vesting ratably on a quarterly basis thereafter, (iii) are contingent upon employment on the vesting date, and (iv) have an exercise price equal to the 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. The expected vesting of the Company’s performance-based RSUs is based upon the likelihood that the Company achieves the defined performance goals. The level of achievement of performance goals, if any, is determined by the compensation committee of the Company’s Board of Directors. 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.

In May 2015, the Company’s stockholders approved the 2015 Equity Incentive Plan (the “2015 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. In May 2017, the Company’s stockholders amended and restated the 2015 Plan (the “Amended 2015 Plan”), primarily to increase the number of shares available under the plan.  All grants in June 2017 were made under the Amended 2015 Plan, which continues to permit the grant of stock-based awards, including nonqualified stock options, incentive stock options, restricted stock and other equity securities to employees, consultants and non-employee directors.  Members of the Company’s board of directors have received a portion of their annual compensation in the form of equity awards under the 2015 Plan. An aggregate amount of approximately 96,000 and 126,000 RSUs were granted in January 2017 and 2016, respectively. These RSUs vest in full on the first anniversary of the grant date. The estimated aggregate grant date fair value of the RSUs granted tounderlying shares at the directors in January 2017 and 2016 was $1.0 million for each year.

date of grant.


During the six months ended June 30, 20172018 and 2016,2017, the Company granted approximately 110,000284,000 and 214,000110,000 stock options, respectively, to its employees, with an estimated aggregate grant date fair value of $1.6 million and $0.5 million, and $0.7 million, respectively. Additionally, during the six months ended June 30, 2017 and 2016, the Company granted 964,000 and 564,000 service-based

Restricted Stock Units

The RSUs respectively,granted to its employees with an estimated aggregate grant date fair value of $8.5 million and $4.0 million, respectively. Employee stock options and service-based RSUsfor service 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.

In March 2017 and 2016,thereafter, subject to continued employment. The RSUs



granted to non-employee directors generally vest in full on the Company awarded approximately 1,190,000 and 1,335,000 performance-based RSUs to the Company’s executives and employees (the “Bonus RSUs”). The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. Vestingfirst anniversary of the March 2017 and 2016 Bonusgrant date. Some RSUs is and was dependentgranted to employees for performance vest upon the Company’s achievementcompletion of defined performance goals, over a one-year period (fiscal year 2017 for the March 2017 Bonus RSUs and fiscal year 2016 for the March 2016 Bonus RSUs). Management believes it is probable that certain of the March 2017 Bonus RSUs will vest. The level of achievement, if any, of performance goals will be determined by the compensation committee of the Company’s Board of Directors and, if such goals are achieved, the March 2017 Bonus RSUs will vest, subject to continued employment,employment. The Company’s RSUs are generally classified as equity awards because the RSUs will be paid in March 2018. Certainthe Company's common stock upon vesting. The related compensation expense is recognized over the service period and is based on the grant date fair value of the March 2016 BonusCompany's common stock and the number of shares expected to vest. The fair value of the awards is not remeasured at the end of each reporting period. The awards do not carry voting rights until they are vested and released in accordance with the terms of the award.

Service-Based RSUs vested

The majority of the annual compensation the Company provides to members of its board of directors is paid in March 2017. Thethe form of RSUs. In addition, certain members of the Company's board of directors elect to receive the remainder of their annual compensation, or a portion thereof, in the form of RSUs. An aggregate amount of approximately 110,000 and 96,000 service-based RSUs were granted to its directors as a result of these payments and elections during the six months ended June 30, 2018 and 2017, respectively, with an estimated grant date fair value of $1.3 million and $1.0 million, respectively.

During the six months ended June 30, 2018 and 2017, the Company granted approximately 900,000 and 964,000 service-based RSUs, respectively, to its employees, with an estimated aggregate grant date fair value of the March 2017 and 2016 Bonus RSUs was $10.5$10.7 million and $9.4$8.5 million, respectively.

12


Additionally, in March 2017 and 2016, the Company awarded approximately 173,000 and 119,000 performance-based RSUs, respectively, to the Company’s executives (the “Performance RSUs”).  Vesting of the 2017 and 2016 Performance RSUs is and was dependent upon the Company’s achievement of defined performance goals over a two-year period (fiscal years 2017 and 2018 for the Performance RSUs granted in 2017 and fiscal years 2016 and 2017 for the Performance RSUs granted in 2016). Management believes it is probable that certain of the Performance RSUs will vest. The number of Performance 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 Performance RSUs will vest in March in the year after the performance period ends and the remaining 50% will vest in March of the third year after grant, in each case subject to the executive’s continued service as of the vesting date. The estimated aggregate grant date fair value of the Performance RSUs was $1.5 million for the 2017 grants and $0.8 million for the 2016 grants.

respectively.


In June 20172018 and June 2016,2017, the Company granted approximately 13,000 and 8,000 and 35,000service-based RSUs, respectively, to non-employee consultants. The RSUs are generally subject to service-based vesting. The RSUs will vest 50% in June of the year after the grant and the remaining 50% will vest quarterly thereafter. The estimated aggregate grant date fair value of the RSUs granted to non-employee consultants during the six months ended June 30, 2018 and 2017 was $0.2 million and $0.1 million, respectively.

Performance-Based RSUs

In March 2018 and 2017, the Company granted approximately 474,000 and 1,190,000 performance-based RSUs to the Company’s executives and employees (the “Bonus RSUs”), with an estimated grant date fair value of $5.6 million and $10.5 million, respectively. Vesting of the Bonus RSUs is and was dependent upon the Company’s achievement of defined performance goals over a one-year period (fiscal year 2018 for the 2018 Bonus RSUs and fiscal year 2017 for the 2017 Bonus RSUs). The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. Management believes it is probable that certain of the 2018 Bonus RSUs will vest. The level of achievement, if any, of performance goals will be determined by the compensation committee of the Company’s board of directors and, if such goals are achieved, the 2018 Bonus RSUs will vest, subject to continued employment, in March 2019. A portion of the 2017 Bonus RSUs vested in March 2018 upon the determination of the level of achievement of the performance goals.

Additionally, during 2018 and 2017, the Company awarded approximately 134,000 and 173,000 performance-based RSUs, respectively, to the Company’s executives (the “Executive RSUs”). The estimated aggregate grant date fair value of the Executive RSUs was $1.6 million for the 2018 grants and $1.5 million for the 2017 grants. Vesting of the Executive RSUs is and was dependent upon the Company’s achievement of defined performance goals over a two-year period (fiscal years 2018 and 2019 for the Executive RSUs granted in 2018 and fiscal years 2017 and 2016 was $0.1 million2018 for the Executive RSUs granted in 2017). Management believes it is probable that the Executive RSUs will vest at least in part. The vesting of Executive RSUs will ultimately range from 0% to 150% of the number of shares underlying the Executive RSUs granted based on the level of achievement of the performance goals. If the Company achieves the performance goals, 50% of the Executive RSUs will vest on the second anniversary of the grant date, and $0.3 million, respectively.

7.the remaining 50% will vest on the third anniversary of the grant date, in each case subject to the executive's continued service as of the vesting date.


8. Equity Transactions and Instruments


Preferred Stock


The Company is authorized to issue 2.0 million shares of preferred stock with a par value of $0.0001 per share. As described below, the Company issued 1.0 million shares of preferred stock in the fourth quarter of 2012 and 0.5 million shares of preferred stock in the second quarter of 2014. The remaining 0.5 million authorized shares of preferred stock remain undesignated and unissued as of June 30, 2017.

2018.




Series A Cumulative Perpetual Convertible Preferred Stock


In the fourth quarter of 2012, the Company issued 1.0 million shares of its 7.00% Series A Cumulative Perpetual Convertible Preferred Stock (the “Series"Series A Preferred Stock”Stock") in a private offering. The Company received proceedsDuring the three months ended March 31, 2018, the Company's daily volume-weighted average stock price remained at or above $12.26 per share for a period of $96.5 million from20 out of 30 trading days, thereby allowing for the saleconversion of the Series A Preferred Stock netat the election of the aggregate $3.5 millionCompany. On March 20, 2018, the Company converted all outstanding shares of its Series A Preferred Stock into shares of common stock, resulting in initial purchaser discountthe issuance of 10,599,974 shares of common stock. The Company declared and offering costs. The net proceedspaid all current and cumulative dividends to holders of this offering were used to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes.

Holdersrecord of Series A Preferred Stock are entitled to receive cumulativeas of March 8, 2018. As such, the Company paid cash dividends at a rate of 7.00% per annumzero and $7.0 million to the holders 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 and pari passu with the Company’s 6.75% Series B Cumulative Perpetual Convertible Preferred Stock (the “Series B Preferred 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 at an initial 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).

During the three months ended June 30, 2017, the Company began a five-quarter deferral of dividends on the Series A Preferred Stock. No cash dividends were declared or paid during the three months ended June 30, 2017, and no dividends were accrued. During the six months ended June 30, 2017, the2018, respectively. The Company paid cash dividends of zero and $1.8 million to holders of the Series A Preferred Stock. DuringStock during the three and six months June 30, 2016, the Company paid cash dividends of $1.8 million and $3.5 million, respectively, to holders of the Series A Preferred Stock. As ofended June 30, 2017, and December 31, 2016, the Company had accrued $0.3 million in cash dividends for the holders of the Series A Preferred Stock, which is included within accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets.

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. Any suspended dividends are required to be paid prior to conversion.

13


respectively.


Series B Cumulative Perpetual Convertible Preferred Stock


In May 2014, the Company issued 500,000 shares of its 6.75% Series B Cumulative Perpetual Convertible Preferred Stock (the "Series B Preferred Stock") in an underwritten public offering at a price to the public of $250 per share. The purchase price received by the Company, equal to $242.50 per share, reflected an underwriting discount of $7.50 per share. The Company received proceeds of $120.8 million from the sale of the Series B Preferred Stock, net of the $3.8 million underwriter discount and $0.4 million of offering costs. The net proceeds of this offering are being used to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes.


As of June 30, 2017,2018, there were 499,955500,000 shares of Series B Preferred Stock outstanding. Holders of Series B Preferred Stock are entitled to receive cumulative cash dividends at a rate of 6.75% per annum of the $250 liquidation preference per share (equivalent to an annual rate of $16.875 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. The Series B Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series B Preferred Stock ranks senior to the Company’s common stock and pari passu with respect to the Company’s Series A Preferred Stock with respect to dividend rights and rights upon the Company’s voluntary or involuntary liquidation, dissolution or winding-up. Holders of Series B Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series B Preferred Stock may convert some or all of their outstanding Series B Preferred Stock at an initial conversion rate of 33.456 shares of common stock per $250 liquidation preference, which is equivalent to an initial conversion price of approximately $7.47 per share of common stock (subject to adjustment in certain events).

During


In connection with the three months ended June 30, 2017,conversion of the Series A Preferred Stock described above, the Company began a five-quarter deferraldeclared and paid all current and cumulative dividends to holders of record of Series B Preferred Stock as of March 8, 2018. As such, the Company paid cash dividends onof zero and $8.4 million to holders of the Series B Preferred Stock. No cash dividends were declared or paidStock during the three months ended June 30, 2017, and no dividends were accrued. During the six months ended June 30, 2017,2018, respectively. In compliance with the Credit Facility, subsequent to the dividend payment, the Company began the planned suspension of dividends to holders of the Series B Preferred Stock for five quarters, beginning with the dividend payment that would otherwise be required to be paid in June 2018. The Company paid cash dividends of zero and $2.1 million to holders of the Series B Preferred Stock. DuringStock during the three and six months ended June 30, 2016, the Company paid cash dividends of $2.1 million and $4.2 million, respectively, to holders of the Series B Preferred Stock. As of June 30, 2017, and December 31, 2016, the Company had accrued $0.4 million in cash dividends for the holders of the Series B Preferred Stock, which is included within accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet.

respectively.


On or after May 15, 2019, the Company may, at its option, convert some or all of the Series B Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to May 15, 2019,conditions, including (i) a daily volume-weighted average stock price of at least $11.15 per share over a period of 20 trading days in a 30-day period and (ii) the payment of cumulative dividends. In the event of certain specified fundamental changes, holders of the Series B Preferred Stock will have the right to convert some or all of their shares of Series B Preferred Stock into the greater of (i) a number of shares of the Company’s common stock as subject to adjustment plus the make-whole premium, if any, and (ii) a number of shares of the Company’s common stock equal to the lesser of (a) the liquidation preference divided by the market value of the Company’s common stock on the effective date of such fundamental change and (b) 81.9672 (subject to adjustment). In certain circumstances, the Company may elect to cash settle any conversions in connection with a fundamental change. Any suspended dividends are required to be paid prior to conversion.

8.conversion by the Company.


9. Revenue

Effective January 1, 2018, the Company adopted ASU No. 2014-09. Under the new standard, the Company performs the following steps to determine the amount of revenue to be recognized: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.



In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the standard using the modified retrospective method with a cumulative effect adjustment recorded to opening retained earnings. This method required application of the new guidance at the beginning of the earliest comparative period presented for revenue agreements that were not substantially complete as of the date of adoption. The Company does not disclose the value of unsatisfied performance obligations because the majority of its contracts have expected lengths of one year or less. The Company did not retrospectively restate contracts with modifications prior to the earliest period presented, but instead reflected the aggregate effect of all modifications at transition.

The Company derives its revenue primarily as a wholesaler of satellite communications products and services. Pursuant to wholesale agreements, the Company sells its products and services to service providers who, in turn, sell the products and services to other distributors or directly to the end users. The primary types of revenue include (i) service revenue (access and usage-based airtime fees), (ii) subscriber equipment revenue, and (iii) revenue generated by providing engineering and support services to commercial and government customers.

Contracts with multiple performance obligations. At times, the Company sells services and equipment through arrangements that bundle equipment, airtime and other services. For these revenue arrangements when the Company sells services and equipment in bundled arrangements and determines that it has separate distinct performance obligations, the Company allocates the bundled contract price among the various performance obligations based on each deliverable’s stand-alone selling price. If the stand-alone selling price is not directly observable, the Company estimates the amount to be allocated for each performance obligation based on observable market transactions or the residual approach. When the Company determines the performance obligations are not distinct, the Company recognizes revenue on a combined basis as the last obligation is satisfied. To the extent the Company's contracts include variable consideration, the transaction price includes both fixed and variable consideration. The variable consideration contained within the Company's contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, the Company evaluates the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, the Company includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration estimates are updated at the end of each quarter. 

Service revenue sold on a stand-alone basis. Service revenue is generated from the Company’s service providers through usage of its satellite system and through fixed monthly access fees per user charged to service providers. Revenue for usage is recognized when usage occurs. Revenue for fixed-per-user access fees is recognized over the usage period in which the services are provided to the end user. The Company sells prepaid services in the form of e-vouchers and prepaid cards. A liability is established equal to the cash paid upon purchase for the e-voucher or prepaid card. Under the new standard, the Company (i) recognizes revenue from the prepaid services upon the use of the e-voucher or prepaid card by the customer and (ii) estimates the expected revenue that will expire unused on an ongoing basis and recognizes this revenue in a manner consistent with the usage period. The Company does not offer refunds for unused prepaid services.

Services sold to the U.S. government. The Company provides airtime and airtime support to U.S. government and other authorized customers pursuant to the Enhanced Mobile Satellite Services (“EMSS”) contract managed by the Defense Information Systems Agency (“DISA”). Effective October 22, 2013, the Company executed a five-year EMSS contract, managed by DISA. Under the terms of this agreement, authorized customers continue to utilize airtime services, provided through the U.S. Department of Defense’s (“DoD”) dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast and Distributed Tactical Communications Services (“DTCS”) services for an unlimited number of DoD and other federal subscribers. The fixed-price rate for the remaining contract year, which runs through October 21, 2018, is $88 million per year. Under this contract, revenue is based on the annual fee for the fixed-price contract with unlimited subscribers, and is recognized on a straight-line basis over each contractual year. The U.S. government purchases its subscriber equipment from third-party distributors and not directly from the Company.

The following table summarizes the Company’s services revenue:
  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
  (in thousands)
Commercial voice and data services $48,712
 $44,203
 $92,442
 $85,849
Commercial IoT data services 20,835
 18,505
 40,618
 35,435
Hosted payload and other data services 12,419
 1,915
 16,648
 3,112
Government services 22,000
 22,000
 44,000
 44,000
Total services $103,966
 $86,623
 $193,708
 $168,396



Subscriber equipment sold on a stand-alone basis. The Company recognizes subscriber equipment sales and the related costs at a point in time when title to the equipment (and the risks and rewards of ownership) passes to the customer, typically upon shipment. Customers do not have rights of return without prior consent from the Company.

Government engineering and support services. The Company provides maintenance services to the U.S. government’s dedicated gateway. This revenue is recognized ratably over the periods in which the services are provided; the related costs are expensed as incurred.

Other government and commercial engineering and support services. The Company also provides engineering services to assist customers in developing new technologies for use on the Company’s satellite system. The revenue associated with fixed fee contracts is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying its performance obligations. The Company does not include purchases of goods from a third party in its evaluation of costs incurred. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Revenue on cost-plus-fixed-fee contracts is recognized to the extent of estimated costs incurred plus the applicable fees earned. The Company considers fixed fees under cost-plus-fixed-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.

The following table summarizes the Company’s engineering and support services revenue:
  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
  (in thousands)
Commercial $114
 $736
 $195
 $1,207
Government 4,986
 5,401
 8,529
 10,469
Total $5,100
 $6,137
 $8,724
 $11,676

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the condensed consolidated balance sheet. The Company bills amounts under its agreed-upon contractual terms at periodic intervals (for services), upon shipment (for equipment), or upon achievement of contractual milestones or as work progresses (for engineering and support services). Billing may occur subsequent to revenue recognition, resulting in accounts receivable (contract assets). The Company may also receive payments from customers before revenue is recognized, resulting in deferred revenue (contract liabilities). The Company recognized revenue that was previously recorded as deferred revenue in the amounts of $16.3 million and $8.7 million for the three months ended June 30, 2018 and 2017, respectively, and $24.8 million and $16.0 million for the six months ended June 30, 2018 and 2017, respectively. The Company has also recorded costs of obtaining contracts expected to be recovered in prepaid expenses and other assets (contract assets or commissions), that are not separately disclosed on the condensed consolidated balance sheets. The commissions are recognized over the estimated prepaid usage period. The contract assets not separately disclosed are as follows:
  June 30, 2018 December 31, 2017
  (in thousands)
Contract Assets:    
Commissions $1,096
 $1,555
Other Contract Costs 3,862
 3,753

The primary impact of adopting ASU 2014-09 relates to the Company’s prepaid service revenue and associated breakage. Under the new standard, the Company now estimates the expected revenue that will expire unused on an ongoing basis and recognizes this revenue in a manner consistent with the usage period. Upon adoption, the contract liability - deferred revenue, associated with prepaid service revenue, was reduced by approximately $15.7 million as a result of the change to include a breakage estimate over the usage period.



Adopting the new standard had an immaterial impact on the Company’s financial statements. The impact of the implementation of the new revenue standard on the Company's condensed consolidated balance sheet, as compared to accounting under prior revenue guidance (Accounting Standards Codification ("ASC") Topic 605), was as follows:

 June 30, 2018
 As reported Adjustment As adjusted
 (in thousands)
Prepaid expenses and other current assets$25,048
 $446
 $25,494
      
Deferred revenue21,692
 19,781
 41,473
Deferred revenue, net of current portion58,565
 (2,914) 55,651
Other long-term liabilities4,150
 (3,852) 298
      
Retained earnings522,150
 (12,568) 509,582

The impact of the implementation of the new standard on the Company's condensed consolidated statements of operations and comprehensive income was as follows:
 Three months ended June 30, 2018 Six months ended June 30, 2018
 As reported Adjustment As adjusted As reported Adjustment As adjusted
 (in thousands)
Service revenue$103,966
 (255) 103,711
 $193,708
 (1,182) 192,526
            
Cost of services$22,644
 37
 22,681
 $41,596
 (63) 41,533
            
Income before income taxes$3,425
 (292) 3,133
 $18,736
 (1,119) 17,617
Income tax expense(7,843) 22
 (7,821) (11,682) 288
 (11,394)
Net income (loss)$(4,418) (270) (4,688) $7,054
 (831) 6,223

10. Income Taxes

The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 was effective for reporting periods that include December 22, 2017. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects of the Tax Act and recorded provisional amounts in its financial statements as of and for the year ended December 31, 2017, resulting in a net tax benefit of $150.9 million in that period. As the Company collects and prepares the necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company's provision for income taxes and effective tax rate in the period in which the adjustments are made.  To date, management has not made any such adjustments to the provisional amounts for the remeasurement of deferred tax assets and liabilities and the deemed repatriation of certain foreign subsidiary earnings. The accounting for the tax effects of the Tax Act will be completed during 2018. 

In April 2018, Maryland enacted the single sales factor method for apportioning income to the state to be phased in over five years commencing in 2018. This change results in higher future Maryland taxes for the Company, increasing its year-to-date income tax provision by $8.7 million for the impact on its existing deferred tax assets and liabilities. If the Company's current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly.



11. Net Income (Loss) Per Share


The Company calculates basic net income per share by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share takes into account the effect of potential dilutive common shares when the effect is dilutive. The effect of potential dilutive common shares, including common stock issuable upon exercise of outstanding stock options, is computed using the treasury stock method. The effect of potential dilutive common shares from the conversion of outstanding convertible preferred securities is computed using the as-if converted method at the stated conversion rate. As noted above, the Series A Preferred Stock was converted into shares of common stock on March 20, 2018. The RSUs granted to members of the Company’s board of directors contain non-forfeitable rights to dividends and therefore are considered to be participating securities in periods of net income. As a result, the calculation of basic and diluted net income per share excludes net income attributable to the unvested RSUs granted to the Company’s board of directors from the numerator and excludes the impact of the unvested RSUs granted to the Company’s board of directors from the denominator.

14



The computations of basic and diluted net income per share are as follows:

 

Three Months Ended June 30,

 

 

2017

 

 

2016

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to common stockholders

(numerator for basic net income per share)

$

20,919

 

 

$

22,995

 

Net income allocated to participating securities

 

(20

)

 

 

(30

)

Numerator for basic net income per share

 

20,899

 

 

 

22,965

 

Dividends on Series A Preferred Stock, paid and unpaid

 

1,750

 

 

 

1,750

 

Dividends on Series B Preferred Stock, paid and unpaid

 

2,109

 

 

 

2,109

 

Numerator for diluted net income per share

$

24,758

 

 

$

26,824

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic net income per share - weighted

   average outstanding common shares

 

97,989

 

 

 

95,913

 

Dilutive effect of stock options

 

1,571

 

 

 

222

 

Dilutive effect of contingently issuable shares

 

54

 

 

 

-

 

Dilutive effect of Series A Preferred Stock

 

10,602

 

 

 

10,602

 

Dilutive effect of Series B Preferred Stock

 

16,727

 

 

 

16,728

 

Denominator for diluted net income per share

 

126,943

 

 

 

123,465

 

 

 

 

 

 

 

 

 

Net income per share attributable to common

   stockholders - basic

$

0.21

 

 

$

0.24

 

Net income per share attributable to common

   stockholders - diluted

$

0.20

 

 

$

0.22

 

  Three Months Ended June 30,
  2018 2017
  (in thousands, except per share data)
Numerator:    
Net income (loss) attributable to common stockholders $(6,527) $20,919
Net income allocated to participating securities 6
 (20)
Numerator for basic net income (loss) per share (6,521) 20,899
Dividends on Series A Preferred Stock, excluding cumulative dividends 
 1,750
Dividends on Series B Preferred Stock, excluding cumulative dividends 
 2,109
Numerator for diluted net income (loss) per share $(6,521) $24,758
     
Denominator:    
Denominator for basic net income per share - weighted
   average outstanding common shares
 111,111
 97,989
Dilutive effect of stock options 
 1,571
Dilutive effect of contingently issuable shares 
 54
Dilutive effect of Series A Preferred Stock 
 10,602
Dilutive effect of Series B Preferred Stock 
 16,727
Denominator for diluted net income per share 111,111
 126,943
Net income (loss) per share attributable to common
   stockholders - basic
 $(0.06) $0.21
Net income (loss) per share attributable to common
   stockholders - diluted
 $(0.06) $0.20

For the three months ended June 30, 2018, options to purchase 0.3 million shares of common stock were not included in the computation of diluted net loss per share, as the effect would be anti dilutive, and 0.7 million unvested performance-based RSUs were not included in the computation of basic and diluted net loss per share as certain performance criteria had not been satisfied. For the three months ended June 30, 2018, 16.7 million as-if converted shares of the Series B Preferred Stock were not included in the computation of diluted net loss per share, as the effect would be anti-dilutive. For the three months ended June 30, 2017, 1.8 million unvested non-performance based RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share, as the effect would be anti-dilutive, and 0.1 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria had not been satisfied.

For the three months ended June 30, 2018, $2.1 million in cumulative unpaid dividends to holders of the Series B Preferred Stock were not declared or accrued as a result of all cash dividends being suspended, but such amounts were deducted to arrive at net income attributable to common stockholders. For the three months ended June 30, 2017, $1.8 million and $2.1 million in cumulative unpaid dividends to holders of the Series A Preferred Stock and Series B Preferred Stock, respectively, were not declared or accrued as a result of all cash dividends being suspended, in connection with the amendments described in Note 4, but such amounts were deducted to arrive at net income attributable to common stockholders.



  Six Months Ended June 30,
  2018 2017
  (in thousands, except per share data)
Numerator:    
Net income attributable to common stockholders $1,086
 $55,008
Net income allocated to participating securities (1) (55)
Numerator for basic net income per share 1,085
 54,953
Dividends on Series A Preferred Stock, excluding cumulative dividends 
 3,500
Dividends on Series B Preferred Stock, excluding cumulative dividends 
 4,218
Numerator for diluted net income per share $1,085
 $62,671
     
Denominator:    
Denominator for basic net income per share - weighted
   average outstanding common shares
 105,927
 97,424
Dilutive effect of stock options 2,347
 1,353
Dilutive effect of contingently issuable shares 1,131
 553
Dilutive effect of Series A Preferred Stock 
 10,602
Dilutive effect of Series B Preferred Stock 
 16,727
Denominator for diluted net income per share 109,405
 126,659
Net income per share attributable to common
   stockholders - basic
 $0.01
 $0.56
Net income per share attributable to common
   stockholders - diluted
 $0.01
 $0.49

For the threesix months ended June 30, 2017, 1.82018, options to purchase 0.3 million unvested non-performance-based RSUsshares of common stock were excluded from the computation of basic net income per share and not included in the computation of diluted net income per share, as the effect would be anti-dilutive, and 0.10.6 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria havehad not been satisfied.

For the threesix months ended June 30, 2016, options to purchase 4.12018, 4.6 million as-if converted shares of common stockthe Series A Preferred Stock and 16.7 million as-if converted shares of the Series B Preferred Stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive. For the threesix months ended June 30, 2016, 1.52017, 1.6 million unvested non-performance based RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share, as the effect would be anti-dilutive, and 1.70.6 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria havehad not been satisfied.


15


 

Six Months Ended June 30,

 

 

2017

 

 

2016

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to common stockholders

(numerator for basic net income per share)

$

55,008

 

 

$

47,656

 

Net income allocated to participating securities

 

(55

)

 

 

(61

)

Numerator for basic net income per share

 

54,953

 

 

 

47,595

 

Dividends on Series A Preferred Stock, paid and unpaid

 

3,500

 

 

 

3,500

 

Dividends on Series B Preferred Stock, paid and unpaid

 

4,218

 

 

 

4,218

 

Numerator for diluted net income per share

$

62,671

 

 

$

55,313

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic net income per share - weighted

   average outstanding common shares

 

97,424

 

 

 

95,782

 

Dilutive effect of stock options

 

1,353

 

 

 

112

 

Dilutive effect of contingently issuable shares

 

553

 

 

 

3

 

Dilutive effect of Series A Preferred Stock

 

10,602

 

 

 

10,602

 

Dilutive effect of Series B Preferred Stock

 

16,727

 

 

 

16,728

 

Denominator for diluted net income per share

 

126,659

 

 

 

123,227

 

 

 

 

 

 

 

 

 

Net income per share attributable to common

   stockholders - basic

$

0.56

 

 

$

0.50

 

Net income per share attributable to common

   stockholders - diluted

$

0.49

 

 

$

0.45

 

For the six months ended June 30, 2018, $2.1 million in cumulative unpaid dividends to holders of the Series B Preferred Stock were not declared or accrued as a result of all cash dividends being suspended, but such amounts were deducted to arrive at net income attributable to common stockholders. For the six months ended June 30, 2017, $1.8 million and $2.1 million in cumulative unpaid dividends to holders of the Series A Preferred Stock and Series B Preferred Stock, respectively, were not declared or accrued as a result of all cash dividends being suspended, in connection with the amendments described in Note 4, but such amounts were deducted to arrive at net income attributable to common stockholders. For the six months ended June 30, 2017, options to purchase 0.1 million shares of common stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive. For




12. Related Party Transactions

Aireon LLC

The Iridium NEXT constellation hosts the AireonSM system, which will provide a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast ("ADS-B") receivers on the Iridium NEXT satellites. Iridium formed Aireon LLC ("Aireon") in 2011, with subsequent investments from the air navigation service providers ("ANSPs") of Canada, Italy, Denmark, Ireland and the United Kingdom, to develop and market this service. Aireon has contracted to pay Iridium a fee to host the ADS-B receivers on Iridium NEXT, as well as data service fees for the delivery of the air traffic surveillance data over the Iridium NEXT system. Under this agreement with Aireon, Aireon will pay Iridium fees of $200.0 million to host the ADS-B receivers on Iridium NEXT (the "Hosting Agreement") and additional power fees of approximately $2.8 million per year, as well as data services fees of up to approximately $19.8 million per year for the delivery of the air traffic surveillance data over the Iridium NEXT system (the "Data Services Agreement"). The Aireon ADS-B receivers on the Iridium NEXT satellites are activated on an individual basis as the Iridium NEXT satellite begins carrying traffic.

At June 30, 2018, the Company had a fully diluted ownership stake in Aireon of approximately 35.7%, subject to certain redemption provisions contained in the Amended and Restated Limited Liability Company Agreement (the "Aireon LLC Agreement").

Under the Company's Hosting Agreement, the $200.0 million due is interest-bearing for amounts not paid on time. The Company had previously determined there was not sufficient support that Aireon will be able to make the payments due under the Hosting Agreement. As of June 30, 2018, the Company had received $8.1 million under the Hosting Agreement, all of which was received in the quarter ended June 30, 2018.

In July 2018, the Company and Aireon amended certain terms of the Hosting Agreement. As amended, the Company is scheduled to receive an additional payment of $6.4 million in December 2018 and semi-annual payments of $8.0 million beginning in 2019 until the hosting fees are paid in full, without any contingency relating to Aireon's ability to raise debt. Aireon continues to be obligated to pay the Company in full the remaining portion of the $200.0 million in hosting fees when they are able to raise debt to do so. As a result of the amendment and an updated financial collectability assessment, as of June 30, 2018, the Company recognized $6.9 million of revenue related to total cumulative hosting services rendered to date.

Under the Data Services Agreement, Aireon pays the Company monthly data service payments on a per satellite basis beginning on each satellite's in-service date. The Company recorded data service revenue from Aireon of $2.1 million and $3.6 million for the three and six months ended June 30, 2018, respectively. Revenues recorded for the three and six months ended June 30, 2017 1.6were immaterial.

Under a services agreement, the Company also provides administrative services, including subleased office space to Aireon, which are paid monthly. Aireon receivables due to the Company under all agreements totaled $1.0 million unvested non-performance-based RSUs were excluded from the computation of basic net income per share and not included in the computation of diluted net income per share, as the effect would be anti-dilutive, and 0.6$0.6 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria have not been satisfied.

For the six months endedat June 30, 2016, options to purchase 4.4 million shares of common stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive. For the six months ended June 30, 2016, 1.4 million unvested non-performance based RSUs were excluded from the computation of basic net income per share2018 and not included in the computation of diluted net income per share, as the effect would be anti-dilutive, and 1.3 million unvested performance-based RSUs were not included in the computation of basic and diluted net income per share, as certain performance criteria have not been satisfied.

16


December 31, 2017, respectively.



ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, filed on February 23, 201722, 2018 with the Securities and Exchange Commission, or the SEC, as well as our condensed consolidated financial statements included in this Form 10-Q.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development or otherwise are not statements of historical fact. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. The important factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 filed on February 23, 2017,22, 2018, and in this Quarterly Report, could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


Overview of Our Business


We are 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.coverage, connecting people, organizations and assets to and from anywhere, in real time. Our unique L-band satellite network provides reliable communications services to regions of the world where terrestrial wireless or wireline networks do not exist or are limited, including remote land areas, open oceans,ocean, airways, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters.


We provide voice and data communications services to businesses, the U.S. and foreign governments, non-governmental organizations and consumers via our satellite network, which has an architecture of 66 in-orbitoperational satellites with in-orbit spares and related ground infrastructure. We utilize an interlinked mesh architecture to route traffic across our satellite constellation using radio frequency crosslinks between satellites. This unique architecture minimizes the need for local ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence.


We sell our products and services to commercial end-users through a wholesale distribution network, encompassing approximately 70150 service providers, approximately 200230 value-added resellers, or VARs, and approximately 7085 value-added manufacturers, or VAMs, which create and sell technology that uses the Iridium® network either directly to the end user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications using our products and services to target specific lines of business. We expect that demand for our services will increase as more applications are developed and deployed that utilize our technology.

At June 30, 2017,2018, we had over 912,000approximately 1,047,000 billable subscribers worldwide, representing an increase of 11%15% from approximately 823,000912,000 billable subscribers at June 30, 2016.2017. We have a diverse customer base, with end users in the following lines of business: land-based handset; machine-to-machine,Internet of Things, or M2M;IoT; maritime; aviation; and government.

We recognize revenue from both the sale of equipment and the provision of services. We expect a higherOver the past several years, an increasing proportion of our future revenue will behas been derived from service revenue, including revenue from hosting and data services. Revenues from providing voiceservices, and data service historically have generated higher gross margins than saleswe expect that trend to continue.
We are in the process of subscriber equipment.

We began launchingreplacing our newfirst generation constellation with our Iridium NEXT satellite constellation, in January 2017, which we expect to complete in 2018, and which will replace our first-generation satellite network withuse the same interlinked mesh architecture ofas our first-generation constellation, with 66 operational satellites, as well as in-orbit and ground spares. OfAs of June 30, 2018, of the 2055 Iridium NEXT satellites we have launched so far in 2017, 13to date, 50 have been or will soon be, placed into service, and seven2 are being drifted to adjacent planes.

planes and 3 are in-orbit spares.

We have contracted with Thales Alenia Space France, or Thales, to construct the Iridium NEXT satellites, which are compatible with our first-generation constellation and current end-user equipment, so that as we launch Iridium NEXT satellites, we will replace the first-generation satellites in our constellation without affecting the service to our end users. We plan to deploy 75 satellites on seven dedicated Falcon 9 rockets and one shared Falcon 9 rocket launched by Space Exploration Technologies Corporation, or SpaceX. We estimate the costs associated with the design, build and launch of Iridium NEXT and related ground infrastructure upgrades through 2018 to be approximately $3 billion. Our funding plan for these costs includes the substantial majority of the funds drawn under our

17


$1.8 $1.8 billion credit facility, or the Credit Facility, which was fully drawn as of



February 2017, together with cash on hand and internally generated cash flows, including contracted cash flows from hosted payloads.

The Iridium NEXT constellation will also host the AireonSM system to provide a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast, or ADS-B, receivers on the Iridium NEXT satellites. We formed Aireon LLC in 2011, with subsequent investments from the air navigation service providers, or ANSPs, of Canada, Italy, Denmark, Ireland and Ireland,the United Kingdom, to develop and market this service.  Aireon has contracted to provide the service to our co-investors in Aireon as well as NATS (En Route) PLC, the ANSP of the United Kingdom, and other ANSPs. Aireon also plans to offer the service to other customers worldwide, including the U.S. Federal Aviation Administration, or FAA. Aireon has contracted to pay us a fee to host the ADS-B receivers on Iridium NEXT, and has begun payingmade an initial $8.1 million payment for a portion of its hosting fee to us. Aireon also pays us data service fees for the delivery of the air traffic surveillance data over the Iridium NEXT system on a per satellite basis, which will increase with the number of Iridium NEXT satellites placed into service. In addition, we have entered into an agreement with Harris Corporation, the manufacturer of the Aireon hosted payload, pursuant to which Harris pays us fees to allocatefor the remaining hosted payload capacity which it has sold to its customers; Harris also pays us data service fees on behalf of these customers.


Recent Developments


Iridium NEXT


As described above, as of June 30, 2018, we have begun launching Iridium NEXT. As a resulthad completed six out of the delays in theeight scheduled Iridium NEXT launch schedule, we updated the estimated useful lives of the current satellites and extended the lives to be consistent with the expected deployment of Iridium NEXT in 2018. We will continue to evaluate the useful lives of our current satellites through the full deployment of Iridium NEXT as the satellites are placed into service.

The Credit Facility requires us to obtain insurance covering the launch and first 12 months of operation of the Iridium NEXT satellites. We finished placing this insurance during 2016.

launches. Our insurance program includes our ground spares and a prepaid relaunch right with SpaceX to self-insure a portion of our launch and in-orbit risks, as permitted under the Credit Facility. While we believe this has enabled us to obtain insurance at a substantially lower cost than would have been possible without the spares and relaunch right, if we use our spares to replace lost satellites, we will likely choosecould decide to purchase additional satellites to maintain a backup supply of spares. The cost of such additional spares is not included in the $3 billion estimated cost for the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2018.

Amendments to Credit Facility and FSD

As described below under “Liquidity and Capital Resources,” on July 26, 2017, we amended and restated the Credit Facility by a supplemental agreement.  As amended and restated, the Credit Facility delays, until March 2019, $54.0 million in contributions that we were previously scheduled to make during 2017 to the debt service reserve account, or DSRA, that we are required to maintain under the Credit Facility, and we will be refunded $33.0 million of the contributions we have made to date.  In addition, in the event that our projected Available Cash (as defined in the Credit Facility) falls below $35.0 million on a three-month forward-looking basis between now and March 2019, we will receive a refund of an additional $11.0 million in contributions made to date.  The amended and restated Credit Facility also requires that we establish a new restricted account to receive payment of hosting fees from Aireon. Hosting fees up to $50.0 million would be kept in the account and could also be drawn by us based on the same $35.0 million three-month forward-looking Available Cash threshold described above.  Hosting fees in excess of $50.0 million will be distributed pro rata to replenish the DSRA and secure the payment of the bills of exchange to Thales described below.

The Credit Facility does not include any requirements that the Company raise additional equity but requires that we suspend the payment of dividends on our 7% Series A Cumulative Perpetual Convertible Preferred Stock and our 6.75% Series B Cumulative Perpetual Convertible Preferred Stock for five quarters.  As previously announced, in anticipation of this requirement, we began this suspension with the dividend payments payable on June 15, 2017. The Credit Facility also includes revised financial covenant levels to reflect changing business conditions and makes immaterial changes to certain definitions and other terms in the Credit Facility.

Also on July 26, 2017, we entered into Amendments 28 and 29 to our Full Scale Development Contract with Thales Alenia Space France SAS, or Thales, for the Iridium NEXT System, dated June 1, 2010, which we refer to as the FSD.  We signed Amendment 28 on May 18, 2017, but effectiveness was conditioned on the effectiveness of Amendment 29.  Amendment 28 revises the liquidated damages and other cost provisions regarding delays to the Iridium NEXT program.  Under Amendment 28, we agreed with Thales that liquidated damages for Thales production delays to date would be set at $30.0 million, with this amount to be used only to offset costs otherwise payable by us to Thales under the FSD with respect to past and future delays to the launch schedule from causes other than Thales, at agreed upon rates.  Any portion of the $30.0 million remaining at the completion of the launch campaign will be forgiven.  Liquidated damages owed to us from any future delays caused by Thales would remain payable in cash.  Similarly, costs payable by us to Thales for non-Thales delays exceeding the $30.0 million would be payable in cash.  Unless there are substantial future delays to the Iridium NEXT program, we expect this arrangement will result in no cash payments by either party due to delays.

18



Amendment 29 provides for the deferral of payment by us of approximately $100.0 million in milestones under the FSD that we expect to be completed in 2017 and 2018.  Under Amendment 29, we will pay these milestones using bills of exchange due in March 2019, with interest at a specified base rate (LIBOR or SWAP, depending on the term of the bill of exchange) plus 1.4%, with the bills of exchange guaranteed by Bpifrance Assurance Export S.A.S., which we refer to as BPIAE.  Amendment 29 also requires that we pay Thales for the BPIAE premium on the guarantee in the amount of $1 million in cash at signing plus 1.62%, to be paid by bills of exchange on the same terms as stated above, on each bill of exchange to be issued.

Material Trends and Uncertainties


Our industry and customer base has historically grown as a result of:

demand for remote and reliable mobile communications services;

increased demand for communications services by disaster and relief agencies and emergency first responders;

a broad wholesale distribution network with access to diverse and geographically dispersed niche markets;

a growing number of new products and services and related applications;

improved data transmission speeds for mobile satellite service offerings;

regulatory mandates requiring the use of mobile satellite services;

a general reduction in prices of mobile satellite services and subscriber equipment; and

geographic market expansion through the ability to offer our services in additional countries.

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

our ability to continue to manufacture and launchcomplete the deployment of Iridium NEXT and successfully transfer service from our first-generation satellites to our Iridium NEXT satellites;

NEXT;

our ability to develop and launch new and innovative products and services for Iridium NEXT, including Iridium Certus;

NEXT;

our ability to generate sufficient internal cash flows, including contracted cash flows from hosted payloads, to fund a portion of the remaining costs associated with Iridium NEXT and to support our ongoing business;

Aireon LLC’s ability to successfully deploy and market its space-based ADS-B, global aviation monitoring service to be carried as a hosted payload on the Iridium NEXT system;

Aireon’s ability to raise sufficient funds to pay in full its hosting fees to us or our ability to seek alternative financing arrangements;

us;

our ability to maintain the health, capacity, control and level of service of our remaining first-generation satellites through the completion of Iridium NEXT;

changes in general economic, business and industry conditions, including the effects of currency exchange rates;

our reliance on a single primary commercial gateway and a primary satellite network operations center;



competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial-based cellular phone systems and related pricing pressures;

market acceptance of our products, including Iridium CertusSM;

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 the manufacture of most of our subscriber equipment and for some of the components required in the manufacture of our end-user subscriber equipment and our ability to purchase parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events; and

reliance on a few significant customers, particularly agencies of the U.S. government, for a substantial portion of our revenue, as a result of which the loss or decline in business with any of these customers may negatively impact our revenue and risk of collectability of related accounts receivable is more concentrated.

receivable.

19


Comparison of Our Results of Operations for the Three Months Ended June 30, 20172018 and 2016

2017

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

 

Change

 

($ in thousands)

 

2017

 

 

Revenue

 

 

2016

 

 

Revenue

 

 

Dollars

 

 

Percent

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

86,623

 

 

 

78

%

 

$

83,486

 

 

 

76

%

 

$

3,137

 

 

 

4

%

Subscriber equipment

 

 

18,844

 

 

 

17

%

 

 

20,362

 

 

 

19

%

 

 

(1,518

)

 

 

(7

%)

Engineering and support services

 

 

6,137

 

 

 

5

%

 

 

5,347

 

 

 

5

%

 

 

790

 

 

 

15

%

Total revenue

 

 

111,604

 

 

 

100

%

 

 

109,195

 

 

 

100

%

 

 

2,409

 

 

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and amortization)

 

 

21,368

 

 

 

19

%

 

 

16,448

 

 

 

15

%

 

 

4,920

 

 

 

30

%

Cost of subscriber equipment

 

 

10,868

 

 

 

10

%

 

 

11,859

 

 

 

11

%

 

 

(991

)

 

 

(8

%)

Research and development

 

 

3,014

 

 

 

3

%

 

 

4,013

 

 

 

4

%

 

 

(999

)

 

 

(25

%)

Selling, general and administrative

 

 

20,411

 

 

 

18

%

 

 

22,303

 

 

 

20

%

 

 

(1,892

)

 

 

(8

%)

Depreciation and amortization

 

 

20,201

 

 

 

18

%

 

 

12,843

 

 

 

12

%

 

 

7,358

 

 

 

57

%

Total operating expenses

 

 

75,862

 

 

 

68

%

 

 

67,466

 

 

 

62

%

 

 

8,396

 

 

 

12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

35,742

 

 

 

32

%

 

 

41,729

 

 

 

38

%

 

 

(5,987

)

 

 

(14

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

832

 

 

 

1

%

 

 

800

 

 

 

1

%

 

 

32

 

 

 

4

%

Undrawn credit facility fees

 

 

-

 

 

 

0

%

 

 

(368

)

 

 

0

%

 

 

368

 

 

 

(100

%)

Other income (expense), net

 

 

(56

)

 

 

0

%

 

 

333

 

 

 

0

%

 

 

(389

)

 

 

(117

%)

Total other income, net

 

 

776

 

 

 

1

%

 

 

765

 

 

 

1

%

 

 

11

 

 

 

1

%

Income before income taxes

 

 

36,518

 

 

 

33

%

 

 

42,494

 

 

 

39

%

 

 

(5,976

)

 

 

(14

%)

Provision for income taxes

 

 

(11,740

)

 

 

(11

%)

 

 

(15,640

)

 

 

(14

%)

 

 

3,900

 

 

 

(25

%)

Net income

 

$

24,778

 

 

 

22

%

 

$

26,854

 

 

 

25

%

 

$

(2,076

)

 

 

(8

%)

  Three Months Ended June 30,    
  2018 % of Total Revenue 2017 % of Total Revenue Change
($ in thousands)     Dollars Percent
Revenue:            
Services $103,966
 77 % $86,623
 78 % $17,343
 20 %
Subscriber equipment 25,865
 19 % 18,844
 17 % 7,021
 37 %
Engineering and support services 5,100
 4 % 6,137
 5 % (1,037) (17)%
Total revenue 134,931
 100 % 111,604
 100 % 23,327
 21 %
             
Operating expenses:            
Cost of services (exclusive of depreciation            
and amortization) 22,644
 17 % 21,368
 19 % 1,276
 6 %
Cost of subscriber equipment 15,619
 12 % 10,868
 10 % 4,751
 44 %
Research and development 5,566
 4 % 3,014
 3 % 2,552
 85 %
Selling, general and administrative 24,266
 18 % 20,411
 18 % 3,855
 19 %
Depreciation and amortization 50,491
 37 % 20,201
 18 % 30,290
 150 %
Total operating expenses 118,586
 88 % 75,862
 68 % 42,724
 56 %
Operating income 16,345
 12 % 35,742
 32 % (19,397) (54)%
             
Other income (expense):            
Interest income (expense), net (12,985) (10)% 832
 1 % (13,817) (1,661)%
Other income (expense), net 65
  % (56)  % 121
 (216)%
Total other income (expense), net (12,920) (10)% 776
 1 % (13,696) (1,765)%
Income before income taxes 3,425
 2 % 36,518
 33 % (33,093) (91)%
Income tax expense (7,843) (6)% (11,740) (11)% 3,897
 (33)%
Net income (loss) $(4,418) (4)% $24,778
 22 % $(29,196) (118)%



Revenue

Commercial Service Revenue 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

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

 

$

45.6

 

 

 

360

 

 

$

41

 

 

$

45.0

 

 

 

359

 

 

$

41

 

 

$

0.6

 

 

 

1

 

 

$

-

 

Commercial M2M data

 

 

19.0

 

 

 

461

 

 

 

14

 

 

 

16.5

 

 

 

384

 

 

 

15

 

 

 

2.5

 

 

 

77

 

 

 

(1

)

Total Commercial

 

$

64.6

 

 

 

821

 

 

 

 

 

 

$

61.5

 

 

 

743

 

 

 

 

 

 

$

3.1

 

 

 

78

 

 

 

 

 

  Three Months Ended June 30,      
  2018 2017 Change
  Revenue 
Billable
Subscribers (1)
 
ARPU (2)
 Revenue 
Billable
Subscribers (1)
 
ARPU (2)
 Revenue 
Billable
Subscribers
 ARPU
  (Revenue in millions and subscribers in thousands)
Commercial voice and data $48.8
 364
 $45
 $44.1
 360
 $41
 $4.7
 4
 $4
Commercial IoT data 20.8
 576
 12
 18.6
 461
 14
 2.2
 115
 (2)
Hosted payload and other data services 12.4
 N/A
   1.9
 N/A
   10.5
 N/A
  
Total Commercial $82.0
 940
   $64.6
 821
   $17.4
 119
  

(1)

(1)
Billable subscriber numbers shown are at the end of the respective period.

(2)

(2)
Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period. Billable subscriber and ARPU excludes revenue from our non-subscriber satellite, timing, and location service that was launched in the second quarter of 2016 and revenue from data fees collected as part of theis not applicable for hosted payload and other data service that became available with Iridium NEXT in the first quarter of 2017.

revenue items.

For the three months ended June 30, 2017, commercial voice and data revenue increased slightly primarily due to the increase in hosting and data services and push-to-talk, offset by continued declines in telephony airtime usage.

We anticipate revenue from our hosting and data services to increase as more Iridium NEXT satellites are placed into service over the launch campaign, which is expected to be completed in 2018.  Hosting and data services for the three months ended June 30, 2017 were immaterial.

20


For the three months ended June 30, 2017,2018, commercial M2Mvoice and data revenue increased $2.5by $4.7 million, or 10%, from the prior year period principally due to an increase in average revenue per unit resulting from certain price increases in access fees and growth in Iridium OpenPort® subscribers.
For the three months ended June 30, 2018, commercial IoT data revenue increased by $2.2 million, or 13%, from the prior year period primarily due to a 20%25% increase in commercial M2MIoT data billable subscribers, partially offsetsubscribers.
Hosted payload and other data service revenue increased by a decline$10.5 million, or 549%, from the prior year primarily due to increased revenue recognition from hosting services related to Aireon, increased data services due to an increase in the related ARPU due to the growthnumber of Iridium NEXT satellites in subscribers using lower data usage plans.

orbit and increased satellite timing and location services. 

We anticipate continued growth in billable commercial subscribers for the remainder of 2017.

2018.

Government Service Revenue 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

Change

 

 

 

(Revenue in millions and subscribers in thousands)

 

 

 

 

 

 

 

Billable

 

 

 

 

 

 

Billable

 

 

 

 

 

 

Billable

 

 

 

Revenue

 

 

Subscribers (1)

 

 

Revenue

 

 

Subscribers (1)

 

 

Revenue

 

 

Subscribers

 

Government service revenue

 

$

22.0

 

 

 

92

 

 

$

22.0

 

 

 

80

 

 

$

-

 

 

 

12

 

  Three Months Ended June 30,    
  2018 2017 Change
  Revenue 
Billable
Subscribers (1)
 Revenue 
Billable
Subscribers (1)
 Revenue 
Billable
Subscribers
  (Revenue in millions and subscribers in thousands)
Government service revenue $22.0
 107
 $22.0
 92
 $
 15

(1)

(1)
Billable subscriber numbers shown are at the end of the respective period.


Government

We provide Iridium airtime and airtime support to U.S. government and other authorized customers pursuant to a five-year EMSS contract executed in October 2013 and managed by DISA. Under the terms of this agreement, authorized customers utilize certain Iridium airtime services provided through the U.S. Department of Defense’s, or DoD’s, dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast, and Distributed Tactical Communications System, or DTCS, services for an unlimited number of DoD and other federal subscribers. The service revenuesfee under the EMSS contract is fixed at $88 million per year for the three months ended June 30, 2017 did not change from the prior year period as a resultremainder of the final contractual price increase having taken place in October 2015 under the Enhanced Mobile Satellite Services, or EMSS, contract with the U.S. government’s Defense Information Systems Agency. Under this contract, revenue is a fixed monthly amountterm, and is not based on subscribers or usage, allowing an unlimited number of users access to such existing services. As we continue to innovate and better meet the needs of our customers, additional services not contemplated under the current EMSS contract may be provided in future periods at an amount mutually agreed upon by both parties. Additionally, theThe EMSS contract expires in October 2018, and pricing is then subjectalthough based on federal acquisition regulations, the government has the ability to renegotiation.

unilaterally extend for an additional six months. We have begun discussions with the U.S. government on a new EMSS contract, which we expect to enter into later in 2018 or in 2019.

Subscriber Equipment Revenue

Subscriber equipment revenue decreased $1.5increased by $7.0 million, or 7%37%, for the three months ended June 30, 20172018 compared to the prior year period. The decreaseThis increase was primarily due to loweran increase in volume of handset and Iridium M2M device sales, partially offset by increased Iridium L-Band transceiver unit sales.

We expect our full year subscriber equipment revenue for 2018 to exceed the prior year.


Engineering and Support Service Revenue

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

Change

 

 

 

(In millions)

 

Government

 

$

5.4

 

 

$

4.8

 

 

$

0.6

 

Commercial

 

 

0.7

 

 

 

0.5

 

 

 

0.2

 

Total

 

$

6.1

 

 

$

5.3

 

 

$

0.8

 

  Three Months Ended June 30,  
  2018 2017 Change
  (Revenue in millions)
Commercial 0.1
 0.7
 $(0.6)
Government 5.0
 5.4
 (0.4)
Total $5.1
 $6.1
 $(1.0)
Engineering and support service revenue increaseddecreased by $0.8$1.0 million, or 15%17%, for the three months ended June 30, 20172018 compared to the prior year period, primarily as a result of increased engineering on the U.S. government’s gateway modernization effort offset by decreased revenue for a contract with the U.S. Departmentvolume of Defense, or DoD, to adapt the Iridium Extreme® handset for DoD applications, which is near completion.

contracted work.

Operating Expenses

Cost of Services (exclusive of depreciation and amortization)

Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services and cost of services for government and commercial engineering and support service revenue.

Cost of services (exclusive of depreciation and amortization) increased $4.9by $1.3 million, or 30%6%, for the three months ended June 30, 20172018 from the prior year period, primarily as a result of in-orbit insurance costs from Iridium NEXT satellites placed into service during 2017.

2017 and through the first half of 2018.

We expect our in-orbit insurance expenses to increaseremain consistent through 2018 as we place Iridium NEXT satellites into service throughout the launch campaign, which is expectedwe expect to be complete in 2018.

21


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 decreasedincreased by $1.0$4.8 million, or 8%44%, for the three months ended June 30, 20172018 compared to the prior year period. This decrease isperiod primarily due to a lowerincreased subscriber equipment revenue primarily from increased volume of handset sales and increased costs related to our Iridium M2M device sales.

CertusSM product.

Research and Development

Research and development expenses decreasedincreased by $1.0$2.6 million, or 25%85%, for the three months ended June 30, 20172018 compared to the prior year period due to decreasedincreased spend on the development of Iridium CertusSM broadband to expand functionality on our Iridium NEXT projects.

satellites.

Selling, General and Administrative

Selling, general and administrative expenses that are not directly attributable to the sale of services or products include sales and marketing costs as well as employee-related expenses (such as salaries, wages, and benefits), legal, finance, information technology, facilities, billing and customer care expenses.

Selling, general and administrative expenses decreasedincreased by $1.9$3.9 million, or 8%19%, for the three months ended June 30, 20172018 compared to the prior year period, primarily due to decreasesan increase in employee-related expenses related toand professional fees, including an increase in stock appreciation rights expense resulting from an increase in the reclassificationshare price of expenses associated with the Boeing Insourcing Agreement, partially offset by increases in professional fees.

our common stock.

Depreciation and Amortization

Depreciation and amortization expense increased by $7.4$30.3 million, or 57%150%, for the three months ended June 30, 20172018 compared to the prior year period, primarily due to the addition of new assets, including Iridium NEXT satellites placed into service during 2017 and assetsthrough the first half of 2018.
Other Expense
Interest Expense
Interest expense for the three months ended June 30, 2018 was $13.0 million, compared to interest income of $0.8 million for the prior year period. The increase in interest expense is primarily related to a decrease in the Russian gateway completed atcredit facility interest being capitalized as the endaverage balance of 2016.

Provision for satellites in construction has decreased as satellites are launched and placed into orbit.



Income Taxes

Tax Expense

For the three months ended June 30, 2017,2018, our income tax provisionexpense was $11.7$7.8 million, compared to $15.6$11.7 million for the prior year period. The decrease in the income tax provisionexpense is primarily related to a decrease in ournet income before income taxes and the lower Federal corporate tax rate as well asa result of the Tax Cuts and Jobs Act of 2017, or the Tax Act, compared to the prior year. This decrease is partially offset by a decrease in our effectivethe state tax rate related to lower state taxesbenefit in the current year compared to the prior year which primarily consists of a nonrecurring adjustment to our deferred tax assets and liabilities related to a Maryland law change enacted in the current period. See "Income Taxes" in Note 10 to our financial statements included in this report for more detail on our assessment of the Tax Act.
In April 2018, Maryland enacted the single sales factor method for apportioning income to the state to be phased in over five years commencing in 2018. This change results in higher future Maryland taxes increasing our year-to-date income tax provision by $8.7 million for the impact on our existing deferred tax assets and liabilities. The current period tax provision also includes the impact of this law change on the deferred tax assets and liabilities expected to be generated during the year. If our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly.

Net Income

(Loss)

Net incomeloss was $24.8$4.4 million for the three months ended June 30, 2017, a decrease2018, compared to net income of $2.1$24.8 million fromfor the prior year period. This decrease in net income wasperiod, primarily driven byresulting from the increases$30.3 million increase in depreciation and amortization expense, the $12.4 million increase in other operating expenses and insurance coststhe $13.8 million increase in interest expense, net, as described above, partially offset by the $23.3 million increase in commercial M2M data service revenuetotal revenues and the $3.9 million decrease in the provision for income taxestax expense as described above. 


22



Comparison of Our Results of Operations for the Six Months Ended June 30, 20172018 and 2016

2017

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

 

Change

 

($ in thousands)

 

2017

 

 

Revenue

 

 

2016

 

 

Revenue

 

 

Dollars

 

 

Percent

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

168,396

 

 

 

78

%

 

$

163,309

 

 

 

77

%

 

$

5,087

 

 

 

3

%

Subscriber equipment

 

 

35,958

 

 

 

17

%

 

 

37,922

 

 

 

18

%

 

 

(1,964

)

 

 

(5

%)

Engineering and support services

 

 

11,676

 

 

 

5

%

 

 

12,166

 

 

 

6

%

 

 

(490

)

 

 

(4

%)

Total revenue

 

 

216,030

 

 

 

100

%

 

 

213,397

 

 

 

100

%

 

 

2,633

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and amortization)

 

 

38,326

 

 

 

18

%

 

 

32,351

 

 

 

15

%

 

 

5,975

 

 

 

18

%

Cost of subscriber equipment

 

 

20,972

 

 

 

10

%

 

 

22,322

 

 

 

10

%

 

 

(1,350

)

 

 

(6

%)

Research and development

 

 

6,241

 

 

 

3

%

 

 

6,572

 

 

 

3

%

 

 

(331

)

 

 

(5

%)

Selling, general and administrative

 

 

39,628

 

 

 

18

%

 

 

41,366

 

 

 

19

%

 

 

(1,738

)

 

 

(4

%)

Depreciation and amortization

 

 

33,708

 

 

 

16

%

 

 

25,779

 

 

 

12

%

 

 

7,929

 

 

 

31

%

Total operating expenses

 

 

138,875

 

 

 

65

%

 

 

128,390

 

 

 

60

%

 

 

10,485

 

 

 

8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on Boeing transaction

 

 

14,189

 

 

 

7

%

 

 

-

 

 

 

0

%

 

 

14,189

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

91,344

 

 

 

42

%

 

 

85,007

 

 

 

40

%

 

 

6,337

 

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

1,665

 

 

 

1

%

 

 

1,558

 

 

 

1

%

 

 

107

 

 

 

7

%

Undrawn credit facility fees

 

 

(25

)

 

 

0

%

 

 

(871

)

 

 

0

%

 

 

846

 

 

 

(97

%)

Other income (expense), net

 

 

(118

)

 

 

0

%

 

 

320

 

 

 

0

%

 

 

(438

)

 

 

(137

%)

Total other income, net

 

 

1,522

 

 

 

1

%

 

 

1,007

 

 

 

1

%

 

 

515

 

 

 

51

%

Income before income taxes

 

 

92,866

 

 

 

43

%

 

 

86,014

 

 

 

41

%

 

 

6,852

 

 

 

8

%

Provision for income taxes

 

 

(30,140

)

 

 

(14

%)

 

 

(30,640

)

 

 

(14

%)

 

 

500

 

 

 

(2

%)

Net income

 

$

62,726

 

 

 

29

%

 

$

55,374

 

 

 

27

%

 

$

7,352

 

 

 

13

%

  Six Months Ended June 30,    
  2018 % of Total Revenue 2017 % of Total Revenue Change
($ in thousands)     Dollars Percent
Revenue:            
Services $193,708
 76 % $168,396
 78 % $25,312
 15 %
Subscriber equipment 51,647
 20 % 35,958
 17 % 15,689
 44 %
Engineering and support services 8,724
 4 % 11,676
 5 % (2,952) (25)%
Total revenue 254,079
 100 % 216,030
 100 % 38,049
 18 %
             
Operating expenses:            
Cost of services (exclusive of depreciation            
and amortization) 41,596
 16 % 38,326
 18 % 3,270
 9 %
Cost of subscriber equipment 30,833
 12 % 20,972
 10 % 9,861
 47 %
Research and development 10,149
 4 % 6,241
 3 % 3,908
 63 %
Selling, general and administrative 46,761
 18 % 39,628
 18 % 7,133
 18 %
Depreciation and amortization 88,956
 35 % 33,708
 16 % 55,248
 164 %
Total operating expenses 218,295
 85 % 138,875
 65 % 79,420
 57 %
             
Gain on Boeing transaction 
  % 14,189
 7 % (14,189) (100)%
             
Operating income 35,784
 15 % 91,344
 42 % (55,560) (61)%
             
Other income (expense):            
Interest income (expense), net (17,150) (7)% 1,665
 1 % (18,815) (1,130)%
Other income (expense), net 102
  % (143)  % 245
 (171)%
Total other income (expense), net (17,048) (7)% 1,522
 1 % (18,570) (1,220)%
Income before income taxes 18,736
 8 % 92,866
 43 % (74,130) (80)%
Income tax expense (11,682) (5)% (30,140) (14)% 18,458
 (61)%
Net income $7,054
 3 % $62,726
 29 % $(55,672) (89)%



Revenue
Commercial Service Revenue

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

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

 

$

88.2

 

 

 

360

 

 

$

40

 

 

$

87.7

 

 

 

359

 

 

$

41

 

 

$

0.5

 

 

 

1

 

 

$

(1

)

Commercial M2M data

 

 

36.2

 

 

 

461

 

 

 

14

 

 

 

31.6

 

 

 

384

 

 

 

15

 

 

 

4.6

 

 

 

77

 

 

 

(1

)

Total Commercial

 

$

124.4

 

 

 

821

 

 

 

 

 

 

$

119.3

 

 

 

743

 

 

 

 

 

 

$

5.1

 

 

 

78

 

 

 

 

 

  Six Months Ended June 30,      
  2018 2017 Change
  Revenue 
Billable
Subscribers (1)
 
ARPU (2)
 Revenue 
Billable
Subscribers (1)
 
ARPU (2)
 Revenue 
Billable
Subscribers
 ARPU
  (Revenue in millions and subscribers in thousands)
Commercial voice and data $92.5
 364
 $43
 $85.8
 360
 $40
 $6.7
 4
 $3
Commercial IoT data 40.6
 576
 12
 35.5
 461
 14
 5.1
 115
 (2)
Hosted payload and other data services 16.6
 N/A
   3.1
 N/A
   13.5
 N/A
  
Total Commercial $149.7
 940
   $124.4
 821
   $25.3
 119
  

(1)

(1)
Billable subscriber numbers shown are at the end of the respective period.

(2)

(2)
Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period. Billable subscriber and ARPU excludes revenue from our non-subscriber satellite, timing, and location service that was launched in the second quarter of 2016 and revenue from data fees collected as part of theis not applicable for hosted payload and other data service that became available with Iridium NEXT in the first quarter of 2017.

revenue items.

For the six months ended June 30, 2017,2018, commercial voice and data revenue increased slightly primarilyby $6.7 million, or 8%, from the prior year period principally due to an increase in average revenue per unit resulting from certain price increases in hostingaccess fees and data services andgrowth in Iridium OpenPort® services, partially offset by continued declines in telephony airtime usage.

23


We anticipate revenue from our hosting and data services to increase as more Iridium NEXT satellites are placed into service over the launch campaign, which is expected to be completed in 2018.  Hosting and data services for the six months ended June 30, 2017 were immaterial. subscribers.

For the six months ended June 30, 2017,2018, commercial M2MIoT data revenue increased by $5.1 million, or 15%, from the prior year period primarily due to a 20%25% increase in commercial M2MIoT data billable subscribers, partially offsetsubscribers.
Hosted payload and other data service revenue increased by a decline$13.5 million, or 435%, from the prior year primarily due to increased revenue recognition from hosting services related to Aireon, increased data services due to an increase in the related ARPU due to the growthnumber of Iridium NEXT satellites in subscribers using lower data usage plans.

orbit and increased satellite timing and location services.  

We anticipate continued growth in billable commercial subscribers for the remainder of 2017.

2018.

Government Service Revenue 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

Change

 

 

 

(Revenue in millions and subscribers in thousands)

 

 

 

 

 

 

 

Billable

 

 

 

 

 

 

Billable

 

 

 

 

 

 

Billable

 

 

 

Revenue

 

 

Subscribers (1)

 

 

Revenue

 

 

Subscribers (1)

 

 

Revenue

 

 

Subscribers

 

Government service revenue

 

$

44.0

 

 

 

92

 

 

$

44.0

 

 

 

80

 

 

$

-

 

 

 

12

 

  Six Months Ended June 30,    
  2018 2017 Change
  Revenue 
Billable
Subscribers (1)
 Revenue 
Billable
Subscribers (1)
 Revenue 
Billable
Subscribers
  (Revenue in millions and subscribers in thousands)
Government service revenue $44.0
 107
 $44.0
 92
 $
 15

(1)

(1)
Billable subscriber numbers shown are at the end of the respective period.


Government service revenues for the six months ended June 30, 2017 did not change from the prior year period as

We provide Iridium airtime and airtime support to U.S. government and other authorized customers pursuant to a result of the final contractual price increase having taken placefive-year EMSS contract executed in October 20152013 and managed by DISA. Under the terms of this agreement, authorized customers utilize certain Iridium airtime services provided through the U.S. Department of Defense’s, or DoD’s, dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast, and Distributed Tactical Communications System, or DTCS, services for an unlimited number of DoD and other federal subscribers. The service fee under the EMSS contract as described above.

is fixed at $88 million per year for the remainder of the term, and is not based on subscribers or usage, allowing an unlimited number of users access to such existing services. The EMSS contract expires in October 2018, although based on federal acquisition regulations, the government has the ability to unilaterally extend for an additional six months. We have begun discussions with the U.S. government on a new EMSS contract, which we expect to enter into later in 2018 or in 2019.

Subscriber Equipment Revenue

Subscriber equipment revenue decreased $2.0increased by $15.7 million, or 5%44%, for the six months ended June 30, 20172018 compared to the prior year period. The decreaseThis increase was primarily due to loweran increase in volume of handset sales, partially offset by increased Iridium L-Band transceiver and M2M device unit sales.

We expect our full year subscriber equipment revenue for 2018 to exceed the prior year.


Engineering and Support Service Revenue

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

Change

 

 

 

(In millions)

 

Government

 

$

10.5

 

 

$

11.0

 

 

$

(0.5

)

Commercial

 

 

1.2

 

 

 

1.2

 

 

 

-

 

Total

 

$

11.7

 

 

$

12.2

 

 

$

(0.5

)

  Six Months Ended June 30,  
  2018 2017 Change
  (Revenue in millions)
Commercial $0.2
 $1.2
 $(1.0)
Government 8.5
 10.5
 (2.0)
Total $8.7
 $11.7
 $(3.0)
Engineering and support service revenue decreased by $0.5$3.0 million, or 4%25%, for the six months ended June 30, 20172018 compared to the prior year period primarily as a result of decreased revenue for a contractdecrease in the volume of contracts with the U.S. Department of Defense, or DoD, to adapt the Iridium Extreme® handset for DoD applications, which is near completion, offset by increased engineering for the U.S. government’s gateway modernization effort.

government.

Operating Expenses

Cost of Services (exclusive of depreciation and amortization)

Cost of services (exclusive of depreciation and amortization) increased $6.0by $3.3 million, or 18%9%, for the six months ended June 30, 20172018 from the prior year period, primarily as a result of in-orbit insurance costs from Iridium NEXT satellites placed into service during 2017 and through the first half of 2017 and2018. The increase was partially offset by a decrease in volume of engineering costs associated with operating our new gateway in Russia that completed at the end of 2016.

government contracts.

We expect our in-orbit insurance expenses to increaseremain consistent through 2018 as we place Iridium NEXT satellites into service throughout the launch campaign, which is expectedwe expect to be complete in 2018.

Cost of Subscriber Equipment

Cost of subscriber equipment decreasedincreased by $1.4$9.9 million, or 6%47%, for the six months ended June 30, 2017 compared to the prior year period. This decrease is primarily due to a lower volume of handset sales, partially offset by increased Iridium L-Band transceiver and M2M device unit sales.

24


Research and Development

Research and development expenses decreased by $0.3 million, or 5%, for the six months ended June 30, 2017 compared to the prior year period due to decreased spend on Iridium NEXT projects.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $1.7 million, or 4%, for the six months ended June 30, 20172018 compared to the prior year period primarily due to decreases in employee-related expensesincreased subscriber equipment revenue from increased volume of handset sales and increased costs related to the reclassification ofour Iridium CertusSM product.

Research and Development
Research and development expenses associated with the Boeing Insourcing Agreement, partially offset by increases in professional fees.

Depreciation and Amortization

Depreciation and amortization expense increased by $7.9$3.9 million, or 31%63%, for the six months ended June 30, 20172018 compared to the prior year period due to increased spend on the development of Iridium CertusSM broadband to expand functionality on our Iridium NEXT satellites.

Selling, General and Administrative
Selling, general and administrative expenses increased by $7.1 million, or 18%, for the six months ended June 30, 2018 compared to the prior year period, primarily due to an increase in employee-related expenses and professional fees, as well as an increase in stock appreciation rights expense resulting from an increase in the share price of our common stock.
Depreciation and Amortization
Depreciation and amortization expense increased by $55.2 million, or 164%, for the six months ended June 30, 2018 compared to the prior year period, primarily due to the addition of new assets, including Iridium NEXT satellites placed into service during the six-month period ended June 30, 2017 and assets related toduring the Russian gateway completed at the endfirst half of 2016.

2018.

Gain on Boeing Transaction


OnNovember 28, 2016, we entered into an Insourcing Agreement with Boeing for us to hire, effective as of January 3, 2017, we hired the majority of Boeing employees and third party contractors who were responsible for the operations and maintenance of our satellite constellation and ground infrastructure.infrastructure pursuant to an Insourcing Agreement with Boeing. As a result, we and Boeing terminated our previous Operations and Maintenance Agreement, or O&M Agreement, and our previous Iridium NEXT Support Service Agreement and entered into a new Development Services Agreement, or DSA, with a $6.0 million annual take-or-paycommitment through 2021.

We


In the first quarter of 2017, we recognized a $14.2 million gain in the first quarter of 2017, consisting of (1)(i) the derecognition of a purchase accounting liability of $11.0 million created when GHL Acquisition Corp. acquired Iridium in 2009 related to the fair value of the contractual arrangement with Boeing as of that date and (2)(ii) the remainder of a credit, equal to $3.2 million, resulting from an O&M Agreement amendment in July 2010.

Provision



Other Expense
Interest Expense
Interest expense for the six months ended June 30, 2018 was $17.2 million, compared to interest income of $1.7 million for the prior year period. The increase is primarily related to less interest from the credit facility being capitalized as the average balance of satellites in construction has decreased as satellites are launched and placed into orbit. Additional interest expense was incurred as a result of the prepayment of the Thales bills of exchange during the six months ended June 30, 2018, which resulted in a $4.0 million loss on extinguishment of debt, representing premiums paid and the write-off of unamortized debt issuance costs. There was no loss on extinguishment of debt recorded for the six months ended June 30, 2017.
Income Taxes

Tax Expense

For the six months ended June 30, 2017,2018, our income tax provisionexpense was $30.1$11.7 million, compared to $30.6income tax expense of $30.1 million for the prior year period. The decrease in the income tax provisionexpense is primarily related to a decrease in our effectiveincome before income taxes and the lower Federal corporate tax rate relatedas a result of the Tax Act compared to lowerthe prior year. This decrease is partially offset by a decrease in the state taxestax benefit in the current year compared to the prior year partially offset by an increasewhich primarily consists of a nonrecurring adjustment to our deferred tax assets and liabilities related to a Maryland law change enacted in the current period. See "Income Taxes" in Note 10 to our financial statements included in this report for more detail on our assessment of the Tax Act.
In April 2018, Maryland enacted the single sales factor method for apportioning income before income taxes compared to the priorstate to be phased in over five years commencing in 2018. This change results in higher future Maryland taxes increasing our year-to-date income tax provision by $8.7 million for the impact on its existing deferred tax assets and liabilities. The current period tax provision also includes the impact of this law change on the deferred tax assets and liabilities expected to be generated during the year. If our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly.

Net Income

Net income was $62.7$7.1 million for the six months ended June 30, 2017, an increase2018, compared to net income of $7.4$62.7 million fromfor the prior year period. This increasedecrease in net income was primarily driven bythe result of the $55.2 million increase in depreciation and amortization expense, $24.2 million increase in other operating expenses, $18.8 million increase in interest expense and the $14.2 million gain onfrom the Boeing transaction, and the increaseInsourcing Agreement in commercial M2M data service revenue,2017 as described above. This increase wasabove, partially offset by the $10.5$38.0 million increase in total operating expenses driven by increased depreciationrevenue and Iridium NEXT insurancethe $18.5 million decrease in income tax expense as noteddescribed above.


25



Liquidity and Capital Resources


As of June 30, 2017,2018, our total cash and cash equivalents balance was $335.2$176.1 million, and our marketable securities balance was $21.3$199.8 million. Our principal sources of liquidity are cash, cash equivalents and marketable securities on hand, as well as internally generated cash flows, including contracted cash flows from hosted payloads. Our Credit Facility was fully drawn as of February 2017. Our principal liquidity requirements over the next twelve months are to meet capital expenditure needs, principally the launch andcontinued deployment of Iridium NEXT, as well as for working capital, interest on the Credit Facility and futurethe Notes, and principal payments on the Credit Facility.

We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2018 to be approximately $3 billion. Our funding plan for these costs includes the substantial majority of the funds under our $1.8 billion Credit Facility, which was fully drawn as of February 2017, together with cash on hand and internally generated cash flows, including cash flows from hosted payloads. Now that our Credit Facility is fully drawn, we expect to pay 100% of each remaining invoice received from Thales and all principal and interest payments due under the Credit Facility and the Notes from cash, cash equivalents and marketable securities on hand, and internally generated cash flows, including cash flows from hosted payloads.

On March 21, 2018, we issued $360.0 million in senior unsecured notes, or the Notes, including $9.5 million of deferred financing costs, for a net balance of $350.5 million in borrowings from the Notes. The Notes bear interest at 10.25% per annum and mature on April 15, 2023. Interest is payable semi-annually on April 15 and October 15, beginning on October 15, 2018, and principal is repaid in full upon maturity. The proceeds of the Notes were used to prepay the outstanding deferred Thales bills of exchange of approximately $59.9 million issued pursuant to the Thales FSD, replenish the debt service reserve account, or DSRA, under the Credit Facility to $189.0 million, and is also being used to pay approximately $44.4 million in Thales milestones previously expected to be satisfied by the issuance of bills of exchange. The proceeds of the Notes also provided us with sufficient cash to meet our needs, including principal and interest payments under our Credit Facility. The Notes contain covenant requirements that apply to certain permitted financing actions, and are no more restrictive than the covenants in the Credit Facility. We were in compliance with all covenants under the Notes as of June 30, 2018.

On March 9, 2018, we amended and restated our Credit Facility by a supplemental agreement, which was effective upon the issuance of the Notes. As amended and restated, the Credit Facility allowed us to issue the Notes and (i) delayed a portion of the


principal repayments scheduled under the Credit Facility for 2018, 2019 and 2020 into 2023 and 2024 pursuant to an amended repayment installment schedule, (ii) after funding of the DSRA back to $189.0 million, allows us access to up to $87.0 million from the DSRA under the Credit Facility in the future if our projected cash level falls below $75.0 million, and (iii) adjusted our financial covenants, including eliminating covenants that required us to receive cash flows from hosted payloads and adding a covenant that requires us to receive $200.0 million in hosting fees from Aireon by December 2023. Under the Credit Facility Amendment, in the event that (a) our cash balance exceeds $140.0 million after September 30, 2019 (subject to specified exceptions) or (b) we receive hosting fees from Aireon, we would be required to use 50% of such excess cash and up to $200.0 million of hosting fees to prepay the Credit Facility. In addition, if any Notes remain outstanding on October 15, 2022, which is six months prior to the scheduled maturity of the Notes, the maturity of all amounts remaining outstanding under the Credit Facility would be accelerated from September 30, 2024 to October 15, 2022.

Also on March 9, 2018, we entered into Amendment 32 to our FSD, pursuant to which we unwound the changes made in Amendment 29 which allowed for the deferral of certain milestone payments via bills of exchange totaling $100.0 million. Amendment 32 became effective on March 21, 2018 upon receipt of proceeds from the Notes. We utilized a portion of the proceeds from the Notes to prepay in full the $59.9 million due under the bills of exchange and will not utilize any new bills of exchange to defer future milestones under the FSD. In connection with the prepayment of the Thales as described below,bills of exchange, for the six months ended June 30, 2018, we recorded a $4.0 million loss on extinguishment of debt, included within interest expense, representing premiums paid and future dividend paymentsthe write-off of unamortized debt issuance costs. There was no loss on extinguishment of debt recorded for the six months ended June 30, 2017.

On March 20, 2018, we converted all outstanding shares of our Series A Preferred Stock into shares of common stock, resulting in the issuance of approximately 10.6 million shares of common stock. In order to convert the Series A Preferred Stock, we declared and paid all current and cumulative dividends on our Series A Preferred Stock and Series B Preferred Stock.

On July 26, 2017, we amendedStock in the amounts of $7.0 million and restated$8.4 million, respectively. In compliance with the Credit Facility, by a supplemental agreement.  As amended, the Credit Facility delays $54.0 million of our 2017 debt service reserve account, or DSRA contributions, provides a refund of $33.0 million in contributions we have made to date, and provides for a refund of an additional $11.0 million in contributions made to date in the event that our projected Available Cash (as defined in the Credit Facility) falls below $35.0 million on a three-month forward-looking basis through March 2019.  The delay and refunds are effective through the end of March 2019, at which time the DSRA must be fully fundedsubsequent to the previously agreed amount of $189.0 million.  The Credit Facility also requires thatdividend payment, we establish a new restricted account to receive payment of hosting fees from Aireon.  Hosting fees up to $50.0 million would be kept inbegan the account and could also be drawn by us based on the same $35.0 million three-month forward-looking Available Cash threshold described above.  Aireon hosting fees in excess of the first $50.0 million would be distributed pro rata to replenish the DSRA and secure the payment of the bills of exchange to Thales described below.

The Credit Facility does not include any requirements that we raise additional equity but requires that we suspend the paymentplanned suspension of dividends on our 7% Series A Cumulative Perpetual Convertible Preferred Stock and our 6.75% Series B Cumulative Perpetual Convertible Preferred Stock for five quarters.  As previously announced, in anticipationto holders of this requirement, we began this suspension with the dividend payments payable on June 15, 2017.  

Also on July 26, 2017, we entered into Amendment 29 to our Full Scale Development Contract with Thales Alenia Space France SAS, or Thales, for the Iridium NEXT System, dated June 1, 2010, which we refer to as the FSD.  

Amendment 29 provides for the deferral of payment by us of approximately $100.0 million in milestones under the FSD that we expect to be completed in 2017 and 2018.  Under Amendment 29, we will pay these milestones using bills of exchange due in March 2019, with interest at a specified base rate (LIBOR or SWAP, depending on the term of the bill of exchange) plus 1.4%, with the bills of exchange guaranteed by Bpifrance Assurance Export S.A.S., which we refer to as BPIAE.  Amendment 29 also requires that we pay Thales for the BPIAE premium on the guarantee in the amount of $1.0 million in cash at signing plus 1.62%, to be paid by bills of exchange on the same terms as stated above, on each bill of exchange to be issued. In connection with these arrangements, we also agreed with Thales as to the amount of liquidated damages Thales owes us for manufacturing delays to date and the additional costs we must pay Thales for launch delays. Unless there are substantial future delays to the Iridium NEXT program, we expect this arrangement will result in no cash payments due to delays by either party.  

While the contracted cash flows from our primary hosted payload customer, Aireon, are interest-bearing if not paid on time, we expect those hosted payload payments will continue to be delayed. Aireon is working to secure contracts with ANSPs, including the FAA, for the sale of Aireon’s space-based ADS-B services. Aireon is currently seeking to raise the capital it will need to fund its continued operations and a portion of our hosted payload payments. Its ability to fund our hosted payload payments in the previously anticipated timeframe has been adversely affected by delays in its sales efforts to these ANSPs, which we believe in part results from delays in the development, construction and launch of the Iridium NEXT system. 

There can be no assurance that our internally generated cash flows, including those from hosting and data services on our Iridium NEXT satellites, will meet our current expectations. If we do not generate sufficient cash flows, or if the cost of implementing Iridium NEXT or the other elements of our business plan are higher than anticipated, we may need further external funding. Our ability to obtain additional funding may be adversely affected by a number of factors, including global economic conditions, and such funding may not be available on reasonable terms or at all. If we are not able to secure such funding in a timely manner, our ability to maintain our network, to design, build and launch Iridium NEXT and related ground infrastructure, products and services, and to pursue additional growth opportunities will be impaired, and we would likely need to delay some elements of our Iridium NEXT deployment. Our liquidity and our ability to fund our liquidity requirements also depend on our future financial performance, which is subject to general economic, financial, regulatory and other factors that are beyond our control.

Holders of Series A Preferred Stock and Series B Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of $7.00 and $16.875 per share, respectively. Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. For each full quarter that the Series A Preferred Stock or Series B Preferred Stock, as applicable, is outstanding, and assuming that no shares have been converted into common stock, we are required to pay cash dividends of $1.75 million and $2.1 million, respectively, per quarter. Except to the extent we suspend payment of the dividends as described above, we expect that we will satisfy dividend requirements, if and when declared. As discussed above, in anticipation of the amendment to the Credit Facility, we suspended these payments for five quarters, beginning with the June 15, 20172018 dividend payment.

26



We believe our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.

As of June 30, 2017,2018, we reported $1,688.4an aggregate total of $1,773.9 million in borrowings, including $94.2 million of deferred financing costs, for a net balance of $1,679.7 million in borrowings under the Credit Facility in our condensed consolidated balance sheet, net of $111.6 million of deferred financing costs, for an aggregate balance of $1.8 billion outstanding undersheet. Pursuant to the Credit Facility.Facility, we maintain the DSRA. As of June 30, 2017,2018, the DSRA balance was $135.2$189.7 million, which is classified as restricted cash and cash equivalents in our condensed consolidated balance sheet. The DSRA requirement is scheduledThis amount includes a minimum cash reserve for debt service related to increase to $189.0 million in March 2019.the Credit Facility as well as the interest earned on these amounts. In addition to the minimum debt service levels, financial covenants under the Credit Facility, as amended to date, include:


an available cash balance of at least $25 million;


a debt-to-equity ratio, which is calculated as the ratio of total net debt to the aggregate of total net debt and total stockholders’ equity, of no more than 0.7 to 1, measured each June 30 and December 31;


specified maximum levels of annual capital expenditures (excluding expenditures on the construction of Iridium NEXT satellites) through the year ending December 31, 2024;

specified minimum levels of consolidated operational earnings before interest, taxes, depreciation and amortization, or operational EBITDA, for the 12-month periods ending June 30 and December 31, 2017;


specified minimum cumulative cash flow requirements from customers who have hosted payloads on our satellites, measured each June 30 and December 31 through June 30, 2019;

a debt service coverage ratio, measured during the repayment period, of not less than 1 to 1.5;1.5, measured each June 30 and

December 31 through the year ending December 31, 2020, not less than 1 to 1.25 for June 30 and December 31, 2021, and not less than 1 to 1.5, for each June 30 and December 31 thereafter through 2024;

specified maximum leverage levels during the repayment period that decline from a ratio of 7.538.77 to 1 for the twelve months endingended June 30, 2018 to a ratio of 2.362.00 to 1 for the twelve months ending December 31, 2024.

2024; and

a requirement that we receive at least $200.0 million in hosting fees from Aireon by December 31, 2023.

Our available cash balance, as defined by the Credit Facility, was $339.9$375.9 million as of June 30, 2017.2018. Our debt-to-equity ratio was 0.510.52 to 1 as of June 30, 2018. Our debt service coverage ratio was 3.6 as of June 30, 2018, and our leverage was 6.2 to 1 for the twelve months ending June 30, 2018. We were also in compliance with the annual capital expenditures covenant as of December 31, 2017, the last point at which it was required to be measured. We were also in compliance with the operational EBITDA and hosted payload cash flow covenants set forth above as of June 30, 2017, the last point at which they were required to be measured, and with the annual capital expenditure

The covenant as of December 31, 2016, the last point at which it was required to be measured.

The covenants regarding capital expenditures operational EBITDA and hosted payload cash flows areis calculated in connection with a measurement, which we refer to as available cure amount, that is derived using a complex calculation based on overall cash flows, as adjusted by numerous measures



specified in the Credit Facility. In a period in which our capital expenditures exceed or our operational EBITDA or hosted payload cash flows fall short of, the amount specified in the respective covenant, we would be permitted to allocate available cure amount, if any, to prevent a breach of the applicable covenant. As of June 30, 2017,2018, the last point at which it was measured, we had noan available cure amount of $19.3 million, although it was not necessary for us to apply any available cure amount to maintain compliance with the covenants. The available cure amount has fluctuated significantly from one measurement period to the next, and we expect that it will continue to do so.


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, incur additional indebtedness, or make loans, guarantees or indemnities. If we are not in compliance with the financial covenants under the Credit Facility, after any opportunity to cure such non-compliance, or we otherwise experience an event of default under the Credit Facility, the lenders may require repayment in full of all principal and interest outstanding under the Credit Facility. It is unlikely we would have adequate funds to repay such amounts prior to the scheduled maturity of the Credit Facility. If we fail to repay such amounts, the lenders may foreclose on the assets we have pledged under the Credit Facility, which include substantially all of our assets and those of our domestic subsidiaries.

We believe that our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least The covenants under the next 12 months.


27


Notes are no more restrictive than the covenants under the Credit Facility.

Cash Flows

The following table summarizes our cash flows:

 

Six Months Ended June 30,

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

 

(in thousands)

 

Cash provided by operating activities

$

119,866

 

 

$

108,835

 

 

$

11,031

 

Cash used in investing activities

$

(150,271

)

 

$

(29,951

)

 

$

(120,320

)

Cash provided by (used in) financing activities

$

(5,492

)

 

$

101,955

 

 

$

(107,447

)

  Six Months Ended June 30,  
  2018 2017 Change
  (in thousands)
Cash provided by operating activities $141,088
 $119,866
 $21,222
Cash used in investing activities $(403,058) $(150,271) $(252,787)
Cash provided by financing activities $239,550
 $16,634
 $222,916
Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended June 30, 20172018 increased $11.0by $21.2 million from the prior year period principally due to changes in working capital requirements comparedprimarily related to the prior period.

interest.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 20172018 increased by $120.3$252.8 million compared to the prior year period primarily due to a $109.0 million decreasean increase in net salespurchases of marketable securities and an $11.4 million increase in capital expenditures primarily related to the timing of payments of our Iridium NEXT.

construction.

Cash Flows from Financing Activities

Net cash used inprovided by financing activities for the six months ended June 30, 20172018 increased by $107.4$222.9 million from the prior year period primarily due to the decrease in borrowings under our credit facility in 2017, as it was fully drawn in February 2017.

Contractual Obligations and Commitments

The following table summarizes our outstanding contractual obligations as of June 30, 2017 (in millions), but includes the impactissuance of the July 26, 2017 amendment and restatementNotes, offset in part by the related deferred financing fees, extinguishment of the Thales bills of exchange, principal repayments on the Credit Facility and the amendments executed on that date to the FSD,payment of cumulative preferred dividends as described above in Liquidity and Capital Resources:

 

 

Less than

 

 

 

 

 

 

 

 

 

 

More than

 

 

 

 

 

Contractual Obligations

 

1 year

 

 

1-3 Years

 

 

3-5 years

 

 

5 years

 

 

Total

 

Payment obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thales (1)

 

$

323.2

 

 

$

104.6

 

 

$

 

 

$

 

 

$

427.8

 

Thales related interest

 

1.0

 

 

5.9

 

 

 

 

 

 

 

 

 

6.9

 

SpaceX(2)

 

101.2

 

 

14.4

 

 

 

 

 

 

 

 

 

115.6

 

Launch and in-orbit insurers(3)

 

 

69.3

 

 

 

 

 

 

 

 

 

 

 

69.3

 

Kosmotras (4)

 

 

 

 

 

15.0

 

 

 

 

 

 

 

 

 

15.0

 

Boeing (5)

 

8.8

 

 

 

12.0

 

 

 

9.0

 

 

 

 

 

29.8

 

Debt obligations: (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

 

18.0

 

 

 

405.0

 

 

 

748.2

 

 

 

628.8

 

 

 

1,800.0

 

Contractual interest

 

 

78.9

 

 

 

158.3

 

 

 

100.6

 

 

 

38.2

 

 

 

376.0

 

Operating lease obligations (7)

 

3.6

 

 

 

7.3

 

 

7.4

 

 

10.5

 

 

28.8

 

Uncertain tax positions (8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.0

 

Unconditional purchase obligations (9)

 

14.4

 

 

3.8

 

 

 

1.4

 

 

 

 

 

 

19.6

 

Total

 

$

618.4

 

 

$

726.3

 

 

$

866.6

 

 

$

677.5

 

 

$

2,889.8

 

(1)

Thales obligations consist of commitments under the FSD for the design and manufacture of satellites for Iridium NEXT. We previously used the Credit Facility to pay 85% of each invoice received from Thales under the FSD with the remaining 15% funded from cash on hand. The Credit Facility was fully drawn in February 2017, and as a result, we now pay 100% of each invoice received from Thales from cash and marketable securities on hand or the issuance of up to $100.0 million in bills of exchange due in March 2019. As of June 30, 2017, we had made aggregate payments of $1,826.8 million to Thales. The timing of a portion of the contractual obligation payments to Thales shown in the table above is based on current expectations regarding Thales’ manufacturing schedule and SpaceX’s targeted launch schedule.

above.

(2)

SpaceX obligations consist of remaining payments to secure SpaceX as the primary launch services provider for Iridium NEXT. The total price for seven launches and a reflight option in the event of launch failure is $468.1 million. In November 2016, we entered into an agreement for an eighth launch with SpaceX to launch five spare satellites and share the services with GFZ, the German Research Centre for Geosciences. The total price under our agreement with SpaceX for the eighth launch is $67.9 million. As of June 30, 2017, we had made aggregate payments of $420.4 million to SpaceX. The timing of a

28


portion of the contractual obligation payments to SpaceX shown in the table above is based on SpaceX’s targeted launch schedule.


(3)

The total insurance premiumis $118.2 million,and as of June 30, 2017, we had made aggregate payments of $48.9 million. The timing of the majority of the contractual obligation payments shown in the table above is based on SpaceX’s targeted launch schedule.

(4)

Kosmotras obligations consist of remaining payments to purchase one launch. In June 2013, we exercised an option for one launch to carry two Iridium NEXT satellites. If we do not exercise any additional options, the total cost under the contract including this single launch will be $51.8 million. As of June 30, 2017, we had made aggregate payments of $36.8 million to Kosmotras. The timing of a portion of the contractual obligation payments to Kosmotras shown in the table above is based on the earliest date we may include Kosmotras in our launch schedule.

(5)

Boeing obligations represent a new five-year take-or-pay commitment with the execution of the Development Services Agreement and the final payment for the acquisition of the assembled workforce due in December 2017.

(6)

Debt obligations include repayment of the Credit Facility as of June 30, 2017. We have included interest payments to be made on our fixed and variable rate tranches of the Credit Facility. Interest payments for variable rate debt have been estimated based on the six-month LIBOR forward contracts. We did not include any scheduled increases in the DSRA, which is classified as restricted cash on our condensed consolidated balance sheet. The repayment schedule includes $120.0 million in Aireon redemption and Aireon dividends that must be used to prepay the Credit Facility based on current expectations regarding Aireon funding.

(7)

Operating lease obligations do not include payments to landlords covering real estate taxes, common area maintenance and other charges, as such fees are not determinable based upon the provisions of our lease agreements.

(8)

As of June 30, 2017, we estimated our uncertain tax positions to be $1.0 million, including penalties and interest. However, we are unable to reasonably estimate the period of the possible future payments for the remaining balance, and therefore the remaining balance has not been reflected in a specified period.

(9)

Unconditional purchase obligations include our agreement with a supplier for the manufacturing of our devices and various commitments with other vendors that are enforceable, legally binding and have specified terms, including fixed or minimum quantities, minimum or variable price provisions, and a fixed timeline. Unconditional purchase obligations do not include agreements that are cancelable by us without penalty.

The contractual obligations table does not include future payments of dividends on the Series A Preferred Stock or Series B Preferred Stock. Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends when, as and if declared from, and including, the date of original issue at a rate of 7.00% per annum of the $100 liquidation preference per share, which is equivalent to an annual rate of $7.00 per share. Holders of Series B Preferred Stock are entitled to receive cumulative cash dividends when, as and if declared from, and including, the date of original issue at a rate of 6.75% per annum of the $250 liquidation preference per share, which is equivalent to an annual rate of $16.875 per share. Dividends on both the Series A Preferred Stock and Series B Preferred Stock are payable quarterly in arrears, on March 15, June 15, September 15 and December 15 of each year, although we have temporarily suspended dividend payments as noted above. Neither the Series A Preferred Stock nor the Series B Preferred stock has a stated maturity date. Holders of Series A Preferred Stock and Series B Preferred Stock may convert some or all of their outstanding shares to common stock at the stated conversion rate. On or after October 3, 2017, we may at our option cause some or all of the shares of Series A Preferred Stock to be automatically converted into shares of common stock at the then prevailing conversion rate if specified conditions are satisfied. On or after May 15, 2019, we may, at our option, convert some or all of the Series B Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. We cannot forecast the conversions, if any, of Series A Preferred Stock or Series B Preferred Stock to common stock and thus cannot forecast with certainty the amounts of future dividend payments on outstanding Series A Preferred Stock. As of June 30, 2017, there were 1,000,000 shares of Series A Preferred Stock and 499,955 shares of Series B Preferred Stock outstanding.

Off-Balance Sheet Arrangements


We do not currently have, nor have we had in the last three years, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements as such term is defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K, that have or are reasonably likely to have a material currentother contractually narrow or future effect on our financial condition, results of operations, liquidity or capital resources.

limited purposes.

Seasonality

Our results of operations have been subject to seasonal usage changes for commercial customers, and we expect that our results will be affected by similar seasonality effects in the future.going forward. March through October are typically the peak months for commercial voice services revenue and related subscriber equipment sales. Commercial M2MU.S. government revenue hasand commercial IoT revenue have been less subject to seasonal usage changes, and revenue from our fixed-price U.S. government contract is not subject to seasonal fluctuations.

29


changes.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our condensed 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, collectability of accounts receivable, useful lives of property and equipment, long-lived assets and other intangible assets, inventory, internally developed software, deferred financing costs, asset retirement obligations, income taxes, stock-based compensation, warranty expenses, loss contingencies, 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. During the three months ended June 30, 2017,Except as described in Note 9 to our financial statements with respect to revenue recognition, there werehave been no material changes to our critical accounting policies and use of estimates.

from those described in our Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

Refer to Note 2 to our condensed consolidated financial statements for a full description of recent accounting pronouncements and recently adopted pronouncements.


30




ITEM 3.

QUANTITATIVE AND QUALITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The fixed price under the FSD with Thales is denominated in U.S. dollars. As a result, we do not bear any foreign currency exchange risk under the FSD.

We have borrowed an aggregate $1.8 billion under the Credit Facility as of June 30, 2017.2018. A portion of the draws we made under the Credit Facility bear interest at a floating rate equal to the London Interbank Offered Rate, or LIBOR, plus 1.95% and will, accordingly, subject us to interest rate fluctuations in future periods. HadBased on the currentlyaverage outstanding borrowings under the Credit Facility been outstanding throughoutfor the three months ended June 30, 2017,2018, a one-half percentage point increase or decrease in the LIBOR would not have had a material impact on our interest cost for the period.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. At times we maintain cash and cash equivalent deposit balances in excess of Federal Deposit Insurance Corporation limits, and we may have marketable securities balances in excess of Securities Investment Protection Corporation limits. However, we maintain our cash, cash equivalents and marketable securities with financial institutions with high credit ratings. The majority of our cash is swept nightly into funds that invest in or are collateralized by U.S. government-backed securities. We invest in marketable securities consisting of U.S. treasury notes, fixed income debt instruments and commercial paper debt instruments with fixed interest rates and maturity dates within three yearsone year of original purchase. Due to the credit quality and nature of these debt instruments, we do not believe there has been a significant change in our market risk exposure since December 31, 2016.2017. Accounts receivable are due from both domestic and international customers. We perform credit evaluations of our customers’ financial condition and record reserves to provide for estimated credit losses. Accounts payable are owed to both domestic and international vendors.

We also currently hold marketable securities consisting of commercial paper and fixed-income debt securities. As of June 30, 2017,2018, a 100 basis point change in interest rates would not have had a material impact on the fair value of our marketable securities.


ITEM 4.

CONTROLS AND PROCEDURES.


Evaluation of Disclosure Controls and Procedures


Under the supervision and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. In evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.


Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2017,2018, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31




PART II.
PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.


None.


ITEM 1A.

RISK FACTORS.


Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the factors described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, filed with the Securities and Exchange Commission on February 23, 2017. There22, 2018, as supplemented by the following updated risk factors.

We have been no material changesa considerable amount of debt which may limit our ability to fulfill our obligations and/or to obtain additional financing.

As of June 30, 2018, we had $2,133.9 million of consolidated indebtedness on an actual basis, consisting of $1,773.9 million of indebtedness outstanding under the Credit Facility and $360.0 million of indebtedness outstanding under the Notes.

Our capital structure can have several important consequences, including, but not limited to, the following:

If future cash flows are insufficient, we may not be able to make principal or interest payments on our debt obligations, which could result in the occurrence of an event of default under one or more of those debt instruments.

Our leverage level could increase our vulnerability to adverse economic and industry conditions.

Our indebtedness could require us to dedicate a substantial portion of our cash flow from operations to payments on our debt (including scheduled principal repayments on the riskoutstanding borrowings under the Credit Facility), thereby reducing the availability of our cash flow for operations and other purposes.

Our leverage level could make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness.

Our leverage level could place us at a competitive disadvantage compared to any competitors that have less debt or comparable debt at more favorable interest rates and that, as a result, may be better positioned to withstand economic downturns.

We may need to increase our indebtedness in order to make our capital expenditures and other expenses or investments planned by us.

Our consolidated indebtedness has the general effect of reducing our flexibility to react to changing business and economic conditions insofar as they affect our financial condition. The interest rates at which we might secure additional financings may be higher than our currently outstanding debt instruments or higher than forecasted at any point in time, which could adversely affect our business, financial condition, results of operations and cash flows.

Market conditions could affect our access to capital markets, restrict our ability to secure financing to make the capital expenditures and investments and pay other expenses planned by us which could adversely affect our business, financial condition, cash flows and results of operations.

Further, despite our substantial levels of indebtedness, we and our subsidiaries may have the ability to incur substantially more indebtedness, which could further intensify the risks described above.

If we do not generate sufficient cash flows, we may be unable to service all of our indebtedness.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash, make scheduled payments or to refinance our debt obligations depends on our successful financial and operating performance, which may be affected by a range of economic, competitive and business factors, many of which are outside of our control and some of which are described in the “Risk Factors” sections of our Form 10-K and this Quarterly Report.



If our cash flow and capital resources are insufficient to fund our debt service obligations or to repay the Credit Facility when it matures or the Notes when they mature, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or operations, reducing or delaying capital investments, or seeking to raise additional capital. We may not be able to refinance our debt, or any refinancing of our debt could be at higher interest rates and may require us to comply with more restrictive covenants that could further restrict our business operations. Our ability to implement successfully any such alternative financing plans will depend on a range of factors, including general economic conditions, the level of activity in mergers and acquisitions and capital markets generally, and the terms of our various debt instruments then in effect.

The indenture governing the Notes and the Credit Facility contain cross-default or cross-acceleration provisions that may cause all of the debt issued under those instruments to become immediately due and payable because of a default under an unrelated debt instrument.

Our failure to comply with the obligations contained in the indenture governing the Notes, the Credit Facility or other instruments governing our indebtedness could result in an event of default under the applicable instrument, which could result in the related debt and the debt issued under other instruments (together with accrued and unpaid interest and other fees) becoming immediately due and payable. In such event, we would need to raise funds from alternative sources, which funds may not be available to us on favorable terms, on a timely basis or at all. Alternatively, such a default could require us to sell our assets and otherwise curtail our operations in order to pay our creditors. These alternative measures could have a material adverse effect on our business, financial position, results of operations and/or cash flows, which could cause us to become bankrupt or insolvent or otherwise impair our ability to make payments in respect of our indebtedness.

Certain provisions in the Credit Facility and in the indenture governing the Notes limit our financial and operating flexibility.

The Credit Facility and the indenture governing the Notes contain numerous financial and operating covenants that place significant restrictions on, among other things, our ability to:

make capital expenditures;

carry out mergers and acquisitions;

dispose of, or grant liens on, our assets;

enter into transactions with our affiliates;

pay dividends or make distributions to our stockholders;

incur indebtedness;

prepay indebtedness; and

make loans, guarantees or indemnities.

Our Credit Facility also requires us to meet certain financial ratios, such as maintaining a debt-to-equity ratio and debt service coverage ratio, and specifies minimum available cash balances, maximum levels of annual report.

capital expenditures, and maximum leverage levels. Our ability to comply with these and other requirements and restrictions may be affected by changes in economic or business conditions, results of operations or other events beyond our control. A failure to comply with the obligations contained in any of the instruments governing our consolidated indebtedness could impair our ability to make payments owed and result in acceleration of related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross‑acceleration or cross‑default provisions.

The Credit Facility also prohibits us from paying dividends to holders of our Series B Preferred Stock for a period of five quarters and at any point beyond that, if we are unable to certify that we anticipate being able to comply with the financial covenants of the Credit Facility for the next twelve months each time we declare a dividend. If we are unable to make that certification, we will not be able to pay the dividends on our outstanding preferred stock. As required by our amended Credit Facility, we announced a five-quarter deferral of dividends on the Series B Preferred Stock beginning with the dividends due June 15, 2018. If we do not pay dividends on our preferred stock for six quarterly periods (whether or not consecutive), the holders of the Series B Preferred Stock will have the power to elect two members of our board of directors. The interests of the holders of our preferred stock may differ from those of our other stockholders. In addition, any dividend we fail to pay will accrue, and the holders of our Series B Preferred Stock will be entitled to a preferential distribution of the original purchase


price per share plus all accrued and unpaid dividends before any distribution may be made to holders of our common stock in connection with any liquidation event. Complying with these restrictions may make it more difficult for us to successfully execute our business plan and compete against companies who are not subject to such restrictions.

Adverse changes in our credit ratings or withdrawal of the ratings assigned to our debt securities by rating agencies may negatively affect us.

Our ability to access capital markets is important to our ability to operate our business. Increased scrutiny of the satellite industry and the impact of regulation, as well as changes in our financial performance and unfavorable conditions in the capital markets could result in credit agencies reexamining our credit ratings. A downgrade in our credit ratings could restrict or discontinue our ability to access capital markets at attractive rates and increase our borrowing costs. Furthermore, any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.

We may be unable to offer one or more services in important regions of the world due to regulatory requirements, which could limit our growth.

While our constellation is capable of providing service globally, our ability to sell one or more types of service in some regions may be limited by local regulations. Some countries have specific regulatory requirements such as local domestic ownership requirements or requirements for physical gateways within their jurisdiction to connect traffic coming to and from their territory. In some countries, we may not be able to find an acceptable local partner or reach an agreement to develop additional gateways, or the cost of developing and deploying such gateways may be prohibitive, which could impair our ability to expand our product and service offerings in such areas and undermine our value for potential users who require service in these areas. Also, other countries where we already provide service may impose similar requirements in the future, which could restrict our ability to continue to sell service in those countries. The inability to offer to sell our products and services in all major international markets could impair our international growth. In addition, the construction of such gateways in foreign countries may trigger and require us to comply with various U.S. regulatory requirements that could conflict with or contravene the laws or regulations of the local jurisdiction. Any of these developments could limit, delay or otherwise interfere with our ability to construct gateways or other infrastructure or network solutions around the world.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

Our ability to utilize U.S. net operating loss carryforwards and other tax attributes may be limited if we experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, which generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our common stock increase their ownership in the aggregate by more than 50% over their lowest ownership percentage within a rolling period that begins on the later of three years prior to the testing date and the date of the last ownership change. Similar rules may apply under state tax laws. If an “ownership change” were to occur, Section 382 of the Code would impose an annual limit on the amount of pre-ownership change net operating loss carryforwards and other tax attributes we could use to reduce our taxable income. It is possible that such an ownership change could materially reduce our ability to use our net operating loss carryforwards or other tax attributes to offset taxable income, which could impact our profitability.

Changes in tax laws could increase our worldwide tax rate and materially affect our financial position and results of operations.

Recently enacted tax reform legislation, including the Tax Cuts and Jobs Act of 2017, or the “Tax Act”, resulted in significant changes to the Code, including, among other things, significantly reducing the statutory corporate U.S. federal income tax rate, imposing limitations on the ability to deduct interest expense and net operating losses and making changes to the way a U.S. multinational company’s foreign operations are taxed, including a one-time mandatory tax on deferred foreign earnings and the imposition of the “base erosion anti-abuse tax.” The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 was effective for reporting periods that include December 22, 2017. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the anticipated effects of the Tax Act and recorded provisional amounts in our financial statements as of and for the year ended December 31, 2017. As we collect and prepare the necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. No such adjustments have been made for the three or six months ended June 30, 2018. These adjustments, if any, may materially impact our provision for income taxes and effective tax rate in the period in which


the adjustments are made. While not complete as of June 30, 2018, the accounting for the tax effects of the Tax Act is expected to be completed in 2018.

In addition, many U.S. states and foreign countries have adopted or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to our U.S. and international business activities, certain of these enacted and proposed changes to the taxation of our activities could increase our worldwide effective tax rate, which in turn could harm our financial position and results of operations.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


None.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.


None.


ITEM 4.

MINE SAFETY DISCLOSURES.


Not applicable.


ITEM 5.

OTHER INFORMATION.


None.



ITEM 6.

EXHIBITS.


See the exhibit index.

32


SIGNATURES

Pursuant to the requirements

The following list of exhibits includes exhibits submitted with this Form 10-Q as filed with the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Commission.

IRIDIUM COMMUNICATIONS INC.

Exhibit

By:

/s/ Thomas J. Fitzpatrick

Description

Thomas J. Fitzpatrick

10.1

Chief Financial Officer

(as duly authorized officer and as principal financial officer of the registrant)

Date: July 27, 2017

33


EXHIBIT INDEX

Exhibit

Description

10.1

Amendment No. 6, dated as of June 23, 2017, to the SecondThird Amended and Restated Limited Liability Company Agreement of Aireon LLC, between Aireon LLC; Iridium Satellite LLC; NAV CANADA; NAV CANADA Satellite, Inc.; Enav S.p.A.; ENAV North Atlantic LLC; Naviair; Naviair Surveillance A/S; Irish Aviation Authority LimitedLimited; and IAA North Atlantic Inc.,NATS, dated as of February 14, 2014.

May 15, 2018.

31.1

10.2

Iridium Communications Inc. Amended and Restated 2015 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 16, 2017.

31.1

31.2

31.2

32.1**

32.1*

101

101

The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017,2018, filed with the Securities and Exchange Commission on July 27, 2017,31, 2018, formatted in XBRL (eXtensible Business Reporting Language):

(i)   Condensed Consolidated Balance Sheets at June 30, 20172018 and December 31, 2016;

2017;

(ii)  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 20172018 and 2016;

2017;

(iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20172018 and 2016;2017; and

(iv) Notes to Condensed Consolidated Financial Statements.

*

**These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

34



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
IRIDIUM COMMUNICATIONS INC.
By:/s/ Thomas J. Fitzpatrick
Thomas J. Fitzpatrick
Chief Financial Officer
(as duly authorized officer and as principal financial officer of the registrant)
 Date: July 31, 2018

38