Iridium Communications Inc

6. Derivative Financial Instruments

The Company is exposed to interest rate fluctuations related to the Term Loan. The Company has reduced its exposure to fluctuations in the cash flows associated with changes in the variable interest rate by entering into offsetting positions through the use of interest rate hedges. This will reduce the negative impact of increases in the variable rate over the term of the derivative contracts. These contracts are not used for trading or other speculative purposes. Historically, the Company has not incurred, and does not expect to incur in the future, any losses as a result of counterparty default.

Interest Rate Cap

In July 2021, the Company entered into an interest rate cap contract (the “Cap”), which had an effective date of December 2021. The Cap manages the Company’s exposure to interest rate movements on a portion of the Term Loan through November 2026. The Cap, as modified to date, currently provides the Company with the right to receive payment from the counterparty if one-month SOFR exceeds 1.436%. The Company pays a fixed monthly premium based on an annual rate of 0.31% for the Cap. The Cap carried a notional amount of $1.0 billion as of September 30, 2024 and December 31, 2023.

The Cap, which was not affected by the expansion of the Term Loan in July 2024 and March 2024 or the repricing of the Term Loan in June 2024, is designed to mirror the terms of the Term Loan and to offset the cash flows being hedged. The Company designated the Cap as a cash flow hedge of the variability of the SOFR-based interest payments on the Term Loan. The effective portion of the Cap’s change in fair value is recorded in accumulated other comprehensive income. Any ineffective portion of the Cap’s change in fair value will be recorded in current earnings as interest expense.

Hedge effectiveness of the current interest rate cap contract is based on a long-haul hypothetical derivative methodology and includes all changes in value. The Company formally assesses, both at the hedge’s inception and on an ongoing quarterly basis, whether the designated derivative instruments are highly effective in offsetting changes in the cash flows of the hedged items. When the hedging instrument is sold, expires, is terminated, is exercised, no longer qualifies for hedge accounting, is de-designated, or is no longer probable, hedge accounting is discontinued prospectively.

Fair Value of Derivative Instruments

As of September 30, 2024 and December 31, 2023, the Company had an asset balance of $41.7 million and $66.5 million, respectively, for the fair value of the Cap and a liability balance of $6.3 million and $8.4 million, respectively, for the fair value of the Cap premium. Both the Cap and the Cap premium are recorded net within other assets on the condensed consolidated balance sheet.

During each of the three and nine months ended September 30, 2024 and September 30, 2023, the Company collectively incurred $0.8 million and $2.5 million, respectively, in interest expense for the Cap premium. Interest expense was reduced by $9.8 million and $9.6 million for the three months ended September 30, 2024 and 2023, respectively, and $29.5 million and $26.3 million for the nine months ended September 30, 2024 and 2023, respectively, for payments received related to the Cap.

Gains and losses resulting from fair value adjustments to the Cap are recorded within accumulated other comprehensive income within the Company’s condensed consolidated balance sheets and reclassified to interest expense on the dates that interest payments become due. Cash flows related to the derivative contracts are included in cash flows from operating activities on the condensed consolidated statements of cash flows. Over the next 12 months, the Company expects any gains or losses for cash flow hedges amortized from accumulated other comprehensive income into earnings to have an immaterial impact on the Company’s consolidated financial statements.

The following table presents the amount of unrealized gain or loss and related tax impact associated with the Cap that the Company recorded in its condensed consolidated statements of operations and comprehensive income (loss):

7. Equity Transactions

Preferred Stock

The Company is authorized to issue 2.0 million shares of preferred stock with a par value of $0.0001 per share. The Company previously issued 1.5 million shares of preferred stock, all of which have converted to common stock. The remaining 0.5 million authorized shares of preferred stock remain undesignated and unissued. As of September 30, 2024 and December 31, 2023, there were no outstanding shares of preferred stock, as all previously designated and issued preferred stock was converted into common stock in prior periods.

Dividends

Stockholders are entitled to receive, when and if declared by the Company’s Board of Directors from time to time, dividends and other distributions in cash, stock or property from the Company’s assets or funds legally and contractually available for such purposes. In December 2022, the Company’s Board of Directors initiated a quarterly dividend. The Company paid dividends of $0.13 on March 28, 2024 and $0.14 per share of common stock on each of June 28, 2024 and September 30, 2024, resulting in total payments to stockholders of $49.1 million for the nine months ended September 30, 2024. Dividend payments for the nine months ended September 30, 2023 totaled $48.8 million. The Company’s liability related to dividends payable on common shares underlying unvested RSUs was $2.2 million and $1.3 million as of September 30, 2024 and December 31, 2023, respectively.

Share Repurchase Program

Since February 2021, the Company’s Board of Directors has authorized the repurchase of up to an aggregate of $1,500.0 million of the Company’s common stock, including the most recent approval in September 2024 of an additional $500.0 million through December 31, 2027. This timeframe can be extended or shortened by the Board of Directors. Repurchases may be made from time to time on the open market at prevailing prices or in negotiated transactions off the market. The Company records share repurchases at cost, which includes broker commissions and related excise taxes. All shares are immediately retired upon repurchase in accordance with the board-approved policy. When treasury shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired first, to additional paid-in capital, and then to retained earnings/accumulated deficit. The portion to be allocated to additional paid-in capital is calculated by applying a percentage, determined by dividing the number of shares to be retired by the number of shares outstanding, to the balance of additional paid-in capital as of the date of retirement.

During the three and nine months ended September 30, 2024, the Company repurchased and subsequently retired 4.7 million and 9.8 million shares of its common stock, respectively, for a total purchase price of $129.0 million and $282.3 million, respectively, inclusive of related commissions. During the three and nine months ended September 30, 2024, the Company incurred $1.2 million and $2.7 million, respectively, of related taxes, which are not included in the total purchase price. In addition, in September 2024, the Company purchased 21,000 shares for $0.7 million, which were settled and retired in October 2024.

The Company repurchased and subsequently retired 1.4 million and 3.4 million shares of its common stock during the three and nine months ended September 30, 2023, respectively, for a total purchase price of $73.8 million and $193.0 million, respectively, exclusive of $0.7 million and $1.2 million of related taxes incurred for the three and nine months ended September 30, 2024, respectively. In addition, in September 2023, the Company purchased 22,000 shares for $0.9 million, which were settled and retired in October 2023.

As of September 30, 2024, $552.2 million remained available and authorized for repurchase under this program.

8. Revenue

The following table summarizes the Company’s services revenue:

The following table summarizes the Company’s engineering and support services revenue:

Approximately 42% and 46% of the Company’s accounts receivable balance at September 30, 2024 and December 31, 2023, respectively, was due from prime contracts or subcontracts with agencies of the U.S. government.

The Company’s contracts with customers generally do not contain performance obligations with terms in excess of one year. As such, the Company does not disclose details related to the value of performance obligations that are unsatisfied as of the end of the reporting period. The total value of any performance obligations that extend beyond one year is immaterial to the financial statements.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the condensed consolidated balance sheets. The Company bills amounts under its agreed-upon contractual terms at periodic intervals (for services), upon shipment (for equipment), or upon achievement of contractual milestones or as work progresses (for engineering and support services). Billing may occur subsequent to revenue recognition, resulting in unbilled accounts receivable (contract assets). The Company may also receive payments from customers before revenue is recognized, resulting in deferred revenue (contract liabilities). The Company recognized revenue that was previously recorded as deferred revenue in the amounts of $12.0 million and $3.3 million for the three months ended September 30, 2024 and 2023, respectively, and $26.4 million and $25.1 million for the nine months ended September 30, 2024 and 2023, respectively.

The Company has also recorded costs of obtaining contracts expected to be recovered in prepaid expenses and other current assets (contract assets or commissions), that are not separately disclosed on the condensed consolidated balance sheets. The commissions are recognized over the estimated usage period. The following table presents contract assets not separately disclosed:

9. Leases

Lessor Arrangements

Operating leases in which the Company is a lessor consist primarily of hosting agreements with Aireon LLC (“Aireon”) (see Note 13) and L3Harris Technologies, Inc. (“L3Harris”) for space on the Company’s satellites. These agreements provide for a fee that will be recognized over the estimated useful lives of the satellites, currently estimated to be approximately 17.5 years from their respective in-service dates. Lease income related to these agreements was $3.1 million and $5.4 million for the three months ended September 30, 2024 and 2023, respectively, and $9.3 million and $16.1 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease for the quarter ended September 30, 2024 as compared to September 30, 2023 was due to the change in estimated useful life of the satellites made in the fourth quarter of 2023. Lease income is recorded as hosted payload and other data service revenue within service revenue on the Company’s condensed consolidated statements of operations and comprehensive income (loss).

Aireon has made payments to the Company pursuant to its hosting agreement, and the Company expects Aireon will continue to do so. L3Harris has prepaid all amounts owed to the Company pursuant to its hosting arrangement. The following table presents future income with respect to the Company’s operating leases in which it is the lessor existing at September 30, 2024, exclusive of the $9.3 million recognized during the nine months ended September 30, 2024, by year and in the aggregate:

10. Stock-Based Compensation

In May 2023, the Company’s stockholders approved the amendment and restatement of the Company’s 2015 Equity Incentive Plan (as so amended and restated, the “Amended 2015 Plan”). As of September 30, 2024, the remaining aggregate number of shares available for future grants under the Amended 2015 Plan was 8,574,398. The Amended 2015 Plan provides for the grant of stock-based awards, including nonqualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights and other equity securities to employees, consultants and non-employee directors of the Company and its affiliated entities. The number of shares of common stock available for issuance under the Amended 2015 Plan is reduced by (i)one share for each share of common stock issued pursuant to an appreciation award, such as a stock option or stock appreciation right with an exercise or strike price of at least 100% of the fair market value of the underlying common stock on the date of grant, and (ii)1.8 shares for each share of common stock issued pursuant to any stock award that is not an appreciation award, also known as a “full value award.” The Amended 2015 Plan allows the Company to utilize a broad array of equity incentives and performance cash incentives in order to secure and retain the services of its employees, directors and consultants, and to provide long-term incentives that align the interests of its employees, directors and consultants with the interests of the Company’s stockholders. The Company accounts for stock-based compensation at fair value.

Restricted Stock Units

Beginning in March 2024, the RSUs granted to employees for service generally vest over three years, with 34% vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter, subject to continued employment. RSUs granted prior to March 2024 generally vest over four years, with 25% vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter, subject to continued employment. Some RSUs granted to employees for performance vest upon the completion of defined performance goals, subject to continued employment. The RSUs granted to non-employee members of the Board of Directors generally vest in full on the first anniversary of the grant date. The RSUs granted to non-employee consultants generally vest 50% on the first anniversary of the grant date, with the remaining 50% vesting quarterly thereafter through the second anniversary of the grant date.

The Company’s RSUs are classified as equity awards because the RSUs will be settled in the Company’s common stock upon vesting. The fair value of the RSUs is determined based on the closing price of the Company’s common stock on the date of grant. The related compensation expense as of the grant date is then recognized over the service period, or shorter periods based on the retirement eligibility of grantees, based on the number of shares expected to vest. The fair value of the awards is not remeasured at the end of each reporting period. RSUs do not carry voting rights until they are vested, although certain unvested RSUs are entitled to accrue dividend equivalent rights, and shares (including additional shares issuable upon satisfaction of any accrued dividend equivalent rights) are issued upon settlement in accordance with the terms of the award.

The following tables summarize the Company’s RSU activity:

(1) These RSUs were granted to the Company’s Board of Directors as a part of their compensation for board and committee service and had vested but had not yet settled, meaning that the underlying shares of common stock had not been issued and released.

Service-Based RSUs

The majority of the annual compensation the Company provides to non-employee members of its Board of Directors is paid in the form of RSUs. Some members of the Company’s Board of Directors may elect to receive the remainder of their annual compensation, or a portion thereof, in the form of RSUs. An aggregate amount of approximately 57,000 and 53,000 service-based RSUs were granted to the non-employee members of the Company’s Board of Directors as a result of these payments and elections during the nine months ended September 30, 2024 and 2023, respectively, with an estimated grant date fair value of $1.9 million and $2.8 million, respectively.

During the nine months ended September 30, 2024 and 2023, the Company granted approximately 1,579,000 and 667,000 service-based RSUs, respectively, to its employees, with an estimated aggregate grant date fair value of $46.5 million and $39.9 million, respectively.

Performance-Based RSUs

In March 2024 and 2023, the Company granted approximately 461,000 and 193,000 annual incentive, performance-based RSUs, respectively, to the Company’s executives and employees (the “Bonus RSUs”), with an estimated grant date fair value of $13.7 million and $11.9 million, respectively. Vesting of the Bonus RSUs is dependent upon the Company’s achievement of defined performance goals over the respective fiscal year. The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. Management believes it is probable that substantially all of the 2024 Bonus RSUs will vest. The level of achievement, if any, of performance goals will be determined by the compensation committee of the Company’s Board of Directors and, if such goals are achieved, the 2024 Bonus RSUs will vest, subject to continued employment, in March 2025. Substantially all of the 2023 Bonus RSUs vested in March 2024 upon the determination of the level of achievement of the performance goals.

Additionally, during the nine months ended September 30, 2024 and 2023, the Company granted approximately 303,000 and 134,000 long-term, performance-based RSUs, respectively, to the Company’s executives (the “Executive RSUs”). The estimated aggregate grant date fair value of the Executive RSU grants was $9.0 million and $8.2 million during the nine months ended September 30, 2024 and 2023, respectively. Vesting of the Executive RSUs is dependent upon the Company’s achievement of defined performance goals over a two-year period. The vesting of the March 2023 Executive RSUs will ultimately range from 0% to 150% of the number of shares underlying the Executive RSUs granted, and the vesting of the March 2024 Executive RSUs will ultimately range from 0% to 200% of the number of shares underlying the Executive RSUs granted, in each case based on the level of achievement of the performance goals. If the Company achieves the performance goals,50% of the number of Executive RSUs earned based on performance will vest on the second anniversary of the grant date, and the remaining 50% will vest on the third anniversary of the grant date, in each case subject to the executive’s continued service as of the vesting date, which may be accelerated based on the retirement eligibility of grantees. During March 2024 and 2023, the Company awarded approximately 83,000 and 55,000 additional shares, respectively, related to long-term, performance-based RSUs granted to the Company’s executives in 2022 and 2021, respectively, for over-achievement of performance targets for the performance periods ended December 31, 2023 and 2022, respectively.

Stock Option Awards

Stock option awards granted to employees generally (i) have a term often years, (ii) vest over four years with 25% vesting after the first year of service and the remainder vesting ratably on a quarterly basis thereafter, (iii) are contingent upon employment on the vesting date, and (iv) have an exercise price equal to the fair market value of the underlying shares at the date of grant. The fair value of stock options was determined at the grant date using the Black-Scholes option pricing model.

A summary of the activity of the Company’s stock options is as follows:

11. Acquisition of Satelles

On April 1, 2024, the Company acquired Satelles, Inc., a provider of satellite-based time and location services that complement and protect GPS and other GNSS systems. This acquisition is intended to support the Company’s long-term business objectives. Satelles was merged with a subsidiary of the Company, with Satelles as the surviving entity, now a direct and indirect wholly owned subsidiary of the Company. The acquisition date fair value of the consideration paid to acquire the remaining 80.5% of the outstanding shares and voting interest of Satelles that was not previously owned by the Company was approximately $125.5 million. The purchase price allocation set forth below, including valuation of intangible assets, is preliminary.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

The customer relationships recognized were determined to have an economic life of 12 years. The Company will amortize the customer relationships over their useful lives, utilizing the economic benefit model. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Satelles. None of the goodwill is expected to be deductible for income tax purposes. As of September 30, 2024, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Satelles.

The Company incurred $2.8 million of acquisition related costs that were expensed in the nine months ended September 30, 2024. These costs are included within selling, general, and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

The amounts of revenue and earnings of Satelles included in the Company’s condensed consolidated statements of operations and comprehensive income (loss), excluding the impact of the Company’s remeasurement of its prior equity interest in Satelles, are as follows:

The following unaudited pro forma data summarizes the results of operations for the periods indicated as if the acquisition of Satelles had been completed as of the beginning of the comparable prior annual reporting period. The unaudited pro forma data gives effect to actual operating results prior to the acquisition, adjusted to include the pro forma effect of amortization of intangibles and the elimination of intercompany sales and acquisition costs. These pro forma amounts are not intended to be indicative of the results that would have actually been obtained if the acquisition had occurred as of the beginning of the comparable prior annual reporting period or that may be obtained in the future.

Prior to the acquisition date, the Company accounted for its 19.5% interest in Satelles as an equity-method investment. The acquisition date fair value of the previous equity interest was $39.7 million and was included in the measurement of the consideration transferred. The Company recognized a gain of $19.8 million as a result of remeasuring its prior equity interest in Satelles held before the business combination. The gain is included within gain (loss) from equity method investments in the condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2024.

12. Income Taxes

Income before income taxes and gain on equity method investments was $30.9 million and $79.3 million for the three and nine months ended September 30, 2024, respectively, while the income tax expense was $6.0 million and $18.5 million for the three and nine months ended September 30, 2024, respectively. The effective tax rate was 19.4% and 23.3% for the three and nine months ended September 30, 2024, respectively, which differed from the federal statutory rate of 21%, primarily due to the discrete tax expense associated with stock compensation and nondeductible executive compensation, which was partially offset by the deduction for foreign derived intangible income.

Loss before income taxes and loss on equity method investments was $6.2 million and $35.0 million for the three and nine months ended September 30, 2023, respectively, while the income tax benefit was $6.0 million and $16.7 million for the three and nine months ended September 30, 2023, respectively. The effective tax rate was 97.5% and 47.7% for the three and nine months ended September 30, 2023, respectively, which differed from the federal statutory rate of 21%, primarily due to a discrete tax benefit associated with stock compensation and U.S. tax credits, which were partially offset by tax expense associated with nondeductible executive compensation.

13. Related Party Transactions

Aireon LLC and Aireon Holdings LLC

The Company’s satellite constellation hosts the Aireon®system. The Aireon system was developed by Aireon LLC, which the Company formed in 2011, and which received subsequent investments from several air navigation service providers (“ANSPs”) to provide a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast (“ADS-B”) receivers on the Company’s satellites. Aireon has contracted to offer this service to ANSPs, which use the service to provide improved air traffic control services over the oceans, as well as polar and remote regions. Aireon also markets its data and services to airlines and other commercial users. The Company and the other Aireon investors hold their interests in Aireon Holdings LLC (“Aireon Holdings”) through an amended and restated LLC agreement (“Aireon Holdings LLC Agreement”). Aireon Holdings holds 100% of the membership interests in Aireon, which is the operating entity.

In June 2022, the Company entered into a subscription agreement with Aireon Holdings and invested $50.0 million for a preferred membership interest of approximately 6%. The Company’s investment in Aireon Holdings is accounted for as an equity method investment. The carrying value of the Company’s investment in Aireon was $42.2 million and $44.6 million as of September 30, 2024 and December 31, 2023, respectively. The investments made by the Company in Aireon Holdings prior to June 2022 had previously been written down to a carrying value of zero.

At each of September 30, 2024 and December 31, 2023, the Company’s fully diluted ownership stake in Aireon Holdings was approximately 39.5%, which is subject to partial future redemption under provisions contained in the Aireon Holdings LLC Agreement.

Under the agreements with Aireon, Aireon agreed to pay the Company fees of $200.0 million to host the ADS-B receivers, of which $102.5 million had been paid as of September 30, 2024. These fees are recognized over the estimated useful life of the Company’s satellites, which is expected to result in revenue of approximately $9.3 million per year, following the change in estimate of the useful lives of the satellites that occurred in the fourth quarter of 2023. The Company recognized $2.3 million and $4.0 million of hosting fee revenue for the three months ended September 30, 2024 and 2023, respectively, and $6.9 million and $12.0 million for the nine months ended September 30, 2024 and 2023, respectively. Deferred hosting fee revenue totaled $3.0 million as of September 30, 2024.

Additionally, Aireon pays power and data services fees of approximately $23.5 million per year, in the aggregate, for the delivery of air traffic surveillance data over the Iridium® system. The Company recognized $5.9 million of power and data service fee revenue from Aireon for each of the three months ended September 30, 2024 and 2023, and $17.6 million for each of the nine months ended September 30, 2024 and 2023.

Under two services agreements, the Company also provides Aireon with administrative services and support services, the fees for which are paid monthly. Aireon receivables due to the Company under these two agreements totaled $2.1 million and $2.2 million as of September 30, 2024 and December 31, 2023, respectively.

The Company and the other Aireon investors have agreed to participate pro-rata, based on their fully diluted ownership stakes, in funding an investor bridge loan to Aireon. The Company’s maximum funding commitment for the bridge loan is $11.9 million. No bridge loan amounts were outstanding as of September 30, 2024 or December 31, 2023.

14. Net Income (Loss) Per Share

The Company calculates basic net income (loss) per share by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. In periods of net income, diluted net income per share takes into account the effect of potentially dilutive common shares when the effect is dilutive. Potentially dilutive common shares include (i) shares of common stock issuable upon exercise of outstanding stock options and (ii) contingently issuable RSUs that are convertible into shares of common stock upon achievement of certain service and performance requirements. The effect of potentially dilutive common shares is computed using the treasury stock method.

The following table summarizes the computations of basic and diluted net income (loss) per share:

The following table presents the incremental number of shares underlying stock options and RSUs outstanding with anti-dilutive effects: