Document And Entity Information(USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Mar. 1, 2012
Jun. 30, 2011
Document And Entity Information [Abstract]
Document Type
10-K
Amendment Flag
false
Document Period End Date
Dec. 31, 2011
Document Fiscal Year Focus
2011
Document Fiscal Period Focus
FY
Entity Registrant Name
Iridium Communications Inc.
Entity Central Index Key
0001418819
Current Fiscal Year End Date
--12-31
Entity Filer Category
Accelerated Filer
Entity Common Stock, Shares Outstanding
73,205,008
Entity Well-known Seasoned Issuer
No
Entity Public Float
$420.8
Entity Current Reporting Status
Yes
Entity Voluntary Filers
No
Consolidated Balance Sheets(USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Assets
Cash and cash equivalents
$136,366
$119,932
Accounts receivable, net
57,418
50,278
Inventory
15,077
16,654
Deferred tax assets, net
9,435
5,784
Income tax receivable
4,330
11,103
Prepaid expenses and other current assets
4,616
4,978
Total current assets
227,242
208,729
Property and equipment, net
843,092
566,519
Restricted cash
27,154
120
Other assets
584
694
Intangible assets, net
83,552
96,602
Deferred financing costs
105,523
87,746
Goodwill
87,039
87,039
Total assets
1,374,186
1,047,449
Liabilities and stockholders' equity
Accounts payable
24,816
28,132
Accrued expenses and other current liabilities
29,791
50,209
Interest payable
5,838
4,062
Note payable
22,223
Deferred revenue
35,445
28,215
Total current liabilities
95,890
132,841
Accrued satellite operations and maintenance expense, net of current portion
19,065
20,402
Credit facility
417,133
135,145
Deferred tax liabilities, net
127,297
100,728
Other long-term liabilities
13,534
2,814
Total liabilities
672,919
391,930
Commitments and contingencies
  
  
Stockholders' equity
Preferred stock, $0.0001 par value, 2,000 shares authorized,none issued and outstanding
  
  
Common stock, $0.001 par value, 300,000 shares authorized and 73,205 and 70,254 shares issued and outstanding, respectively
73
70
Additional paid-in capital
681,781
675,402
Retained earnings (accumulated deficit)
19,638
(20,043)
Accumulated other comprehensive income (loss), net of taxes
(225)
90
Total stockholders' equity
701,267
655,519
Total liabilities and stockholders' equity
$1,374,186
$1,047,449
Consolidated Balance Sheets (Parenthetical)(USD $)
Dec. 31, 2011
Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Preferred stock, par value
$0.0001
$0.0001
Preferred stock, shares authorized
2,000
2,000
Preferred stock, shares issued
0
0
Preferred stock, shares outstanding
0
0
Common stock, par value
$0.001
$0.001
Common stock, shares authorized
300,000
300,000
Common stock, shares issued
73,205
70,254
Common stock, shares outstanding
73,205
70,254
Consolidated Statements Of Operations(USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended 9 Months Ended 12 Months Ended 9 Months Ended 12 Months Ended 9 Months Ended 12 Months Ended 9 Months Ended 12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Sep. 29, 2009
Predecessor [Member]
Dec. 31, 2008
Predecessor [Member]
Sep. 29, 2009
Class A Units [Member]
Predecessor [Member]
Dec. 31, 2008
Class A Units [Member]
Predecessor [Member]
Sep. 29, 2009
Government [Member]
Predecessor [Member]
Dec. 31, 2008
Government [Member]
Predecessor [Member]
Sep. 29, 2009
Commercial [Member]
Predecessor [Member]
Dec. 31, 2008
Commercial [Member]
Predecessor [Member]
Revenue:
Services
$262,322
$236,351
$53,014
$56,039
$67,759
$120,706
$133,247
Subscriber equipment
94,709
90,184
17,293
66,206
119,938
Engineering and support services
27,276
21,638
5,682
Total revenue
384,307
348,173
75,989
242,951
320,944
Operating expenses:
Cost of services (exclusive of depreciation and amortization)
71,181
72,579
18,965
58,978
69,882
Cost of subscriber equipment
54,113
61,661
18,657
33,265
67,570
Research and development
18,684
19,178
5,974
17,432
32,774
Selling, general and administrative
65,682
66,728
17,029
44,505
55,105
Depreciation and amortization
97,646
90,667
22,376
10,850
12,535
Transaction costs
6,163
12,478
7,959
Total operating expenses
307,306
310,813
89,164
177,508
245,825
Operating income (expense)
77,001
37,360
(13,175)
65,443
75,119
Other income (expense):
Change in fair value of warrants
(34,117)
Interest income, net
1,200
637
1,226
(12,829)
(21,094)
Undrawn credit facility fees
(13,524)
(2,368)
Interest income and other income (expense), net
670
(146)
Other income (expense), net
(96)
(17)
26
Total other expense
(12,420)
(1,748)
(32,865)
(12,159)
(21,240)
Income (loss) before income taxes
64,581
35,612
(46,040)
Benefit from (provision for) income taxes
(24,900)
(12,921)
1,654
Net income (loss)
39,681
22,691
(44,386)
53,284
53,879
Net income attributable to Class A Units
$36,143
$36,456
Weighted average shares outstanding-basic
72,164
70,289
53,964
Weighted average Class A Units outstanding-basic
1,084
1,084
Weighted average shares outstanding-diluted
73,559
72,956
53,964
Weighted average Class A Units outstanding-diluted
1,168
1,098
Net income (loss) per share-basic
$0.55
$0.32
$(0.82)
Earnings per unit-basic
$33.34
$33.63
Net income (loss) per share-diluted
$0.54
$0.31
$(0.82)
Earnings per unit-diluted
$31.75
$33.40
Consolidated Statements Of Operations (Parenthetical)(USD $)
In Thousands, unless otherwise specified
9 Months Ended 12 Months Ended
Sep. 30, 2009
Dec. 31, 2008
Consolidated Statements Of Operations [Abstract]
capitalized interest
$324
$1,303
Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income (Loss)(USD $)
Class A Units [Member]
Predecessor [Member]
Class B Units [Member]
Predecessor [Member]
USD ($)
Common Stock [Member]
USD ($)
Additional Paid-In Capital [Member]
Predecessor [Member]
USD ($)
Additional Paid-In Capital [Member]
USD ($)
Accumulated Other Comprehensive Income (Loss) [Member]
Predecessor [Member]
USD ($)
Accumulated Other Comprehensive Income (Loss) [Member]
USD ($)
Accumulated Retained Earnings (Deficit) [Member]
Predecessor [Member]
USD ($)
Accumulated Retained Earnings (Deficit) [Member]
USD ($)
Comprehensive Income (Loss) [Member]
Predecessor [Member]
USD ($)
Comprehensive Income (Loss) [Member]
USD ($)
Predecessor [Member]
USD ($)
Total
USD ($)
Balance at Dec. 31, 2007
$761,000
$(3,632,000)
$(75,576,000)
$(78,447,000)
Balance, shares at Dec. 31, 2007
1,083,872
455,209
Stock-based compensation
1,964,000
1,964,000
Exchange of profits interests for B Units
1,704,000
1,704,000
Exchange of profits interests for B Units, shares
59,382
Class A and B Units distributions
(41,800,000)
(41,800,000)
Anti-dilution adjustment
3,421
Other comprehensive income-swap
470,000
470,000
470,000
Net income (loss)
53,879,000
53,879,000
53,879,000
Total
54,349,000
Balance at Dec. 31, 2008
4,429,000
(3,162,000)
(63,497,000)
(62,230,000)
Balance, shares at Dec. 31, 2008
1,083,872
518,012
Resignation of board member
(3,958)
Stock-based compensation
2,616,000
2,616,000
Other comprehensive income-swap
2,028,000
2,028,000
2,028,000
Net income (loss)
53,284,000
53,284,000
53,284,000
Cumulative translation adjustment
104,000
104,000
104,000
Total
55,416,000
Balance at Sep. 29, 2009
7,045,000
(1,030,000)
(10,213,000)
(4,198,000)
Balance, shares at Sep. 29, 2009
1,083,872
514,054
Balance at Dec. 31, 2008
(62,230,000)
Balance, shares at Dec. 31, 2008
1,083,872
Net income (loss)
53,284,000
Balance at Sep. 30, 2009
Balance at Dec. 31, 2008
48,000
268,563,000
1,652,000
270,263,000
Balance, shares at Dec. 31, 2008
1,083,872
48,500,000
Payment of deferred underwriting fees
6,982,000
6,982,000
Purchase of stock purchase warrants
(1,828,000)
(1,828,000)
Net proceeds from issuance of common stock
16,000
148,734,000
148,750,000
Net proceeds from issuance of common stock, shares
16,000,000
Fair value of stock issued in Acquisition
29,000
333,419,000
333,448,000
Fair value of stock issued in Acquisition, shares
29,443,000
Purchase of common stock
(9,000)
28,298,000
28,289,000
Purchase of common stock, shares
(9,170,000)
Purchase of common stock under forward purchase contracts
(16,000)
(164,868,000)
(164,884,000)
Purchase of common stock under forward purchase contracts, shares
(16,325,000)
Forfeitures of stock options and warrants
(1,000)
1,000
Forfeitures of stock options and warrants, shares
(1,441,000)
Reclassification of warrants to derivative instruments
(28,555,000)
(28,555,000)
Settlement of derivative instruments for warrants
47,110,000
47,110,000
Settlement of derivative instruments for shares of common stock
1,000
12,448,000
12,449,000
Settlement of derivative instruments for shares of common stock, shares
1,245,000
Stock-based compensation
436,000
436,000
Stock issued upon conversion of subordinated convertible note
2,000
19,376,000
19,378,000
Stock issued upon conversion of subordinated convertible note, shares
1,996,000
Net income (loss)
(44,386,000)
(44,386,000)
(44,386,000)
Cumulative translation adjustment
22,000
22,000
22,000
Balance at Dec. 31, 2009
70,000
670,116,000
22,000
(42,734,000)
(44,364,000)
627,474,000
Balance, shares at Dec. 31, 2009
70,248,000
Stock-based compensation
5,242,000
5,242,000
Stock issued upon exchange of warrants
23,000
23,000
Stock issued upon exchange of warrants, shares
3,000
Stock issued upon exercise of stock options
21,000
21,000
Stock issued upon exercise of stock options, shares
3,000
Net income (loss)
22,691,000
22,691,000
22,691,000
Cumulative translation adjustment
68,000
68,000
68,000
Balance at Dec. 31, 2010
70,000
675,402,000
90,000
(20,043,000)
22,759,000
655,519,000
Balance, shares at Dec. 31, 2010
70,254,000
Stock-based compensation
6,341,000
6,341,000
Settlement of warrants for common stock
3,000
(2,000)
1,000
Settlement of warrants for common stock, shares
2,946,000
Stock issued upon exercise of stock options
40,000
40,000
Stock issued upon exercise of stock options, shares
5,000
Net income (loss)
39,681,000
39,681,000
39,681,000
Cumulative translation adjustment
(315,000)
(315,000)
(315,000)
Balance at Dec. 31, 2011
$73,000
$681,781,000
$(225,000)
$19,638,000
$39,366,000
$701,267,000
Balance, shares at Dec. 31, 2011
73,205,000
Consolidated Statements Of Cash Flows(USD $)
In Thousands, unless otherwise specified
12 Months Ended 9 Months Ended 12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Sep. 30, 2009
Predecessor [Member]
Dec. 31, 2008
Predecessor [Member]
Cash flows from operating activities:
Net income (loss)
$39,681
$22,691
$(44,386)
$53,284
$53,879
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred taxes
22,917
11,721
(2,044)
Change in market value of warrants
34,117
Depreciation and amortization
97,646
90,667
22,376
10,850
12,535
Stock-based compensation
5,895
5,051
436
Gain on disposal of property and equipment
(13)
Other non-cash amortization and accretion
2,537
5,425
Equity and profits interest compensation
5,406
2,867
Changes in operating assets and liabilities:
Restricted cash
15,400
Accounts receivable
(7,140)
(9,089)
5,382
(5,539)
(6,193)
Inventory
1,577
9,002
15,044
8,919
(15,691)
Prepaid expenses and other current assets
363
(1,050)
(1,683)
2,158
(3,008)
Deferred cost of sales
3,408
Income tax receivable
6,773
(10,598)
(502)
Other assets
110
433
35
935
(3,206)
Accounts payable
454
3,428
3,584
(2,368)
4,289
Accrued expenses and other current liabilities
(1,417)
(144)
(9,561)
(7,134)
5,849
Accrued compensation and employee benefits
(2,908)
2,544
Deferred revenue
7,230
8,188
2,127
(54)
1,214
Accrued satellite and network operation expense, net of current portion
(1,337)
5,102
(1,020)
(1,856)
(2,474)
Other long-term liabilities
10,722
636
(737)
Net cash provided by operating activities
183,461
151,438
23,168
64,230
61,438
Cash flows from investing activities:
Changes in investment in trust account
401,838
Cash paid for Acquisition, net of cash acquired
(39,950)
Payment of deferred Acquisition consideration
(4,636)
Capital expenditures
(359,404)
(237,450)
(7,351)
(7,698)
(13,913)
Proceeds from sale of property and equipment
67
Net cash provided by (used in) investing activities
(359,337)
(242,086)
354,537
(7,698)
(13,913)
Cash flows from financing activities:
Payments under credit facilities
(23,327)
(27,554)
Proceeds from public offerings
149,600
Purchase of stock option warrants
(4,940)
Purchase of shares of common stock
(164,884)
Purchase of shares of common stock for no-votes
(91,700)
Payment of underwriting fees
(4,288)
Payment of costs associated with offering
(850)
Payments under Iridium Holdings Credit Facility
(113,594)
Borrowings under Credit Facility
274,976
135,145
Proceeds from issuance of Convertible Subordinated Note
22,900
Transfers from restricted cash for letters of credit
2,900
Distributions to Class A and B members
(41,378)
Payment of deferred financing fees
(33,450)
(71,787)
(1,688)
Change in restricted cash-Credit Facility
(27,034)
Repayment of note payable
(22,223)
Proceeds from exercise of warrants
1
23
Proceeds from exercise of stock options
40
21
Net cash provided by (used in) financing activities
192,310
63,402
(230,656)
(23,327)
(44,820)
Net increase (decrease) in cash and cash equivalents
16,434
(27,246)
147,049
33,205
2,705
Cash and cash equivalents, beginning of period
119,932
147,178
129
24,810
22,105
Cash and cash equivalents, end of period
136,366
119,932
147,178
58,015
24,810
Supplemental cash flow information:
Interest paid
4,528
1,330
10,704
16,991
Income taxes paid (refunded)
(6,296)
11,872
339
Supplemental disclosure of non-cash investing activities:
Shares issued for the acquisition of Iridium Holdings
333,448
Accrual of additional consideration for acquisition of Iridium Holdings
4,636
Property and equipment received but not paid for yet
14,409
21,093
3,200
2,403
581
Interest capitalized but not paid
2,979
Capitalized paid-in-kind interest
7,012
Leasehold improvement incentives
901
Stock-based compensation capitalized
446
191
Supplemental disclosure of non-cash financing activities:
Reversal of deferred underwriter commissions
(8,176)
Conversion of subordinated convertible note to equity
(19,378)
Accrued financing fees
15,959
Note payable
22,223
Leasehold incentives in the form of leasehold improvements
$1,171
Organization And Basis Of Presentation
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Organization And Basis Of Presentation

1. Organization and Basis of Presentation

Iridium Communications Inc. (the "Company") offers voice and data communications services and products to businesses, U.S. and international government agencies and other customers on a global basis. The Company was initially formed as GHL Acquisition Corp., a special purpose acquisition company, as further described below. The Company acquired all the outstanding equity of Iridium Holdings LLC ("Iridium Holdings" and, together with its direct and indirect subsidiaries, "Iridium") in a transaction accounted for as a business combination on September 29, 2009 (the "Acquisition"). In accounting for the Acquisition, the Company was deemed the legal and accounting acquirer. On September 29, 2009, the Company changed its name to Iridium Communications Inc.

Iridium Holdings is considered the predecessor of the Company and, accordingly, its historical financial statements are separately presented as predecessor financial statements.

The Company was formed on November 2, 2007 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination. All activity from November 2, 2007 (inception) through February 21, 2008 was related to the Company's formation and initial public offering. From February 21, 2008 through September 29, 2009, the Company's activities were limited to identifying prospective target businesses to acquire. On September 29, 2009, the Company consummated the Acquisition.

Iridium Holdings was formed under the laws of Delaware in 2000 as a limited liability company pursuant to the Delaware Limited Liability Company Act. On December 11, 2000, Iridium acquired certain satellite communications assets from Iridium LLC, a non-affiliated debtor in possession.

As a result of and subsequent to the Acquisition, the Company is a provider of mobile voice and data communications services via a constellation of low earth orbiting satellites. The Company holds various licenses and authorizations from the U.S. Federal Communications Commission (the "FCC") and from foreign regulatory bodies that permit the Company to conduct its business, including the operation of its satellite constellation.

Organization And Basis Of Presentation

1. Organization and Business

Organization

Iridium Holdings LLC ("Iridium Holdings" and, together with its direct and indirect subsidiaries, "Iridium") was formed under the laws of Delaware in 2000 and was organized as a limited liability company pursuant to the Delaware Limited Liability Company Act. On December 11, 2000, Iridium Satellite LLC, a wholly owned subsidiary of Iridium Holdings, acquired certain satellite communication assets from Iridium LLC, a non-affiliated debtor in possession, pursuant to an asset purchase agreement.

Business

Iridium is a provider of mobile voice and data communications services via satellite. Iridium holds various licenses and authorizations from the Federal Communications Commission (the "FCC") and from international regulatory bodies that permit Iridium to conduct its business, including the operation of its satellite constellation. Iridium offers voice and data communications services and products to businesses, U.S. and international government agencies and other customers on a global basis.

On September 22, 2008, Iridium Holdings and its members entered into a transaction agreement, as amended on April 28, 2009 (the "Transaction Agreement"), with GHL Acquisition Corp., a special purpose acquisition company ("GHQ"), whereby GHQ agreed to purchase, directly or indirectly, all of the outstanding equity of Iridium Holdings (the "Acquisition"). Following the closing of the Acquisition on September 29, 2009, GHQ changed its name to Iridium Communications Inc. Total consideration included approximately 29.4 million shares of GHQ's common stock and $102.6 million in cash (which included a requirement to make a payment of $25.5 million in cash to some of the former members of Iridium Holdings for tax benefits Iridium Communications Inc. received, payable on December 29, 2009). Iridium is considered a predecessor entity to Iridium Communications Inc.

Significant Accounting Policies And Basis Of Presentation
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Significant Accounting Policies And Basis Of Presentation

2. Significant Accounting Policies and Basis of Presentation

Principles of Consolidation and Basis of Presentation

The Company has prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The accompanying consolidated financial statements include the accounts of (i) the Company, (ii) its wholly owned subsidiaries, (iii) all less than wholly owned subsidiaries that the Company controls, and (iv) variable interest entities where the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated and net income not attributable to the Company (when material) has been allocated to noncontrolling interests.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ materially from those estimates.

Financial Instruments

The consolidated balance sheets include various financial instruments (primarily cash and cash equivalents, restricted cash, prepaid expenses, deposits and other current assets, accounts receivable, accounts payable, accrued expenses and other liabilities, notes and loans payable, and other obligations). 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. These tiers of inputs include:

 

  •  

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

 

  •  

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

  •  

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of December 31, 2011 and 2010, the carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses, deposits and other current assets, accounts receivable, accounts payable, accrued expenses and other current liabilities and other obligations) approximate their fair values because of their short-term nature.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and receivables. The majority of cash is swept nightly into a money market fund invested in U.S. treasuries. The Company performs credit evaluations of its customers' financial condition and records reserves to provide for estimated credit losses. While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it often maintains those deposits in federally insured financial institutions in excess of federally insured (FDIC) limits. Accounts receivable are due from both domestic and international customers.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The cash and cash equivalents balances at December 31, 2011 and 2010, consisted of cash deposited in institutional money market funds, regular interest bearing and non-interest bearing depository accounts and certificates of deposits with commercial banks. The Company's restricted cash balances as of December 31, 2011 and 2010 were $27.2 million and $0.1 million, respectively. Changes in restricted cash balances are reflected on the consolidated statements of cash flows as an operating activity if pertaining to collateral for operations and maintenance agreements; changes in restricted cash balances are reflected on the consolidated statements of cash flows as a financing activity if pertaining to required reserve balances for debt agreements.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and are subject to late fee penalties. Management develops its estimate of an allowance for uncollectible receivables based on the Company's experience with specific customers, aging of outstanding invoices, its understanding of customers' current economic circumstances and its own judgment as to the likelihood that the Company will ultimately receive payment. The Company writes off its accounts receivable when balances ultimately are deemed uncollectible. The allowance for doubtful accounts was less than $0.1 million and $0 as of December 31, 2011 and 2010, respectively.

Foreign Currencies

The functional currency of the Company's foreign consolidated subsidiaries is their local currency, except for countries that are deemed to have "highly inflationary" economies, in which case the functional currency is deemed to be the reporting currency (or U.S. dollar). Assets and liabilities of its foreign subsidiaries are translated to U.S. dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the weighted average exchange rates prevailing during the reporting period. Translation adjustments are accumulated in a separate component of stockholders' equity. Transaction gains or losses are classified as other income (expense), net in the accompanying consolidated statements of operations.

Internally Developed Software

The Company capitalizes the costs of acquiring, developing and testing software to meet its internal needs. Capitalization of costs associated with software obtained or developed for internal use commences when the preliminary project stage is complete and it is probable that the project will be completed and used to perform the function intended. Capitalized costs include only (i) external direct cost of materials and services consumed in developing or obtaining internal-use software and (ii) payroll and payroll-related costs for employees who are directly associated with, and devote time to, the internal-use software project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Internal use software costs are amortized once the software is placed in service using the straight-line method over periods ranging from three to seven years.

Deferred Financing Costs

Direct and incremental costs incurred in connection with securing debt financing are deferred and are amortized as additional interest expense using the effective interest method over the term of the related debt.

As of December 31, 2011 and 2010, the Company had deferred approximately $105.5 million and $87.7 million, respectively, of direct and incremental financing costs associated with securing debt financing for Iridium NEXT, the Company's next-generation satellite constellation.

 

Capitalized Interest

Interest costs associated with financing the Company's assets during the construction period have been capitalized. Capitalized interest and interest expense were as follows:

 

     Year Ended December 31,  
     2011      2010      2009  
     (In thousands)  

Capitalized interest

    $ 12,825       $ 1,694       $ —     

Interest expense

      42         23         51   
  

 

 

     

 

 

     

 

 

  

Total interest

    $ 12,867       $ 1,717       $ 51   
  

 

 

     

 

 

     

 

 

  

Inventory

Inventory consists primarily of finished goods, although the Company at times also maintains an inventory of raw materials from third-party manufacturers. The Company outsources manufacturing of subscriber equipment primarily to a third-party manufacturer and purchases accessories from third-party suppliers. The Company's cost of inventory includes an allocation of overhead (including salaries and benefits of employees directly involved in bringing inventory to its existing condition, and freight). Inventories are valued using the average cost method, and are carried at the lower of cost or market.

The Company has a manufacturing agreement with a supplier to manufacture subscriber equipment, which contains minimum monthly purchase requirements. The Company's purchases have exceeded the monthly minimum requirement since inception. Pursuant to the agreement, the Company may be required to purchase excess materials if the materials are not used in production within the periods specified in the agreement. The supplier will then repurchase such materials from the Company at the same price paid by the Company, as required for the production of the subscriber equipment.

Stock-Based Compensation

The Company accounts for stock-based compensation at fair value. Accordingly, the Company expenses the estimated fair value of stock-based awards made in exchange for employee, non-employee director and consultant services over the requisite service period. Stock-based compensation cost related to restricted stock units is determined at the grant date using the closing price of the common stock on the date of grant. Stock-based compensation cost related to stock options is determined at the grant date using the Black-Scholes option pricing model. The value of an employee award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service period and is classified within the financial statements in a manner consistent with the classification of the employee's compensation. Awards to consultants and non-employee directors are recognized according to the terms of their agreements and are classified in selling, general and administrative expenses in the accompanying consolidated statements of operations. Classification of stock-based compensation for the years ended December 31, 2011 and 2010 is as follows:

 

     2011      2010  
     (In thousands)  

Property and equipment, net

    $ 446       $ 191   

Inventory

      9         —     

Cost of subscriber equipment

      130         51   

Cost of services (exclusive of depreciation and amortization)

      458         235   

Research and development

      220         154   

Selling, general and administrative

      5,078         4,611   
  

 

 

     

 

 

  

Total stock-based compensation

    $ 6,341       $ 5,242   
  

 

 

     

 

 

  

 

Property and Equipment

Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:

 

Ground system    5 – 7 years
Equipment    3 – 5 years
Internally developed software and purchased software    3 – 7 years
Building    39 years
Building improvements    estimated useful life
Leasehold improvements    shorter of useful life or remaining lease term

Repairs and maintenance costs are expensed as incurred.

Long-Lived Assets

The Company assesses its long-lived assets for impairment when indicators of impairment exist. Recoverability of assets is measured by comparing the carrying amounts of the assets to the future undiscounted cash flows expected to be generated by the assets. Any impairment loss would be measured as the excess of the assets' carrying amount over their fair value.

During 2011, the Company lost communication with one of the satellites within its existing constellation. Accordingly, a $3.0 million impairment charge was recorded within depreciation and amortization expense during the year ended December 31, 2011. The Company had an in-orbit spare satellite located within the same plane that was repositioned to take over the function of the lost satellite.

Goodwill and Other Intangible Assets

Goodwill

Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed during the fourth quarter of each annual period or more frequently if indicators of potential impairment exist. If the fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized.

At December 31, 2010, the Company recorded an adjustment related to prior periods to decrease its non-current deferred tax liability and its goodwill by approximately $7.6 million. The Company concluded that this correcting adjustment was immaterial to the 2009 balance sheet, and accordingly, retroactive adjustment to previously issued financial statements was unnecessary.

Intangible Assets Not Subject to Amortization

A portion of the Company's intangible assets are spectrum and regulatory authorizations, and trade names which are indefinite-lived intangible assets. The Company reevaluates the useful life determination for these assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company tests its indefinite-lived intangible assets for potential impairment annually in the fourth quarter or more frequently if indicators of impairment exist. If the fair value of the indefinite-lived asset is less than the carrying amount, an impairment loss is recognized.

Intangible Assets Subject to Amortization

The Company's intangible assets that do have finite lives (customer relationships – government and commercial, core developed technology, intellectual property and software) are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. The Company also reevaluates the useful lives for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.

Asset Retirement Obligations

Liabilities arising from legal obligations associated with the retirement of long-lived assets are required to be measured at fair value and recorded as a liability. Upon initial recognition of a liability for retirement obligations, a company must record an asset, which is depreciated over the life of the asset to be retired.

Under certain circumstances, each of the U.S. government, The Boeing Company ("Boeing"), and Motorola Solutions, Inc. ("Motorola Solutions") has the right to require the de-orbit of the Company's satellite constellation. In the event the Company was required to effect a mass de-orbit, pursuant to the amended and restated operations and maintenance agreement (the "O&M Agreement") by and between the Company's indirect wholly owned subsidiary Iridium Constellation LLC ("Iridium Constellation") and Boeing, the Company would be required to pay Boeing $16.9 million, plus an amount equivalent to the premium for de-orbit insurance coverage ($2.5 million as of December 31, 2011). The Company has concluded that each of the foregoing de-orbit rights meets the definition of an asset retirement obligation. However, the Company currently does not believe the U.S. government, Boeing or Motorola Solutions will exercise their respective de-orbit rights. As a result, the Company believes the likelihood of any future cash outflows associated with the mass de-orbit obligation is remote and has recorded an asset retirement obligation with respect to the potential mass de-orbit of approximately $0.2 million at December 31, 2011, which is included in other long-term liabilities on the accompanying consolidated balance sheet.

There are other circumstances in which the Company could be required, either by the U.S. government or for technical reasons, to de-orbit an individual satellite; however, the Company believes that such costs would not be significant relative to the costs associated with the ordinary operations of the satellite constellation.

Revenue Recognition

The Company derives its revenue primarily as a wholesaler of satellite communications products and services. 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.

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 Company recognizes revenue when services are performed or delivery has occurred, evidence of an arrangement exists, the fee is fixed or determinable, and collection is probable, as follows:

Contracts with multiple elements

At times, the Company sells services and equipment through multi-element arrangements that bundle equipment, airtime and other services. For multi-element revenue arrangements entered into or materially modified after January 1, 2011, when the Company sells services and equipment in bundled arrangements that include guaranteed minimum orders and determines that it has separate units of accounting, the Company allocates the bundled contract price among the various contract deliverables based on each deliverable's relative selling price. The selling price used for each deliverable is based on vendor-specific objective evidence when available, third-party evidence when vendor-specific evidence is not available, or the estimated selling price when neither vendor-specific evidence nor third party evidence is available. The Company determines vendor specific objective evidence of selling price by assessing sales prices of subscriber equipment, airtime and other services when they are sold to customers on a stand-alone basis. When the Company determines the elements are not separate units of accounting, the Company recognizes revenue on a combined basis as the last element is delivered. For similar multi-element revenue arrangements entered into prior to January 1, 2011, when the Company determined that it had separate units of accounting, the Company allocated the bundled contract price among the various contract deliverables based on each deliverable's objectively determined and relative fair value. The Company determined vendor specific objective evidence of fair value by assessing sales prices of subscriber equipment, airtime and other services when they are sold to customers on a stand-alone basis. When the Company determines the elements are not separate units of accounting, the Company recognizes revenue on a combined basis as the last element is delivered.

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 ratably over the 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 for the cash paid for the e-voucher or prepaid card on purchase. The Company recognizes revenue from the prepaid services (i) upon the use of the e-voucher or prepaid card by the customer; (ii) upon the expiration of the right to access the prepaid service; or (iii) when it is determined that the likelihood of the prepaid card being redeemed by the customer is remote ("Prepaid Card Breakage"). The Company has determined the recognition of Prepaid Card Breakage based on its historical redemption patterns. The Company does not offer refund privileges for unused prepaid services.

Subscriber equipment sold on a stand-alone basis

The Company recognizes subscriber equipment sales and the related costs when title to the equipment (and the risks and rewards of ownership) passes to the customer, typically upon shipment.

Services sold to the U.S. government

The Company provides airtime to U.S. government subscribers through (i) fixed monthly fees on a per user basis for unlimited voice services, (ii) fixed monthly fees per user for unlimited paging services, (iii) a tiered pricing plan (based on usage) per device for data services, (iv) fixed monthly fees on a per user basis for unlimited beyond-line-of-sight push-to-talk voice services to user-defined groups ("Netted Iridium"), and (v) a monthly fee for active user-defined groups using Netted Iridium. Revenue related to these services is recognized ratably over the periods in which the services are provided, and the related costs are expensed as incurred. The U.S. government purchases its subscriber equipment from third-party distributors and not directly 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 certain engineering services to assist customers in developing new technologies for use on the Company's satellite system. The revenue associated with these services is recorded when the services are rendered, typically on a proportional performance method of accounting based on the Company's estimate of total costs expected to complete the contract, and the related costs are expensed as incurred. 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 portion of revenue on research and development arrangements that is contingent upon the achievement of substantive milestone events is recognized in the period in which the milestone is achieved.

Warranty Expense

The Company provides the first end-user purchaser of its products a warranty on subscriber equipment for one to five years from the date of purchase by such first end-user, depending on the product. A warranty accrual is recorded when it is estimable and probable that a loss has been incurred. A warranty reserve is maintained based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties are recorded as cost of subscriber equipment sales and include equipment replacements, repairs, freight, and program administration. The roll-forward of the warranty accrual for the years ended December 31, 2011 and 2010 is as follows:

 

     2011     2010  
     (In thousands)  

Balance at beginning of the period

    $ 2,307      $ 726   

Provision

      3,483        2,932   

Utilization

      (1,689 )      (1,351 ) 
  

 

 

    

 

 

  

Balance at end of the period

    $ 4,101      $ 2,307   
  

 

 

    

 

 

  

Research and Development

Research and development costs are charged to expense in the period in which they are incurred.

Advertising Costs

Costs associated with advertising and promotions are expensed as incurred. Advertising expenses were $0.6 million, $0.6 million and $0.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Income Taxes

The Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. For interim periods, the Company recognizes a provision (benefit) for income taxes based on an estimated annual effective tax rate expected for the entire year. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is "more likely than not" that the position is sustainable based on its technical merits. The Company's policy is to recognize interest and penalties on uncertain tax positions as a component of income tax expense.

Net Income (Loss) Per Share

The Company calculates basic net income (loss) per share by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share takes into account the effect of potential dilutive common shares when the effect is dilutive. The effect of potential dilutive common shares, consisting of common stock issuable upon exercise of outstanding stock options and stock purchase warrants, is computed using the treasury stock method. The Company's unvested restricted stock units contain non-forfeitable rights to dividends and therefore are considered to be participating securities in periods of net income. The calculation of basic and diluted net income per share excludes net income attributable to the unvested restricted stock units from the numerator and excludes the impact of unvested restricted stock units from the denominator.

 

Accounting Developments

In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2009-13, "Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force" ("ASU 2009-13"). ASU 2009-13 amends existing accounting guidance for separating consideration in multiple-deliverable arrangements. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific evidence is not available, or the estimated selling price if neither vendor-specific evidence nor third-party evidence is available. ASU 2009-13 eliminates the residual method of allocation and requires that consideration be allocated at the inception of the arrangement to all deliverables using the "relative selling price method." The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable's selling price. ASU 2009-13 requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis. The Company adopted the provisions of ASU 2009-13 effective January 1, 2011 for revenue arrangements entered into or materially modified beginning on or after that date.

The adoption of ASU 2009-13 did not have any effect on the Company's consolidated balance sheets, statements of operations or statements of cash flows as of or for the year ended December 31, 2011. The Company is not able to reasonably estimate the effect of adopting this standard on future periods because the impact will vary based on the nature and volume of new or materially modified revenue arrangements in any given period.

Significant Accounting Policies And Basis Of Presentation

2. Significant Accounting Policies and Basis of Presentation

Principles of Consolidation and Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The accompanying consolidated financial statements include the accounts of Iridium and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Reclassifications

Approximately $1.0 million of selling, general and administrative expense for the six months ended June 30, 2009 has been reclassified to cost of services (exclusive of depreciation and amortization).

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires Iridium to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ materially from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject Iridium to concentrations of credit risk consist primarily of cash and cash equivalents and receivables. The majority of this cash is swept nightly into a money market fund with a diversified portfolio. Iridium performs credit evaluations of its customers' financial condition and records reserves to provide for estimated credit losses. Accounts receivable are due from both domestic and international customers (see Note 11). Iridium maintained its cash and cash equivalents with financial institutions with high credit ratings, although at times Iridium maintained deposits in federally insured financial institutions in excess of federally insured (FDIC) limits.

Cash and Cash Equivalents

Iridium considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The cash and cash equivalents balances at December 31, 2008 and 2007 consisted of cash deposited in institutional money market mutual funds and regular interest bearing and non-interest bearing depository accounts and certificates of deposits with commercial banks.

 

Accounts Receivable

Trade accounts receivable are generally recorded at the invoiced amount and are subject to late fee penalties. Accounts receivable are stated net of allowances for doubtful accounts. Iridium had no allowance for doubtful accounts at December 31, 2008 or 2007. Iridium develops its estimate of this allowance based on Iridium's experience with specific customers, aging of outstanding invoices, its understanding of their current economic circumstances and its own judgment as to the likelihood that it will ultimately receive payment. Iridium writes off its accounts receivable when balances are deemed uncollectible.

Foreign Currencies

The functional currency of Iridium's foreign consolidated subsidiaries is its local currency. Assets and liabilities of its foreign subsidiaries are translated to United States dollars based on exchange rates at the end of the reporting period. Income and expense items are translated at the weighted average exchange rates prevailing during the reporting period. Translation adjustments are accumulated in a separate component of members' equity. Transaction gains or losses are classified as "Interest income and other income (expense), net" in the statements of income.

Inventory

Inventory consists primarily of finished goods including Iridium OpenPort terminals, handsets, L-Band transceivers, data devices, related accessories, and replacement parts to be sold to customers to access Iridium services. Iridium also has raw materials from third-party manufacturers. Iridium outsources manufacturing of subscriber equipment primarily to a third-party manufacturer and purchases accessories from third-party suppliers. Iridium's cost of inventory includes an allocation of overhead (including salaries and benefits of employees directly involved in bringing inventory to its existing condition, scrap, tooling and freight). Inventories are valued using the average cost method, and are carried at the lower of cost or market.

Accounting for Equity-Based Compensation

Iridium accounts for equity-based compensation at fair value; accordingly Iridium expenses the estimated fair value of share-based awards made in exchange for employee services over the requisite employee service period. Share-based compensation cost is determined at the grant date using the Black-Scholes option pricing model. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee's requisite service period and is classified in the statement of income in a manner consistent with the statement of income's classification of the employee's salaries. No grants of equity based compensation occurred in 2009.

The expected volatility assumption used in the option pricing model was based on a review of the expected volatility of publicly traded entities similar to Iridium, which Iridium believes is a reasonable indicator of the expected volatility. The risk-free interest rate assumption is based upon U.S. Treasury Bond interest rates with terms similar to the expected term of the award. The dividend yield assumption is based on Iridium's history of not declaring and paying dividends. The expected term is based on Iridium's best estimate for the period of time for which the instrument is expected to be outstanding.

Since Iridium was a nonpublic entity, Iridium can make a policy decision regarding whether to measure all of the liabilities incurred under share-based payment arrangements at fair value or to measure all such liabilities at intrinsic value. Iridium's policy is to measure all share-based payment liabilities using the intrinsic value method. This intrinsic value is then amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

As a result of the Acquisition, certain employee share-based awards and certain other employee benefits were automatically accelerated in vesting. The acceleration resulted in an additional $3.8 million expense in the consolidated statement of income for the period January 1, 2009 to September 29, 2009 (the "2009 Period"). As of September 29, 2009, the closing date of the Acquisition, there were no equity based awards outstanding.

Property and Equipment

Property and equipment is carried at cost less accumulated depreciation. Leasehold improvements are depreciated over the shorter of their useful life or their remaining lease term. Depreciation is calculated using the straight-line method over the following estimated useful lives:

 

Satellite system

    14 years

Terrestrial system

    7 years

Equipment

    3 - 5 years

Gateway system

    5 years

Internally developed software and purchased software

    3 - 7 years

Building

    39 years

Leasehold improvements

    Shorter of estimated useful life or remaining lease term

 

Iridium capitalizes interest costs associated with the construction of capital assets and amortizes the cost over the assets' useful lives beginning when the assets are placed in service. Repairs and maintenance costs are expensed as incurred.

Depreciation expense was $10.9 million and $12.5 million for the 2009 Period and the year ended December 31, 2008, respectively.

Long-Lived Assets

Iridium assesses the impairment of long-lived assets when indicators of impairment are present. Recoverability of assets is measured by comparing the carrying amounts of the assets to the future undiscounted cash flows expected to be generated by the assets. Any impairment loss would be measured as the excess of the assets' carrying amount over their fair value. Fair value is based on market prices where available, an estimate of market value or various valuation techniques.

The carrying value of a satellite lost as a result of an in-orbit failure would be charged to operations upon the occurrence of the loss. Iridium recorded $0.1 million of impairment charges in both the 2009 Period and the year ended December 31, 2008 for lost use on satellites.

Convertible Subordinated Note

In October 2008, Iridium issued to Greenhill & Co. Europe Holdings Limited (the "Holder"), a $22.9 million 5% convertible subordinated note due October 2015 (the "Note"). Iridium has determined that the embedded derivatives contained in the Note (including the conversion option, the Holder's put options and Iridium's call option) do not require separate accounting, and therefore Iridium accounted for the Note as a conventional convertible debt instrument. There are no beneficial conversion features associated with the Note. Interest on the Note began accruing in April 2009 at 5% per year. Iridium recorded periodic interest cost using the effective interest rate method.

Deferred Financing Costs

Costs incurred in connection with securing debt financing have been deferred and are amortized as additional interest expense using the effective interest method over the term of the related debt.

Asset Retirement Obligations

Liabilities arising from legal obligations associated with the retirement of long-lived assets are required to be measured at fair value and recorded as a liability. Upon initial recognition of a liability for retirement obligations, a company must record an asset, which is depreciated over the life of the asset to be retired.

Under certain circumstances, each of the U.S. government, The Boeing Company ("Boeing") and Motorola, Inc. ("Motorola") has the unilateral right to require the de-orbit of Iridium's satellite constellation. In the event Iridium was required to effect a mass de-orbit, Iridium, pursuant to the amended and restated operations and maintenance agreement with Boeing (the "O&M Agreement"), would be required to pay Boeing $16.0 million, plus an amount equivalent to the premium for inception of Section B de-orbit insurance coverage ($2.5 million as of December 31, 2008). Iridium has concluded that each of the foregoing de-orbit rights meets the definition of a legal obligation and currently does not believe the U.S. government, Boeing or Motorola will exercise their respective de-orbit rights. As a result, Iridium believes the likelihood of any future cash outflows associated with the mass de-orbit obligation is remote. Accordingly, Iridium has not recorded an asset retirement obligation relating to the potential de-orbit rights.

There are other circumstances in which Iridium could be required, either by the U.S. government or for technical reasons, to de-orbit an individual satellite; however, Iridium believes that such costs would not be significant relative to the costs associated with the ordinary operations of the satellite constellation.

Revenue Recognition

Iridium derives its revenue primarily as a wholesaler of satellite communications products and services. The primary types of revenue include (i) services revenue (access and usage-based airtime fees) and (ii) subscriber equipment revenue. Additionally, Iridium generates revenue by providing engineering and support services to commercial and government customers.

 

Wholesaler of satellite communications products and services

Pursuant to wholesale agreements, Iridium 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. Generally, Iridium recognizes revenue when services are performed or delivery has occurred, evidence of an arrangement exists, the fee is fixed or determinable, and collection is probable, as follows:

Contracts with multiple elements

At times, Iridium sells subscriber equipment through multi-element contracts that bundle subscriber equipment with airtime services. When it sells subscriber equipment and airtime services in bundled arrangements that include guaranteed minimum orders and determines that it has separate units of accounting, Iridium allocates the bundled contract price among the various contract deliverables based on each deliverable's relative fair value. Iridium determines vendor specific objective evidence of fair value by assessing sales prices of subscriber equipment and airtime services when they are sold to customers on a stand-alone basis.

Services revenue sold on a stand-alone basis

Services revenue is generated from Iridium'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 ratably over the period in which the services are provided to the end-user. Revenue from prepaid services is recognized when usage occurs or, if not used, when the customer's right to access the unused prepaid services expires. Iridium does not offer refund privileges for unused prepaid services. Deferred prepaid services revenue and access fees are typically earned and recognized as income within one year of customer prepayment. Based on historical information for prepaid scratch card services that do not have an initial expiration date, Iridium records breakage associated with prepaid scratch card account balances for which the likelihood of redemption is remote, which is generally determined after 36 months from issuance.

Subscriber equipment sold on a stand-alone basis

Iridium recognizes subscriber equipment sales and the related costs when title to the equipment (and the risks and rewards of ownership) passes to the customer, typically upon shipment.

Services and subscriber equipment sold to the U.S. government

Iridium provides airtime to U.S. government subscribers through (i) fixed monthly fees on a per user basis for unlimited voice services, (ii) fixed monthly fees per user for unlimited paging services and (iii) a tiered pricing plan (based on usage) per device for data services. Revenue related to these services is recognized ratably over the periods in which the services are provided; and costs are expensed as incurred. The U.S. government purchases its equipment from third-party service providers and not directly from Iridium.

Government engineering and support services

Iridium provides maintenance services to the U.S. government's dedicated gateway in Hawaii. This revenue is recognized ratably over the periods in which the services are provided; costs are expensed as incurred.

Other government and commercial engineering and support services

Iridium also provides certain engineering services to assist customers in developing new technologies for use on the Iridium satellite system. The revenue associated with these services is recorded when the services are rendered, typically on a percentage of completion method of accounting based on Iridium's estimate of total costs expected to complete the contract; and costs are expensed as incurred. Revenue on cost-plus-fixed-fee contracts is recognized to the extent of estimated costs incurred plus the applicable fees earned. Iridium considers fixed fees under cost-plus-fixed-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.

Warranty Expense

Iridium generally provides its customers a warranty on subscriber equipment for one to two years from the date of activation, depending on the product. A warranty accrual is made when it is estimable and probable that a loss has been incurred. A warranty reserve is maintained based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties are recorded as cost of subscriber equipment sales and include equipment replacements, repairs and program administration.

 

The following is a summary of the activity in the warranty reserve account:

 

     For the 2009 Period     For the Year Ended
December 31,
2008		  
     (In thousands)  

Balance at beginning of period

    $ (381 )    $ (483 ) 

Provision

      (1,256 )      (318 ) 

Utilization

      976        420   
  

 

 

    

 

 

  

Balance at end of period

    $ (661 )    $ (381 ) 
  

 

 

    

 

 

  

Research and Development

Research and development costs are charged as an expense in the period in which they are incurred.

Advertising Costs

Costs associated with advertising and promotions are expensed as incurred. Advertising expenses, primarily consisting of print media, were $0.3 million, and $0.5 million in the 2009 Period and the year ended December 31, 2008, respectively.

Income and Other Taxes

As a limited liability company that is treated as a partnership for federal income tax purposes, Iridium Holdings is generally not subject to federal or state income tax directly. Rather, each member is subject to income taxation based on the member's portion of Iridium Holdings' income or loss, as defined in Iridium Holdings' amended and restated limited liability company agreement (the "LLC Agreement"). Iridium Holdings is subject to income taxes in certain non-U.S. jurisdictions in which its foreign affiliates operate.

Accounting Developments

In February 2007, the Financial Accounting Standards Board ("FASB") issued accounting guidance that permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. This accounting guidance does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. Iridium has chosen not to adopt the alternative provided in this statement.

In April 2009, the FASB issued accounting guidance for other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The accounting guidance is effective for interim and annual periods ending after June 15, 2009. Iridium adopted the accounting guidance in the second quarter of 2009 and the adoption did not have a material impact on its financial position or results of operations.

In May 2009, the FASB issued accounting guidance for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The accounting guidance applies prospectively to both interim and annual financial periods ending after June 15, 2009. Iridium adopted the accounting guidance for subsequent events in the second quarter of 2009 and the adoption did not have a material impact on the reporting of its subsequent events.

Business Combination
Business Combination

3. Business Combination

On September 22, 2008, the Company entered into a transaction agreement, as amended on April 28, 2009, with Iridium Holdings and its members whereby it agreed to purchase all of the outstanding equity of Iridium Holdings. The Acquisition closed on September 29, 2009. For the purpose of acquisition accounting, total consideration of approximately $436.0 million included 29.4 million shares of the Company's common stock ("Common Stock") valued at $333.4 million and $102.6 million in cash (which included a requirement to make a payment of $25.5 million in cash to some of the former members of Iridium Holdings for tax benefits the Company received). The Company accounted for its acquisition of Iridium Holdings by recording all assets acquired and liabilities assumed at their respective fair values on the date of Acquisition. The Company recognized deferred tax assets and liabilities for the tax effects of the differences between assigned book values and tax bases of assets acquired and liabilities assumed in the Acquisition.

An acquirer is required to recognize as expense the direct costs of a business combination in the period in which the expense is incurred. Accordingly, the Company expensed Acquisition-related costs as they were incurred during the pre-Acquisition period presented.

$76.0 million of revenue and $5.0 million of net loss of Iridium was included in the Company's consolidated statement of operations for the period from the date of the Acquisition to December 31, 2009.

Equity Instruments
Equity Instruments

4. Equity Instruments

$7.00 Warrants – General Terms

In connection with the Company's initial public offering ("IPO") in February 2008, the Company sold 40.0 million units at a price of $10.00 per unit. Each unit consisted of one share of Common Stock and one Common Stock purchase warrant ("$7.00 warrant"). Each $7.00 warrant entitled the holder to purchase from the Company one share of Common Stock at a price of $7.00 per share.

The Company may redeem each of the $7.00 warrants at a price of $0.01 upon 30 days' prior notice, provided that the warrants are exercisable and the registration statement covering the Common Stock issuable upon exercise of the warrants remains effective and available, and provided further that such redemption can only be made if the closing price of the Common Stock is at least $14.25 per share (the "redemption price") for any 20 trading days within a 30-trading-day period ending on the third day prior to the date on which notice of redemption is given. If a registration statement is not effective at the time of exercise, the holders of the $7.00 warrants will not be entitled to exercise the warrants, and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle any such warrant exercise. Consequently, the $7.00 warrants could expire unexercised and unredeemed. The number of shares of Common Stock issuable upon the exercise of each $7.00 warrant is subject to adjustment from time to time upon the occurrence of certain events. The $7.00 warrants expire in 2013. As of December 31, 2011 and 2010, the Company had 13,653,704 and 13,653,804 of such $7.00 warrants outstanding, respectively. All outstanding $7.00 warrants are classified within stockholders' equity.

$11.50 Warrants – General Terms

On September 29, 2009, in connection with the acquisition of Iridium Holdings, holders of approximately 14.4 million $7.00 warrants exchanged their existing warrants for new $11.50 warrants.

 

The Company may redeem each of the $11.50 warrants at a price of $0.01 upon 30 days prior notice, provided that the warrants are exercisable and the registration statement covering the Common Stock issuable upon exercise of the warrants remains effective and available, and provided further that such redemption can only be made if the closing price of the Common Stock is at least $18.00 per share for any 20 trading days within a 30-trading-day period ending on the third day prior to the date on which notice of redemption is given. If the registration statement is not still effective at the time of exercise, the holders of the $11.50 warrants will not be entitled to exercise the warrants, and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle any such warrant exercise. Consequently, the $11.50 warrants may expire unexercised and unredeemed. The number of shares of Common Stock issuable upon the exercise of each $11.50 warrant is subject to adjustment from time to time upon the occurrence of specified events. The $11.50 warrants expire in 2015.

During 2011, the Company entered into several private transactions (the "Private Warrant Exchanges") to exchange shares of its Common Stock for outstanding $11.50 warrants. As a result of these transactions, the Company issued an aggregate of 1,643,453 unrestricted shares of its Common Stock in exchange for an aggregate of 8,167,541 $11.50 warrants. Additionally, during 2011, the Company initiated and completed a tender offer to exchange outstanding $11.50 warrants for unrestricted shares of its Common Stock (the "Tender Offer Warrant Exchange"). As a result of the Tender Offer Warrant Exchange, the Company issued an aggregate of 1,303,272 unrestricted shares of its Common Stock in exchange for an aggregate of 5,923,963 of the $11.50 warrants.

As of December 31, 2011 and 2010, the Company had 277,021 and 14,368,525 of the $11.50 warrants outstanding, respectively. All outstanding $11.50 warrants are classified within stockholders' equity.

Equity Transactions

During 2009, the Company sold to the public 16.0 million shares of Common Stock for net proceeds of $148.8 million. Concurrent with the offering, the Company repurchased, pursuant to existing forward contracts, 16.3 million shares of Common Stock for $164.9 million. In addition, the Company repurchased approximately 9.2 million shares of Common Stock for $91.7 million, representing the shares held by those stockholders who voted against the Acquisition. In September 2009, 8.4 million $7.00 warrants originally purchased in November 2007 and 4.0 million $7.00 warrants originally purchased in February 2008 were forfeited by their holders.

Debt
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Debt

5. Debt

Credit Facility

On October 4, 2010, the Company entered into a $1.8 billion loan facility (the "Credit Facility") with a syndicate of bank lenders. Ninety-five percent of the Company's obligations under the Credit Facility are insured by Compagnie Française d'Assurance pour le Commerce Extérieur ("COFACE"), the French export credit agency. The Credit Facility is comprised of two tranches, with draws and repayments applied pro rata in respect of each tranche:

 

  •  

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

 

  •  

Tranche B – $262,500,000 at a floating rate equal to the London Interbank Offer Rate ("LIBOR") plus 1.95%.

Interest is payable on a semi-annual basis in April and October of each year. Prior to the repayment period described below, a portion of interest will be paid via a deemed loan and added to the related tranche principal. The amount of interest paid via a deemed loan for each tranche is as follows:

 

  •  

Tranche A – fixed rate of 3.56%; and

 

  •  

Tranche B – LIBOR plus 0.55%.

For the years ended December 31, 2011 and 2010, the Company incurred total interest expense of $11.9 million and $1.1 million, respectively, of which $8.3 million and $0.8 million, respectively, was paid via a deemed loan and the remainder paid in cash on the scheduled semi-annual payment dates.

In connection with each draw it makes under the Credit Facility, the Company also borrows an amount equal to 6.49% of such draw to cover the premium for the COFACE policy. The Company also pays a commitment fee of 0.80% per year, in semi-annual installments, on any undrawn portion of the Credit Facility. In addition, pursuant to separate fee letters entered into at the same time as the Credit Facility, the Company paid arrangement fees to the syndicate banks totaling $46.6 million on October 29, 2010.

Funds drawn under the Credit Facility will be used for (i) 85% of the costs under a fixed price full scale development contract with Thales Alenia Space France ("Thales") for the design and manufacture of satellites for Iridium NEXT (the "FSD"), (ii) the premium for the COFACE policy, and (iii) the payment of a portion of interest during a part of the construction and launch phase of Iridium NEXT.

Scheduled semi-annual principal repayments will begin six months after the earlier of (i) the successful deployment of a specified number of Iridium NEXT satellites or (ii) September 30, 2017. During this repayment period, interest will be paid on the same date as the principal repayments. Interest expense incurred during the year ended December 31, 2011 was $11.9 million. All interest costs incurred related to the Credit Facility have been capitalized during the construction period of the assets; accordingly the Company capitalized $11.9 million related to interest incurred throughout the year. The Company pays interest on each semi-annual due date through a combination of a cash payment and a deemed additional loan. The $11.9 million in interest incurred during the year ended December 31, 2011 consisted of $3.6 million payable in cash, of which $2.7 million was paid during the year and $0.9 million was accrued at year end, and $8.3 million payable by deemed loans, of which $6.3 million was paid during the year and $2.0 million was accrued at year end. Total interest payable associated with the Credit Facility was $2.9 million and $1.1 million and is included in interest payable in the consolidated balance sheets as of December 31, 2011 and 2010, respectively.

The Credit Facility will mature seven years after the start of the repayment period. In addition, the Company is required to maintain minimum debt service reserve levels, which are estimated as follows:

 

At December 31,

    Amount  
     (in millions)  

2012

    $ 54   

2013

      81   

2014

      108   

2015

      135   

2016

      162   

2017

      189   

These levels may be higher once the Company begins repayment under the Credit Facility. The minimum debt service reserve level at December 31, 2011 was $27.0 million which is included in restricted cash on the consolidated balance sheet. Obligations under the Credit Facility are secured on a senior basis by a lien on substantially all of the Company's assets.

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

 

  •  

a minimum cash requirement;

 

  •  

a minimum debt to equity ratio level;

 

  •  

maximum capital expenditure levels;

 

  •  

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

 

  •  

minimum cash flow requirements from customers who have hosted payloads on the Company's satellites;

 

  •  

minimum debt service reserve levels;

 

  •  

a minimum debt service coverage ratio level; and

 

  •  

maximum leverage levels.

The covenants also place limitations on the ability of the Company and its subsidiaries to carry out mergers and acquisitions, dispose of assets, grant security interests, declare, make or pay dividends, enter into certain transactions with affiliates, fund payments under the FSD from its own resources, incur debt, or make loans, guarantees or indemnities.

As of December 31, 2011, the Company had borrowed $417.1 million under the Credit Facility. The unused portion of the Credit Facility as of December 31, 2011 was approximately $1.4 billion. The Company recognized the semi-annual commitment fee on the undrawn portion of the Credit Facility of $13.5 million and $2.4 million for the years ended December 31, 2011 and 2010, respectively.

Debt

5. Credit Facility

On July 27, 2006, Iridium entered into a $170.0 million first lien credit facility and $40.0 million second lien credit facility (collectively, the "Credit Facility"). The Credit Facility includes a $98.0 million four-year first lien Tranche A term loan facility, a $62.0 million five-year first lien Tranche B term loan facility, and a $40.0 million six-year second lien term loan facility. In addition, the facilities include a $10.0 million three-year revolving credit facility. The proceeds of the Credit Facility were used to repay Iridium's then existing credit facilities, provide cash collateral for letters of credit, return capital to Iridium's equity investors and for general corporate purposes including development of new and advanced devices and services. Iridium elected the Eurodollar base interest rate for the calculation of interest and currently uses the London Interbank Offered Rate ("LIBOR"), which is an acceptable substitute to the Eurodollar base rate according to the Credit Facility agreement.

Mandatory principal prepayments are required based on net cash proceeds related to debt or equity issuances and certain dispositions, as is a mandatory prepayment of 75% of excess cash flow, determined by a defined formula. Iridium must also maintain hedge agreements in order to provide interest rate protection on a minimum of 50% of the aggregate principal amounts outstanding during the first three years of the Credit Facility. As a result, Iridium entered into four interest rate swap agreements upon the closing of the Credit Facility that ranged in duration from one to four years and collectively in July 2006 provided interest rate protection on $170.0 million (see Note 12).

 

The Credit Facility requires Iridium to abide by various covenants primarily related to limitations on liens, indebtedness, sales of assets, investments, dispositions, distributions to members, transactions with affiliates and certain financial covenants with respect to its consolidated leverage ratio on a quarterly basis. Iridium was compliant with all covenants required by the Credit Facility at December 31, 2008 and 2007. Substantially all of Iridium's assets are pledged as collateral for the Credit Facility.

On October 17, 2008, Iridium entered into Amendment No. 1 to the first lien credit facility ("First Lien Amendment") and Amendment No. 1 to the second lien credit facility ("Second Lien Amendment"). The First Lien Amendment and Second Lien Amendment included the consent of the respective lenders to the issuance of the Convertible Subordinated Note with Greenhill & Co. Europe Holdings Limited (see Note 6).

Pursuant to the First Lien Amendment, Iridium and its requisite lenders agreed to, among other things: (i) increase the applicable margin for Eurodollar loans by 75 basis points to 5%; (ii) increase permitted capital expenditures for 2008 and 2009; (iii) permit distributions of up to $37.9 million to the members of Iridium in 2008; (iv) require Iridium to prepay $80.0 million of the outstanding balance if the Acquisition was consummated and $15.0 million if the Acquisition was not consummated by June 29, 2009. $15.0 million was paid in June 2009. If the Acquisition was consummated after June 29, 2009 Iridium was required to prepay the remaining $65.0 million upon the Acquisition; and (v) to amend the definition of "Change of Control" to apply to the post-acquisition public company. Upon the execution of the First Lien Amendment, Iridium prepaid $22.0 million of the outstanding balance under the first lien credit facility.

Pursuant to the Second Lien Amendment, Iridium and its requisite lenders agreed to, among other things: (i) increase the applicable margin for Eurodollar loans by 75 basis points to 9%; (ii) increase permitted capital expenditures for 2008 and 2009; (iii) permit distributions of up to $37.9 million to the members of Iridium in 2008; and (iv) amend the definition of "Change of Control" to apply to the post-Acquisition public company. As a result of the Acquisition, Iridium Communications Inc. assumed liability for the Credit Facility and paid all outstanding amounts under the Credit Facility on September 30, 2009, which resulted in the Credit Facility being no long in effect.

$10.0 million First Lien Revolving Credit Facility

The proceeds of the revolving credit facility may be used for general corporate purposes of Iridium. Iridium paid an up-front fee of 2% on the revolving facility ($0.2 million) and pays an annual unused facility fee of 0.5% on the available balance of the commitment on a quarterly basis. As of December 31, 2008, Iridium had not drawn any amounts under the revolving credit facility. Notwithstanding Iridium's rights to access the credit facility, Iridium is subject to counterparty risk associated with future access to the revolving credit facility, as one of the counterparties to the revolving credit facility filed for bankruptcy during 2008. The revolving credit facility matured on July 27, 2009.

$98.0 million First Lien Tranche A Term Loan

The Tranche A term loan matures on June 30, 2010, and requires quarterly principal payment amounts ranging from $2.25 million to $9.75 million. Quarterly interest payments are also made. LIBOR, including the applicable margin of 5.00% and 4.25%, was 8.47% and 9.24% at December 31, 2008 and 2007, respectively. Iridium can prepay the First Lien Tranche A term loan in its entirety for par. At December 31, 2008 and 2007, the outstanding principal balance was $37.2 million and $63.9 million, respectively. As a result of the Acquisition, Iridium Communications Inc. assumed the loan and the outstanding balance was paid on September 30, 2009.

$62.0 million First Lien Tranche B Term Loan

The Tranche B term loan matures on July 27, 2011, and requires quarterly principal payment amounts starting on September 30, 2010 in the amount of $14.9 million. Quarterly interest payments are also made. LIBOR including the applicable margin of 5.00% and 4.25%, was 8.47% and 9.24% at December 31, 2008 and 2007, respectively. Iridium can prepay the First Lien Tranche B term loan in its entirety at par. At December 31, 2008 and 2007, the outstanding balance was $59.7 million and $60.5 million, respectively. As a result of the Acquisition, Iridium Communications Inc. assumed the loan and the outstanding balance was paid on September 30, 2009.

$40.0 million Second Lien Term Loan

The Second Lien term loan matures on July 27, 2012, at which time the entire $40.0 million principal amount is due. LIBOR including the applicable margin of 9.00% and 8.25%, was 12.47% and 13.24% at December 31, 2008 and 2007, respectively. Iridium is required to make quarterly interest payments. The Second Lien term loan can be prepaid in its entirety at 101% through July 27, 2009, and at par thereafter. At December 31, 2008 and 2007, the outstanding balance was $40.0 million. As a result of the Acquisition, Iridium Communications Inc. assumed the loan and the outstanding balance was paid on September 30, 2009.

As a result of the Acquisition, Iridium Communications Inc. assumed the Credit Facility and the outstanding balance was paid on September 30, 2009.

Motorola Settlement
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Motorola Settlement

6. Motorola Settlement

On October 1, 2010, the Company entered into a Settlement Agreement (the "Settlement Agreement") with Motorola, pursuant to which the parties settled the litigation filed by Motorola against Iridium Satellite and Iridium Holdings in the Circuit Court of Cook County, Illinois, County Department – Chancery Division (captioned Motorola, Inc. vs. Iridium Satellite LLC and Iridium Holdings LLC, Docket No. 10 CH 05684). On the same date, the parties entered into a series of other agreements. Pursuant to the Settlement Agreement, which contains no admission of liability by any party, and the certain other agreements entered into on the same date, the Company agreed to pay Motorola an aggregate of $46.0 million, in consideration of payment of debt of $15.4 million otherwise due in 2010, expanded intellectual property licenses, the conversion of existing intellectual property licenses from being royalty-based to prepaid, transfer to the Company of ownership of certain intellectual property rights, termination of Motorola's rights to distributions and payments based on the value of the Company upon certain "triggering events" and mutual releases of claims. Of the total $46.0 million, the Company paid $23.0 million contemporaneously with the execution of the Settlement Agreement and the remaining $23.0 million was reflected in the Promissory Note the Company issued to Motorola, which bore interest at the rate of 10%. In December 2010, the Company paid $0.8 million to Motorola which was applied against the Promissory Note principal. In May 2011, the Company paid $23.6 million to Motorola Solutions, successor to Motorola, as a payment in full for the outstanding balance of the Promissory Note, including accrued interest. Interest costs of $0.8 million and $0.6 million for the years ended December 31, 2011 and 2010, respectively, was capitalized as part of the Company's assets under construction and included within property and equipment, net in the consolidated balance sheets.

In conjunction with the execution of the Settlement Agreement, Iridium Satellite and Motorola terminated the Senior Subordinated Term Loan Agreement and also amended and restated the existing transition services, products and asset agreement to eliminate provisions which by completion or passage of time were deemed unnecessary. The Company's insurance requirements and Motorola Solutions' de-orbit rights under the transition services, products and asset agreement, or the TSA, remain materially unchanged.

In addition, the Company and Motorola entered into a System Intellectual Property Rights Amendment and Agreement and a Supplemental Subscriber Equipment Technology Amendment and Agreement. Pursuant to those two agreements, the Company broadened its existing licenses to certain Motorola intellectual property for use with its current satellite constellation and subscriber equipment, and the Company received licenses to such intellectual property for use with Iridium NEXT and future subscriber equipment.

Motorola Settlement

7. Motorola Note Agreement

On December 11, 2000, Iridium entered into a Senior Subordinated Term Loan Agreement (the "Note Agreement"), pursuant to which Iridium borrowed $30 million from Motorola, as evidenced by a senior subordinated term note ("Motorola Note") dated December 11, 2000. The principal amount of, and all interest accrued on, the Motorola Note, was paid in full on May 27, 2005. However, as detailed below, certain payment obligations survive this repayment.

Under the Note Agreement, Iridium is required to pay Motorola a commitment fee of $5.0 million upon the earlier of December 11, 2010, and the occurrence of a "trigger event." A "trigger event" means the first to occur of: (a) the occurrence of a change of control (as defined in the Note Agreement), (b) the consummation of an initial public offering by Iridium Holdings or Iridium Satellite, or (c) the sale of all or a material portion of the assets of Iridium Holdings or Iridium Satellite. Iridium is accruing the commitment fee through December 2010 using the effective-interest method.

Additionally, in the event of a "distribution event," Iridium is required to pay Motorola a loan success fee equal to the amount that a holder of Class B units in Iridium constituting 5% of the total number of issued and outstanding units (both Class A and B) would have received in the distribution event. A "distribution event" means the (i) direct or indirect (a) payment of any dividend or other distribution (in the form of cash or otherwise) in respect of the equity interests of Iridium or (b) purchase, conversion, redemption or other acquisition for value or otherwise by Iridium of any equity interest in Iridium or (ii) initial public or any secondary offering by Iridium Holdings or Iridium Satellite in which any holders of equity interests in Iridium are afforded the opportunity to participate as a selling equity holder in such offering. Iridium paid Motorola $2.2 million in loan success fees as required in the year ended December 31, 2008, and $0 in the 2009 Period (see Note 10).

Finally, in addition to the above obligations, upon the first to occur of (a) any change of control (as defined in the Note Agreement) or (b) the sale of all or a material portion of Iridium Holdings or Iridium Satellite, Iridium is required to pay a cash amount equal to the lesser of (i) an amount to be determined based on a multiple of earnings before interest, taxes, depreciation, and amortization less capital contributions not returned to Class A Unit holders and the amount of the $5.0 million commitment fee discussed above which has been or is concurrently being paid and (ii) the value of the consideration that a holder of Class B Units in Iridium constituting 5% of the total number of issued and outstanding units (both Class A and B) would receive in the transaction. See Note 18 for information on Motorola's complaint against Iridium in 2010.

Boeing Operations And Maintenance Agreements
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Boeing Operations And Maintenance Agreements

7. Boeing Operations and Maintenance Agreements

As a result of the Acquisition, the Company acquired an operations and maintenance agreement between Iridium Constellation and Boeing, pursuant to which Boeing agreed to provide transition services and continuing steady-state operations and maintenance services with respect to the satellite network operations center, telemetry, tracking and control stations and the on-orbit satellites (including engineering, systems analysis, and operations and maintenance services). On July 21, 2010, the Company and Boeing entered into the O&M Agreement, which superseded the prior operations and maintenance agreement. Pursuant to the O&M Agreement, each of Boeing, Motorola Solutions and the U.S. government has the unilateral right to commence the de-orbit of the constellation upon the occurrence of certain enumerated events.

The O&M Agreement incorporates a de-orbit plan, which, if exercised, would cost approximately $16.9 million plus an amount equivalent to the premium of the de-orbit insurance coverage to be paid to Boeing in the event of a mass de-orbit of the satellite constellation. Under the prior operations and maintenance agreement, the Company was required to cause to be issued to Boeing a $15.4 million letter of credit as collateral for such costs. Under the O&M Agreement, the Company is no longer required to maintain a letter of credit and the prior letter of credit was allowed to expire in July 2010. In addition, on July 21, 2010, the Company and Boeing entered into an agreement pursuant to which Boeing will operate and maintain Iridium NEXT (the "NEXT Support Services Agreement"). Boeing will provide these services on a time-and-materials fee basis. The term of the NEXT Support Services Agreement runs concurrently with the estimated useful life of the Iridium NEXT constellation. The Company is entitled to terminate the agreement for convenience and without cause commencing in 2019.

Following the Acquisition, the Company incurred expenses of $34.3 million, $41.4 million and $11.9 million relating to satellite operations and maintenance costs for the years ended December 31, 2011, 2010 and 2009, respectively, included in cost of services (exclusive of depreciation and amortization) in the consolidated statements of operations.

Boeing Operations And Maintenance Agreements

4. Boeing Operations and Maintenance Agreement

On December 11, 2000, Iridium Constellation LLC ("Iridium Constellation"), a wholly owned subsidiary of Iridium Holdings, entered into an operations and maintenance agreement with Boeing, pursuant to which Boeing agreed to provide transition services and continuing steady-state operations and maintenance services with respect to the Iridium System (including engineering, systems analysis, and operations and maintenance services). Since Iridium Constellation initially entered into the agreement, there have been a number of amendments, including the O&M Agreement. As a result of these various amendments, the period of performance has been extended to be concurrent with the useful life of the satellite constellation, the schedule of monthly payments has been revised and a cost escalation according to a prescribed formula is now included. In addition, pursuant to the O&M Agreement, Boeing has the unilateral right to commence the de-orbit of the constellation upon the occurrence of certain enumerated events.

The O&M Agreement incorporates a revised de-orbit plan, which, if exercised, would cost approximately $16.0 million plus an amount equivalent to the premium of Section B de-orbit insurance coverage to be paid to Boeing in the event of a mass de-orbit of the satellite constellation. Iridium caused to be issued to Boeing a $15.4 million letter of credit as collateral for de-orbit costs. This letter of credit is cash collateralized, which is included in long-term restricted cash in the accompanying consolidated balance sheets.

Under the O&M Agreement, Iridium incurred expenses of $37.7 million and $48.7 million relating to satellite operations and maintenance costs for the 2009 Period and for the year ended December 31, 2008, respectively.

The O&M Agreement previously provided for Boeing to receive an additional fee of 5% of any amounts distributed to Class A or Class B members of Iridium to the extent that such distributions did not constitute a return of members' capital contributions or distributions in respect of the members' tax liabilities. Boeing was entitled to receive, upon any sale or exchange of substantially all of the interests of the Class A and B members to an unrelated third party, 5% of the aggregate amount received by the Class A and B members. During the 2009 Period and for the year ended December 31, 2008, related amortization expense was $0.9 million and $1.2 million, respectively.
Property And Equipment
Property And Equipment

8. Property and Equipment

Property and equipment consisted of the following at December 31:

 

     2011     2010  
     (In thousands)  

Satellite system

    $ 342,086      $ 347,057   

Ground system

      15,652        13,644   

Equipment

      19,793        16,595   

Internally developed software and purchased software

      29,955        10,717   

Building and leasehold improvements

      27,832        27,720   
  

 

 

    

 

 

  
     435,318        415,733   

Less: accumulated depreciation

      (176,995 )      (97,667 ) 
  

 

 

    

 

 

  
     258,323        318,066   

Land

      8,268        8,268   

Construction in process:

     

Iridium NEXT systems under construction

      569,439        226,636   

Other construction in process

      7,062        13,549   
  

 

 

    

 

 

  

Total property and equipment, net of accumulated depreciation

    $ 843,092      $ 566,519   
  

 

 

    

 

 

  

Other construction in process consisted of the following at December 31:

 

     2011      2010  
     (In thousands)  

Internally developed software

    $ 5,429       $ 11,036   

Equipment

      1,633         2,295   

Ground system

      —           218   
  

 

 

     

 

 

  

Total other construction in process

    $ 7,062       $ 13,549   
  

 

 

     

 

 

  

Depreciation expense for the years ended December 31, 2011 and 2010 was $84.6 million and $78.3 million, respectively. Following the Acquisition, depreciation expense for the year ended December 31, 2009 was $19.4 million.

Intangible Assets
Intangible Assets

9. Intangible Assets

As a result of the Acquisition, the Company had identifiable intangible assets as follows:

 

     December 31, 2011  
     Useful
Lives		    Gross
Carrying Value		      Accumulated
Amortization		     Net
Carrying Value		  
     (In thousands)  

Indefinite life intangible assets:

           

Trade names

    Indefinite    $ 21,195       $ —        $ 21,195   

Spectrum and licenses

    Indefinite      14,030         —          14,030   
     

 

 

     

 

 

    

 

 

  

Total

         35,225         —          35,225   

Definite life intangible assets:

           

Customer relationships - government

    5 years      20,355         (9,160 )      11,195   

Customer relationships - commercial

    5 years      33,052         (14,873 )      18,179   

Coe developed technology

    5 years      4,842         (2,179 )      2,663   

Intellectual property

    16.5 years  (1)      16,439         (1,263 )      15,176   

Software

    5 years      2,025         (911 )      1,114   
     

 

 

     

 

 

    

 

 

  

Total

         76,713         (28,386 )      48,327   
     

 

 

     

 

 

    

 

 

  

Total intangible assets

       $ 111,938       $ (28,386 )    $ 83,552   
     

 

 

     

 

 

    

 

 

  
     December 31, 2010  
     Useful
Lives		    Gross
Carrying Value		      Accumulated
Amortization		     Net
Carrying Value		  
     (In thousands)  

Indefinite life intangible assets:

           

Trade names

    Indefinite    $ 21,195       $ —        $ 21,195   

Spectrum and licenses

    Indefinite      14,030         —          14,030   
     

 

 

     

 

 

    

 

 

  

Total

         35,225         —          35,225   

Definite life intangible assets:

           

Customer relationships - government

    5 years      20,355         (5,089 )      15,266   

Customer relationships - commercial

    5 years      33,052         (8,263 )      24,789   

Coe developed technology

    5 years      4,842         (1,210 )      3,632   

Intellectual property

    16.5 years  (1)      16,439         (268 )      16,171   

Software

    5 years      2,025         (506 )      1,519   
     

 

 

     

 

 

    

 

 

  

Total

         76,713         (15,336 )      61,377   
     

 

 

     

 

 

    

 

 

  

Total intangible assets

       $ 111,938       $ (15,336 )    $ 96,602   
     

 

 

     

 

 

    

 

 

  

 

(1) Intellectual property is allocated over the estimated life of the existing satellite systems and Iridium NEXT, which averages to 16.5 years in useful lives.

The weighted average amortization period of intangible assets is 7.5 years. Amortization expense for the years ended December 31, 2011, 2010 and 2009, was $13.0 million, $12.3 million and $3.0 million, respectively.

Future amortization expense with respect to intangible assets existing at December 31, 2011, by year and in the aggregate, is as follows:

 

Year ending December 31,

    Amount  
     (In thousands)  

2012

    $ 13,050   

2013

      13,050   

2014

      10,036   

2015

      995   

2016

      995   

Thereafter

      10,201   
  

 

 

  

Total estimated future amortization expense

    $ 48,327  
  

 

 

  
Commitments And Contingencies
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Commitments And Contingencies

10. Commitments and Contingencies

Thales

In June 2010, the Company executed the FSD with Thales for the design and manufacture of satellites for Iridium NEXT. The total price under the FSD is approximately $2.2 billion, and the Company expects payment obligations under the FSD to extend into the third quarter of 2017. As of December 31, 2011, the Company had made total payments of $454.6 million to Thales, which were capitalized as construction in progress within property and equipment, net in the consolidated balance sheet. The Company's obligations to Thales that are currently scheduled for the years ending December 31, 2012, 2013, 2014, 2015 and 2016, are in the amounts of $418.9 million, $373.2 million, $361.8 million, $274.4 million and $186.1 million, respectively.

SpaceX

In March 2010, the Company entered into an agreement with Space Exploration Technologies Corp. ("SpaceX") to secure SpaceX as the primary launch services provider for Iridium NEXT (the "SpaceX Agreement"). The SpaceX Agreement, as amended, has a maximum price of $492.0 million. As of December 31, 2011, the Company has made total payments of $43.9 million to SpaceX, which has been capitalized as construction in progress within property and equipment, net in the consolidated balance sheet. The Company's obligations with SpaceX that are currently scheduled for the years ending December 31, 2012, 2013, 2014, 2015 and 2016, are in the amounts of $6.6 million, $28.6 million, $112.8 million, $172.8 million and $106.1 million, respectively.

Kosmotras

In June 2011, the Company entered into an agreement with International Space Company Kosmotras ("Kosmotras") as a supplemental launch service provider for Iridium NEXT (the "Kosmotras Agreement"). The Kosmotras Agreement provides for the purchase of up to six launches with options to purchase additional launches. Each launch will carry two satellites. If all six launches are purchased, the Company will pay Kosmotras a total of approximately $184.3 million. As of December 31, 2011, the Company had made aggregate payments of $11.2 million to Kosmotras which were capitalized as construction in progress within property and equipment, net in the consolidated balance sheet. If the Company elects to purchase all six launches, the remaining amounts owed under the contract will be paid over the next four to five years depending on the launch schedule.

Based on the terms of the Kosmotras Agreement, if the Company does not purchase any launches by March 31, 2013, the Kosmotras Agreement will terminate and any amounts paid by the Company to Kosmotras in excess of $15.1 million will be refunded.

Supplier Purchase Commitments

The Company has a manufacturing agreement with a supplier to manufacture subscriber equipment, which contains minimum monthly purchase requirements. The Company's purchases have exceeded the monthly minimum requirement since inception. Pursuant to the agreement, the Company may be required to purchase certain materials if the materials are not used in production within the periods specified in the agreement. The supplier will then repurchase such materials from the Company at the same price paid by the Company, as required for the production of the devices. As of December 31, 2011 and 2010, the Company had $0.8 million and $1.1 million, respectively, of such materials and the amounts were included in inventory on the accompanying consolidated balance sheets.

Unconditional purchase obligations are $260.8 million, which include the Company's commitments with Boeing on the existing satellite system, an agreement with a supplier for the manufacturing of the Company's devices and various commitments with other vendors. Unconditional purchase obligations are scheduled for the years ending December 31, 2012, 2013, 2014, 2015 and 2016 in the amounts of $63.5 million, $41.8 million, $35.5 million, $41.8 million and $37.7 million, respectively.

In-Orbit Insurance

Due to various contractual requirements, the Company is required to maintain a third-party in-orbit insurance policy with a de-orbiting endorsement to cover potential claims relating to operating or de-orbiting the satellite constellation. The policy covers the Company, Boeing as operator, Motorola Solutions (the original system architect and prior owner), contractors and subcontractors of the insured, the U.S. government and certain other sovereign nations.

The current policy has a one-year term, which expires December 8, 2012. The policy coverage is separated into Sections A, B, and C.

Section A coverage is currently in effect and covers product liability over Motorola's position as manufacturer of the satellites. Liability limits for claims under Section A are $1.0 billion per occurrence and in the aggregate. There is no deductible for claims.

Section B coverage is currently in effect and covers risks in connection with in-orbit satellites. Liability limits for claims under Section B are $500 million per occurrence and in the aggregate for space vehicle liability and $500 million and $1.0 billion per occurrence and in the aggregate, respectively, with respect to de-orbiting. The balance of the unamortized premium payment for Sections A and B coverage as of December 31, 2011 is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. The deductible for claims under Section B is $250,000 per occurrence.

Section C coverage is effective once requested by the Company (the "Attachment Date") and covers risks in connection with a decommissioning of the satellite system. Liability limits for claims under Section C are $500 million and $1.0 billion per occurrence and in the aggregate, respectively. The term of the coverage under Section C is 12 months from the Attachment Date. The premium for Section C coverage is $2.5 million and is payable on or before the Attachment Date. As of December 31, 2011, the Company had not requested Section C coverage since no decommissioning activities are currently anticipated. The deductible for claims under Section C is $250,000 per occurrence.

Operating Leases

The Company leases land, office space, and office and computer equipment under noncancelable operating lease agreements. Most of the leases contain renewal options of 1 to 10 years. The Company's obligations under the current terms of these leases extend through 2020.

 

Additionally, several of the Company's leases contain clauses for rent escalation including, but not limited to, a pro-rata share of increased operating and real estate tax expenses. Rent expense is recognized on a straight-line basis over the lease term. The Company leases facilities located in Chandler, Arizona; Tempe, Arizona; Bethesda, Maryland; McLean, Virginia; Canada and Norway. Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases at December 31, 2011, are as follows (in thousands):

 

Year ending December 31,

    Operating
Leases		  
     (In thousands)  

2012

    $ 3,427   

2013

      3,010   

2014

      2,284   

2015

      2,073   

2016

      1,466   

Thereafter

      4,684   
  

 

 

  

Total

    $ 16,944   
  

 

 

  

Rent expense for the years ended December 31, 2011, 2010, and 2009 was $3.0 million, $4.0 million and $1.0 million, respectively.

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.

Commitments And Contingencies

8. Commitments and Contingencies

In-Orbit Insurance

Due to various contractual requirements, Iridium is required to maintain an in-orbit insurance policy with a de-orbiting endorsement to cover potential claims relating to operating or de-orbiting the satellite constellation. The policy covers Iridium, Boeing as operator (see Note 4), Motorola (the original system architect and prior owner), Lehman Commercial Paper, Inc., contractors and subcontractors of the insured, the U.S. government and certain other sovereign nations.

 

The current policy has a one-year term, which expires December 8, 2012. The policy coverage is separated into Sections A and B. Liability limits for claims under each of Sections A and B are $500 million per occurrence and $1 billion in the aggregate. The deductible for claims is $250,000 per occurrence.

Section A coverage is currently in effect and covers risks in connection with in-orbit satellites. Section B coverage is effective once requested by Iridium (the "Attachment Date") and covers risks in connection with a decommissioning of the satellite system. The term of the coverage under Section B is 12 months from the Attachment Date. The premium for Section B coverage is $2.5 million and is payable on or before the Attachment Date. As of December 31, 2008, Iridium had not requested Section B coverage since no decommissioning activities are currently anticipated.

Operating Leases

Iridium leases land, office space, and office and computer equipment under noncancelable operating lease agreements. Most of the leases contain renewal options of 1 to 10 years. Iridium's obligations under the current terms of these leases extend through 2016.

Additionally, several of Iridium's leases contain clauses for rent escalation including but not limited to a pro-rata share of increased operating and real estate tax expenses. Rent expense is recognized pursuant to the existing accounting guidance, on a straight-line basis over the lease term.

Rent expense for the 2009 Period and the year ended December 31, 2008 was $1.4 million and $1.5 million, respectively. In 2008, the Company commenced the lease of a new corporate facility in Tempe, Arizona. The facility will be used primarily for administrative purposes and is approximately 25,500 square feet. The lease term will expire in March 2016.

Contingencies

From time to time, in the normal course of business, Iridium is party to various pending claims and lawsuits. Other than the Motorola action described in Note 18, Iridium is not aware of any such actions that Iridium would expect to have a material adverse impact on Iridium's business, financial results or financial condition.

Iridium, a director, and a former officer were named as defendants in a lawsuit commenced in 2007 by a former member of Iridium's Board of Directors (the "Plaintiff"). The lawsuit alleges, among other things, defamation and tortious interference with the Plaintiff's economic/business relationship with his principal, an investor in Iridium. These actions seek compensatory and other damages, and costs and expenses associated with the litigation. Iridium settled this claim in May 2009.

Iridium was named as a defendant in a lawsuit commenced in December 2008 by a vendor alleging copyright infringement by Iridium of certain software owned by the vendor. The lawsuit seeks (i) actual damages and any infringer's profits of Iridium attributable to the alleged infringement, (ii) punitive damages, (iii) statutory damages, including certain enhanced damages based on Iridium's alleged willful conduct (as an alternative to the damages specified in (i) and (ii) above), (iv) a permanent injunction, and (v) costs and attorney's fees under applicable law. Iridium settled this claim in May 2009.

Iridium NEXT

Iridium has selected two contractors to participate in the final phase of its procurement process for Iridium NEXT. This final phase is expected to end with Iridium awarding a full-scale development agreement for Iridium NEXT to one prime contractor by mid-2009. The contractor not selected as the prime contractor will be paid a bonus payment if they have successfully completed all milestones and deliverables required under this phase of the contract. The potential bonus payments range from $0 to $10 million. As of December 31, 2008, Iridium has accrued $3.9 million in connection with this potential bonus payment.

Stock-Based Compensation
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Stock-Based Compensation

11. Stock-Based Compensation

During 2009, the Company's stockholders approved a stock incentive plan (the "2009 Stock Incentive Plan") to provide stock-based awards, including nonqualified stock options, incentive stock options, restricted stock and other equity securities, as incentives and rewards for employees, consultants and non-employee directors. As of December 31, 2011, 8.0 million shares of common stock have been authorized for issuance as awards under the 2009 Stock Incentive Plan. As of December 31, 2011, 3.2 million shares are available for grant. The Company did not issue stock-based awards prior to the adoption of the 2009 Stock Incentive Plan.

Stock Option Awards

The stock option awards granted to employees generally (i) have a term of ten years, (ii) vest over a four-year period with 25% vesting after the first year of service and ratably on a quarterly basis thereafter, (iii) are contingent upon employment on the vesting date, and (iv) have an exercise price equal to the fair value of the underlying shares at the date of grant. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility for 2011 is based on the actual historical volatility of the Company's stock price. The expected term of the award was calculated using the simplified method as the Company currently does not have sufficient experience of its own option exercise patterns. The Company does not anticipate paying dividends during the expected term of the grants; therefore, the dividend rate was assumed to be zero. The risk-free interest rate assumed is based upon U.S. Treasury Bond interest rates with similar terms at similar dates.

The stock options granted to consultants are generally subject to service vesting and vest quarterly over a two-year service period. The fair value of the consultant options is the then-current fair value attributable to the vesting portions of the awards, calculated using the Black-Scholes option pricing model.

Assumptions used in determining the fair value of the Company's options were as follows:

 

     Year Ended December 31,
     2011    2010

Expected volatility

    40% - 45%    69% - 82%

Expected term (years)

    5.50 - 6.25    5.50 - 6.25

Expected dividends

    0%    0%

Risk free interest rate

    1.16% - 2.65%    1.78% - 2.90%

During 2011, the Company granted approximately 2.0 million stock options to its employees and non-employee directors.

 

A summary of the activity of the Company's stock options as of December 31, 2011 is as follows:

 

     Shares     Weighted-
Average
Exercise Price
Per Share		      Weighted-
Average
Remaining
Contractual
Term (Years)		      Aggregate
Intrinsic
Value		  
     (In thousands, except years and per share data)  

Options outstanding at January 1, 2011

      3,049      $ 8.69         

Granted

      2,031      $ 8.14         

Cancelled or expired

      (159 )    $ 8.72         

Exercised

      (5 )    $ 8.73         

Forfeited

      (273 )    $ 8.59         
  

 

 

          

Options outstanding at December 31, 2011

      4,643      $ 8.45         8.53       $ —     
  

 

 

          

Options vested and exercisable at December 31, 2011

      1,347      $ 8.65         8.02       $ —     
  

 

 

          

Options exercisable and expected to vest at December 31, 2011

      4,558      $ 8.46         8.53       $ —     
  

 

 

          

The Company recognized $5.6 million, $4.4 million and $0.4 million of stock-based compensation expense related to these options in the years ended December 31, 2011, 2010 and 2009, respectively. To the extent the Company's actual forfeiture rate is different from its estimate of such forfeitures, the stock-based compensation may differ in future periods.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 were $3.69, $6.13 and $5.61 per share, respectively.

As of December 31, 2011, the total unrecognized cost related to non-vested options was approximately $14.2 million. This cost is expected to be recognized over a weighted average period of 2.7 years. The total fair value of the shares vested during the year ended December 31, 2011 was $4.6 million.

Restricted Stock Unit Awards

The Company granted approximately 0.1 million restricted stock units ("RSUs") to its non-employee directors during each of 2011 and 2010. The grant-date fair value of the RSUs is based on the closing stock price of the Company's Common Stock on the date of grant. The RSUs vest over a one year period with 25% vesting on the last day of each calendar quarter.

A summary of the Company's RSU activity for the year ended December 31, 2011 is as follows:

 

     RSUs      Weighted-
Average
Grant Date
Fair Value
Per RSU		  
     (In thousands)         

Outstanding at January 1, 2011

      106       $ 7.79   

Granted

      90       $ 8.29   
  

 

 

     

Outstanding at December 31, 2011

      196       $ 8.02   
  

 

 

     

Vested at December 31, 2011

      196      
  

 

 

     

All RSUs granted in 2011 were fully vested as of December 31, 2011. The Company recognized $0.7 million of stock-based compensation expense related to these RSUs in the year ended December 31, 2011.

Stock-Based Compensation

9. Equity Based Compensation

Interests in Iridium Employee Holdings LLC

Iridium, in its role as manager of Iridium Employee Holdings LLC ("Iridium Employee Holdings"), has granted certain key employees equity interests in Iridium Employee Holdings. Iridium Employee Holdings was created solely to own certain Class B non-voting units of Iridium and has no other operations. Each interest in Iridium Employee Holdings represents and is equivalent to ownership of 15.484 Class B Units of Iridium. Interests in Iridium Employee Holdings generally vest over a three to five year period, and Iridium Employee Holdings is only required to make distributions with respect to vested portions thereof. If an employee terminates employment with Iridium, unvested interests are forfeited. Additionally, all interests fully vest in the event of a change in control of Iridium. With respect to some of the interests granted to employees, a designated threshold amount must be exceeded before employees become entitled to receive distributions with respect to their Iridium Employee Holdings equity interests (and all distributions are first applied (without regard to vesting) against the threshold amount until it has been fully satisfied). The Class B Units of Iridium held by Iridium Employee Holdings are subject to the same vesting and threshold amount provisions that apply to Iridium Employee Holdings equity interests granted to employees. As a result of the Acquisition, all interests were accelerated in vesting and converted into shares of Iridium Communications Inc.'s common stock and cash.

 

Interests in Employee Holdings LLC

In 2008, Iridium, in its role as manager of Employee Holdings LLC ("Employee Holdings"), granted certain executive-level employees equity interests in Employee Holdings. A total of 51,466 equity interests in Employee Holdings were issued as a result of this grant. Employee Holdings was created solely to own certain Class B non-voting units of Iridium and has no other operations. Each interest in Employee Holdings is intended to represent and is equivalent to ownership of one Class B Unit of Iridium. Certain grants in Employee Holdings are fully vested on the date of grant; others vest over a three- to four-year period, in each case subject to the continued employment of the recipient. The equity interests in Employee Holdings contain restrictions on transfer and a right of first refusal and Employee Holdings has repurchase rights from the recipients in the event of a termination of service. Equity interests in Employee Holdings have a right to equivalent distributions to those paid to Class B Unit holders of Iridium, provided, however, that all such distributions are first applied toward the satisfaction of a designated threshold amount (without regard to vesting). Once the threshold amount is satisfied, distributions to holders of interests in Employee Holdings are paid with respect to vested portions of the grant and deferred with respect to unvested portions. If an employee terminates his employment with Iridium, unvested equity interests are forfeited. Additionally, equity interests fully vest in certain cases in the event of a change in control of Iridium and in other cases in the event of a termination of service as a result of such a change in control of Iridium. The Class B Units of Iridium held by Employee Holdings are subject to the same vesting and threshold amount provisions that apply to the Employee Holdings equity interests granted to employees. As a result of the Acquisition, all interests were accelerated in vesting and converted into shares of Iridium Communications Inc.'s common stock and cash.

Equity Compensation

During the 2009 Period and the year ended December 31, 2008, Iridium recognized $2.6 million and $2.0 million, respectively, of equity-based compensation expense related to the interests granted to certain key employees. At December 31, 2008, there was $3.0 million of unrecognized compensation expense related to non-vested equity-based compensation awards that was to be recognized over a weighted-average period of approximately one year.

The following schedule provides a summary of Iridium's nonvested Class B Units at September 29, 2009 and changes during the 2009 Period:

 

     Nonvested Class B
Units		     Wtd. Avg. Grant
Date Fair Value Per Unit		  

Nonvested Class B Units at December 31, 2008

      41,023      $ 76.04   

Vested

      (41,023 )    $ 76.04   
  

 

 

    
     Nonvested Class B
Units		     Wtd. Avg. Grant
Date Fair Value Per Unit		  

Nonvested Class B Units at September 29, 2009

      —        $ —     
  

 

 

    

As a result of the Acquisition, certain employee share-based awards and certain other employee benefits were automatically accelerated in vesting. The acceleration resulted in $3.8 million being expensed in the 2009 Period. As of September 29, 2009, the closing date of the Acquisition, there were no equity based awards outstanding.

Profits Interests

Iridium has granted certain key executives and non-employee members of Iridium's board of directors' (the "Board") cash payment rights, or "profits interests." These interests do not give the holder any equity ownership interest in Iridium, but are intended to convey to the holder an economic interest similar to the appreciation in value of Class B Units in Iridium. Certain profits interest grants were fully vested at the date of grant, others vest over a three to four year period, in each case subject to the continued employment or Board service of the recipient. The profits interests grants set forth a pro-rata threshold equity valuation of Iridium. All distributions received by Class B holders after the date of grant of the profits interests are aggregated, and once the pro-rata threshold value is exceeded, the recipient of the profits interests becomes entitled to receive, upon an applicable payment event, cash equal to the aggregate distributions he would have received if he had held Class B Units of Iridium from the date of grant of the profits interest through the date on which the applicable payment event occurs. Vested profits interest rights will remain outstanding following termination of employment or Board service and will become payable upon the earlier of a "change in control event," within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury regulations issued thereunder, or December 31, 2017 (at which time the profits interest rights will terminate).

During the 2009 Period and for the year ended December 31, 2008, Iridium recognized $2.8 million and $0.9 million, respectively, of compensation expense related to profits interests. As of December 31, 2008, there was $1.6 million of unrecognized compensation expense related to non-vested profits interests awards that was to be recognized over a weighted-average period of approximately 1.7 years. Iridium will re-measure its liabilities under these payment arrangements at each reporting date until the profits interests are terminated or otherwise settled. As a result of the Acquisition, certain employee share-based awards and certain other employee benefits were automatically accelerated in vesting and full payment of this profits interests was made. As of September 29, 2009, the closing date of the Acquisition, there were no grants of profits interests outstanding.

 

In 2008, in consideration for terminating their profits interests awards, certain employees received grants in Employee Holdings, as discussed above, and two non-employee Board members received grants of Class B units in Iridium (which units are only entitled to receive distributions from Iridium once such distributions exceed a designated threshold amount and are subject to forfeiture if the Board member voluntarily resigns or is removed from the Board before the expiration of his then current term). As a result, the corresponding "profits interests" liability of $1.7 million was reclassified to members' deficit during 2008.

Segments, Significant Customers, Supplier And Service Providers And Geographic Information
12 Months Ended 9 Months Ended
Dec. 31, 2011
Sep. 29, 2009
Predecessor [Member]
Segments, Significant Customers, Supplier And Service Providers And Geographic Information

12. Segments, Significant Customers, Supplier and Service Providers and Geographic Information

The Company operates in one business segment, providing global satellite communications services and products.

The Company derived approximately 23%, 23% and 25% of its total revenue in the years ended December 31, 2011, 2010 and 2009 (following the Acquisition), respectively, and approximately 27% and 32% of its accounts receivable balances at December 31, 2011 and 2010, respectively, from prime contracts or subcontracts with agencies of the U.S. government. The two largest commercial customers accounted for approximately 21% of the Company's total revenue for the year ended December 31, 2011 and 19% of the Company's total revenue for both the years ended December 31, 2010 and 2009 (following the Acquisition). The two largest commercial customers represented approximately 14% and 19% of the Company's accounts receivable balance at December 31, 2011 and 2010, respectively.

 

The Company contracts for the manufacture of its subscriber equipment primarily from one manufacturer and utilizes other sole source suppliers for certain component parts of its devices. Should events or circumstances prevent the manufacturer or the suppliers from producing the equipment or component parts, the Company's business could be adversely affected until the Company is able to move production to other facilities of the manufacturer or secure a replacement manufacturer or an alternative supplier for such component parts.

A significant portion of the Company's satellite operations and maintenance service is provided by Boeing. Should events or circumstances prevent Boeing from providing these services, the Company's business could be adversely affected until the Company is able to assume operations and maintenance responsibilities or secure a replacement service provider.

Net property and equipment by geographic area, was as follows as of December 31:

 

     2011      2010  
     (In thousands)  

United States

    $ 79,263       $ 73,170   

Satellites in orbit

      188,263         260,293   

Iridium NEXT systems under construction

      569,439         226,636   

All others (1)

     6,127         6,420   
  

 

 

     

 

 

  

Total

    $ 843,092       $ 566,519   
  

 

 

     

 

 

  

 

(1)

No one other country represented more than 10% of property and equipment, net.

Revenue by geographic area was as follows for the years ended December 31:

 

     2011      2010  
     (In thousands)  

United States

    $ 176,043       $ 167,535   

Canada

      52,419         49,203   

United Kingdom

      48,886         40,068   

Other countries (1)

     106,959         91,367   
  

 

 

     

 

 

  

Total

    $ 384,307       $ 348,173   
  

 

 

     

 

 

  

 

(1) 

No one other country represented more than 10% of revenue.

Revenue is attributed to geographic area based on the billing address of the distributor. Service location and the billing address are often not the same. The Company's distributors sell services directly or indirectly to end-users, who may be located or use the Company's products and services elsewhere. The Company cannot provide the geographical distribution of end-users because it does not contract directly with them. The Company does not have significant foreign exchange risk on sales, as invoices are generally denominated in United States dollars.

Segments, Significant Customers, Supplier And Service Providers And Geographic Information

11. Segments, Significant Customers, Supplier, and Service Providers and Geographic Information

Iridium operates in one segment, providing global satellite communications services and products.

Iridium derived approximately 23% and 21% of its total revenue during the 2009 Period and for the year ended December 31, 2008, respectively, from agencies of the U.S. government. Iridium's two largest commercial customers accounted for 23% and 28% of total revenue for the 2009 Period and for the year ended December 31, 2008, respectively.

Iridium acquires subscriber equipment primarily from one manufacturer. Should events or circumstances prevent the manufacturer from producing the equipment, Iridium's business could be adversely affected until Iridium is able to move production to other facilities of the manufacturer or secure a replacement manufacturer.

A significant portion of Iridium's satellite operations and maintenance services are provided by Boeing. Should events or circumstances prevent Boeing from providing these services, Iridium's business could be adversely affected until Iridium is able to assume operations and maintenance responsibilities or secure a replacement service provider.

 

Revenue by geographic area was as follows:

 

     For the 2009 Period      For the Year Ended
December 31,
2008		  
     (In thousands)  

United States

    $ 115,901       $ 155,923   

Canada

      37,087         55,271   

United Kingdom

      23,461         25,516   

Other countries (1)

     66,502         84,234   
  

 

 

     

 

 

  
   $ 242,951       $ 320,944   
  

 

 

     

 

 

  

(1) No one other country represented more than 10% of revenue for any of the periods presented.

Revenue is attributed to geographic area based on the billing address of the distributor. Service location and the billing address are often not the same. Iridium's distributors sell services directly or indirectly to end-users, who may be located or use Iridium's products and services elsewhere. Iridium cannot provide the geographical distribution of end-users because it does not contract directly with them. Iridium does not have significant foreign exchange risk on sales, as nearly all invoices are denominated in United States dollars.

Fair Value Measurements (Predecessor [Member])
Fair Value Measurements

12. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability that assumes an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchal disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

 

  •  

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

 

  •  

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets; 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.

Interest Rate Swaps

Iridium accounts for its interest rate swaps on the balance sheet at their respective fair values. As required by Iridium's credit facilities, management executed four pay-fixed receive-variable interest rate swaps in 2006, all of which were settled on or before September 29, 2009. The interest rate swaps were designated as cash flow hedges. The objective for holding these instruments was to manage variable interest rate risk related to Iridium's $210.0 million credit facilities, by synthetically converting a portion of the variable rate risk to fixed rate interest rate risk. The swaps were structured so that Iridium would pay a fixed rate of interest and receive a variable interest payment, which, to the extent hedged, should offset the variable interest that was being paid on its debt.

The principal market in which Iridium executes interest rate swap contracts is the retail market. For recognizing the most appropriate value, the highest and best use of Iridium's derivatives are measured using an in-exchange valuation premise that considers the assumptions that market participants would use in pricing the derivatives. Iridium has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates, and credit default swap rates at commonly quoted intervals).

Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are compared to provide spot rates at resets specified by each swap as well as to discount those future cash flows to present value at the measurement date. Inputs are collected on the last market day of the period. The same rates used to compare the yield curve are used to discount the future cash flows. A credit default swap basis available at commonly quoted intervals is collected and applied to all cash flows when the swap is in an asset position pre-credit effect.

The variable interest rates on the swaps reset every quarter concurrent with the reset of the variable rate on the debt. The fixed rate will not change over the life of the swap. Each quarter-end, the swaps are measured against current interest rates to determine a fair market value. The fair market value is recorded on the balance sheet and the offset to the value, to the extent effective, is recorded in accumulated other comprehensive income. The effectiveness of the swaps in offsetting the gain or loss on the debt is assessed on a contract-by-contract basis quarterly, by regressing historical changes in the value of the swap against the historical change in value of the underlying debt. To establish a value for the underlying debt, a "hypothetical" derivative is created with terms that match the debt (e.g., notional amount, reset rates and terms, maturity) and which has a zero fair value at designation. Subsequent to the closing of the Acquisition, Iridium closed the outstanding interest rate swaps, which had no impact on the statements of income.

Foreign Currency Exchange Contracts

Iridium enters into foreign currency exchange contracts to mitigate foreign currency exposure on a product consulting service contract denominated in foreign currency. Given the variability of its purchase commitments and payment terms under the product consulting service contracts, Iridium has not elected hedge accounting for these foreign currency exchange contracts. Accordingly, the foreign currency exchange contracts are marked to market at each balance sheet date, with the changes in fair value being recognized as a current period gain or loss in the accompanying consolidated statements of income. The inputs used in measuring the fair value of these instruments are considered to be Level 2 in the fair value hierarchy. The fair market values are based on quoted market values for similar contracts.

Derivative Instruments and Hedging Activities

The following table summarizes the effect of derivative instruments designated as cash flow hedges (interest rate swaps) on Iridium's results of operations for the 2009 Period:

 

     For the 2009 Period  

Derivatives in Cash Flow Hedging
Relationships

    Amount of
Loss
Recognized
in OCI on
Derivative
(Effective Portion)		     Location of Loss
Reclassified from
Accumulated OCI
into  Income
(Effective Portion)		      Amount of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)		     Location of Loss
Recognized in
Income on
Derivative
(Ineffective Portion)		      Amount of Loss
Recognized in
Income on
Derivative
(Ineffective Portion)		  
                  (In thousands)               

Accumulated other comprehensive loss

    $ (295 )      Interest expense       $ (2,323 )      Interest expense       $ (10 ) 
  

 

 

       

 

 

       

 

 

  

Total

    $ (295 )       $ (2,323 )       $ (10 ) 
  

 

 

       

 

 

       

 

 

  

The following table summarizes the effect of derivative instruments not designated as hedges (foreign currency exchange contracts) on Iridium's results of operations for the 2009 Period: