1. Organization and Business
\nIridium Communications Inc. (the “Company”), a Delaware corporation, 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 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.
2. Significant Accounting Policies and Basis of Presentation
\nPrinciples of Consolidation and Basis of Presentation
\nThe 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, and (iii) all less than wholly owned subsidiaries that the Company controls. All intercompany transactions and balances have been eliminated.
\nAdopted Accounting Pronouncements
\nIn April 2015, the Financial Accounting Standards Board (\"FASB\") issued Accounting Standards Update (\"ASU\") No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendment. Effective January 1, 2016, the Company applied the new guidance retrospectively to all prior periods presented in the accompanying financial statements. The adoption had no effect on the Company’s condensed consolidated statements of operations and comprehensive income, and condensed consolidated statements of cash flows for each of the periods ended December 31, 2016 and 2015. The implementation of this accounting standard resulted in a reduction in the deferred financing costs asset and in the credit facility as of December 31, 2016 and December 31, 2015, respectively, as shown below.
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Credit facility | \n\n
| \n\n $ | \n\n 1,777,789 | \n\n
| \n\n
| \n\n $ | \n\n 1,521,822 | \n\n
| \n
| \n Deferred financing costs | \n\n
| \n\n
| \n\n (120,644 | \n\n ) | \n\n
| \n\n
| \n\n (133,056 | \n\n ) | \n
| \n Credit facility, net | \n\n
| \n\n $ | \n\n 1,657,145 | \n\n
| \n\n
| \n\n $ | \n\n 1,388,766 | \n\n
| \n
Recent Accounting Developments
\nIn March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 addresses multiple changes. The amendment requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company will be required to make the disclosures about a change in accounting principle, but will not have to quantify the income statement effect of the change in the period of adoption. The Company anticipates adopting relevant changes prospectively and expects the impact to its condensed consolidated statements of operations and comprehensive income to be immaterial.
\nIn February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. This ASU is effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted and reporting organizations are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the effect ASU 2016-02 may have on its condensed consolidated financial statements and related disclosures, but recognizing the lease liability and related right-of-use asset will impact its balance sheet.
\nIn July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. The Company will apply this guidance prospectively beginning January 1, 2017, as required. The Company does not anticipate a material impact on its inventory balances or cost of equipment expenses.
\nIn May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property, identifying performance obligations, and most recently, technical corrections on the interpretation of the new guidance. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 for public entities to be effective for annual and interim periods beginning after December 15, 2017. Early adoption would be permitted no earlier than the original effective date beginning after December 15, 2016. ASU 2014-09 becomes effective for the Company in the first quarter of fiscal 2018 and the Company anticipates using the full retrospective transition method.
\nThe Company has established a project team in order to analyze the effect of the standard on its revenue streams by reviewing its current accounting policies and practices to identify potential differences which would result from applying the requirements of the new standard to its revenue contracts. The Company has identified each revenue stream and is continuing to assess all potential effects of the standard. The Company has not yet completed its review of the effect of this guidance.
\nUse of Estimates
\nThe 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.
\nFair Value Measurements
\nThe Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts receivable, accounts payable and accrued expenses and other current liabilities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. The fair value hierarchy consists of the following tiers:
\n| \n
| \n\n • | \n\n Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; |
| \n
| \n\n • | \n\n Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
| \n
| \n\n • | \n\n Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses and other current liabilities) approximate their fair values because of their short-term nature. The fair value of the Company’s investments in money market funds approximates its carrying value; such instruments are classified as Level 1 and are included in cash and cash equivalents on the accompanying consolidated balance sheets. The fair value of the Company’s investments in commercial paper and short-term U.S. agency securities with original maturities of less than ninety days approximates their carrying value; such instruments are classified as Level 2 and are included in cash and cash equivalents on the accompanying consolidated balance sheets.
\nThe fair value of the Company’s investments in fixed-income debt securities and commercial paper with original maturities of greater than ninety days are obtained using similar investments traded on active securities exchanges and are classified as Level 2. For fixed income securities that do not have quoted prices in active markets, the Company uses third-party vendors to price its debt securities resulting in classification as Level 2. All fixed-income securities are included in marketable securities on the accompanying consolidated balance sheets.
\nConcentrations of Credit Risk
\nFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and receivables. The majority of cash is swept nightly into a money market fund invested in U.S. treasuries, Agency Mortgage Backed Securities and/or U.S. Government guaranteed debt. 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. The Company’s marketable securities are highly-rated corporate and foreign fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. The Company 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.
\nCash, Cash Equivalents and Restricted Cash
\nThe Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. These investments, along with cash deposited in institutional money market funds, regular interest bearing depository accounts and non-interest bearing depository accounts, are classified as cash and cash equivalents on the accompanying consolidated balance sheets. The Company is required to maintain a minimum cash reserve for debt service related to its $1.8 billion loan facility (the “Credit Facility”). As of December 31, 2016 and 2015, the Company’s restricted cash balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $113.0 million and $91.0 million, respectively. For further discussion on the cash reserve for debt service related to the Credit Facility, see the Credit Facility footnote below.
\nMarketable Securities
\nMarketable securities consist of fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale and are included in marketable securities within current assets on the accompanying consolidated balance sheets. All investments are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of other comprehensive income or loss. The specific identification method is used to determine the cost basis of the marketable securities sold. There were no material realized gains or losses on the sale of marketable securities for the years ended December 31, 2016 and 2015. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that any decline in fair value of these investments is temporary as the Company does not intend to sell these securities and it is not likely that the Company will be required to sell the securities before the recovery of their amortized cost basis.
\nAccounts Receivable
\nTrade 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 $1.0 million and $0.6 million as of December 31, 2016 and 2015, respectively.
\nForeign Currencies
\nThe functional currency of the Company’s foreign consolidated subsidiaries is the local currency. 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 and comprehensive income.
\nInternally Developed Software
\nThe 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.
\nDeferred Financing Costs
\nDirect 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, 2016 and 2015, the Company had deferred approximately $120.7 million and $133.1 million, respectively, of direct and incremental financing costs, net of amortization, associated with securing debt financing for Iridium NEXT, the Company’s next-generation satellite constellation.
\nCapitalized Interest
\nInterest costs associated with financing the Company’s assets during the construction period of Iridium NEXT have been capitalized. Capitalized interest costs for the years ended December 31, 2016, 2015 and 2014 were $106.4 million, $83.1 million and $62.0 million, respectively.
\nInventory
\nInventory 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 to a third-party manufacturer and purchases accessories from third-party suppliers. The Company’s cost of inventory includes an allocation of overhead, including payroll and payroll-related costs 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. Accordingly, the Company recorded expenses of $1.1 million, $0.7 million and $0.9 million, for the years ended December 31, 2016, 2015 and 2014, respectively, included within the cost of subscriber equipment for excess and obsolete inventory. The expenses for the year ended December 31, 2016 were primarily related to certain handset parts and accessories; the expenses for the year ended December 31, 2015 were primarily related to Iridium Pilot equipment; and the expenses for the year ended December 31, 2014 were primarily related to Iridium 9505 handset parts and accessories.
\nThe Company has a manufacturing agreement with Benchmark Electronics Inc. (“Benchmark”) to manufacture subscriber equipment. 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. Benchmark 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.
\nStock-Based Compensation
\nThe Company accounts for stock-based compensation at fair value. The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is equal to the closing price of the underlying common stock on the grant date. The fair value of an award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or performance period and is classified in the consolidated statements of operations and comprehensive income in a manner consistent with the classification of the recipient’s compensation. The expected vesting of the Company’s performance-based RSUs is based upon the probability that the Company achieves the defined performance goals. The level of achievement of performance goals, if any, is determined by the compensation committee. Stock-based awards to non-employee consultants are expensed at their fair value as services are provided according to the terms of their agreements and are classified in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income. Classification of stock-based compensation for the years ended December 31, 2016 and 2015 is as follows:
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| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Property and equipment, net | \n\n
| \n\n $ | \n\n 1,906 | \n\n
| \n\n
| \n\n $ | \n\n 998 | \n\n
| \n
| \n Inventory | \n\n
| \n\n 359 | \n\n
| \n\n
| \n\n 48 | \n\n
| \n||
| \n Cost of subscriber equipment | \n\n
| \n\n 56 | \n\n
| \n\n
| \n\n 135 | \n\n
| \n||
| \n Cost of services (exclusive of depreciation and amortization) | \n\n
| \n\n
| \n\n 1,655 | \n\n
| \n\n
| \n\n 721 | \n\n
| \n|
| \n Research and development | \n\n
| \n\n 457 | \n\n
| \n\n
| \n\n 221 | \n\n
| \n||
| \n Selling, general and administrative | \n\n
| \n\n
| \n\n 11,540 | \n\n
| \n\n
| \n\n
| \n\n 7,526 | \n\n
| \n
| \n Total stock-based compensation | \n\n
| \n\n $ | \n\n 15,973 | \n\n
| \n\n
| \n\n $ | \n\n 9,649 | \n\n
| \n
Property and Equipment
\nProperty and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
\n\n
| \n First-generation satellites | \n\n
| \n\n 15-19 years | \n
| \n Ground system | \n\n
| \n\n 5-7 years | \n
| \n Equipment | \n\n
| \n\n 3-5 years | \n
| \n Internally developed software and purchased software | \n\n
| \n\n 3-7 years | \n
| \n Building | \n\n
| \n\n 39 years | \n
| \n Building improvements | \n\n
| \n\n 5-39 years | \n
| \n Leasehold improvements | \n\n
| \n\n shorter of useful life or remaining lease term | \n
\n
The estimated useful lives of the Company’s first-generation satellites reflect the period of expected use for each satellite. Satellites are depreciated on a straight-line basis through the date they will be replaced by next-generation satellites. The Company began deployment of its next-generation satellite constellation (“Iridium NEXT”) in January 2017, and, based on the current launch schedule, the Company expects the final launch to occur in 2018. The Company’s next-generation satellites will be depreciated on a straight-line basis over the estimated useful life which is currently estimated to be 12.5 years.
\nThe Company calculates depreciation expense using the straight-line method and evaluates the appropriateness of the useful life used in this calculation on a quarterly basis or as events occur that require additional assessment. In addition to the changes made in prior years, in 2016, the Company updated its estimate of the first-generation satellites’ remaining useful lives based on the continued refinement of the launch schedule, health of the existing constellation, and deployment plan for the Company’s next-generation satellite constellation. As a result, the estimated useful lives of the first-generation satellites have been extended and are consistent with the expected deployment of the next-generation satellites. The $2.4 million decrease in depreciation expense for the year ended December 31, 2016 compared to the prior year is primarily related to the continued refinement in the estimated useful lives, partially offset by the addition of new assets and the impairment of two lost satellites during the second quarter of 2016. For the year ended December 31, 2016, the impact of the change in useful lives of the first-generation satellites resulted in an increase in basic and diluted net income per share of $0.04 and $0.03, respectively. The impact for the year ended December 31, 2015, resulted in an increase in both basic and diluted net loss per share by $0.01.
\nRepairs and maintenance costs are expensed as incurred.
\nLong-Lived Assets
\nThe 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.
\nThe Company lost communication with three of its first-generation satellites in 2014. As a result, impairment charges totaling $2.2 million were recorded within depreciation expense during 2014. The Company replaced the lost satellites with in-orbit spares. No satellite loss occurred during 2015. During the second quarter of 2016 two first-generation satellites ceased operations. As a result, impairment charges totaling $0.3 million were recorded within depreciation expense during 2016. The Company does not believe the loss of these satellites in 2016 is an indicator of impairment of the remaining individual first-generation satellites or the constellation as of December 31, 2016.
\nGoodwill and Other Intangible Assets
\nGoodwill
\nGoodwill 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. Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. To measure the amount of impairment loss, if any, the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. Specifically, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
\nThe Company operates in a single reporting unit, and the possibility of impairment is assessed by comparing the carrying amount of the reporting unit to its estimated fair value. The most recent annual assessment of goodwill and indefinite-lived assets was performed on October 1, 2015 (the “2015 Analysis”).
\nHistorically, the Company has determined the estimated fair value of the reporting unit based on a combination of the market approach using comparable public companies (guideline company method) and the income approach using discounted cash flows. These valuation techniques have involved the use of estimates and assumptions. However, as a result of a decrease in the Company’s stock price and related market capitalization (one-year low) around the test date of the 2015 Analysis, management determined that the Company’s market capitalization represented the best estimate of fair value of the reporting unit as of the test date.
\nUpon completion of step one of the 2015 Analysis, the Company determined the carrying value of the reporting unit exceeded its fair value as a result of a decrease in the Company’s stock price and related market capitalization. The Company performed a step two analysis to compare the carrying amount of goodwill to the implied fair value of that goodwill where the Company determined the estimated fair values of the assets and liabilities of its single reporting unit. The implied fair value of goodwill for the Company’s single reporting unit was determined in the same manner as utilized to recognize goodwill in a business combination. The implied fair value of goodwill was measured as the excess of the fair value of the Company’s single reporting unit over the fair value of its assets and liabilities. As a result of the step two test, the Company recorded a non-cash goodwill impairment charge of $87.0 million during the fourth quarter of 2015. The Company did not record an impairment of goodwill during the year ended December 31, 2014. The Company had no goodwill as of December 31, 2016 and 2015.
\nIntangible Assets Not Subject to Amortization
\nA portion of the Company’s intangible assets are spectrum, licenses, 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 most recent annual assessment of indefinite-lived assets was performed as of October 1, 2016 (the “2016 Analysis”). In this 2016 Analysis, the Company chose the optional qualitative assessment to test indefinite-lived intangible assets for impairment. The qualitative assessment permits companies to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If a company concludes based on the qualitative assessment that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it would not have to quantitatively determine the assets’ fair value. Based on the results of the 2016 Analysis, it was not more likely than not that the intangible assets not subject to amortization were impaired. Therefore, a quantitative analysis was not necessary, and no impairment charge was recorded during the period.
\nIntangible Assets Subject to Amortization
\nThe Company’s intangible assets that do have finite lives, consisting of intellectual property, 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 evaluates the useful lives for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.
\nAsset Retirement Obligations
\nLiabilities 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.
\nAs of December 31, 2016, 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. One such right the U.S. government holds is to require the Company to de-orbit the satellite constellation at any time after January 1, 2015. 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 and Boeing, the Company would be required to pay Boeing $18.4 million, plus an amount equivalent to the premium for mass de-orbit insurance coverage payable to the insurer ($2.5 million as of December 31, 2016). 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, 2016, which is included in other long-term liabilities on the accompanying consolidated balance sheet.
\nThere 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.
\nRevenue Recognition
\nThe 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.
\nWholesaler of satellite communications products and services
\nPursuant 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 reasonably assured, as follows:
\nContracts with multiple elements
\nAt times, the Company sells services and equipment through multi-element arrangements that bundle equipment, airtime and other services. For multi-element revenue arrangements when the Company sells services and equipment in bundled arrangements 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 objective 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. The Company’s determination of best estimate of selling price is consistent with its determination of vendor-specific objective evidence of selling price, and the Company assesses qualitative and quantitative market factors and entity-specific factors when estimating the selling price. 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.
\nService revenue sold on a stand-alone basis
\nService 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 equal to the cash paid upon purchase for the e-voucher or prepaid card. The Company recognizes revenue from the prepaid services upon the use of the e-voucher or prepaid card by the customer or upon the expiration of the right to access the prepaid service. While the terms of prepaid e-vouchers can be extended by the purchase of additional e-vouchers, prepaid e-vouchers may not be extended beyond three or four years, dependent on the initial expiry period when purchased. The Company does not offer refunds for unused prepaid services.
\nSubscriber equipment sold on a stand-alone basis
\nThe 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.
\nServices sold to the U.S. government
\nThe Company provides airtime and airtime support to U.S. government and other authorized customers pursuant to the Enhanced Mobile Satellite Services (“EMSS”) contract managed by the Defense Information Systems Agency (“DISA”). Effective October 22, 2013, the Company executed a new five-year EMSS contract, managed by DISA. Under the terms of this new agreement, authorized customers continue to utilize airtime services, provided through the U.S. Department of Defense’s (“DoD”) dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast and Distributed Tactical Communications Services (“DTCS”) services for an unlimited number of DoD and other federal subscribers. The fixed-price rate for the remaining contract years, which run from October 22 through the following October 21 of each year, is $88 million per year. Under this contract, revenue is based on the annual fee for the fixed-price contract with unlimited subscribers, and is recognized on a straight-line basis over each contractual year.
\nThe U.S. government purchases its subscriber equipment from third-party distributors and not directly from the Company.
\nGovernment engineering and support services
\nThe 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.
\nOther government and commercial engineering and support services
\nThe Company also provides 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.
\nWarranty Expense
\nThe Company provides the first end-user purchaser of its subscriber equipment a warranty for one to five years from the date of purchase by such first end-user, depending on the product. The Company maintains a warranty reserve based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties, including equipment replacements, repairs, freight, and program administration, are recorded as cost of subscriber equipment in the accompanying consolidated statements of operations and comprehensive income. The Company’s warranty provision for the year ended December 31, 2016 increased by $2.3 million compared to the prior year. This increase was primarily the result of increased sales of Iridium Pilot.
\nChanges in the warranty reserve for the years ended December 31, 2016 and 2015 were as follows:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Balance at beginning of the period | \n\n
| \n\n $ | \n\n 3,320 | \n\n
| \n\n
| \n\n $ | \n\n 7,381 | \n\n
| \n
| \n Provision | \n\n
| \n\n
| \n\n 604 | \n\n
| \n\n
| \n\n
| \n\n (1,715 | \n\n ) | \n
| \n Utilization | \n\n
| \n\n
| \n\n (1,594 | \n\n ) | \n\n
| \n\n
| \n\n (2,346 | \n\n ) | \n
| \n Balance at end of the period | \n\n
| \n\n $ | \n\n 2,330 | \n\n
| \n\n
| \n\n $ | \n\n 3,320 | \n\n
| \n
Research and Development
\nResearch and development costs are charged to expense in the period in which they are incurred.
\nAdvertising Costs
\nCosts associated with advertising and promotions are expensed as incurred. Advertising expenses were $0.5 million for each of the years ended December 31, 2016, 2015 and 2014.
\nIncome Taxes
\nThe Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses for temporary differences between the financial reporting and tax bases of assets and liabilities. 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.
\nNet Income (Loss) Per Share
\nThe Company calculates basic net income (loss) per share by dividing net income (loss) attributable 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, including common stock issuable upon exercise of outstanding stock options and stock purchase warrants, is computed using the treasury stock method. The effect of potential dilutive common shares from the conversion of the outstanding convertible preferred securities is computed using the as-if converted method at the stated conversion rate. The Company’s unvested RSUs awarded to the board of directors 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 (loss) per share excludes net income attributable to these unvested RSUs from the numerator and excludes the impact of these unvested RSUs from the denominator.
3. Cash and Cash Equivalents and Marketable Securities
\nCash and Cash Equivalents
\nThe following table summarizes the Company’s cash and cash equivalents as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Recurring Fair | \n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n Value Measurement | \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n|||||
| \n Cash and cash equivalents: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Cash | \n\n
| \n\n $ | \n\n 102,194 | \n\n
| \n\n
| \n\n $ | \n\n 67,005 | \n\n
| \n\n
| \n\n
| \n
| \n Money market funds | \n\n
| \n\n
| \n\n 266,478 | \n\n
| \n\n
| \n\n
| \n\n 118,660 | \n\n
| \n\n
| \n\n Level 1 | \n
| \n Commercial paper | \n\n
| \n\n
| \n\n 2,495 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Total cash and cash equivalents | \n\n
| \n\n $ | \n\n 371,167 | \n\n
| \n\n
| \n\n $ | \n\n 185,665 | \n\n
| \n\n
| \n\n
| \n
\n
Marketable Securities
\nThe following tables summarize the Company’s marketable securities as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n As of December 31, 2016 | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Recurring Fair | \n||
| \n
| \n\n
| \n\n Amortized \nCost | \n\n
| \n\n
| \n\n Unrealized Gains | \n\n
| \n\n
| \n\n Unrealized Losses | \n\n
| \n\n
| \n\n Estimated \nFair Value | \n\n
| \n\n
| \n\n Value Measurement | \n||||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n Fixed-income debt securities | \n\n
| \n\n $ | \n\n 30,037 | \n\n
| \n\n
| \n\n $ | \n\n 14 | \n\n
| \n\n
| \n\n $ | \n\n (11 | \n\n ) | \n\n
| \n\n $ | \n\n 30,040 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n U.S. Treasury notes | \n\n
| \n\n
| \n\n 9,283 | \n\n
| \n\n
| \n\n
| \n\n 7 | \n\n
| \n\n
| \n\n
| \n\n (2 | \n\n ) | \n\n
| \n\n
| \n\n 9,288 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Total marketable securities | \n\n
| \n\n $ | \n\n 39,320 | \n\n
| \n\n
| \n\n $ | \n\n 21 | \n\n
| \n\n
| \n\n $ | \n\n (13 | \n\n ) | \n\n
| \n\n $ | \n\n 39,328 | \n\n
| \n\n
| \n\n
| \n
\n
| \n
| \n\n
| \n\n As of December 31, 2015 | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Recurring Fair | \n||
| \n
| \n\n
| \n\n Amortized \nCost | \n\n
| \n\n
| \n\n Unrealized Gains | \n\n
| \n\n
| \n\n Unrealized Losses | \n\n
| \n\n
| \n\n Estimated \nFair Value | \n\n
| \n\n
| \n\n Value Measurement | \n||||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n Fixed-income debt securities | \n\n
| \n\n $ | \n\n 181,636 | \n\n
| \n\n
| \n\n $ | \n\n 4 | \n\n
| \n\n
| \n\n $ | \n\n (200 | \n\n ) | \n\n
| \n\n $ | \n\n 181,440 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Commercial paper | \n\n
| \n\n
| \n\n 9,821 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n (1 | \n\n ) | \n\n
| \n\n
| \n\n 9,820 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n U.S. Treasury notes | \n\n
| \n\n
| \n\n 12,079 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n (10 | \n\n ) | \n\n
| \n\n
| \n\n 12,069 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Total marketable securities | \n\n
| \n\n $ | \n\n 203,536 | \n\n
| \n\n
| \n\n $ | \n\n 4 | \n\n
| \n\n
| \n\n $ | \n\n (211 | \n\n ) | \n\n
| \n\n $ | \n\n 203,329 | \n\n
| \n\n
| \n\n
| \n
\n
The following table presents the contractual maturities of the fixed income debt securities, commercial paper and U.S. Treasury notes held as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n December 31, 2016 | \n\n
| \n\n
| \n\n December 31, 2015 | \n\n
| \n||||||||||
| \n
| \n\n
| \n\n Amortized | \n\n
| \n\n
| \n\n Fair | \n\n
| \n\n
| \n\n Amortized | \n\n
| \n\n
| \n\n Fair | \n\n
| \n||||
| \n
| \n\n
| \n\n Cost | \n\n
| \n\n
| \n\n Value | \n\n
| \n\n
| \n\n Cost | \n\n
| \n\n
| \n\n Value | \n\n
| \n||||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n||||||||||
| \n Mature within one year | \n\n
| \n\n $ | \n\n 32,776 | \n\n
| \n\n
| \n\n $ | \n\n 32,788 | \n\n
| \n\n
| \n\n $ | \n\n 169,728 | \n\n
| \n\n
| \n\n $ | \n\n 169,619 | \n\n
| \n
| \n Mature after one year and within three years | \n\n
| \n\n
| \n\n 6,544 | \n\n
| \n\n
| \n\n
| \n\n 6,540 | \n\n
| \n\n
| \n\n
| \n\n 33,808 | \n\n
| \n\n
| \n\n
| \n\n 33,710 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 39,320 | \n\n
| \n\n
| \n\n $ | \n\n 39,328 | \n\n
| \n\n
| \n\n $ | \n\n 203,536 | \n\n
| \n\n
| \n\n $ | \n\n 203,329 | \n\n
| \n
\n
The decrease in marketable securities from December 31, 2015 to December 31, 2016 is due to the Company selling some of its investments during 2016 and utilizing the proceeds to support the construction of Iridium NEXT.
4. Equity Transactions
\nPreferred Stock
\nThe Company is authorized to issue 2.0 million shares of preferred stock with a par value of $0.0001 per share. As described below, the Company issued 1.0 million shares of preferred stock in the fourth quarter of 2012 and 0.5 million shares of preferred stock in the second quarter of 2014. The remaining 0.5 million authorized shares of preferred stock remain undesignated and unissued as of December 31, 2016.
\nSeries A Cumulative Perpetual Convertible Preferred Stock
\nIn the fourth quarter of 2012, the Company issued 1.0 million shares of its 7.00% Series A Cumulative Perpetual Convertible Preferred Stock (the “Series A Preferred Stock”) in a private offering. The Company received proceeds of $96.5 million from the sale of the Series A Preferred Stock, net of the aggregate $3.5 million in initial purchaser discount and offering costs. The net proceeds of this offering were used to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes.
\nHolders of Series A Preferred Stock are entitled to receive cumulative cash dividends at a rate of 7.00% per annum of the $100 liquidation preference per share (equivalent to an annual rate of $7.00 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series A Preferred Stock ranks senior to the Company’s common stock and on parity with the Company’s 6.75% Series B Cumulative Perpetual Convertible Preferred Stock (the “Series B Preferred Stock”) with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding-up. Holders of Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series A Preferred Stock may convert some or all of their outstanding Series A Preferred Stock at an initial conversion rate of 10.6022 shares of common stock per $100 liquidation preference, which is equivalent to an initial conversion price of approximately $9.43 per share of common stock (subject to adjustment in certain events).
\nIn both 2016 and 2015, the Company paid $7.0 million in cash dividends to the holders of Series A Preferred Stock. As of December 31, 2016, the Company had accrued $0.3 million in cash dividends for the holders of the Series A Preferred Stock, which is included within accrued expenses and other current liabilities on the accompanying consolidated balance sheet.
\nOn or after October 3, 2017, the Company may, at its option, convert some or all of the Series A Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to October 3, 2017, the holders of Series A Preferred Stock will have a special right to convert some or all of the Series A Preferred Stock into shares of common stock in the event of fundamental changes described in the Certificate of Designations for the Series A Preferred Stock, subject to specified conditions and limitations. In certain circumstances, the Company may also elect to settle conversions in cash as a result of these fundamental changes.
\nSeries B Cumulative Perpetual Convertible Preferred Stock
\nIn May 2014, the Company issued 500,000 shares of its Series B Preferred Stock in an underwritten public offering at a price to the public of $250 per share. The purchase price received by the Company, equal to $242.50 per share, reflected an underwriting discount of $7.50 per share. The Company received proceeds of $120.8 million from the sale of the Series B Preferred Stock, net of the $3.8 million underwriting discount and $0.4 million of offering costs.
\nHolders of Series B Preferred Stock are entitled to receive cumulative cash dividends at a rate of 6.75% per annum of the $250 liquidation preference per share (equivalent to an annual rate of $16.875 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. The Series B Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series B Preferred Stock ranks senior to the Company’s common stock and pari passu with respect to the Company’s Series A Preferred Stock with respect to dividend rights and rights upon the Company’s voluntary or involuntary liquidation, dissolution or winding-up. Holders of Series B Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series B Preferred Stock may convert some or all of their outstanding Series B Preferred Stock at an initial conversion rate of 33.456 shares of common stock per $250 liquidation preference, which is equivalent to an initial conversion price of approximately $7.47 per share of common stock (subject to adjustment in certain events).
\nIn both 2016 and 2015, the Company paid $8.4 million in cash dividends to the holders of Series B Preferred Stock. As of December 31, 2016, the Company had accrued $0.4 million in cash dividends for the holders of the Series B Preferred Stock, which is included within accrued expenses and other current liabilities on the accompanying consolidated balance sheet.
\nOn or after May 15, 2019, the Company may, at its option, convert some or all of the Series B Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to May 15, 2019, in the event of certain specified fundamental changes, holders of the Series B Preferred Stock will have the right to convert some or all of their shares of Series B Preferred Stock into the greater of (i) a number of shares of the Company’s common stock as subject to adjustment plus the make-whole premium, if any, and (ii) a number of shares of the Company’s common stock equal to the lesser of (a) the liquidation preference divided by the market value of the Company’s common stock on the effective date of such fundamental change and (b) 81.9672 (subject to adjustment). In certain circumstances, the Company may elect to cash settle any conversions in connection with a fundamental change.
\nCommon Stock
\nRegistered Direct Public Offering
\nIn May 2014, the Company issued 7,692,308 shares of its common stock in a registered direct public offering to certain investment funds affiliated with Baron Capital Group Inc. (“Baron”) at a price of $6.50 per share for aggregate gross proceeds of $50.0 million. The Company received proceeds of $49.9 million from the sale of the common stock to Baron, net of offering costs of $0.1 million.
\nUnder the stock purchase agreement entered into with Baron, Baron was entitled to receive additional shares if, during the 90-day period following the date of the stock purchase agreement, the Company issued or sold securities below specified prices. As a result of the Company’s public offering of common stock, described below, and its public offering of Series B Preferred Stock, described above, the Company delivered 504,413 additional shares of common stock to Baron on August 6, 2014.
\nUnderwritten Public Offering
\nConcurrently with its public offering of Series B Preferred Stock in May 2014, the Company issued 8,483,608 shares of its common stock in an underwritten public offering, including 1,106,558 shares upon the underwriters’ exercise of their overallotment option in full, at a price to the public of $6.10 per share. The Company received proceeds of $49.0 million, net of $2.6 million of underwriting discount and $0.2 million of offering costs.
\nThe net proceeds of these common stock offerings and the Series B Preferred Stock offering are being used to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes.
\n
5. Debt
\nCredit Facility
\nIn October 2010, the Company entered into a $1.8 billion credit facility with a syndicate of bank lenders, which was amended and restated in May 2014 (as further amended to date, the “Credit Facility”). 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:
\n| \n
| \n\n • | \n\n Tranche A – $1,537,500,000 at a fixed rate of 4.96%; and |
| \n
| \n\n • | \n\n 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 being fully drawn on the Credit Facility, which occurred in February 2017, a portion of interest was paid via a deemed loan and added to the related tranche principal, and the remainder was payable in cash. The amount of interest paid via a deemed loan for each tranche was as follows:
\n| \n
| \n\n • | \n\n Tranche A – fixed rate of 3.56%; and |
| \n
| \n\n • | \n\n Tranche B – LIBOR plus 0.55%. |
For the years ended December 31, 2016, 2015 and 2014, the Company incurred total interest of $77.7 million, $64.6 million and $50.8 million, respectively, of which $44.4 million, $44.9 million and $35.3 million, respectively, is payable via a deemed loan and the remainder is payable in cash on the scheduled semi-annual payment dates.
\nIn connection with each draw it made under the Credit Facility, the Company also borrowed an amount equal to 6.49% of such draw to cover the premium for the COFACE insurance policy. The Company also paid a commitment fee of 0.80% per year, in semi-annual installments, on any undrawn portion of the Credit Facility through February 2017, when the Credit Facility was fully drawn.
\nFunds drawn under the Credit Facility have been used to pay for (i) 85% of the costs under a fixed price full scale development contract (the “FSD”) with Thales Alenia Space France (“Thales”) for the design and manufacture of satellites for Iridium NEXT until the Credit Facility was fully drawn in February 2017 (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.
\nScheduled 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. All interest costs incurred related to the Credit Facility have been capitalized during the construction period of the assets. During the construction period, the Company pays interest on each semi-annual due date through a combination of a cash payment and a deemed additional loan. The following tables present interest activity for the Credit Facility for the years ended December 31, 2016 and 2015 payable via cash or deemed loan:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n Cash | \n\n
| \n\n
| \n\n Deemed Loan | \n\n
| \n\n
| \n\n Total | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||
| \n Beginning interest payable | \n\n
| \n\n $ | \n\n 3,720 | \n\n
| \n\n
| \n\n $ | \n\n 8,514 | \n\n
| \n\n
| \n\n $ | \n\n 12,234 | \n\n
| \n
| \n Interest incurred | \n\n
| \n\n
| \n\n 33,326 | \n\n
| \n\n
| \n\n
| \n\n 44,359 | \n\n
| \n\n
| \n\n
| \n\n 77,685 | \n\n
| \n
| \n Interest payments | \n\n
| \n\n
| \n\n (22,910 | \n\n ) | \n\n
| \n\n
| \n\n (52,873 | \n\n ) | \n\n
| \n\n
| \n\n (75,783 | \n\n ) | \n
| \n Ending interest payable | \n\n
| \n\n $ | \n\n 14,136 | \n\n
| \n\n
| \n\n $ | \n\n - | \n\n
| \n\n
| \n\n $ | \n\n 14,136 | \n\n
| \n
\n
| \n
| \n\n
| \n\n 2015 | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n Cash | \n\n
| \n\n
| \n\n Deemed Loan | \n\n
| \n\n
| \n\n Total | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||
| \n Beginning interest payable | \n\n
| \n\n $ | \n\n 2,936 | \n\n
| \n\n
| \n\n $ | \n\n 6,653 | \n\n
| \n\n
| \n\n $ | \n\n 9,589 | \n\n
| \n
| \n Interest incurred | \n\n
| \n\n
| \n\n 19,662 | \n\n
| \n\n
| \n\n
| \n\n 44,934 | \n\n
| \n\n
| \n\n
| \n\n 64,596 | \n\n
| \n
| \n Interest payments | \n\n
| \n\n
| \n\n (18,878 | \n\n ) | \n\n
| \n\n
| \n\n (43,073 | \n\n ) | \n\n
| \n\n
| \n\n (61,951 | \n\n ) | \n
| \n Ending interest payable | \n\n
| \n\n $ | \n\n 3,720 | \n\n
| \n\n
| \n\n $ | \n\n 8,514 | \n\n
| \n\n
| \n\n $ | \n\n 12,234 | \n\n
| \n
\n
As of December 31, 2016, the Company had borrowed a total of $1,777.8 million under the Credit Facility. The unused portion of the Credit Facility as of December 31, 2016 was $22.2 million, and that amount was fully drawn in February 2017. Future payments with respect to the Credit Facility balance existing at December 31, 2016, plus the February 2017 draw of $22.2 million, by year and in the aggregate, is as follows:
\n\n
| \n Year ending December 31, | \n\n
| \n\n Amount | \n\n
| \n|
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|
| \n 2017 | \n\n
| \n\n $ | \n\n - | \n\n
| \n
| \n 2018 | \n\n
| \n\n
| \n\n 85,500 | \n\n
| \n
| \n 2019 | \n\n
| \n\n
| \n\n 202,500 | \n\n
| \n
| \n 2020 | \n\n
| \n\n
| \n\n 288,000 | \n\n
| \n
| \n 2021 | \n\n
| \n\n
| \n\n 306,000 | \n\n
| \n
| \n Thereafter | \n\n
| \n\n
| \n\n 918,000 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 1,800,000 | \n\n
| \n
\n
Under the terms of the Credit Facility, the Company is required to maintain a minimum cash reserve for debt service of $113.0 million as of December 31, 2016, which increases to $189.0 million in 2017, and is classified as restricted cash on the accompanying consolidated balance sheet. The Company recognized the semi-annual commitment fee on the undrawn portion of the Credit Facility of $1.3 million, $3.3 million and $5.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Credit Facility will mature seven years after the start of the repayment period.
\nObligations under the Credit Facility are secured on a senior basis by a lien on substantially all of the Company’s assets. In addition to the minimum debt service reserve levels, financial covenants under the Credit Facility include:
\n| \n • | \n\n an available cash balance of at least $25 million; |
| \n • | \n\n a debt-to-equity ratio, which is calculated as the ratio of total net debt to the aggregate of total net debt and total stockholders’ equity, of no more than 0.7 to 1, measured each June 30 and December 31; |
| \n • | \n\n specified maximum levels of annual capital expenditures (excluding expenditures on the construction of Iridium NEXT satellites) through the year ending December 31, 2024; |
| \n • | \n\n specified minimum levels of consolidated operational earnings before interest, taxes, depreciation and amortization, or operational EBITDA, for the 12-month periods ending each December 31 and June 30 through December 31, 2017; |
| \n • | \n\n specified minimum cumulative cash flow requirements from customers who have hosted payloads on the Company’s satellites, measured each December 31 and June 30, from June 30, 2016 through December 31, 2017; |
| \n • | \n\n a debt service coverage ratio, measured during the repayment period, of not less than 1 to 1.5; and |
| \n • | \n\n specified maximum leverage levels during the repayment period that decline from a ratio of 4.73 to 1 for the twelve months ending June 30, 2018 to a ratio of 2.36 to 1 for the twelve months ending December 31, 2024. |
The Company’s available cash balance, as defined by the Credit Facility, was $382.0 million as of December 31, 2016. The Company’s debt-to-equity ratio was 0.51 to 1 as of December 31, 2016. The Company was in compliance with the operational EBITDA covenant, the annual capital expenditure covenant and the cumulative cash flow requirements from customers who have hosted payloads covenant as of December 31, 2016.
\nThe covenants regarding capital expenditures, operational EBITDA and hosted payload cash flows are calculated in connection with a measurement, which the Company refers to as available cure amount, that is derived using a complex calculation based on overall cash flows, as adjusted by numerous measures specified in the Credit Facility. In a period in which the Company’s capital expenditures exceed, or the Company’s operational EBITDA or hosted payload cash flows falls short of, the amount specified in the respective covenant, the Company would be permitted to allocate available cure amount, if any, to prevent a breach of the applicable covenant. As of December 31, 2016, the Company had no available cure amount, although it was not necessary to apply any available cure amount to maintain compliance with the covenants. The available cure amount has fluctuated significantly from one measurement period to the next, and the Company expects that it will continue to do so.
\nThe covenants also place limitations on the Company’s ability and that of its subsidiaries to carry out mergers and acquisitions, dispose of assets, grant security interests, declare, make or pay dividends, enter into transactions with affiliates, incur additional indebtedness, or make loans, guarantees or indemnities. If the Company is not in compliance with the financial covenants under the Credit Facility, after any opportunity to cure such non-compliance, or the Company otherwise experiences an event of default under the Credit Facility, the lenders may require repayment in full of all principal and interest outstanding under the Credit Facility. It is unlikely the Company would have adequate funds to repay such amounts prior to the scheduled maturity of the Credit Facility. If the Company fails to repay such amounts, the lenders may foreclose on the assets the Company has pledged under the Credit Facility, which include substantially all of its assets and those of its domestic subsidiaries.
\nPursuant to the Company’s hosting agreement with its subsidiary, Aireon LLC, Aireon is obligated to pay the Company $200 million for the placement of the Aireon payload on each of the Iridium NEXT satellites. In anticipation of potential delays in receipt of the Aireon hosting payments, the Company entered into discussions with its Credit Facility lenders and Thales for deferral of certain payments.
\nThe Company believes that liquidity sources will provide sufficient funds for the Company to meet its liquidity requirements for at least the next 12 months.
6. Boeing Operations and Maintenance (O&M) Agreements
\nOn July 21, 2010, the Company and Boeing entered into the O&M Agreement, pursuant to which Boeing agreed to provide continuing steady-state operations and maintenance services with respect to the satellite network operations center, telemetry, tracking and control stations and the first-generation satellites (including engineering, systems analysis, and operations and maintenance services). Boeing had, and Motorola Solutions and the U.S. government each currently have, the unilateral right to commence the de-orbit of the Company’s first-generation satellites upon the occurrence of certain enumerated events. The O&M Agreement incorporated a mass de-orbit plan for the first-generation satellites, which, if exercised, would have cost the Company approximately $18.4 million to be paid to Boeing, plus an amount equivalent to the premium of the mass de-orbit insurance coverage to be paid to the insurer.
\nOn July 21, 2010, the Company and Boeing entered into an agreement pursuant to which Boeing would operate and maintain Iridium NEXT (the “Iridium NEXT Support Services Agreement”). On January 1, 2015, Boeing supported a hybrid operations mode involving network elements from both the first-generation satellites and the Iridium NEXT system. Boeing provided those services on a time-and-materials fee basis. Obligations to Boeing represented the not to exceed (“NTE”) price for services under the Iridium NEXT Support Services Agreement.
\nThe Company incurred expenses of $29.0 million, $30.7 million and $32.1 million relating to satellite operations and maintenance costs for the years ended December 31, 2016, 2015 and 2014, respectively, included in cost of services (exclusive of depreciation and amortization) in the consolidated statements of operations and comprehensive income.
\nOn November 28, 2016, the Company entered into an Insourcing Agreement with Boeing for the Company to hire, effective January 3, 2017, the majority of Boeing employees and third party contractors who were responsible for the operations and maintenance of the Company’s satellite constellation and ground infrastructure. Pursuant to the Insourcing Agreement, the Company is obligated to pay Boeing $5.5 million, of which $2.75 million was paid during the year ended December 31, 2016 and the remaining $2.75 million will be paid in December 2017. Concurrent with the hiring of the assembled workforce on January 3, 2017, the Company and Boeing terminated both the O&M Agreement and the Iridium NEXT Support Service Agreement and entered into a new Development Services Agreement (“DSA”) with a $6.0 million annual take-or-pay commitment through 2021. As a result of the termination of certain Boeing agreements under the Insourcing Agreement, Boeing no longer has a unilateral right to commence the de-orbit of the Company’s first-generation satellites. The assembled workforce will be recorded as a definite-lived intangible asset in the first quarter of 2017 and will be amortized over an estimated useful life of 7 years. Additionally, by terminating the O&M Agreement, the Company will recognize a $14.4 million gain from the derecognition of a purchase accounting liability created from GHL’s acquisition of Iridium in 2009 related to the fair value of the contractual arrangement with Boeing as of that date and the remainder of a credit from Boeing in the July 2010 Boeing O&M contract negotiations.
7. Property and Equipment
\nProperty and equipment consisted of the following as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Satellite system | \n\n
| \n\n $ | \n\n 314,228 | \n\n
| \n\n
| \n\n $ | \n\n 323,607 | \n\n
| \n
| \n Ground system | \n\n
| \n\n
| \n\n 63,519 | \n\n
| \n\n
| \n\n
| \n\n 41,629 | \n\n
| \n
| \n Equipment | \n\n
| \n\n
| \n\n 34,139 | \n\n
| \n\n
| \n\n
| \n\n 30,189 | \n\n
| \n
| \n Internally developed software and purchased software | \n\n
| \n\n
| \n\n 127,498 | \n\n
| \n\n
| \n\n
| \n\n 116,960 | \n\n
| \n
| \n Building and leasehold improvements | \n\n
| \n\n
| \n\n 32,099 | \n\n
| \n\n
| \n\n
| \n\n 31,589 | \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n 571,483 | \n\n
| \n\n
| \n\n
| \n\n 543,974 | \n\n
| \n
| \n Less: accumulated depreciation | \n\n
| \n\n
| \n\n (422,098 | \n\n ) | \n\n
| \n\n
| \n\n (385,860 | \n\n ) | \n
| \n
| \n\n
| \n\n
| \n\n 149,385 | \n\n
| \n\n
| \n\n
| \n\n 158,114 | \n\n
| \n
| \n Land | \n\n
| \n\n
| \n\n 8,037 | \n\n
| \n\n
| \n\n
| \n\n 8,037 | \n\n
| \n
| \n Construction in process: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Iridium NEXT systems under construction | \n\n
| \n\n
| \n\n 2,639,824 | \n\n
| \n\n
| \n\n
| \n\n 2,252,290 | \n\n
| \n
| \n Other construction in process | \n\n
| \n\n
| \n\n 15,838 | \n\n
| \n\n
| \n\n
| \n\n 25,126 | \n\n
| \n
| \n Total property and equipment, net of accumulated \ndepreciation | \n\n
| \n\n $ | \n\n 2,813,084 | \n\n
| \n\n
| \n\n $ | \n\n 2,443,567 | \n\n
| \n
\n
Other construction in process consisted of the following as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Internally developed software | \n\n
| \n\n $ | \n\n 14,218 | \n\n
| \n\n
| \n\n $ | \n\n 7,708 | \n\n
| \n
| \n Equipment | \n\n
| \n\n
| \n\n 1,546 | \n\n
| \n\n
| \n\n
| \n\n 1,981 | \n\n
| \n
| \n Ground system | \n\n
| \n\n
| \n\n 74 | \n\n
| \n\n
| \n\n
| \n\n 15,143 | \n\n
| \n
| \n Building and leasehold improvements | \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n 294 | \n\n
| \n|
| \n Total other construction in process | \n\n
| \n\n $ | \n\n 15,838 | \n\n
| \n\n
| \n\n $ | \n\n 25,126 | \n\n
| \n
\n
Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $48.6 million, $51.0 million and $62.7 million, respectively.
8. Intangible Assets
\nThe Company had identifiable intangible assets as follows as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n December 31, 2016 | \n\n
| \n|||||||||||
| \n
| \n\n
| \n\n Useful | \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Accumulated | \n\n
| \n\n
| \n\n Net | \n\n
| \n|||
| \n
| \n\n
| \n\n Lives | \n\n
| \n\n Carrying Value | \n\n
| \n\n
| \n\n Amortization | \n\n
| \n\n
| \n\n Carrying Value | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||||
| \n Indefinite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Trade names | \n\n
| \n\n Indefinite | \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n\n
| \n\n $ | \n\n — | \n\n
| \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n
| \n Spectrum and licenses | \n\n
| \n\n Indefinite | \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n
| \n Definite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Intellectual property | \n\n
| \n\n 20 years | \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,868 | \n\n ) | \n\n
| \n\n
| \n\n 10,571 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,868 | \n\n ) | \n\n
| \n\n
| \n\n 10,571 | \n\n
| \n
| \n Total intangible assets | \n\n
| \n\n
| \n\n
| \n\n $ | \n\n 51,664 | \n\n
| \n\n
| \n\n $ | \n\n (5,868 | \n\n ) | \n\n
| \n\n $ | \n\n 45,796 | \n\n
| \n
\n
| \n
| \n\n
| \n\n December 31, 2015 | \n\n
| \n|||||||||||
| \n
| \n\n
| \n\n Useful | \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Accumulated | \n\n
| \n\n
| \n\n Net | \n\n
| \n|||
| \n
| \n\n
| \n\n Lives | \n\n
| \n\n Carrying Value | \n\n
| \n\n
| \n\n Amortization | \n\n
| \n\n
| \n\n Carrying Value | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||||
| \n Indefinite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Trade names | \n\n
| \n\n Indefinite | \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n\n
| \n\n $ | \n\n — | \n\n
| \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n
| \n Spectrum and licenses | \n\n
| \n\n Indefinite | \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n
| \n Definite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Intellectual property | \n\n
| \n\n 19.5 years | \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,075 | \n\n ) | \n\n
| \n\n
| \n\n 11,364 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,075 | \n\n ) | \n\n
| \n\n
| \n\n 11,364 | \n\n
| \n
| \n Total intangible assets | \n\n
| \n\n
| \n\n
| \n\n $ | \n\n 51,664 | \n\n
| \n\n
| \n\n $ | \n\n (5,075 | \n\n ) | \n\n
| \n\n $ | \n\n 46,589 | \n\n
| \n
\n
The Company evaluated the useful life of the remaining definite-lived intangible assets in 2016 to reflect the refinement of the Iridium NEXT launch schedule and deployment plan. This resulted in a change in the weighted-average amortization period of intangible assets from 19.5 years for the year ended December 31, 2015 to 20.0 years for the year ended December 31, 2016. Amortization expense was $0.8 million, $0.8 million and $10.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.
\nFuture amortization expense with respect to intangible assets existing at December 31, 2016, by year and in the aggregate, is as follows:
\n\n
| \n Year ending December 31, | \n\n
| \n\n Amount | \n\n
| \n|
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|
| \n 2017 | \n\n
| \n\n $ | \n\n 783 | \n\n
| \n
| \n 2018 | \n\n
| \n\n 783 | \n\n
| \n|
| \n 2019 | \n\n
| \n\n 783 | \n\n
| \n|
| \n 2020 | \n\n
| \n\n 783 | \n\n
| \n|
| \n 2021 | \n\n
| \n\n 783 | \n\n
| \n|
| \n Thereafter | \n\n
| \n\n
| \n\n 6,656 | \n\n
| \n
| \n Total estimated future amortization expense | \n\n
| \n\n $ | \n\n 10,571 | \n\n
| \n
9. Commitments and Contingencies
\nThales
\nIn June 2010, the Company executed a primarily fixed-price FSD with Thales for the design and build of satellites for Iridium NEXT. The total price under the FSD is $2.3 billion, and the Company expects payment obligations under the FSD to extend through 2018. As of December 31, 2016, the Company had made aggregate payments of $1,753.6 million to Thales, of which $1,490.6 million were from borrowings under the Credit Facility and were capitalized as construction in progress within property and equipment, net in the accompanying consolidated balance sheet. The Company’s obligations to Thales that are currently scheduled for the years ending December 31, 2017 and 2018 are in the amounts of $287.1 million and $212.7 million, respectively. The timing of a portion of the Company’s obligations to Thales is based on SpaceX’s targeted launch schedule to complete the NEXT constellation in mid-2018. During 2016, the Company used the Credit Facility to pay 85% of each invoice received from Thales under the FSD, with the remaining 15% funded from cash on hand. The Credit Facility was fully drawn in February 2017, and as a result, the Company will pay 100% of each invoice received from Thales from cash and marketable securities on hand as well as internally generated cash flows, including contracted cash flows from hosted payloads.
\nSpaceX
\n\n
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 (as amended to date, the “SpaceX Agreement”). The total price under the SpaceX Agreement for seven launches and a reflight option in the event of launch failure is $468.1 million. The SpaceX Falcon 9 rocket is configured to carry ten Iridium NEXT satellites to orbit for each of the initial seven launches. In November 2016, the Company entered into an agreement for an eighth launch with SpaceX to launch five spare satellites and share the launch services with GFZ German Research Centre for Geosciences (“GFZ”). The total price under the SpaceX Agreement for the eighth launch is $67.9 million. GFZ will pay Iridium $31.8 million to share the launch services to launch NASA’s two Gravity Recovery and Climate Experiment Follow-On satellites. As of December 31, 2016, the Company made aggregate payments of $394.0 million to SpaceX, which were capitalized as construction in progress within property and equipment, net in the accompanying consolidated balance sheet. Additionally, the Company received $16.5 million from GFZ as of December 31, 2016. The Company maintains a $1.5 million refundable deposit with SpaceX for the reservation of an additional future launch, which is not included in the total contract price. The Company's obligations to SpaceX currently scheduled for the years ending December 31, 2017, 2018 and 2019 are $110.9 million, $20.9 million and $10.2 million, respectively. The timing of a portion of the Company's obligations to SpaceX is based on SpaceX’s targeted launch schedule to complete the NEXT constellation in mid-2018.
\nKosmotras
\nIn June 2011, the Company entered into an agreement with International Space Company Kosmotras (“Kosmotras”) as a supplemental launch service provider for Iridium NEXT (the “Kosmotras Agreement”). In June 2013, the Company exercised an option for one launch to carry two Iridium NEXT satellites. If the Company does not exercise any additional options, the total cost under the contract including this single launch will be $51.8 million. As of December 31, 2016, the Company had made aggregate payments of $36.8 million to Kosmotras, which were capitalized within property and equipment, net in the accompanying consolidated balance sheet. In June 2015, the Company agreed with Kosmotras to replace the remaining options with a new set of options to purchase up to six dedicated launches. Kosmotras has been unable to obtain permission to launch the Company’s satellites to date. The Company may be unable to recover the amounts already paid to Kosmotras. The Company's obligations to Kosmotras currently expected in the year ending December 31, 2018 are $15.0 million. The timing of a portion of the Company's obligations to Kosmotras is based on the earliest date the Company plans to include Kosmotras into its launch profile.
\nIridium NEXT Launch and In-Orbit Insurance
\nThe Credit Facility requires the Company to obtain insurance covering the launch and first 12 months of operation of the Iridium NEXT satellites. The launch and in-orbit insurance the Company has obtained contains elements, consistent with the terms of the Credit Facility, of self-insurance and deductibles, providing reimbursement only after a specified number of satellite failures. As a result, a failure of one or more of the Company’s satellites, or the occurrence of equipment failures and other related problems, could constitute an uninsured loss or require the payment of additional premiums and could harm the Company’s financial condition. Furthermore, launch and in-orbit insurance does not cover lost revenue.
\nThe total premium is $117.9 million and as of December 31, 2016, the Company had made aggregate payments of $31.5 million. The Company's insurance obligations scheduled for the years ending December 31, 2017 and 2018 are $59.5 million and $26.9 million, respectively. The timing of a portion of the contractual obligation payments are based on SpaceX’s targeted launch schedule to complete the NEXT constellation in mid-2018.
\nUnconditional Purchase Obligations
\nThe Company has a manufacturing agreement with Benchmark. 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. Benchmark 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, 2016 and 2015, the Company had $0.5 million and $2.9 million, respectively, of such materials, and the amounts were included in inventory on the accompanying consolidated balance sheets. The Company’s obligation to Benchmark for the year ending December 31, 2017 is $3.4 million.
\n\n
As of December 31, 2016, the aggregate unconditional purchase obligations were $45.9 million, which include the Company’s commitments with Boeing and Benchmark. The unconditional purchase obligations scheduled for the years ending December 31, 2017 through 2021 are $17.7 million, $8.2 million, $7.3 million, $6.7 million and $6.0 million, respectively. The Boeing obligations represent the new take-or-pay commitment with the execution of the DSA and final payment for the acquisition of the assembled workforce.
\nIn-Orbit Insurance
\nDue to various contractual requirements, the Company is required to maintain a third-party liability in-orbit insurance policy on its first-generation satellites with a de-orbiting endorsement to cover potential claims relating to operating or de-orbiting the satellite constellation or individual satellites. The policy covers the Company, Boeing as former 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.
\nThe current policy has a renewable one-year term, which is scheduled to expire on December 8, 2017. The policy coverage is separated into Sections A, B, and C.
\nSection A coverage is currently in effect and covers product liability over Motorola’s position as manufacturer of the first-generation satellites. Liability limits for claims under Section A are $1.0 billion per occurrence and in the aggregate. There is no deductible for claims.
\nSection B coverage is currently in effect and covers risks in connection with in-orbit satellites and for the de-orbit of individual 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, 2016 is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet. The deductible for claims under Section B is $250,000 per occurrence.
\n\n
Section C coverage is effective once requested by the Company (the “Attachment Date”) and covers risks in connection with a mass decommissioning of the first-generation satellites. 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, 2016, the Company had not requested Section C coverage since no mass decommissioning activities are currently anticipated. The deductible for claims under Section C is $250,000 per occurrence.
\nOperating Leases
\nThe 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 2026.
\nAdditionally, 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; McLean, Virginia; Canada; Russia; and Norway. Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases at December 31, 2016, are as follows:
\n\n
| \n
| \n\n
| \n\n Operating | \n\n
| \n|
| \n Year ending December 31, | \n\n
| \n\n Leases | \n\n
| \n|
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|
| \n 2017 | \n\n
| \n\n $ | \n\n 3,589 | \n\n
| \n
| \n 2018 | \n\n
| \n\n
| \n\n 3,554 | \n\n
| \n
| \n 2019 | \n\n
| \n\n
| \n\n 3,644 | \n\n
| \n
| \n 2020 | \n\n
| \n\n
| \n\n 3,734 | \n\n
| \n
| \n 2021 | \n\n
| \n\n
| \n\n 3,827 | \n\n
| \n
| \n Thereafter | \n\n
| \n\n
| \n\n 12,251 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 30,599 | \n\n
| \n
\n
Rent expense for the years ended December 31, 2016, 2015 and 2014 was $3.1 million, $3.4 million and $3.3 million, respectively.
\nContingencies
\n\n
The Company is not aware of any actions that it expects to have a material adverse impact on its business, financial results or financial condition.
10. Stock-Based Compensation
\nDuring 2015, the Company’s stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”) to provide stock-based awards, including nonqualified stock options, incentive stock options, restricted stock and other equity securities, as incentives and rewards for employees, consultants and non-employee directors.
\nStock Option Awards
\nThe 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 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 value of the underlying shares at the date of grant. The stock option awards granted to the Company’s board of directors generally (i) represent a portion of their annual compensation, (ii) have a term of ten years, (iii) vest over the calendar year with 25% vesting on the last day of each calendar quarter, (iv) are contingent upon continued service on the vesting date, and (v) 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 options granted was based on the actual historical volatility of the Company’s stock price. The expected term of the award was calculated using the simplified method. 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. To the extent the Company’s actual forfeiture rate is different from its estimate of forfeitures, the stock-based compensation may differ in future periods.
\nIn 2016, the Company granted stock options to new hires and promoted employees only. The Company’s board of directors and non-employee consultants were granted restricted stock unit awards.
\nDuring 2016, 2015 and 2014, the Company granted approximately 249,000, 744,000 and 987,000 stock options, respectively, to its employees, with an estimated aggregate grant-date fair value of $0.9 million, $2.9 million and $3.0 million, respectively.
\nDuring 2015 and 2014, certain members of the Company’s board of directors elected to receive a portion of their annual compensation in the form of stock options in an aggregate amount of approximately 103,000 and 132,000 stock options, respectively. These options vested quarterly through the end of the calendar year in which they were granted. Additionally, in October 2015, certain members of the Company’s board of directors were granted 7,500 stock options, related to their service as part of a newly created Government Advisory Committee, and vested through the end of 2015. The estimated aggregate grant-date fair value of the options granted to directors in each of 2015 and 2014 was $0.4 million.
\nDuring 2015 and 2014, the Company granted 30,000 and 45,000 stock options, respectively, to its non-employee consultants, with an estimated aggregate grant-date fair value of $0.2 million for each year, respectively. The stock options granted to consultants are generally subject to service-based 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.
\nAssumptions used in determining the fair value of the Company’s options were as follows:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n Expected volatility | \n\n
| \n\n 40% - 42% | \n\n
| \n\n
| \n\n 39% - 42% | \n\n
| \n\n
| \n\n 41% - 43% | \n\n
| \n|||
| \n Expected term (years) | \n\n
| \n\n 6.00 - 9.25 | \n\n
| \n\n
| \n\n 5.25 - 10.00 | \n\n
| \n\n
| \n\n 5.25 - 10.00 | \n\n
| \n|||
| \n Expected dividends | \n\n
| \n\n
| \n\n 0% | \n\n
| \n\n
| \n\n
| \n\n 0% | \n\n
| \n\n
| \n\n
| \n\n 0% | \n\n
| \n
| \n Risk free interest rate | \n\n
| \n\n 1.15% - 2.45% | \n\n
| \n\n
| \n\n 1.50% - 2.35% | \n\n
| \n\n
| \n\n 1.10% - 2.35% | \n\n
| \n
\n
A summary of the activity of the Company’s stock options for the year ended December 31, 2016 is as follows:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n\n
| \n\n Average | \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Average | \n\n
| \n\n
| \n\n Remaining | \n\n
| \n\n Aggregate | \n\n
| \n||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Exercise Price | \n\n
| \n\n
| \n\n Contractual | \n\n
| \n\n Intrinsic | \n\n
| \n||
| \n
| \n\n
| \n\n Shares | \n\n
| \n\n
| \n\n Per Share | \n\n
| \n\n
| \n\n Term (Years) | \n\n
| \n\n Value | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands, except years and per share data) | \n\n
| \n|||||||||||
| \n Options outstanding at January 1, 2016 | \n\n
| \n\n
| \n\n 7,120 | \n\n
| \n\n
| \n\n $ | \n\n 7.86 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Granted | \n\n
| \n\n
| \n\n 249 | \n\n
| \n\n
| \n\n $ | \n\n 8.13 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Cancelled or expired | \n\n
| \n\n
| \n\n (39 | \n\n ) | \n\n
| \n\n $ | \n\n 8.92 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Exercised | \n\n
| \n\n
| \n\n (73 | \n\n ) | \n\n
| \n\n $ | \n\n 7.33 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Forfeited | \n\n
| \n\n
| \n\n (55 | \n\n ) | \n\n
| \n\n $ | \n\n 7.62 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Options outstanding at December 31, 2016 | \n\n
| \n\n
| \n\n 7,202 | \n\n
| \n\n
| \n\n $ | \n\n 7.87 | \n\n
| \n\n
| \n\n 5.45 | \n\n
| \n\n $ | \n\n 12,473 | \n\n
| \n
| \n Options exercisable at December 31, 2016 | \n\n
| \n\n
| \n\n 6,169 | \n\n
| \n\n
| \n\n $ | \n\n 7.83 | \n\n
| \n\n
| \n\n 5.02 | \n\n
| \n\n $ | \n\n 10,924 | \n\n
| \n
| \n Options exercisable and expected to vest at \nDecember 31, 2016 | \n\n
| \n\n
| \n\n 7,188 | \n\n
| \n\n
| \n\n $ | \n\n 7.87 | \n\n
| \n\n
| \n\n 5.13 | \n\n
| \n\n $ | \n\n 12,442 | \n\n
| \n
\n
The Company recognized $2.5 million, $3.4 million and $4.3 million of stock-based compensation expense related to stock options in the years ended December 31, 2016, 2015 and 2014, respectively.
\nThe weighted-average grant-date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $3.47, $3.95 and $2.97 per share, respectively.
\nAs of December 31, 2016, the total unrecognized cost related to non-vested options was approximately $3.1 million. This cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of the shares vested during the years ended December 31, 2016, 2015 and 2014 was approximately $2.9 million, $3.6 million and $4.6 million, respectively.
\nRestricted Stock Unit Awards
\nMembers of the Company’s board of directors may elect to receive a portion of their annual compensation in the form of RSUs. An aggregate amount of approximately 126,000 service-based RSUs were granted in January 2016 with an estimated grant date fair value of $1.0 million. These RSUs vest in full on the first anniversary of the grant date. In January 2015 and 2014, an aggregate amount of approximately 62,000 and 108,000 RSUs were granted, respectively, with an estimated grant date fair value of $0.6 million and $0.7 million, respectively. These RSUs vested over a one-year period, with 25% vesting on the last day of each calendar quarter. In addition, 15,000 RSUs were granted in July 2015 to new directors, with an estimated aggregate grant-date fair value of $0.1 million, and vested through the end of 2015, with 33% vesting immediately upon grant and 33% and 34% vesting on the last day of each remaining calendar quarter in 2015.
\nDuring the years ended December 31, 2016, 2015 and 2014, the Company granted approximately 573,000, 596,000 and 786,000 service-based RSUs, respectively, to its employees, with an estimated grant date fair value of $4.0 million, $5.6 million and $5.1 million, respectively. Employee service-based RSUs generally vest over a four-year service period, with 25% vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter.
\nIn March 2016, the Company awarded approximately 1,335,000 performance-based RSUs to the Company’s executives and employees (the “2016 Bonus RSUs”), with an estimated grant date fair value of $9.4 million. The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. Vesting of the 2016 Bonus RSUs is dependent upon the Company’s achievement of defined performance goals for the 2016 fiscal year. Management believes it is probable that certain 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 2016 Bonus RSUs will vest, subject to continued employment, on the anniversary of the grant date in March 2017. Similarly, in June 2014, the Company awarded approximately 323,000 performance-based RSUs to its executives and employees (the “2014 Bonus RSUs”). Vesting of the 2014 Bonus RSUs was dependent upon the Company’s achievement of defined performance goals for the 2014 fiscal year. The level of achievement was determined by the compensation committee. Approximately 304,000 of the 2014 Bonus RSUs were vested and released in March 2015 at an estimated aggregate fair value of $2.4 million, which was recognized as compensation expense over the service period.
\nAdditionally, in March 2016, 2015 and 2014, the Company awarded approximately 119,000, 161,000 and 207,000 performance-based RSUs, respectively, to the Company’s executives (the “March Performance RSUs”). Vesting of each March Performance RSU award is dependent upon the Company’s achievement of defined performance goals over a two-year period. Management believes it is probable that certain RSUs will vest. The number of March Performance RSUs that will ultimately vest will range from 0% to 150% of the original grant based on the level of achievement of the performance goals. If the Company achieves the performance goals, 50% of the March Performance RSUs 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 executives continued service as of the vesting date. The estimated aggregate grant date fair values of the March Performance RSUs granted in 2016 and 2015 was $0.8 million and $1.5 million, respectively. The level of achievement of performance goals in connection with the 2014 March Performance RSUs was determined by the compensation committee in March 2016. Approximately 155,000 of the 2014 March Performance RSUs were vested and released in March 2016 at an estimated aggregate fair value of $1.0 million, and the remaining 155,000 will vest at the end of March 2017.
\nIn June 2016, the Company granted approximately 35,000 RSUs to non-employee consultants with an estimated grant date fair value of $0.3 million. The non-employee consultant RSUs are subject to service-based vesting and will vest 50% on the first anniversary of the grant date and quarterly thereafter through the second anniversary of the grant date.
\n\n
A summary of the Company’s activity for the year ended December 31, 2016 for outstanding RSUs is as follows:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Average | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Grant Date | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Fair Value | \n\n
| \n|
| \n
| \n\n
| \n\n RSUs | \n\n
| \n\n
| \n\n Per RSU | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Outstanding at January 1, 2016 | \n\n
| \n\n
| \n\n 1,944 | \n\n
| \n\n
| \n\n $ | \n\n 7.76 | \n\n
| \n
| \n Granted | \n\n
| \n\n
| \n\n 2,297 | \n\n
| \n\n
| \n\n $ | \n\n 7.09 | \n\n
| \n
| \n Forfeited | \n\n
| \n\n
| \n\n (152 | \n\n ) | \n\n
| \n\n $ | \n\n 7.44 | \n\n
| \n
| \n Released | \n\n
| \n\n
| \n\n (766 | \n\n ) | \n\n
| \n\n $ | \n\n 7.36 | \n\n
| \n
| \n Outstanding at December 31, 2016 | \n\n
| \n\n
| \n\n 3,323 | \n\n
| \n\n
| \n\n $ | \n\n 7.40 | \n\n
| \n
| \n Vested at December 31, 2016 | \n\n
| \n\n 395 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
\n
A summary of the Company’s activity for the year ended December 31, 2016 for unvested RSUs is as follows:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Average | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Grant Date | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Fair Value | \n\n
| \n|
| \n
| \n\n
| \n\n RSUs | \n\n
| \n\n
| \n\n Per RSU | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Non-vested at January 1, 2016 | \n\n
| \n\n
| \n\n 1,541 | \n\n
| \n\n
| \n\n $ | \n\n 7.83 | \n\n
| \n
| \n Granted | \n\n
| \n\n
| \n\n 2,297 | \n\n
| \n\n
| \n\n $ | \n\n 7.09 | \n\n
| \n
| \n Vested | \n\n
| \n\n
| \n\n (758 | \n\n ) | \n\n
| \n\n $ | \n\n 7.36 | \n\n
| \n
| \n Forfeited | \n\n
| \n\n
| \n\n (152 | \n\n ) | \n\n
| \n\n $ | \n\n 7.44 | \n\n
| \n
| \n Non-vested at December 31, 2016 | \n\n
| \n\n
| \n\n 2,928 | \n\n
| \n\n
| \n\n $ | \n\n 7.39 | \n\n
| \n
\n
As of December 31, 2016, the total unrecognized cost related to non-vested RSUs was approximately $5.9 million. This cost is expected to be recognized over a weighted-average period of less than 1 year. The Company recognized $13.5 million, $6.3 million and $6.5 million of stock-based compensation expense related to RSUs in the years ended December 31, 2016, 2015 and 2014, respectively.
11. Segments, Significant Customers, Supplier and Service Providers and Geographic Information
\nThe Company operates in one business segment, providing global satellite communications services and products.
\nThe Company derived approximately 25%, 23% and 21% of the Company’s total revenue in the years ended December 31, 2016, 2015 and 2014, respectively, from prime contracts or subcontracts with agencies of the U.S. government. For the years ended December 31, 2016, 2015 and 2014, no single commercial customer accounted for more than 10% of the Company’s total revenue.
\nApproximately 32% and 29% of the Company’s accounts receivable balance at December 31, 2016 and 2015, respectively, was due from prime contracts or subcontracts with agencies of the U.S. government. As of December 31, 2016 and 2015, no other single commercial customer accounted for more than 10% of the Company’s total accounts receivable balance.
\nThe 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.
\nA significant portion of the Company’s satellite operations and maintenance service was previously provided by Boeing. On January 3, 2017, the operation and maintenance responsibilities were transitioned to the Company pursuant to an Insourcing Agreement.
\nNet property and equipment by geographic area was as follows as of December 31:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n United States | \n\n
| \n\n $ | \n\n 124,483 | \n\n
| \n\n
| \n\n $ | \n\n 127,959 | \n\n
| \n
| \n Satellites in orbit | \n\n
| \n\n
| \n\n 13,405 | \n\n
| \n\n
| \n\n
| \n\n 32,774 | \n\n
| \n
| \n Iridium NEXT systems under construction | \n\n
| \n\n
| \n\n 2,639,824 | \n\n
| \n\n
| \n\n
| \n\n 2,252,290 | \n\n
| \n
| \n All others (1) | \n\n
| \n\n
| \n\n 35,372 | \n\n
| \n\n
| \n\n
| \n\n 30,544 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 2,813,084 | \n\n
| \n\n
| \n\n $ | \n\n 2,443,567 | \n\n
| \n
\n
| \n (1) | \n\n 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:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n United States | \n\n
| \n\n $ | \n\n 226,190 | \n\n
| \n\n
| \n\n $ | \n\n 204,777 | \n\n
| \n\n
| \n\n $ | \n\n 194,060 | \n\n
| \n
| \n Canada | \n\n
| \n\n
| \n\n 42,373 | \n\n
| \n\n
| \n\n
| \n\n 42,063 | \n\n
| \n\n
| \n\n
| \n\n 44,933 | \n\n
| \n
| \n United Kingdom | \n\n
| \n\n
| \n\n 47,135 | \n\n
| \n\n
| \n\n
| \n\n 44,012 | \n\n
| \n\n
| \n\n
| \n\n 47,093 | \n\n
| \n
| \n Other countries (1) | \n\n
| \n\n
| \n\n 117,942 | \n\n
| \n\n
| \n\n
| \n\n 120,526 | \n\n
| \n\n
| \n\n
| \n\n 122,471 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 433,640 | \n\n
| \n\n
| \n\n $ | \n\n 411,378 | \n\n
| \n\n
| \n\n $ | \n\n 408,557 | \n\n
| \n
\n
| \n (1) | \n\n 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 is exposed to foreign currency exchange fluctuations as foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies.
12. Employee Benefit Plan
\nThe Company sponsors a defined-contribution 401(k) retirement plan (the “Plan”) that covers all employees. Employees are eligible to participate in the Plan on the first day of the month following the date of hire, and participants are 100% vested from the date of eligibility. The Company matches employees’ contributions equal to 100% of the salary deferral contributions up to 5% of the employees’ compensation. Company-matching contributions to the Plan were $1.3 million, $1.5 million and $1.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company pays all administrative fees related to the Plan.
\n
13. Income Taxes
\nU.S. and foreign components of income before income taxes are presented below:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n U.S. income | \n\n
| \n\n $ | \n\n 176,448 | \n\n
| \n\n
| \n\n $ | \n\n 75,431 | \n\n
| \n\n
| \n\n $ | \n\n 115,858 | \n\n
| \n
| \n Foreign income (loss) | \n\n
| \n\n
| \n\n 1,717 | \n\n
| \n\n
| \n\n
| \n\n (2,316 | \n\n ) | \n\n
| \n\n 594 | \n\n
| \n|
| \n Total income before income taxes | \n\n
| \n\n $ | \n\n 178,165 | \n\n
| \n\n
| \n\n $ | \n\n 73,115 | \n\n
| \n\n
| \n\n $ | \n\n 116,452 | \n\n
| \n
\n
The components of the Company’s income tax provision were as follows:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Current taxes: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Federal provision (benefit) | \n\n
| \n\n $ | \n\n 1,206 | \n\n
| \n\n
| \n\n $ | \n\n 1,700 | \n\n
| \n\n
| \n\n $ | \n\n 50 | \n\n
| \n
| \n State provision (benefit) | \n\n
| \n\n
| \n\n 978 | \n\n
| \n\n
| \n\n
| \n\n 266 | \n\n
| \n\n
| \n\n
| \n\n (90 | \n\n ) | \n
| \n Foreign provision | \n\n
| \n\n
| \n\n 1,141 | \n\n
| \n\n
| \n\n
| \n\n 650 | \n\n
| \n\n
| \n\n
| \n\n 1,260 | \n\n
| \n
| \n Total current tax provision | \n\n
| \n\n
| \n\n 3,325 | \n\n
| \n\n
| \n\n
| \n\n 2,616 | \n\n
| \n\n
| \n\n
| \n\n 1,220 | \n\n
| \n
| \n Deferred taxes: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Federal provision | \n\n
| \n\n
| \n\n 60,295 | \n\n
| \n\n
| \n\n
| \n\n 54,906 | \n\n
| \n\n
| \n\n
| \n\n 40,155 | \n\n
| \n
| \n State provision (benefit) | \n\n
| \n\n
| \n\n 3,454 | \n\n
| \n\n
| \n\n
| \n\n 8,803 | \n\n
| \n\n
| \n\n
| \n\n (77 | \n\n ) | \n
| \n Foreign provision (benefit) | \n\n
| \n\n
| \n\n 59 | \n\n
| \n\n
| \n\n
| \n\n (333 | \n\n ) | \n\n
| \n\n 165 | \n\n
| \n|
| \n Total deferred tax provision | \n\n
| \n\n
| \n\n 63,808 | \n\n
| \n\n
| \n\n
| \n\n 63,376 | \n\n
| \n\n
| \n\n
| \n\n 40,243 | \n\n
| \n
| \n Total income tax provision | \n\n
| \n\n $ | \n\n 67,133 | \n\n
| \n\n
| \n\n $ | \n\n 65,992 | \n\n
| \n\n
| \n\n $ | \n\n 41,463 | \n\n
| \n
\n
In 2011 and 2012, Arizona enacted tax law changes resulting in a benefit to the Company’s net deferred tax expense. Due to the size and nature of the Company’s operations in Arizona, such changes have a significant impact on the tax provision in a given period. As a result of these law changes, the Company’s deferred tax expense was reduced by approximately $3.0 million for the year ended December 31, 2016, increased by approximately $0.1 million for the year ended December 31, 2015 and decreased by approximately $5.5 million for the year ended December 31, 2014.
\nA reconciliation of the U.S. federal statutory income tax expense to the Company’s effective income tax provision is as follows:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Expected provision at U.S. federal statutory tax rate | \n\n
| \n\n $ | \n\n 62,309 | \n\n
| \n\n
| \n\n $ | \n\n 25,590 | \n\n
| \n\n
| \n\n $ | \n\n 40,766 | \n\n
| \n
| \n State taxes, net of federal benefit | \n\n
| \n\n
| \n\n 9,757 | \n\n
| \n\n
| \n\n
| \n\n 11,663 | \n\n
| \n\n
| \n\n
| \n\n 4,991 | \n\n
| \n
| \n State tax valuation allowance | \n\n
| \n\n
| \n\n (2,710 | \n\n ) | \n\n
| \n\n
| \n\n (2,763 | \n\n ) | \n\n
| \n\n 380 | \n\n
| \n|
| \n Deferred impact of Arizona tax law changes and elections | \n\n
| \n\n
| \n\n (2,962 | \n\n ) | \n\n
| \n\n
| \n\n 99 | \n\n
| \n\n
| \n\n
| \n\n (5,525 | \n\n ) | \n
| \n Impairment of goodwill | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 30,464 | \n\n
| \n\n
| \n\n
| \n\n - | \n\n
| \n
| \n Other nondeductible expenses | \n\n
| \n\n 596 | \n\n
| \n\n
| \n\n 557 | \n\n
| \n\n
| \n\n 903 | \n\n
| \n|||
| \n Tax credits | \n\n
| \n\n
| \n\n (442 | \n\n ) | \n\n
| \n\n
| \n\n (97 | \n\n ) | \n\n
| \n\n
| \n\n (994 | \n\n ) | \n
| \n Foreign taxes and other items | \n\n
| \n\n 585 | \n\n
| \n\n
| \n\n 479 | \n\n
| \n\n
| \n\n 942 | \n\n
| \n|||
| \n Total income tax provision | \n\n
| \n\n $ | \n\n 67,133 | \n\n
| \n\n
| \n\n $ | \n\n 65,992 | \n\n
| \n\n
| \n\n $ | \n\n 41,463 | \n\n
| \n
\n
The components of deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:
\n\n
| \n
| \n\n
| \n\n As of December 31, | \n\n
| \n|||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Deferred tax assets | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Long-term contracts | \n\n
| \n\n $ | \n\n 74,720 | \n\n
| \n\n
| \n\n $ | \n\n 64,287 | \n\n
| \n
| \n Deferred revenue | \n\n
| \n\n
| \n\n 6,309 | \n\n
| \n\n
| \n\n
| \n\n 8,312 | \n\n
| \n
| \n Federal, state and foreign net operating loss carryforwards \nand tax credits | \n\n
| \n\n
| \n\n 60,667 | \n\n
| \n\n
| \n\n
| \n\n 104,996 | \n\n
| \n
| \n Other | \n\n
| \n\n
| \n\n 27,216 | \n\n
| \n\n
| \n\n
| \n\n 24,603 | \n\n
| \n
| \n Total deferred tax assets | \n\n
| \n\n
| \n\n 168,912 | \n\n
| \n\n
| \n\n
| \n\n 202,198 | \n\n
| \n
| \n Valuation allowance | \n\n
| \n\n
| \n\n (2,825 | \n\n ) | \n\n
| \n\n
| \n\n (4,529 | \n\n ) | \n
| \n Net deferred tax assets | \n\n
| \n\n
| \n\n 166,087 | \n\n
| \n\n
| \n\n
| \n\n 197,669 | \n\n
| \n
| \n Deferred tax liabilities | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Fixed assets and intangibles | \n\n
| \n\n
| \n\n (120,568 | \n\n ) | \n\n
| \n\n
| \n\n (101,107 | \n\n ) | \n
| \n Research and development expenditures | \n\n
| \n\n
| \n\n (393,337 | \n\n ) | \n\n
| \n\n
| \n\n (379,220 | \n\n ) | \n
| \n Other | \n\n
| \n\n
| \n\n (13,838 | \n\n ) | \n\n
| \n\n
| \n\n (14,174 | \n\n ) | \n
| \n Total deferred tax liabilities | \n\n
| \n\n
| \n\n (527,743 | \n\n ) | \n\n
| \n\n
| \n\n (494,501 | \n\n ) | \n
| \n Net deferred income tax liabilities | \n\n
| \n\n $ | \n\n (361,656 | \n\n ) | \n\n
| \n\n $ | \n\n (296,832 | \n\n ) | \n
\n
The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers: (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; (iii) taxable income in prior carryback year(s) if carryback is permitted under applicable tax law; and (iv) tax planning strategies.
\nAs of December 31, 2016, the Company had deferred tax assets related to cumulative U.S. and state net operating loss carryforwards of approximately $126.5 million. These net operating loss carryforwards, if unutilized, will expire in various amounts from 2031 through 2036. The Company believes that the U.S. federal net operating losses will be utilized before the expiration dates and as such no valuation allowance has been established for these deferred tax assets. As of December 31, 2016, the Company had deferred tax assets related to the foreign net operating loss carryforwards of approximately $5.9 million in various jurisdictions that begin to expire in 2018. The Company does not expect to fully utilize all of its foreign net operating losses within the respective carryforward periods and as such reflects a partial valuation allowance against these deferred tax assets on its consolidated balance sheet. The timing and manner in which the Company will utilize the net operating loss carryforwards in any year, or in total, may be limited in the future as a result of alternative minimum taxes, changes in the Company’s ownership and any limitations imposed by the jurisdictions in which the Company operates.
\nAs of December 31, 2016, the Company had approximately $5.0 million of deferred tax assets related to research and development tax credits that expire in various amounts from 2028 through 2036, $3.5 million of foreign tax credits which expire in various amounts from 2020 through 2026, and $3.4 million of deferred tax assets related to Alternative Minimum Tax credits which do not expire. The Company believes that the research and development credits will be fully utilized within the carryforward period. However, the Company does not expect to utilize all of its foreign tax credits within the respective carryforward periods. As such, the Company has a partial valuation allowance of $1.1 million as of December 31, 2016.
\nThe Company has provided for U.S. income taxes on all undistributed earnings of its significant foreign subsidiaries since the Company does not indefinitely reinvest these undistributed earnings. The Company measures deferred tax assets and liabilities using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.
\nUncertain Income Tax Positions
\nThe Company is subject to income taxes in the U.S. and various state and foreign jurisdictions. Significant judgment is required in evaluating tax positions and determining the provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to these liabilities.
\nThe amount of uncertain tax positions, if recognized, at December 31, 2016 and 2015 was $0.9 million. Any changes are not anticipated to have significant impact on the results of operations, financial position or cash flows of the Company. All of the Company’s uncertain tax positions, if recognized, would affect its income tax expense.
\nThe Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2016 and 2015, potential interest and penalties on unrecognized tax benefits were not significant.
\nThe Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. Currently, there are no U.S. federal, state or foreign jurisdiction tax audits pending. The Company’s corporate U.S. federal and state tax returns from 2010 to 2015 remain subject to examination by tax authorities and the Company’s foreign tax returns from 2009 to 2015 remain subject to examination by tax authorities.
\nThe following is a tabular reconciliation of the total amounts of unrecognized tax benefits which includes related interest and penalties:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Balance at January 1, | \n\n
| \n\n $ | \n\n 916 | \n\n
| \n\n
| \n\n $ | \n\n 1,150 | \n\n
| \n
| \n Change attributable to tax positions taken in a prior period | \n\n
| \n\n
| \n\n 25 | \n\n
| \n\n
| \n\n
| \n\n 50 | \n\n
| \n
| \n Change attributable to final assessment | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n (311 | \n\n ) | \n
| \n Change attributable to tax positions taken in the \ncurrent period | \n\n
| \n\n 8 | \n\n
| \n\n
| \n\n 29 | \n\n
| \n||
| \n Decrease attributable to lapse of statute of limitations | \n\n
| \n\n
| \n\n (29 | \n\n ) | \n\n
| \n\n
| \n\n (2 | \n\n ) | \n
| \n Balance at December 31, | \n\n
| \n\n $ | \n\n 920 | \n\n
| \n\n
| \n\n $ | \n\n 916 | \n\n
| \n
14. Net Income (Loss) Per Share
\nThe computations of basic and diluted net income (loss) per share are set forth below:
\n\n
| \n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n (In thousands, except per share data) | \n\n
| \n|||||||||
| \n Numerator: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Net income (loss) attributable to common stockholders | \n\n $ | \n\n 95,596 | \n\n
| \n\n
| \n\n $ | \n\n (8,313 | \n\n ) | \n\n
| \n\n $ | \n\n 62,669 | \n\n
| \n
| \n Dividends on Series A Preferred Stock | \n\n
| \n\n 7,000 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 7,000 | \n\n
| \n
| \n Dividends on Series B Preferred Stock | \n\n
| \n\n 8,436 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 5,320 | \n\n
| \n
| \n Numerator for diluted net income per share | \n\n $ | \n\n 111,032 | \n\n
| \n\n
| \n\n $ | \n\n (8,313 | \n\n ) | \n\n
| \n\n $ | \n\n 74,989 | \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Denominator: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Denominator for basic net income per share - weighted \naverage outstanding common shares | \n\n
| \n\n 95,967 | \n\n
| \n\n
| \n\n
| \n\n 95,097 | \n\n
| \n\n
| \n\n
| \n\n 88,080 | \n\n
| \n
| \n Dilutive effect of stock options | \n\n
| \n\n 250 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 85 | \n\n
| \n|
| \n Dilutive effect of Performance RSUs | \n\n
| \n\n 1,328 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n - | \n\n
| \n|
| \n Dilutive effect of Series A Preferred Stock | \n\n
| \n\n 10,602 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 10,602 | \n\n
| \n|
| \n Dilutive effect of Series B Preferred Stock | \n\n
| \n\n 16,728 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 10,633 | \n\n
| \n|
| \n Denominator for diluted net income per share | \n\n
| \n\n 124,875 | \n\n
| \n\n
| \n\n
| \n\n 95,097 | \n\n
| \n\n
| \n\n
| \n\n 109,400 | \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Net income (loss) per share attributable to common \nstockholders - basic | \n\n $ | \n\n 1.00 | \n\n
| \n\n
| \n\n $ | \n\n (0.09 | \n\n ) | \n\n
| \n\n $ | \n\n 0.71 | \n\n
| \n
| \n Net income (loss) per share attributable to common \nstockholders - diluted | \n\n $ | \n\n 0.89 | \n\n
| \n\n
| \n\n $ | \n\n (0.09 | \n\n ) | \n\n
| \n\n $ | \n\n 0.69 | \n\n
| \n
\n
For the year ended December 31, 2016, options to purchase 3.2 million shares of common stock were not included in the computation of diluted net income per share, as the effect would be anti-dilutive. For the year ended December 31, 2016, 1.4 million unvested non-performance RSUs were excluded from the computation of basic net income per share and not included in the computation of diluted net income per share, as the effect would be anti-dilutive. In January 2017, the Company granted approximately 0.1 million RSUs to members of the Company’s board of directors. These grants could have dilutive effects on net income per share in future periods.
\nFor the year ended December 31, 2015, 1.3 million unvested non-performance RSUs were not included in the computation of basic net loss per share. Due to the Company’s net loss for the year ended December 31, 2015, all potential common stock equivalents are anti-dilutive.
\nFor the year ended December 31, 2014, warrants to purchase 0.3 million shares of common stock and options to purchase 3.6 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the year ended December 31, 2014, 1.3 million unvested non-performance RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share.
\n\n
15. Selected Quarterly Information (Unaudited)
\nThe following represents the Company’s unaudited quarterly results for the years ended December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n Quarter Ended | \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n March 31, | \n\n
| \n\n
| \n\n June 30, | \n\n
| \n\n
| \n\n September 30, | \n\n
| \n\n
| \n\n December 31, | \n\n
| \n||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2016 | \n\n
| \n||||
| \n
| \n\n
| \n\n (In thousands, except per share data) | \n\n
| \n|||||||||||||
| \n Revenue | \n\n
| \n\n $ | \n\n 104,202 | \n\n
| \n\n
| \n\n $ | \n\n 109,195 | \n\n
| \n\n
| \n\n $ | \n\n 112,794 | \n\n
| \n\n
| \n\n $ | \n\n 107,449 | \n\n
| \n
| \n Operating income | \n\n
| \n\n $ | \n\n 43,278 | \n\n
| \n\n
| \n\n $ | \n\n 41,729 | \n\n
| \n\n
| \n\n $ | \n\n 49,768 | \n\n
| \n\n
| \n\n $ | \n\n 41,596 | \n\n
| \n
| \n Net income | \n\n
| \n\n $ | \n\n 28,520 | \n\n
| \n\n
| \n\n $ | \n\n 26,854 | \n\n
| \n\n
| \n\n $ | \n\n 31,555 | \n\n
| \n\n
| \n\n $ | \n\n 24,103 | \n\n
| \n
| \n Net income per common share - basic | \n\n
| \n\n $ | \n\n 0.26 | \n\n
| \n\n
| \n\n $ | \n\n 0.24 | \n\n
| \n\n
| \n\n $ | \n\n 0.29 | \n\n
| \n\n
| \n\n $ | \n\n 0.21 | \n\n
| \n
| \n Net income per common share -diluted | \n\n
| \n\n $ | \n\n 0.23 | \n\n
| \n\n
| \n\n $ | \n\n 0.22 | \n\n
| \n\n
| \n\n $ | \n\n 0.26 | \n\n
| \n\n
| \n\n $ | \n\n 0.19 | \n\n
| \n
\n
\n
| \n
| \n\n
| \n\n Quarter Ended | \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n March 31, | \n\n
| \n\n
| \n\n June 30, | \n\n
| \n\n
| \n\n September 30, | \n\n
| \n\n
| \n\n December 31, | \n\n
| \n||||
| \n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||||
| \n
| \n\n
| \n\n (In thousands, except per share data) | \n\n
| \n|||||||||||||
| \n Revenue | \n\n
| \n\n $ | \n\n 97,007 | \n\n
| \n\n
| \n\n $ | \n\n 101,919 | \n\n
| \n\n
| \n\n $ | \n\n 106,034 | \n\n
| \n\n
| \n\n $ | \n\n 106,418 | \n\n
| \n
| \n Operating income (loss) (1) | \n\n
| \n\n $ | \n\n 33,473 | \n\n
| \n\n
| \n\n $ | \n\n 42,334 | \n\n
| \n\n
| \n\n $ | \n\n 46,539 | \n\n
| \n\n
| \n\n $ | \n\n (48,543 | \n\n ) | \n
| \n Net income (loss) | \n\n
| \n\n $ | \n\n 21,019 | \n\n
| \n\n
| \n\n $ | \n\n 25,988 | \n\n
| \n\n
| \n\n $ | \n\n 29,547 | \n\n
| \n\n
| \n\n $ | \n\n (69,431 | \n\n ) | \n
| \n Net income (loss) per common share - basic | \n\n
| \n\n $ | \n\n 0.18 | \n\n
| \n\n
| \n\n $ | \n\n 0.23 | \n\n
| \n\n
| \n\n $ | \n\n 0.27 | \n\n
| \n\n
| \n\n $ | \n\n (0.77 | \n\n ) | \n
| \n Net income (loss) per common share -diluted | \n\n
| \n\n $ | \n\n 0.17 | \n\n
| \n\n
| \n\n $ | \n\n 0.21 | \n\n
| \n\n
| \n\n $ | \n\n 0.24 | \n\n
| \n\n
| \n\n $ | \n\n (0.77 | \n\n ) | \n
| \n (1) | \n\n Includes a goodwill impairment charge which decreased operating income by $87.0 million for the three months ended December 31, 2015. |
\n
The sum of the per share amounts does not equal the annual amounts due to changes in the weighted-average number of common shares outstanding during the year.
Principles of Consolidation and Basis of Presentation
\nThe 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, and (iii) all less than wholly owned subsidiaries that the Company controls. All intercompany transactions and balances have been eliminated.
Adopted Accounting Pronouncements
\nIn April 2015, the Financial Accounting Standards Board (\"FASB\") issued Accounting Standards Update (\"ASU\") No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendment. Effective January 1, 2016, the Company applied the new guidance retrospectively to all prior periods presented in the accompanying financial statements. The adoption had no effect on the Company’s condensed consolidated statements of operations and comprehensive income, and condensed consolidated statements of cash flows for each of the periods ended December 31, 2016 and 2015. The implementation of this accounting standard resulted in a reduction in the deferred financing costs asset and in the credit facility as of December 31, 2016 and December 31, 2015, respectively, as shown below.
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Credit facility | \n\n
| \n\n $ | \n\n 1,777,789 | \n\n
| \n\n
| \n\n $ | \n\n 1,521,822 | \n\n
| \n
| \n Deferred financing costs | \n\n
| \n\n
| \n\n (120,644 | \n\n ) | \n\n
| \n\n
| \n\n (133,056 | \n\n ) | \n
| \n Credit facility, net | \n\n
| \n\n $ | \n\n 1,657,145 | \n\n
| \n\n
| \n\n $ | \n\n 1,388,766 | \n\n
| \n
Recent Accounting Developments
\nIn March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 addresses multiple changes. The amendment requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company will be required to make the disclosures about a change in accounting principle, but will not have to quantify the income statement effect of the change in the period of adoption. The Company anticipates adopting relevant changes prospectively and expects the impact to its condensed consolidated statements of operations and comprehensive income to be immaterial.
\nIn February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. This ASU is effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted and reporting organizations are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the effect ASU 2016-02 may have on its condensed consolidated financial statements and related disclosures, but recognizing the lease liability and related right-of-use asset will impact its balance sheet.
\nIn July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out and retail inventory method are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely aligns U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. The Company will apply this guidance prospectively beginning January 1, 2017, as required. The Company does not anticipate a material impact on its inventory balances or cost of equipment expenses.
\nIn May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property, identifying performance obligations, and most recently, technical corrections on the interpretation of the new guidance. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 for public entities to be effective for annual and interim periods beginning after December 15, 2017. Early adoption would be permitted no earlier than the original effective date beginning after December 15, 2016. ASU 2014-09 becomes effective for the Company in the first quarter of fiscal 2018 and the Company anticipates using the full retrospective transition method.
\nThe Company has established a project team in order to analyze the effect of the standard on its revenue streams by reviewing its current accounting policies and practices to identify potential differences which would result from applying the requirements of the new standard to its revenue contracts. The Company has identified each revenue stream and is continuing to assess all potential effects of the standard. The Company has not yet completed its review of the effect of this guidance.
Use of Estimates
\nThe 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.
Fair Value Measurements
\nThe Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts receivable, accounts payable and accrued expenses and other current liabilities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. The fair value hierarchy consists of the following tiers:
\n| \n
| \n\n • | \n\n Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; |
| \n
| \n\n • | \n\n Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
| \n
| \n\n • | \n\n Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses and other current liabilities) approximate their fair values because of their short-term nature. The fair value of the Company’s investments in money market funds approximates its carrying value; such instruments are classified as Level 1 and are included in cash and cash equivalents on the accompanying consolidated balance sheets. The fair value of the Company’s investments in commercial paper and short-term U.S. agency securities with original maturities of less than ninety days approximates their carrying value; such instruments are classified as Level 2 and are included in cash and cash equivalents on the accompanying consolidated balance sheets.
\nThe fair value of the Company’s investments in fixed-income debt securities and commercial paper with original maturities of greater than ninety days are obtained using similar investments traded on active securities exchanges and are classified as Level 2. For fixed income securities that do not have quoted prices in active markets, the Company uses third-party vendors to price its debt securities resulting in classification as Level 2. All fixed-income securities are included in marketable securities on the accompanying consolidated balance sheets.
Concentrations of Credit Risk
\nFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and receivables. The majority of cash is swept nightly into a money market fund invested in U.S. treasuries, Agency Mortgage Backed Securities and/or U.S. Government guaranteed debt. 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. The Company’s marketable securities are highly-rated corporate and foreign fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. The Company 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.
Cash, Cash Equivalents and Restricted Cash
\nThe Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. These investments, along with cash deposited in institutional money market funds, regular interest bearing depository accounts and non-interest bearing depository accounts, are classified as cash and cash equivalents on the accompanying consolidated balance sheets. The Company is required to maintain a minimum cash reserve for debt service related to its $1.8 billion loan facility (the “Credit Facility”). As of December 31, 2016 and 2015, the Company’s restricted cash balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $113.0 million and $91.0 million, respectively. For further discussion on the cash reserve for debt service related to the Credit Facility, see the Credit Facility footnote below.
Marketable Securities
\nMarketable securities consist of fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale and are included in marketable securities within current assets on the accompanying consolidated balance sheets. All investments are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of other comprehensive income or loss. The specific identification method is used to determine the cost basis of the marketable securities sold. There were no material realized gains or losses on the sale of marketable securities for the years ended December 31, 2016 and 2015. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that any decline in fair value of these investments is temporary as the Company does not intend to sell these securities and it is not likely that the Company will be required to sell the securities before the recovery of their amortized cost basis.
Accounts Receivable
\nTrade 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 $1.0 million and $0.6 million as of December 31, 2016 and 2015, respectively.
Foreign Currencies
\nThe functional currency of the Company’s foreign consolidated subsidiaries is the local currency. 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 and comprehensive income.
Internally Developed Software
\nThe 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
\nDirect 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, 2016 and 2015, the Company had deferred approximately $120.7 million and $133.1 million, respectively, of direct and incremental financing costs, net of amortization, associated with securing debt financing for Iridium NEXT, the Company’s next-generation satellite constellation.
Capitalized Interest
\nInterest costs associated with financing the Company’s assets during the construction period of Iridium NEXT have been capitalized. Capitalized interest costs for the years ended December 31, 2016, 2015 and 2014 were $106.4 million, $83.1 million and $62.0 million, respectively.
Inventory
\nInventory 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 to a third-party manufacturer and purchases accessories from third-party suppliers. The Company’s cost of inventory includes an allocation of overhead, including payroll and payroll-related costs 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. Accordingly, the Company recorded expenses of $1.1 million, $0.7 million and $0.9 million, for the years ended December 31, 2016, 2015 and 2014, respectively, included within the cost of subscriber equipment for excess and obsolete inventory. The expenses for the year ended December 31, 2016 were primarily related to certain handset parts and accessories; the expenses for the year ended December 31, 2015 were primarily related to Iridium Pilot equipment; and the expenses for the year ended December 31, 2014 were primarily related to Iridium 9505 handset parts and accessories.
\nThe Company has a manufacturing agreement with Benchmark Electronics Inc. (“Benchmark”) to manufacture subscriber equipment. 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. Benchmark 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
\nThe Company accounts for stock-based compensation at fair value. The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is equal to the closing price of the underlying common stock on the grant date. The fair value of an award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or performance period and is classified in the consolidated statements of operations and comprehensive income in a manner consistent with the classification of the recipient’s compensation. The expected vesting of the Company’s performance-based RSUs is based upon the probability that the Company achieves the defined performance goals. The level of achievement of performance goals, if any, is determined by the compensation committee. Stock-based awards to non-employee consultants are expensed at their fair value as services are provided according to the terms of their agreements and are classified in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income. Classification of stock-based compensation for the years ended December 31, 2016 and 2015 is as follows:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Property and equipment, net | \n\n
| \n\n $ | \n\n 1,906 | \n\n
| \n\n
| \n\n $ | \n\n 998 | \n\n
| \n
| \n Inventory | \n\n
| \n\n 359 | \n\n
| \n\n
| \n\n 48 | \n\n
| \n||
| \n Cost of subscriber equipment | \n\n
| \n\n 56 | \n\n
| \n\n
| \n\n 135 | \n\n
| \n||
| \n Cost of services (exclusive of depreciation and amortization) | \n\n
| \n\n
| \n\n 1,655 | \n\n
| \n\n
| \n\n 721 | \n\n
| \n|
| \n Research and development | \n\n
| \n\n 457 | \n\n
| \n\n
| \n\n 221 | \n\n
| \n||
| \n Selling, general and administrative | \n\n
| \n\n
| \n\n 11,540 | \n\n
| \n\n
| \n\n
| \n\n 7,526 | \n\n
| \n
| \n Total stock-based compensation | \n\n
| \n\n $ | \n\n 15,973 | \n\n
| \n\n
| \n\n $ | \n\n 9,649 | \n\n
| \n
Property and Equipment
\nProperty and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
\n\n
| \n First-generation satellites | \n\n
| \n\n 15-19 years | \n
| \n Ground system | \n\n
| \n\n 5-7 years | \n
| \n Equipment | \n\n
| \n\n 3-5 years | \n
| \n Internally developed software and purchased software | \n\n
| \n\n 3-7 years | \n
| \n Building | \n\n
| \n\n 39 years | \n
| \n Building improvements | \n\n
| \n\n 5-39 years | \n
| \n Leasehold improvements | \n\n
| \n\n shorter of useful life or remaining lease term | \n
\n
The estimated useful lives of the Company’s first-generation satellites reflect the period of expected use for each satellite. Satellites are depreciated on a straight-line basis through the date they will be replaced by next-generation satellites. The Company began deployment of its next-generation satellite constellation (“Iridium NEXT”) in January 2017, and, based on the current launch schedule, the Company expects the final launch to occur in 2018. The Company’s next-generation satellites will be depreciated on a straight-line basis over the estimated useful life which is currently estimated to be 12.5 years.
\nThe Company calculates depreciation expense using the straight-line method and evaluates the appropriateness of the useful life used in this calculation on a quarterly basis or as events occur that require additional assessment. In addition to the changes made in prior years, in 2016, the Company updated its estimate of the first-generation satellites’ remaining useful lives based on the continued refinement of the launch schedule, health of the existing constellation, and deployment plan for the Company’s next-generation satellite constellation. As a result, the estimated useful lives of the first-generation satellites have been extended and are consistent with the expected deployment of the next-generation satellites. The $2.4 million decrease in depreciation expense for the year ended December 31, 2016 compared to the prior year is primarily related to the continued refinement in the estimated useful lives, partially offset by the addition of new assets and the impairment of two lost satellites during the second quarter of 2016. For the year ended December 31, 2016, the impact of the change in useful lives of the first-generation satellites resulted in an increase in basic and diluted net income per share of $0.04 and $0.03, respectively. The impact for the year ended December 31, 2015, resulted in an increase in both basic and diluted net loss per share by $0.01.
\nRepairs and maintenance costs are expensed as incurred.
Long-Lived Assets
\nThe 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.
\nThe Company lost communication with three of its first-generation satellites in 2014. As a result, impairment charges totaling $2.2 million were recorded within depreciation expense during 2014. The Company replaced the lost satellites with in-orbit spares. No satellite loss occurred during 2015. During the second quarter of 2016 two first-generation satellites ceased operations. As a result, impairment charges totaling $0.3 million were recorded within depreciation expense during 2016. The Company does not believe the loss of these satellites in 2016 is an indicator of impairment of the remaining individual first-generation satellites or the constellation as of December 31, 2016.
Goodwill and Other Intangible Assets
\nGoodwill
\nGoodwill 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. Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. To measure the amount of impairment loss, if any, the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. Specifically, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
\nThe Company operates in a single reporting unit, and the possibility of impairment is assessed by comparing the carrying amount of the reporting unit to its estimated fair value. The most recent annual assessment of goodwill and indefinite-lived assets was performed on October 1, 2015 (the “2015 Analysis”).
\nHistorically, the Company has determined the estimated fair value of the reporting unit based on a combination of the market approach using comparable public companies (guideline company method) and the income approach using discounted cash flows. These valuation techniques have involved the use of estimates and assumptions. However, as a result of a decrease in the Company’s stock price and related market capitalization (one-year low) around the test date of the 2015 Analysis, management determined that the Company’s market capitalization represented the best estimate of fair value of the reporting unit as of the test date.
\nUpon completion of step one of the 2015 Analysis, the Company determined the carrying value of the reporting unit exceeded its fair value as a result of a decrease in the Company’s stock price and related market capitalization. The Company performed a step two analysis to compare the carrying amount of goodwill to the implied fair value of that goodwill where the Company determined the estimated fair values of the assets and liabilities of its single reporting unit. The implied fair value of goodwill for the Company’s single reporting unit was determined in the same manner as utilized to recognize goodwill in a business combination. The implied fair value of goodwill was measured as the excess of the fair value of the Company’s single reporting unit over the fair value of its assets and liabilities. As a result of the step two test, the Company recorded a non-cash goodwill impairment charge of $87.0 million during the fourth quarter of 2015. The Company did not record an impairment of goodwill during the year ended December 31, 2014. The Company had no goodwill as of December 31, 2016 and 2015.
\nIntangible Assets Not Subject to Amortization
\nA portion of the Company’s intangible assets are spectrum, licenses, 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 most recent annual assessment of indefinite-lived assets was performed as of October 1, 2016 (the “2016 Analysis”). In this 2016 Analysis, the Company chose the optional qualitative assessment to test indefinite-lived intangible assets for impairment. The qualitative assessment permits companies to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If a company concludes based on the qualitative assessment that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it would not have to quantitatively determine the assets’ fair value. Based on the results of the 2016 Analysis, it was not more likely than not that the intangible assets not subject to amortization were impaired. Therefore, a quantitative analysis was not necessary, and no impairment charge was recorded during the period.
\nIntangible Assets Subject to Amortization
\nThe Company’s intangible assets that do have finite lives, consisting of intellectual property, 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 evaluates 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
\nLiabilities 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.
\nAs of December 31, 2016, 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. One such right the U.S. government holds is to require the Company to de-orbit the satellite constellation at any time after January 1, 2015. 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 and Boeing, the Company would be required to pay Boeing $18.4 million, plus an amount equivalent to the premium for mass de-orbit insurance coverage payable to the insurer ($2.5 million as of December 31, 2016). 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, 2016, which is included in other long-term liabilities on the accompanying consolidated balance sheet.
\nThere 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
\nThe 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.
\nWholesaler of satellite communications products and services
\nPursuant 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 reasonably assured, as follows:
\nContracts with multiple elements
\nAt times, the Company sells services and equipment through multi-element arrangements that bundle equipment, airtime and other services. For multi-element revenue arrangements when the Company sells services and equipment in bundled arrangements 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 objective 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. The Company’s determination of best estimate of selling price is consistent with its determination of vendor-specific objective evidence of selling price, and the Company assesses qualitative and quantitative market factors and entity-specific factors when estimating the selling price. 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.
\nService revenue sold on a stand-alone basis
\nService 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 equal to the cash paid upon purchase for the e-voucher or prepaid card. The Company recognizes revenue from the prepaid services upon the use of the e-voucher or prepaid card by the customer or upon the expiration of the right to access the prepaid service. While the terms of prepaid e-vouchers can be extended by the purchase of additional e-vouchers, prepaid e-vouchers may not be extended beyond three or four years, dependent on the initial expiry period when purchased. The Company does not offer refunds for unused prepaid services.
\nSubscriber equipment sold on a stand-alone basis
\nThe 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.
\nServices sold to the U.S. government
\nThe Company provides airtime and airtime support to U.S. government and other authorized customers pursuant to the Enhanced Mobile Satellite Services (“EMSS”) contract managed by the Defense Information Systems Agency (“DISA”). Effective October 22, 2013, the Company executed a new five-year EMSS contract, managed by DISA. Under the terms of this new agreement, authorized customers continue to utilize airtime services, provided through the U.S. Department of Defense’s (“DoD”) dedicated gateway. These services include unlimited global secure and unsecure voice, low and high-speed data, paging, broadcast and Distributed Tactical Communications Services (“DTCS”) services for an unlimited number of DoD and other federal subscribers. The fixed-price rate for the remaining contract years, which run from October 22 through the following October 21 of each year, is $88 million per year. Under this contract, revenue is based on the annual fee for the fixed-price contract with unlimited subscribers, and is recognized on a straight-line basis over each contractual year.
\nThe U.S. government purchases its subscriber equipment from third-party distributors and not directly from the Company.
\nGovernment engineering and support services
\nThe 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.
\nOther government and commercial engineering and support services
\nThe Company also provides 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.
Warranty Expense
\nThe Company provides the first end-user purchaser of its subscriber equipment a warranty for one to five years from the date of purchase by such first end-user, depending on the product. The Company maintains a warranty reserve based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties, including equipment replacements, repairs, freight, and program administration, are recorded as cost of subscriber equipment in the accompanying consolidated statements of operations and comprehensive income. The Company’s warranty provision for the year ended December 31, 2016 increased by $2.3 million compared to the prior year. This increase was primarily the result of increased sales of Iridium Pilot.
\nChanges in the warranty reserve for the years ended December 31, 2016 and 2015 were as follows:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Balance at beginning of the period | \n\n
| \n\n $ | \n\n 3,320 | \n\n
| \n\n
| \n\n $ | \n\n 7,381 | \n\n
| \n
| \n Provision | \n\n
| \n\n
| \n\n 604 | \n\n
| \n\n
| \n\n
| \n\n (1,715 | \n\n ) | \n
| \n Utilization | \n\n
| \n\n
| \n\n (1,594 | \n\n ) | \n\n
| \n\n
| \n\n (2,346 | \n\n ) | \n
| \n Balance at end of the period | \n\n
| \n\n $ | \n\n 2,330 | \n\n
| \n\n
| \n\n $ | \n\n 3,320 | \n\n
| \n
Research and Development
\nResearch and development costs are charged to expense in the period in which they are incurred.
Advertising Costs
\nCosts associated with advertising and promotions are expensed as incurred. Advertising expenses were $0.5 million for each of the years ended December 31, 2016, 2015 and 2014.
Income Taxes
\nThe Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses for temporary differences between the financial reporting and tax bases of assets and liabilities. 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
\nThe Company calculates basic net income (loss) per share by dividing net income (loss) attributable 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, including common stock issuable upon exercise of outstanding stock options and stock purchase warrants, is computed using the treasury stock method. The effect of potential dilutive common shares from the conversion of the outstanding convertible preferred securities is computed using the as-if converted method at the stated conversion rate. The Company’s unvested RSUs awarded to the board of directors 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 (loss) per share excludes net income attributable to these unvested RSUs from the numerator and excludes the impact of these unvested RSUs from the denominator.
The implementation of this accounting standard resulted in a reduction in the deferred financing costs asset and in the credit facility as of December 31, 2016 and December 31, 2015, respectively, as shown below.
\n| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Credit facility | \n\n
| \n\n $ | \n\n 1,777,789 | \n\n
| \n\n
| \n\n $ | \n\n 1,521,822 | \n\n
| \n
| \n Deferred financing costs | \n\n
| \n\n
| \n\n (120,644 | \n\n ) | \n\n
| \n\n
| \n\n (133,056 | \n\n ) | \n
| \n Credit facility, net | \n\n
| \n\n $ | \n\n 1,657,145 | \n\n
| \n\n
| \n\n $ | \n\n 1,388,766 | \n\n
| \n
Classification of stock-based compensation for the years ended December 31, 2016 and 2015 is as follows:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Property and equipment, net | \n\n
| \n\n $ | \n\n 1,906 | \n\n
| \n\n
| \n\n $ | \n\n 998 | \n\n
| \n
| \n Inventory | \n\n
| \n\n 359 | \n\n
| \n\n
| \n\n 48 | \n\n
| \n||
| \n Cost of subscriber equipment | \n\n
| \n\n 56 | \n\n
| \n\n
| \n\n 135 | \n\n
| \n||
| \n Cost of services (exclusive of depreciation and amortization) | \n\n
| \n\n
| \n\n 1,655 | \n\n
| \n\n
| \n\n 721 | \n\n
| \n|
| \n Research and development | \n\n
| \n\n 457 | \n\n
| \n\n
| \n\n 221 | \n\n
| \n||
| \n Selling, general and administrative | \n\n
| \n\n
| \n\n 11,540 | \n\n
| \n\n
| \n\n
| \n\n 7,526 | \n\n
| \n
| \n Total stock-based compensation | \n\n
| \n\n $ | \n\n 15,973 | \n\n
| \n\n
| \n\n $ | \n\n 9,649 | \n\n
| \n
Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
\n\n
| \n First-generation satellites | \n\n
| \n\n 15-19 years | \n
| \n Ground system | \n\n
| \n\n 5-7 years | \n
| \n Equipment | \n\n
| \n\n 3-5 years | \n
| \n Internally developed software and purchased software | \n\n
| \n\n 3-7 years | \n
| \n Building | \n\n
| \n\n 39 years | \n
| \n Building improvements | \n\n
| \n\n 5-39 years | \n
| \n Leasehold improvements | \n\n
| \n\n shorter of useful life or remaining lease term | \n
Changes in the warranty reserve for the years ended December 31, 2016 and 2015 were as follows:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Balance at beginning of the period | \n\n
| \n\n $ | \n\n 3,320 | \n\n
| \n\n
| \n\n $ | \n\n 7,381 | \n\n
| \n
| \n Provision | \n\n
| \n\n
| \n\n 604 | \n\n
| \n\n
| \n\n
| \n\n (1,715 | \n\n ) | \n
| \n Utilization | \n\n
| \n\n
| \n\n (1,594 | \n\n ) | \n\n
| \n\n
| \n\n (2,346 | \n\n ) | \n
| \n Balance at end of the period | \n\n
| \n\n $ | \n\n 2,330 | \n\n
| \n\n
| \n\n $ | \n\n 3,320 | \n\n
| \n
The following table summarizes the Company’s cash and cash equivalents as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Recurring Fair | \n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n Value Measurement | \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n|||||
| \n Cash and cash equivalents: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Cash | \n\n
| \n\n $ | \n\n 102,194 | \n\n
| \n\n
| \n\n $ | \n\n 67,005 | \n\n
| \n\n
| \n\n
| \n
| \n Money market funds | \n\n
| \n\n
| \n\n 266,478 | \n\n
| \n\n
| \n\n
| \n\n 118,660 | \n\n
| \n\n
| \n\n Level 1 | \n
| \n Commercial paper | \n\n
| \n\n
| \n\n 2,495 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Total cash and cash equivalents | \n\n
| \n\n $ | \n\n 371,167 | \n\n
| \n\n
| \n\n $ | \n\n 185,665 | \n\n
| \n\n
| \n\n
| \n
The following tables summarize the Company’s marketable securities as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n As of December 31, 2016 | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Recurring Fair | \n||
| \n
| \n\n
| \n\n Amortized \nCost | \n\n
| \n\n
| \n\n Unrealized Gains | \n\n
| \n\n
| \n\n Unrealized Losses | \n\n
| \n\n
| \n\n Estimated \nFair Value | \n\n
| \n\n
| \n\n Value Measurement | \n||||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n Fixed-income debt securities | \n\n
| \n\n $ | \n\n 30,037 | \n\n
| \n\n
| \n\n $ | \n\n 14 | \n\n
| \n\n
| \n\n $ | \n\n (11 | \n\n ) | \n\n
| \n\n $ | \n\n 30,040 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n U.S. Treasury notes | \n\n
| \n\n
| \n\n 9,283 | \n\n
| \n\n
| \n\n
| \n\n 7 | \n\n
| \n\n
| \n\n
| \n\n (2 | \n\n ) | \n\n
| \n\n
| \n\n 9,288 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Total marketable securities | \n\n
| \n\n $ | \n\n 39,320 | \n\n
| \n\n
| \n\n $ | \n\n 21 | \n\n
| \n\n
| \n\n $ | \n\n (13 | \n\n ) | \n\n
| \n\n $ | \n\n 39,328 | \n\n
| \n\n
| \n\n
| \n
\n
| \n
| \n\n
| \n\n As of December 31, 2015 | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Recurring Fair | \n||
| \n
| \n\n
| \n\n Amortized \nCost | \n\n
| \n\n
| \n\n Unrealized Gains | \n\n
| \n\n
| \n\n Unrealized Losses | \n\n
| \n\n
| \n\n Estimated \nFair Value | \n\n
| \n\n
| \n\n Value Measurement | \n||||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n|||||||||||||
| \n Fixed-income debt securities | \n\n
| \n\n $ | \n\n 181,636 | \n\n
| \n\n
| \n\n $ | \n\n 4 | \n\n
| \n\n
| \n\n $ | \n\n (200 | \n\n ) | \n\n
| \n\n $ | \n\n 181,440 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Commercial paper | \n\n
| \n\n
| \n\n 9,821 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n (1 | \n\n ) | \n\n
| \n\n
| \n\n 9,820 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n U.S. Treasury notes | \n\n
| \n\n
| \n\n 12,079 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n (10 | \n\n ) | \n\n
| \n\n
| \n\n 12,069 | \n\n
| \n\n
| \n\n Level 2 | \n
| \n Total marketable securities | \n\n
| \n\n $ | \n\n 203,536 | \n\n
| \n\n
| \n\n $ | \n\n 4 | \n\n
| \n\n
| \n\n $ | \n\n (211 | \n\n ) | \n\n
| \n\n $ | \n\n 203,329 | \n\n
| \n\n
| \n\n
| \n
The following table presents the contractual maturities of the fixed income debt securities, commercial paper and U.S. Treasury notes held as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n December 31, 2016 | \n\n
| \n\n
| \n\n December 31, 2015 | \n\n
| \n||||||||||
| \n
| \n\n
| \n\n Amortized | \n\n
| \n\n
| \n\n Fair | \n\n
| \n\n
| \n\n Amortized | \n\n
| \n\n
| \n\n Fair | \n\n
| \n||||
| \n
| \n\n
| \n\n Cost | \n\n
| \n\n
| \n\n Value | \n\n
| \n\n
| \n\n Cost | \n\n
| \n\n
| \n\n Value | \n\n
| \n||||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n||||||||||
| \n Mature within one year | \n\n
| \n\n $ | \n\n 32,776 | \n\n
| \n\n
| \n\n $ | \n\n 32,788 | \n\n
| \n\n
| \n\n $ | \n\n 169,728 | \n\n
| \n\n
| \n\n $ | \n\n 169,619 | \n\n
| \n
| \n Mature after one year and within three years | \n\n
| \n\n
| \n\n 6,544 | \n\n
| \n\n
| \n\n
| \n\n 6,540 | \n\n
| \n\n
| \n\n
| \n\n 33,808 | \n\n
| \n\n
| \n\n
| \n\n 33,710 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 39,320 | \n\n
| \n\n
| \n\n $ | \n\n 39,328 | \n\n
| \n\n
| \n\n $ | \n\n 203,536 | \n\n
| \n\n
| \n\n $ | \n\n 203,329 | \n\n
| \n
The following tables present interest activity for the Credit Facility for the years ended December 31, 2016 and 2015 payable via cash or deemed loan:
\n| \n
| \n\n
| \n\n 2016 | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n Cash | \n\n
| \n\n
| \n\n Deemed Loan | \n\n
| \n\n
| \n\n Total | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||
| \n Beginning interest payable | \n\n
| \n\n $ | \n\n 3,720 | \n\n
| \n\n
| \n\n $ | \n\n 8,514 | \n\n
| \n\n
| \n\n $ | \n\n 12,234 | \n\n
| \n
| \n Interest incurred | \n\n
| \n\n
| \n\n 33,326 | \n\n
| \n\n
| \n\n
| \n\n 44,359 | \n\n
| \n\n
| \n\n
| \n\n 77,685 | \n\n
| \n
| \n Interest payments | \n\n
| \n\n
| \n\n (22,910 | \n\n ) | \n\n
| \n\n
| \n\n (52,873 | \n\n ) | \n\n
| \n\n
| \n\n (75,783 | \n\n ) | \n
| \n Ending interest payable | \n\n
| \n\n $ | \n\n 14,136 | \n\n
| \n\n
| \n\n $ | \n\n - | \n\n
| \n\n
| \n\n $ | \n\n 14,136 | \n\n
| \n
\n
| \n
| \n\n
| \n\n 2015 | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n Cash | \n\n
| \n\n
| \n\n Deemed Loan | \n\n
| \n\n
| \n\n Total | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||
| \n Beginning interest payable | \n\n
| \n\n $ | \n\n 2,936 | \n\n
| \n\n
| \n\n $ | \n\n 6,653 | \n\n
| \n\n
| \n\n $ | \n\n 9,589 | \n\n
| \n
| \n Interest incurred | \n\n
| \n\n
| \n\n 19,662 | \n\n
| \n\n
| \n\n
| \n\n 44,934 | \n\n
| \n\n
| \n\n
| \n\n 64,596 | \n\n
| \n
| \n Interest payments | \n\n
| \n\n
| \n\n (18,878 | \n\n ) | \n\n
| \n\n
| \n\n (43,073 | \n\n ) | \n\n
| \n\n
| \n\n (61,951 | \n\n ) | \n
| \n Ending interest payable | \n\n
| \n\n $ | \n\n 3,720 | \n\n
| \n\n
| \n\n $ | \n\n 8,514 | \n\n
| \n\n
| \n\n $ | \n\n 12,234 | \n\n
| \n
Future payments with respect to the Credit Facility balance existing at December 31, 2016, plus the February 2017 draw of $22.2 million, by year and in the aggregate, is as follows:
\n\n
| \n Year ending December 31, | \n\n
| \n\n Amount | \n\n
| \n|
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|
| \n 2017 | \n\n
| \n\n $ | \n\n - | \n\n
| \n
| \n 2018 | \n\n
| \n\n
| \n\n 85,500 | \n\n
| \n
| \n 2019 | \n\n
| \n\n
| \n\n 202,500 | \n\n
| \n
| \n 2020 | \n\n
| \n\n
| \n\n 288,000 | \n\n
| \n
| \n 2021 | \n\n
| \n\n
| \n\n 306,000 | \n\n
| \n
| \n Thereafter | \n\n
| \n\n
| \n\n 918,000 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 1,800,000 | \n\n
| \n
Property and equipment consisted of the following as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Satellite system | \n\n
| \n\n $ | \n\n 314,228 | \n\n
| \n\n
| \n\n $ | \n\n 323,607 | \n\n
| \n
| \n Ground system | \n\n
| \n\n
| \n\n 63,519 | \n\n
| \n\n
| \n\n
| \n\n 41,629 | \n\n
| \n
| \n Equipment | \n\n
| \n\n
| \n\n 34,139 | \n\n
| \n\n
| \n\n
| \n\n 30,189 | \n\n
| \n
| \n Internally developed software and purchased software | \n\n
| \n\n
| \n\n 127,498 | \n\n
| \n\n
| \n\n
| \n\n 116,960 | \n\n
| \n
| \n Building and leasehold improvements | \n\n
| \n\n
| \n\n 32,099 | \n\n
| \n\n
| \n\n
| \n\n 31,589 | \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n 571,483 | \n\n
| \n\n
| \n\n
| \n\n 543,974 | \n\n
| \n
| \n Less: accumulated depreciation | \n\n
| \n\n
| \n\n (422,098 | \n\n ) | \n\n
| \n\n
| \n\n (385,860 | \n\n ) | \n
| \n
| \n\n
| \n\n
| \n\n 149,385 | \n\n
| \n\n
| \n\n
| \n\n 158,114 | \n\n
| \n
| \n Land | \n\n
| \n\n
| \n\n 8,037 | \n\n
| \n\n
| \n\n
| \n\n 8,037 | \n\n
| \n
| \n Construction in process: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Iridium NEXT systems under construction | \n\n
| \n\n
| \n\n 2,639,824 | \n\n
| \n\n
| \n\n
| \n\n 2,252,290 | \n\n
| \n
| \n Other construction in process | \n\n
| \n\n
| \n\n 15,838 | \n\n
| \n\n
| \n\n
| \n\n 25,126 | \n\n
| \n
| \n Total property and equipment, net of accumulated \ndepreciation | \n\n
| \n\n $ | \n\n 2,813,084 | \n\n
| \n\n
| \n\n $ | \n\n 2,443,567 | \n\n
| \n
Other construction in process consisted of the following as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Internally developed software | \n\n
| \n\n $ | \n\n 14,218 | \n\n
| \n\n
| \n\n $ | \n\n 7,708 | \n\n
| \n
| \n Equipment | \n\n
| \n\n
| \n\n 1,546 | \n\n
| \n\n
| \n\n
| \n\n 1,981 | \n\n
| \n
| \n Ground system | \n\n
| \n\n
| \n\n 74 | \n\n
| \n\n
| \n\n
| \n\n 15,143 | \n\n
| \n
| \n Building and leasehold improvements | \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n 294 | \n\n
| \n|
| \n Total other construction in process | \n\n
| \n\n $ | \n\n 15,838 | \n\n
| \n\n
| \n\n $ | \n\n 25,126 | \n\n
| \n
The Company had identifiable intangible assets as follows as of December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n December 31, 2016 | \n\n
| \n|||||||||||
| \n
| \n\n
| \n\n Useful | \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Accumulated | \n\n
| \n\n
| \n\n Net | \n\n
| \n|||
| \n
| \n\n
| \n\n Lives | \n\n
| \n\n Carrying Value | \n\n
| \n\n
| \n\n Amortization | \n\n
| \n\n
| \n\n Carrying Value | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||||
| \n Indefinite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Trade names | \n\n
| \n\n Indefinite | \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n\n
| \n\n $ | \n\n — | \n\n
| \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n
| \n Spectrum and licenses | \n\n
| \n\n Indefinite | \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n
| \n Definite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Intellectual property | \n\n
| \n\n 20 years | \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,868 | \n\n ) | \n\n
| \n\n
| \n\n 10,571 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,868 | \n\n ) | \n\n
| \n\n
| \n\n 10,571 | \n\n
| \n
| \n Total intangible assets | \n\n
| \n\n
| \n\n
| \n\n $ | \n\n 51,664 | \n\n
| \n\n
| \n\n $ | \n\n (5,868 | \n\n ) | \n\n
| \n\n $ | \n\n 45,796 | \n\n
| \n
\n
| \n
| \n\n
| \n\n December 31, 2015 | \n\n
| \n|||||||||||
| \n
| \n\n
| \n\n Useful | \n\n
| \n\n Gross | \n\n
| \n\n
| \n\n Accumulated | \n\n
| \n\n
| \n\n Net | \n\n
| \n|||
| \n
| \n\n
| \n\n Lives | \n\n
| \n\n Carrying Value | \n\n
| \n\n
| \n\n Amortization | \n\n
| \n\n
| \n\n Carrying Value | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||||||||
| \n Indefinite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Trade names | \n\n
| \n\n Indefinite | \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n\n
| \n\n $ | \n\n — | \n\n
| \n\n
| \n\n $ | \n\n 21,195 | \n\n
| \n
| \n Spectrum and licenses | \n\n
| \n\n Indefinite | \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 14,030 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 35,225 | \n\n
| \n
| \n Definite life intangible assets: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Intellectual property | \n\n
| \n\n 19.5 years | \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,075 | \n\n ) | \n\n
| \n\n
| \n\n 11,364 | \n\n
| \n
| \n Total | \n\n
| \n\n
| \n\n
| \n\n
| \n\n 16,439 | \n\n
| \n\n
| \n\n
| \n\n (5,075 | \n\n ) | \n\n
| \n\n
| \n\n 11,364 | \n\n
| \n
| \n Total intangible assets | \n\n
| \n\n
| \n\n
| \n\n $ | \n\n 51,664 | \n\n
| \n\n
| \n\n $ | \n\n (5,075 | \n\n ) | \n\n
| \n\n $ | \n\n 46,589 | \n\n
| \n
Future amortization expense with respect to intangible assets existing at December 31, 2016, by year and in the aggregate, is as follows:
\n\n
| \n Year ending December 31, | \n\n
| \n\n Amount | \n\n
| \n|
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|
| \n 2017 | \n\n
| \n\n $ | \n\n 783 | \n\n
| \n
| \n 2018 | \n\n
| \n\n 783 | \n\n
| \n|
| \n 2019 | \n\n
| \n\n 783 | \n\n
| \n|
| \n 2020 | \n\n
| \n\n 783 | \n\n
| \n|
| \n 2021 | \n\n
| \n\n 783 | \n\n
| \n|
| \n Thereafter | \n\n
| \n\n
| \n\n 6,656 | \n\n
| \n
| \n Total estimated future amortization expense | \n\n
| \n\n $ | \n\n 10,571 | \n\n
| \n
Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases at December 31, 2016, are as follows:
\n\n
| \n
| \n\n
| \n\n Operating | \n\n
| \n|
| \n Year ending December 31, | \n\n
| \n\n Leases | \n\n
| \n|
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|
| \n 2017 | \n\n
| \n\n $ | \n\n 3,589 | \n\n
| \n
| \n 2018 | \n\n
| \n\n
| \n\n 3,554 | \n\n
| \n
| \n 2019 | \n\n
| \n\n
| \n\n 3,644 | \n\n
| \n
| \n 2020 | \n\n
| \n\n
| \n\n 3,734 | \n\n
| \n
| \n 2021 | \n\n
| \n\n
| \n\n 3,827 | \n\n
| \n
| \n Thereafter | \n\n
| \n\n
| \n\n 12,251 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 30,599 | \n\n
| \n
Assumptions used in determining the fair value of the Company’s options were as follows:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n Expected volatility | \n\n
| \n\n 40% - 42% | \n\n
| \n\n
| \n\n 39% - 42% | \n\n
| \n\n
| \n\n 41% - 43% | \n\n
| \n|||
| \n Expected term (years) | \n\n
| \n\n 6.00 - 9.25 | \n\n
| \n\n
| \n\n 5.25 - 10.00 | \n\n
| \n\n
| \n\n 5.25 - 10.00 | \n\n
| \n|||
| \n Expected dividends | \n\n
| \n\n
| \n\n 0% | \n\n
| \n\n
| \n\n
| \n\n 0% | \n\n
| \n\n
| \n\n
| \n\n 0% | \n\n
| \n
| \n Risk free interest rate | \n\n
| \n\n 1.15% - 2.45% | \n\n
| \n\n
| \n\n 1.50% - 2.35% | \n\n
| \n\n
| \n\n 1.10% - 2.35% | \n\n
| \n
A summary of the activity of the Company’s stock options for the year ended December 31, 2016 is as follows:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n\n
| \n\n Average | \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Average | \n\n
| \n\n
| \n\n Remaining | \n\n
| \n\n Aggregate | \n\n
| \n||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Exercise Price | \n\n
| \n\n
| \n\n Contractual | \n\n
| \n\n Intrinsic | \n\n
| \n||
| \n
| \n\n
| \n\n Shares | \n\n
| \n\n
| \n\n Per Share | \n\n
| \n\n
| \n\n Term (Years) | \n\n
| \n\n Value | \n\n
| \n|||
| \n
| \n\n
| \n\n (In thousands, except years and per share data) | \n\n
| \n|||||||||||
| \n Options outstanding at January 1, 2016 | \n\n
| \n\n
| \n\n 7,120 | \n\n
| \n\n
| \n\n $ | \n\n 7.86 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Granted | \n\n
| \n\n
| \n\n 249 | \n\n
| \n\n
| \n\n $ | \n\n 8.13 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Cancelled or expired | \n\n
| \n\n
| \n\n (39 | \n\n ) | \n\n
| \n\n $ | \n\n 8.92 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Exercised | \n\n
| \n\n
| \n\n (73 | \n\n ) | \n\n
| \n\n $ | \n\n 7.33 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Forfeited | \n\n
| \n\n
| \n\n (55 | \n\n ) | \n\n
| \n\n $ | \n\n 7.62 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Options outstanding at December 31, 2016 | \n\n
| \n\n
| \n\n 7,202 | \n\n
| \n\n
| \n\n $ | \n\n 7.87 | \n\n
| \n\n
| \n\n 5.45 | \n\n
| \n\n $ | \n\n 12,473 | \n\n
| \n
| \n Options exercisable at December 31, 2016 | \n\n
| \n\n
| \n\n 6,169 | \n\n
| \n\n
| \n\n $ | \n\n 7.83 | \n\n
| \n\n
| \n\n 5.02 | \n\n
| \n\n $ | \n\n 10,924 | \n\n
| \n
| \n Options exercisable and expected to vest at \nDecember 31, 2016 | \n\n
| \n\n
| \n\n 7,188 | \n\n
| \n\n
| \n\n $ | \n\n 7.87 | \n\n
| \n\n
| \n\n 5.13 | \n\n
| \n\n $ | \n\n 12,442 | \n\n
| \n
A summary of the Company’s activity for the year ended December 31, 2016 for outstanding RSUs is as follows:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Average | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Grant Date | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Fair Value | \n\n
| \n|
| \n
| \n\n
| \n\n RSUs | \n\n
| \n\n
| \n\n Per RSU | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Outstanding at January 1, 2016 | \n\n
| \n\n
| \n\n 1,944 | \n\n
| \n\n
| \n\n $ | \n\n 7.76 | \n\n
| \n
| \n Granted | \n\n
| \n\n
| \n\n 2,297 | \n\n
| \n\n
| \n\n $ | \n\n 7.09 | \n\n
| \n
| \n Forfeited | \n\n
| \n\n
| \n\n (152 | \n\n ) | \n\n
| \n\n $ | \n\n 7.44 | \n\n
| \n
| \n Released | \n\n
| \n\n
| \n\n (766 | \n\n ) | \n\n
| \n\n $ | \n\n 7.36 | \n\n
| \n
| \n Outstanding at December 31, 2016 | \n\n
| \n\n
| \n\n 3,323 | \n\n
| \n\n
| \n\n $ | \n\n 7.40 | \n\n
| \n
| \n Vested at December 31, 2016 | \n\n
| \n\n 395 | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
A summary of the Company’s activity for the year ended December 31, 2016 for unvested RSUs is as follows:
\n\n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Weighted- | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Average | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Grant Date | \n\n
| \n|
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n Fair Value | \n\n
| \n|
| \n
| \n\n
| \n\n RSUs | \n\n
| \n\n
| \n\n Per RSU | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Non-vested at January 1, 2016 | \n\n
| \n\n
| \n\n 1,541 | \n\n
| \n\n
| \n\n $ | \n\n 7.83 | \n\n
| \n
| \n Granted | \n\n
| \n\n
| \n\n 2,297 | \n\n
| \n\n
| \n\n $ | \n\n 7.09 | \n\n
| \n
| \n Vested | \n\n
| \n\n
| \n\n (758 | \n\n ) | \n\n
| \n\n $ | \n\n 7.36 | \n\n
| \n
| \n Forfeited | \n\n
| \n\n
| \n\n (152 | \n\n ) | \n\n
| \n\n $ | \n\n 7.44 | \n\n
| \n
| \n Non-vested at December 31, 2016 | \n\n
| \n\n
| \n\n 2,928 | \n\n
| \n\n
| \n\n $ | \n\n 7.39 | \n\n
| \n
Net property and equipment by geographic area was as follows as of December 31:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n United States | \n\n
| \n\n $ | \n\n 124,483 | \n\n
| \n\n
| \n\n $ | \n\n 127,959 | \n\n
| \n
| \n Satellites in orbit | \n\n
| \n\n
| \n\n 13,405 | \n\n
| \n\n
| \n\n
| \n\n 32,774 | \n\n
| \n
| \n Iridium NEXT systems under construction | \n\n
| \n\n
| \n\n 2,639,824 | \n\n
| \n\n
| \n\n
| \n\n 2,252,290 | \n\n
| \n
| \n All others (1) | \n\n
| \n\n
| \n\n 35,372 | \n\n
| \n\n
| \n\n
| \n\n 30,544 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 2,813,084 | \n\n
| \n\n
| \n\n $ | \n\n 2,443,567 | \n\n
| \n
\n
| \n (1) | \n\n 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:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n United States | \n\n
| \n\n $ | \n\n 226,190 | \n\n
| \n\n
| \n\n $ | \n\n 204,777 | \n\n
| \n\n
| \n\n $ | \n\n 194,060 | \n\n
| \n
| \n Canada | \n\n
| \n\n
| \n\n 42,373 | \n\n
| \n\n
| \n\n
| \n\n 42,063 | \n\n
| \n\n
| \n\n
| \n\n 44,933 | \n\n
| \n
| \n United Kingdom | \n\n
| \n\n
| \n\n 47,135 | \n\n
| \n\n
| \n\n
| \n\n 44,012 | \n\n
| \n\n
| \n\n
| \n\n 47,093 | \n\n
| \n
| \n Other countries (1) | \n\n
| \n\n
| \n\n 117,942 | \n\n
| \n\n
| \n\n
| \n\n 120,526 | \n\n
| \n\n
| \n\n
| \n\n 122,471 | \n\n
| \n
| \n Total | \n\n
| \n\n $ | \n\n 433,640 | \n\n
| \n\n
| \n\n $ | \n\n 411,378 | \n\n
| \n\n
| \n\n $ | \n\n 408,557 | \n\n
| \n
\n
| \n (1) | \n\n No one other country represented more than 10% of revenue. |
U.S. and foreign components of income before income taxes are presented below:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n U.S. income | \n\n
| \n\n $ | \n\n 176,448 | \n\n
| \n\n
| \n\n $ | \n\n 75,431 | \n\n
| \n\n
| \n\n $ | \n\n 115,858 | \n\n
| \n
| \n Foreign income (loss) | \n\n
| \n\n
| \n\n 1,717 | \n\n
| \n\n
| \n\n
| \n\n (2,316 | \n\n ) | \n\n
| \n\n 594 | \n\n
| \n|
| \n Total income before income taxes | \n\n
| \n\n $ | \n\n 178,165 | \n\n
| \n\n
| \n\n $ | \n\n 73,115 | \n\n
| \n\n
| \n\n $ | \n\n 116,452 | \n\n
| \n
The components of the Company’s income tax provision were as follows:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Current taxes: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Federal provision (benefit) | \n\n
| \n\n $ | \n\n 1,206 | \n\n
| \n\n
| \n\n $ | \n\n 1,700 | \n\n
| \n\n
| \n\n $ | \n\n 50 | \n\n
| \n
| \n State provision (benefit) | \n\n
| \n\n
| \n\n 978 | \n\n
| \n\n
| \n\n
| \n\n 266 | \n\n
| \n\n
| \n\n
| \n\n (90 | \n\n ) | \n
| \n Foreign provision | \n\n
| \n\n
| \n\n 1,141 | \n\n
| \n\n
| \n\n
| \n\n 650 | \n\n
| \n\n
| \n\n
| \n\n 1,260 | \n\n
| \n
| \n Total current tax provision | \n\n
| \n\n
| \n\n 3,325 | \n\n
| \n\n
| \n\n
| \n\n 2,616 | \n\n
| \n\n
| \n\n
| \n\n 1,220 | \n\n
| \n
| \n Deferred taxes: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Federal provision | \n\n
| \n\n
| \n\n 60,295 | \n\n
| \n\n
| \n\n
| \n\n 54,906 | \n\n
| \n\n
| \n\n
| \n\n 40,155 | \n\n
| \n
| \n State provision (benefit) | \n\n
| \n\n
| \n\n 3,454 | \n\n
| \n\n
| \n\n
| \n\n 8,803 | \n\n
| \n\n
| \n\n
| \n\n (77 | \n\n ) | \n
| \n Foreign provision (benefit) | \n\n
| \n\n
| \n\n 59 | \n\n
| \n\n
| \n\n
| \n\n (333 | \n\n ) | \n\n
| \n\n 165 | \n\n
| \n|
| \n Total deferred tax provision | \n\n
| \n\n
| \n\n 63,808 | \n\n
| \n\n
| \n\n
| \n\n 63,376 | \n\n
| \n\n
| \n\n
| \n\n 40,243 | \n\n
| \n
| \n Total income tax provision | \n\n
| \n\n $ | \n\n 67,133 | \n\n
| \n\n
| \n\n $ | \n\n 65,992 | \n\n
| \n\n
| \n\n $ | \n\n 41,463 | \n\n
| \n
A reconciliation of the U.S. federal statutory income tax expense to the Company’s effective income tax provision is as follows:
\n\n
| \n
| \n\n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n (In thousands) | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n|
| \n Expected provision at U.S. federal statutory tax rate | \n\n
| \n\n $ | \n\n 62,309 | \n\n
| \n\n
| \n\n $ | \n\n 25,590 | \n\n
| \n\n
| \n\n $ | \n\n 40,766 | \n\n
| \n
| \n State taxes, net of federal benefit | \n\n
| \n\n
| \n\n 9,757 | \n\n
| \n\n
| \n\n
| \n\n 11,663 | \n\n
| \n\n
| \n\n
| \n\n 4,991 | \n\n
| \n
| \n State tax valuation allowance | \n\n
| \n\n
| \n\n (2,710 | \n\n ) | \n\n
| \n\n
| \n\n (2,763 | \n\n ) | \n\n
| \n\n 380 | \n\n
| \n|
| \n Deferred impact of Arizona tax law changes and elections | \n\n
| \n\n
| \n\n (2,962 | \n\n ) | \n\n
| \n\n
| \n\n 99 | \n\n
| \n\n
| \n\n
| \n\n (5,525 | \n\n ) | \n
| \n Impairment of goodwill | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 30,464 | \n\n
| \n\n
| \n\n
| \n\n - | \n\n
| \n
| \n Other nondeductible expenses | \n\n
| \n\n 596 | \n\n
| \n\n
| \n\n 557 | \n\n
| \n\n
| \n\n 903 | \n\n
| \n|||
| \n Tax credits | \n\n
| \n\n
| \n\n (442 | \n\n ) | \n\n
| \n\n
| \n\n (97 | \n\n ) | \n\n
| \n\n
| \n\n (994 | \n\n ) | \n
| \n Foreign taxes and other items | \n\n
| \n\n 585 | \n\n
| \n\n
| \n\n 479 | \n\n
| \n\n
| \n\n 942 | \n\n
| \n|||
| \n Total income tax provision | \n\n
| \n\n $ | \n\n 67,133 | \n\n
| \n\n
| \n\n $ | \n\n 65,992 | \n\n
| \n\n
| \n\n $ | \n\n 41,463 | \n\n
| \n
The components of deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:
\n\n
| \n
| \n\n
| \n\n As of December 31, | \n\n
| \n|||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Deferred tax assets | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Long-term contracts | \n\n
| \n\n $ | \n\n 74,720 | \n\n
| \n\n
| \n\n $ | \n\n 64,287 | \n\n
| \n
| \n Deferred revenue | \n\n
| \n\n
| \n\n 6,309 | \n\n
| \n\n
| \n\n
| \n\n 8,312 | \n\n
| \n
| \n Federal, state and foreign net operating loss carryforwards \nand tax credits | \n\n
| \n\n
| \n\n 60,667 | \n\n
| \n\n
| \n\n
| \n\n 104,996 | \n\n
| \n
| \n Other | \n\n
| \n\n
| \n\n 27,216 | \n\n
| \n\n
| \n\n
| \n\n 24,603 | \n\n
| \n
| \n Total deferred tax assets | \n\n
| \n\n
| \n\n 168,912 | \n\n
| \n\n
| \n\n
| \n\n 202,198 | \n\n
| \n
| \n Valuation allowance | \n\n
| \n\n
| \n\n (2,825 | \n\n ) | \n\n
| \n\n
| \n\n (4,529 | \n\n ) | \n
| \n Net deferred tax assets | \n\n
| \n\n
| \n\n 166,087 | \n\n
| \n\n
| \n\n
| \n\n 197,669 | \n\n
| \n
| \n Deferred tax liabilities | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Fixed assets and intangibles | \n\n
| \n\n
| \n\n (120,568 | \n\n ) | \n\n
| \n\n
| \n\n (101,107 | \n\n ) | \n
| \n Research and development expenditures | \n\n
| \n\n
| \n\n (393,337 | \n\n ) | \n\n
| \n\n
| \n\n (379,220 | \n\n ) | \n
| \n Other | \n\n
| \n\n
| \n\n (13,838 | \n\n ) | \n\n
| \n\n
| \n\n (14,174 | \n\n ) | \n
| \n Total deferred tax liabilities | \n\n
| \n\n
| \n\n (527,743 | \n\n ) | \n\n
| \n\n
| \n\n (494,501 | \n\n ) | \n
| \n Net deferred income tax liabilities | \n\n
| \n\n $ | \n\n (361,656 | \n\n ) | \n\n
| \n\n $ | \n\n (296,832 | \n\n ) | \n
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits which includes related interest and penalties:
\n\n
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||
| \n
| \n\n
| \n\n (In thousands) | \n\n
| \n|||||
| \n Balance at January 1, | \n\n
| \n\n $ | \n\n 916 | \n\n
| \n\n
| \n\n $ | \n\n 1,150 | \n\n
| \n
| \n Change attributable to tax positions taken in a prior period | \n\n
| \n\n
| \n\n 25 | \n\n
| \n\n
| \n\n
| \n\n 50 | \n\n
| \n
| \n Change attributable to final assessment | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n (311 | \n\n ) | \n
| \n Change attributable to tax positions taken in the \ncurrent period | \n\n
| \n\n 8 | \n\n
| \n\n
| \n\n 29 | \n\n
| \n||
| \n Decrease attributable to lapse of statute of limitations | \n\n
| \n\n
| \n\n (29 | \n\n ) | \n\n
| \n\n
| \n\n (2 | \n\n ) | \n
| \n Balance at December 31, | \n\n
| \n\n $ | \n\n 920 | \n\n
| \n\n
| \n\n $ | \n\n 916 | \n\n
| \n
The computations of basic and diluted net income (loss) per share are set forth below:
\n\n
| \n
| \n\n Year Ended December 31, | \n\n
| \n|||||||||
| \n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2014 | \n\n
| \n|||
| \n
| \n\n (In thousands, except per share data) | \n\n
| \n|||||||||
| \n Numerator: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Net income (loss) attributable to common stockholders | \n\n $ | \n\n 95,596 | \n\n
| \n\n
| \n\n $ | \n\n (8,313 | \n\n ) | \n\n
| \n\n $ | \n\n 62,669 | \n\n
| \n
| \n Dividends on Series A Preferred Stock | \n\n
| \n\n 7,000 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 7,000 | \n\n
| \n
| \n Dividends on Series B Preferred Stock | \n\n
| \n\n 8,436 | \n\n
| \n\n
| \n\n
| \n\n — | \n\n
| \n\n
| \n\n
| \n\n 5,320 | \n\n
| \n
| \n Numerator for diluted net income per share | \n\n $ | \n\n 111,032 | \n\n
| \n\n
| \n\n $ | \n\n (8,313 | \n\n ) | \n\n
| \n\n $ | \n\n 74,989 | \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Denominator: | \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Denominator for basic net income per share - weighted \naverage outstanding common shares | \n\n
| \n\n 95,967 | \n\n
| \n\n
| \n\n
| \n\n 95,097 | \n\n
| \n\n
| \n\n
| \n\n 88,080 | \n\n
| \n
| \n Dilutive effect of stock options | \n\n
| \n\n 250 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 85 | \n\n
| \n|
| \n Dilutive effect of Performance RSUs | \n\n
| \n\n 1,328 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n - | \n\n
| \n|
| \n Dilutive effect of Series A Preferred Stock | \n\n
| \n\n 10,602 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 10,602 | \n\n
| \n|
| \n Dilutive effect of Series B Preferred Stock | \n\n
| \n\n 16,728 | \n\n
| \n\n
| \n\n - | \n\n
| \n\n
| \n\n
| \n\n 10,633 | \n\n
| \n|
| \n Denominator for diluted net income per share | \n\n
| \n\n 124,875 | \n\n
| \n\n
| \n\n
| \n\n 95,097 | \n\n
| \n\n
| \n\n
| \n\n 109,400 | \n\n
| \n
| \n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n\n
| \n
| \n Net income (loss) per share attributable to common \nstockholders - basic | \n\n $ | \n\n 1.00 | \n\n
| \n\n
| \n\n $ | \n\n (0.09 | \n\n ) | \n\n
| \n\n $ | \n\n 0.71 | \n\n
| \n
| \n Net income (loss) per share attributable to common \nstockholders - diluted | \n\n $ | \n\n 0.89 | \n\n
| \n\n
| \n\n $ | \n\n (0.09 | \n\n ) | \n\n
| \n\n $ | \n\n 0.69 | \n\n
| \n
The following represents the Company’s unaudited quarterly results for the years ended December 31, 2016 and 2015:
\n\n
| \n
| \n\n
| \n\n Quarter Ended | \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n March 31, | \n\n
| \n\n
| \n\n June 30, | \n\n
| \n\n
| \n\n September 30, | \n\n
| \n\n
| \n\n December 31, | \n\n
| \n||||
| \n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2016 | \n\n
| \n\n
| \n\n 2016 | \n\n
| \n||||
| \n
| \n\n
| \n\n (In thousands, except per share data) | \n\n
| \n|||||||||||||
| \n Revenue | \n\n
| \n\n $ | \n\n 104,202 | \n\n
| \n\n
| \n\n $ | \n\n 109,195 | \n\n
| \n\n
| \n\n $ | \n\n 112,794 | \n\n
| \n\n
| \n\n $ | \n\n 107,449 | \n\n
| \n
| \n Operating income | \n\n
| \n\n $ | \n\n 43,278 | \n\n
| \n\n
| \n\n $ | \n\n 41,729 | \n\n
| \n\n
| \n\n $ | \n\n 49,768 | \n\n
| \n\n
| \n\n $ | \n\n 41,596 | \n\n
| \n
| \n Net income | \n\n
| \n\n $ | \n\n 28,520 | \n\n
| \n\n
| \n\n $ | \n\n 26,854 | \n\n
| \n\n
| \n\n $ | \n\n 31,555 | \n\n
| \n\n
| \n\n $ | \n\n 24,103 | \n\n
| \n
| \n Net income per common share - basic | \n\n
| \n\n $ | \n\n 0.26 | \n\n
| \n\n
| \n\n $ | \n\n 0.24 | \n\n
| \n\n
| \n\n $ | \n\n 0.29 | \n\n
| \n\n
| \n\n $ | \n\n 0.21 | \n\n
| \n
| \n Net income per common share -diluted | \n\n
| \n\n $ | \n\n 0.23 | \n\n
| \n\n
| \n\n $ | \n\n 0.22 | \n\n
| \n\n
| \n\n $ | \n\n 0.26 | \n\n
| \n\n
| \n\n $ | \n\n 0.19 | \n\n
| \n
| \n
| \n\n
| \n\n Quarter Ended | \n\n
| \n|||||||||||||
| \n
| \n\n
| \n\n March 31, | \n\n
| \n\n
| \n\n June 30, | \n\n
| \n\n
| \n\n September 30, | \n\n
| \n\n
| \n\n December 31, | \n\n
| \n||||
| \n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n\n
| \n\n 2015 | \n\n
| \n||||
| \n
| \n\n
| \n\n (In thousands, except per share data) | \n\n
| \n|||||||||||||
| \n Revenue | \n\n
| \n\n $ | \n\n 97,007 | \n\n
| \n\n
| \n\n $ | \n\n 101,919 | \n\n
| \n\n
| \n\n $ | \n\n 106,034 | \n\n
| \n\n
| \n\n $ | \n\n 106,418 | \n\n
| \n
| \n Operating income (loss) (1) | \n\n
| \n\n $ | \n\n 33,473 | \n\n
| \n\n
| \n\n $ | \n\n 42,334 | \n\n
| \n\n
| \n\n $ | \n\n 46,539 | \n\n
| \n\n
| \n\n $ | \n\n (48,543 | \n\n ) | \n
| \n Net income (loss) | \n\n
| \n\n $ | \n\n 21,019 | \n\n
| \n\n
| \n\n $ | \n\n 25,988 | \n\n
| \n\n
| \n\n $ | \n\n 29,547 | \n\n
| \n\n
| \n\n $ | \n\n (69,431 | \n\n ) | \n
| \n Net income (loss) per common share - basic | \n\n
| \n\n $ | \n\n 0.18 | \n\n
| \n\n
| \n\n $ | \n\n 0.23 | \n\n
| \n\n
| \n\n $ | \n\n 0.27 | \n\n
| \n\n
| \n\n $ | \n\n (0.77 | \n\n ) | \n
| \n Net income (loss) per common share -diluted | \n\n
| \n\n $ | \n\n 0.17 | \n\n
| \n\n
| \n\n $ | \n\n 0.21 | \n\n
| \n\n
| \n\n $ | \n\n 0.24 | \n\n
| \n\n
| \n\n $ | \n\n (0.77 | \n\n ) | \n
| \n (1) | \n\n Includes a goodwill impairment charge which decreased operating income by $87.0 million for the three months ended December 31, 2015. |