Background
We were initially formed in 2007 asGHL Acquisition Corp. , a special purpose acquisition company. In 2009, we acquired all the outstanding equity inIridium Holdings LLC and changed our name toIridium Communications Inc.
Overview of Our Business
We are engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites. We are the only commercial provider of communications services offering true global coverage, connecting people, organizations and assets to and from anywhere, in real time. Our unique L-band satellite network provides reliable communications services to regions of the world where terrestrial wireless or wireline networks do not exist or are limited, including remote land areas, open ocean, airways, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters. We provide voice and data communications services to businesses, theU.S. and foreign governments, non-governmental organizations and consumers via our upgraded satellite network, which has an architecture of 66 operational satellites with in-orbit and ground spares and related ground infrastructure. We utilize an interlinked mesh architecture to route traffic across the satellite constellation using radio frequency crosslinks between satellites. This unique architecture minimizes the need for ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence. Our upgraded satellite constellation is compatible with all of our end-user equipment and supports more bandwidth and higher data speeds for our new products, including our recently introduced Iridium Certus broadband service. We sell our products and services to commercial end users through a wholesale distribution network, encompassing approximately 125 service providers, 285 value-added resellers, or VARs, and 90 value-added manufacturers, or VAMs, who either sell directly to the end user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications for our products and services targeting specific lines of business. AtDecember 31, 2020 we had approximately 1,476,000 billable subscribers worldwide, an increase of 176,000, or 14%, from approximately 1,300,000 billable subscribers atDecember 31, 2019 . We have a diverse customer base, including end users in land-mobile, Internet of Things, or IoT, maritime, aviation and government. We recognize revenue from both the provision of services and the sale of equipment. Service revenue represented 79% and 80% of total revenue for the years endedDecember 31, 2020 and 2019, respectively. Voice and data and IoT data service revenues have historically generated higher margins than subscriber equipment revenue, and we expect this trend to continue. We also recognize revenue from our hosted payloads, principallyAireon , including fees for hosting the payloads and fees for transmitting data from the payloads over our network, as well as revenue from other services, such as satellite time and location services.
Services Agreements for Upgrade of Satellite Constellation
In 2019, we completed the full replacement of our first-generation satellites
with our upgraded constellation at a cost of approximately
InJune 2010 , we executed a primarily fixed price full scale development contract, or FSD, withThales Alenia Space for the design and manufacture of satellites for the upgraded constellation. The total price under the FSD was$2.3 billion . Final payments under this contract were made during the second quarter of 2019. These costs were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheets. To complete the upgraded constellation, we launched a total of 75 satellites into low earth orbit using eight Falcon 9 rockets under two contracts withSpace Exploration Technologies Corp. , orSpaceX , with a total price of$510.8 million . Final payments toSpaceX for these launches were made during the second quarter of 2019. These costs were capitalized as construction in progress within property and equipment, net in the accompanying consolidated balance sheets. We shared one launch withGFZ German Research Centre for Geosciences for which we received$29.8 million from them. 42 --------------------------------------------------------------------------------
Term Loan
OnNovember 4, 2019 , pursuant to a new loan agreement, or the Credit Agreement, we entered into a$1,450.0 million term loan, or the Term Loan, and an accompanying$100.0 million revolving loan, or the Revolving Facility. We used the proceeds of the Term Loan along with our debt service reserve account, or DSRA, and cash on hand to repay in full all of the indebtedness outstanding under the credit facility with a syndicate of bank lenders guaranteed by Bpifrance Assurance Export S.A.S., or the BPIAE Facility, as well as related expenses. The Term Loan was issued at a price equal to 99.5% of its face value and initially bore interest at an annual rate of LIBOR plus 3.75%, with a 1.0% LIBOR floor, and has a seven-year maturity. OnFebruary 7, 2020 , we closed on an additional$200.0 million under the Term Loan. OnFebruary 13, 2020 , we used these proceeds, together with cash on hand, to prepay and retire all of the indebtedness outstanding under our senior unsecured notes, or the Notes, including premiums for early prepayment. The additional amount is fungible with the original$1,450.0 million , having the same maturity date, interest rate and other terms, but was issued at a 1.0% premium to face value. To prepay the Notes, we paid a call price equal to the present value at the redemption date of (i) 105.125% of the$360.0 million principal amount of the Notes plus (ii) all interest due through the first call date inApril 2020 , representing a total call premium of$23.5 million , plus all accrued and unpaid interest to the redemption date. InJanuary 2021 , we repriced the Term Loan in order to reduce the annual interest rate to LIBOR plus 2.75%, with a 1.0% LIBOR floor, with no other material changes to the terms. The Revolving Facility bears interest at LIBOR plus 3.75% (but without a LIBOR floor) if and as drawn, with no original issue discount, a commitment fee of 0.5% per year on the undrawn amount, and a five-year maturity. See Note 7 for further discussion of our Term Loan. The Credit Agreement, as amended to date, restricts our ability to incur liens, engage in mergers or asset sales, pay dividends, repay subordinated indebtedness, incur indebtedness, make investments and loans, and engage in other transactions as specified in the Credit Agreement, and also contains a mechanism to sweep a portion of our excess cash flow (as defined in the Credit Agreement). The Credit Agreement provides for specified exceptions, baskets measured as a percentage of trailing twelve months of earnings before interest, taxes, depreciation and amortization, or EBITDA, and unlimited exceptions in the case of incurring indebtedness and liens and making investments, dividend payments, and payments of subordinated indebtedness, as well as a phase-out of the excess cash flow sweep, based on achievement and maintenance of specified leverage ratios. The Credit Agreement permits repayment, prepayment, and repricing transactions, subject to a 1% penalty in the event the facility is prepaid or repriced within six months after the repricing action noted above. The Credit Agreement contains no financial maintenance covenants with respect to the Term Loan. With respect to the Revolving Facility, the Credit Agreement requires the maintenance of a consolidated first lien net leverage ratio (as defined in the Credit Agreement) of no greater than 6.25 to 1 if more than 35% of the Revolving Facility has been drawn. The Credit Agreement also contains other customary representations and warranties, affirmative and negative covenants, and events of default.
Derivative Financial Instruments
OnNovember 27, 2019 , we executed a long-term interest rate swap, or the Swap, effective throughNovember 2021 to mitigate variability in forecasted interest payments on a portion of our borrowings under our Term Loan. We receive variable interest payments based on one-month LIBOR from the counterparty. We also entered into an interest rate swaption agreement, or the Swaption, that, if executed onNovember 22, 2021 , would extend our Swap throughNovember 2026 . We pay a fixed annual rate of 0.50% for the Swaption, and a fixed rate of 1.565% on the Swap. Both the Swap and the Swaption derivative instruments carry a notional amount of$1,000.0 million . We designated both the Swap and Swaption as qualifying hedging instruments and accounted for these derivatives as cash flow hedges. Gains and losses resulting from fair value adjustments to the Swap and Swaption are recorded within accumulated other comprehensive loss within our consolidated balance sheets and reclassified to interest expense on the dates that interest payments become due. Cash flows related to the interest rate swaps are included in cash flows from operating activities on the consolidated statements of cash flows. See Note 8 to our consolidated financial statements included in this report for further discussion of our derivative financial instruments.
Senior Unsecured Notes
OnMarch 21, 2018 , we issued$360.0 million in aggregate principal under the Notes, before$9.0 million of deferred financing costs, for a net principal balance of$351.0 million in borrowings from the Notes. The Notes bore interest at 10.25% per annum and were due to mature onApril 15, 2023 . Interest was payable semi-annually onApril 15 andOctober 15 , beginning onOctober 15, 2018 , and principal would have been repaid in full upon maturity. As noted above, the notes were redeemed onFebruary 13, 2020 . 43 --------------------------------------------------------------------------------
Total Interest on Debt and Loss on Extinguishment
Total interest incurred during the years endedDecember 31, 2020 , 2019 and 2018 was$98.6 million ,$140.1 million and$142.7 million , respectively. Interest incurred includes amortization of deferred financing fees of$3.8 million ,$21.6 million and$26.5 million , for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Interest capitalized during the year endedDecember 31, 2020 and 2019 was$3.2 million and$15.1 million , respectively. Interest accrued for the years endedDecember 31, 2020 and 2019 was$0.2 million and$7.8 million , respectively. As part of the repayment of the BPIAE Facility inNovember 2019 , noted above, we incurred a loss of approximately$111.7 million for the early extinguishment which was recorded within other income (expense) on our consolidated statements of operations and comprehensive loss. Similarly, inFebruary 2020 , we incurred a loss of approximately$30.2 million for the early extinguishment of the Notes, also recorded within other income (expense) on our consolidated statements of operations and comprehensive loss.
Material Trends and Uncertainties
Our industry and customer base has historically grown as a result of: •demand for remote and reliable mobile communications services; •a growing number of new products and services and related applications; •a broad wholesale distribution network with access to diverse and geographically dispersed niche markets; •increased demand for communications services by disaster and relief agencies, and emergency first responders; •improved data transmission speeds for mobile satellite service offerings; •regulatory mandates requiring the use of mobile satellite services; •a general reduction in prices of mobile satellite services and subscriber equipment; and •geographic market expansion through the ability to offer our services in additional countries. Nonetheless, we face a number of challenges and uncertainties in operating our business, including: •our ability to maintain the health, capacity, control and level of service of our satellites; •our ability to develop and launch new and innovative products and services; •changes in general economic, business and industry conditions, including the effects of currency exchange rates; •our reliance on a single primary commercial gateway and a primary satellite network operations center; •competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial-based cellular phone systems and related pricing pressures; •market acceptance of our products; •regulatory requirements in existing and new geographic markets; •rapid and significant technological changes in the telecommunications industry; •our ability to generate sufficient internal cash flows to repay our debt; •reliance on our wholesale distribution network to market and sell our products, services and applications effectively; •reliance on single-source suppliers for the manufacture of most of our subscriber equipment and for some of the components required in the manufacture of our end-user subscriber equipment and our ability to purchase parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events; and •reliance on a few significant customers, particularly agencies of theU.S. government, for a substantial portion of our revenue, as a result of which the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing 44 -------------------------------------------------------------------------------- basis, we evaluate our estimates, including those related to revenue recognition, income taxes, useful lives of property and equipment, loss contingencies, and other estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies we believe to be most critical to understanding our financial results and condition and that require complex and subjective management judgments are discussed below. Our accounting policies are more fully described in Note 2 in Item 8 "Financial Statements and Supplementary Data" included in this report. Please see the notes to our consolidated financial statements for a full discussion of these significant accounting policies.
Revenue Recognition
We sell services and equipment through contracts with our customers. We evaluate whether a contract exists as it relates to collectibility of the contract. Once a contract is deemed to exist, we evaluate the transaction price including both fixed and variable consideration. The variable consideration contained within our contracts with customers may include discounts, credits and other similar items. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained. Therefore, we include constrained consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration or collectibility is subsequently resolved. Variable consideration estimates are updated at the end of each quarter and collectibility assessments are evaluated with new customers, or on an ongoing basis if initially deemed not probable, and updated as facts and circumstances change. We sell 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. We recognize revenue from (i) the prepaid services upon the use of the e-voucher or prepaid card by the customer and (ii) the estimated pattern of use. 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 term when purchased. Revenue associated with some of our fixed-price engineering services arrangements is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligation. We recognize revenue on cost-plus-fixed-fee arrangements to the extent of estimated costs incurred plus the applicable fees earned. If actual results are not consistent with our estimates or assumptions, we may be exposed to changes to earned and unearned revenue that could be material to our results of operations. Income Taxes We account for income taxes using the asset and liability approach. This approach requires that we recognize deferred tax assets and liabilities based on differences between the financial statement bases and tax bases of our assets and liabilities. Deferred tax assets and liabilities are recorded based upon enacted tax rates for the period in which the deferred tax items are expected to reverse. Changes in tax laws or tax rates in various jurisdictions are reflected in the period of change. Significant judgment is required in the calculation of our tax provision and the resulting tax liabilities as well as our ability to realize our deferred tax assets. Our estimates of future taxable income and any changes to such estimates can significantly impact our tax provision in a given period. Significant judgment is required in determining our ability to realize our deferred tax assets related to federal, state and foreign tax attributes within their carryforward periods including estimating the amount and timing of the future reversal of deferred tax items in our projections of future taxable income. A valuation allowance is established to reduce deferred tax assets to the amounts we expect to realize in the future. We also recognize tax benefits related to uncertain tax positions only when we estimate that it is "more likely than not" that the position will be sustainable based on its technical merits. If actual results are not consistent with our estimates and assumptions, this may result in material changes to our income tax provision. The Tax Cuts and Jobs Act of 2017, enacted in December of 2017, or the Tax Act, introduced significant changes toU.S. income tax law that have a meaningful impact on our provision for income taxes. Due to the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded these estimates in our financial statements. Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and calculations of the various provisions. During 2019 and 2020, theU.S. Treasury Department , as well as the Internal Revenue Service, orIRS , and other standard-setting bodies issued guidance related to certain provisions in the Tax Act. These same standard-setting bodies may issue additional guidance on how the provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data, interpret the Tax Act 45 --------------------------------------------------------------------------------
and analyze any additional guidance issued by the
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated or amortized over their estimated useful lives. We apply judgment in determining the useful lives based on factors such as engineering data, our long-term strategy for using the assets, the manufacturer's estimated design life for the assets, laws and regulations that could impact the useful lives of the assets and other economic factors. In evaluating the useful lives of our satellites, we assess the current estimated operational life of the satellites, including the potential impact of environmental factors on the satellites, ongoing operational enhancements and software upgrades. Additionally, we review engineering data relating to the operation and performance of our satellite network. We depreciate our satellites over the shorter of their potential operational life or the period of their expected use. The appropriateness of the useful lives is evaluated on a quarterly basis or as events occur that require additional assessment. The upgraded satellites that have been placed into service are depreciated using the straight-line method over their respective estimated useful lives. If the estimated useful lives of our upgraded satellites change, it could have a material impact on the timing of the recognition of depreciation expense. During the construction period for our upgraded satellite constellation, assets under construction primarily consisted of costs incurred associated with the design, development and launch of the upgraded satellites, upgrades to our current infrastructure and ground systems and internal software development costs. We capitalized a portion of the interest on the BPIAE Facility during the construction period of the upgraded satellite constellation. Capitalized interest was added to the cost of the upgraded satellites. Once these assets were placed in service, they are depreciated using the straight-line method over their respective estimated useful lives. During each year end, we evaluate the useful lives of all assets under construction. 46 --------------------------------------------------------------------------------
Comparison of Our Results of Operations for the Year Ended
Year Ended December 31, % of Total % of Total Change ($ In thousands) 2020 Revenue 2019 Revenue Dollars Percent Revenue: Service revenue Commercial$ 362,208 62 %$ 350,026 63 %$ 12,182 3 % Government 100,887 17 % 97,132 17 % 3,755 4 % Total service revenue 463,095 79 % 447,158 80 % 15,937 4 % Subscriber equipment 86,119 15 % 82,856 15 % 3,263 4 % Engineering and support services 34,225 6 % 30,430 5 % 3,795 12 % Total revenue 583,439 100 % 560,444 100 % 22,995 4 % Operating expenses: Cost of services (exclusive of depreciation and amortization) 91,097 16 % 94,958 17 % (3,861) (4) % Cost of subscriber equipment 51,596 9 % 50,186 9 % 1,410 3 % Research and development 12,037 2 % 14,310 2 % (2,273) (16) % Selling, general and administrative 90,052 15 % 93,165 17 % (3,113) (3) % Depreciation and amortization 303,174 52 % 297,705 53 % 5,469 2 % Total operating expenses 547,956 94 % 550,324 98 % (2,368) 0 % Operating income 35,483 6 % 10,120 2 % 25,363 251 % Other income (expense): Interest expense, net (94,271) (16) % (115,396) (21) % 21,125 (18) % Loss on extinguishment of debt (30,209) (5) % (111,710) (20) % 81,501 (73) % Other income (expense), net 33 0 % (1,133) 0 % 1,166 (103) % Total other expense (124,447) (21) % (228,239) (41) % 103,792 (45) % Loss before income taxes (88,964) (15) % (218,119) (39) % 129,155 (59) % Income tax benefit 32,910 5 % 56,120 10 % (23,210) (41) % Net loss$ (56,054) (10) %$ (161,999) (29) %$ 105,945 (65) %
Commercial Service Revenue
Year Ended
2020 2019 Change Billable Billable Billable Revenue Subscribers (1) ARPU (2) Revenue Subscribers (1) ARPU (2) Revenue Subscribers ARPU (Revenue in millions and subscribers in thousands) Commercial services: Voice and data$ 168.6 350$ 40 $ 173.1 352$ 41 $ (4.5) (2)$ (1) IoT data 97.0 962$ 9.16 96.4 802$ 11.10 0.6 160$ (1.94) Broadband (3) 36.0 11.7$ 266 30.5 10.8$ 248 5.5 0.9$ 18 Hosted payload and other data 60.6 N/A 50.0 N/A 10.6 N/A Total commercial services$ 362.2 1,324$ 350.0 1,165$ 12.2 159 (1)Billable subscriber numbers are shown as of the end of the respective period. (2)Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the 47 -------------------------------------------------------------------------------- period and then dividing the result by the number of months in the period. Billable subscriber and ARPU data is not applicable for hosted payload and other data service revenue items. (3)Commercial broadband consists of Iridium OpenPort and Iridium Certus broadband services, which were previously reported in commercial voice and data revenue. Prior year periods have been conformed to this presentation. For the year endedDecember 31, 2020 , total commercial revenue increased$12.2 million , or 3%, due to increased hosted payload and other data services revenue and increased commercial broadband revenue. Hosted payload and other data service revenue increased$10.6 million , or 21%, primarily due to increasedAireon data service fees related to a contractual step-up and increasedAireon power fees. Commercial broadband revenue increased$5.5 million , or 18%, from the prior year period, principally due to sales of Iridium Certus broadband services, which were commercially introduced inJanuary 2019 . Commercial IoT data revenue also increased slightly, up$0.6 million , or 1%, over the prior year period. This primarily reflects a 20% increase in commercial IoT data billable subscribers, primarily from continued strength in consumer personal communications devices, offset in part by a decrease in ARPU, driven by the decrease in usage revenue related to COVID-19, particularly with aviation customers, and an increase in the proportion of consumer personal communications device users comprising IoT subscribers, as users of these devices typically utilize lower ARPU plans. The increases in revenue were partially offset by a$4.5 million , or 3%, decline in commercial voice and data revenue from the prior year resulting from a decrease in subscribers and decreased usage following mobility restrictions associated with the COVID-19 pandemic. Government Service Revenue Year Ended December 31, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) Revenue Subscribers (1) Revenue Subscribers
(Revenue in millions and subscribers in thousands)
Government service revenue$ 100.9 152$ 97.1 135$ 3.8 17
(1)Billable subscriber numbers shown are at the end of the respective period.
We provide airtime and airtime support toU.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services contract, or the EMSS Contract. Under the terms of this agreement, authorized customers utilize specified Iridium airtime services provided through theU.S. government's dedicated gateway. The fee is not based on subscribers or usage, allowing an unlimited number of users access to the services. For the year endedDecember 31, 2020 , government service revenue increased$3.8 million from the prior year period as a result of the higher pricing in the new EMSS Contract.
Subscriber Equipment Revenue
Subscriber equipment revenue increased$3.3 million , or 4%, to$86.1 million for the year endedDecember 31, 2020 compared to the prior year, primarily due to an increase in the volume and higher average selling price of L-band transceivers and an increase in volume of IoT device sales, partially offset by a decrease in the volume of handset sales.
Engineering and Support Service Revenue
Year Ended December 31, 2020 2019 Change (In millions) Commercial$ 4.5 $ 2.8 $ 1.7 Government 29.7 27.6 2.1 Total$ 34.2 $ 30.4 $ 3.8 Engineering and support service revenue increased by$3.8 million , or 12%, for the year endedDecember 31, 2020 compared to the prior year primarily as a result of an increase in the volume of contracted work to enable services for theU.S. government and an increase in the volume of work for commercial customers, primarily related to theAireon hosted payload operations center. 48 --------------------------------------------------------------------------------
Operating Expenses
Cost of Services (exclusive of depreciation and amortization)
Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services, and cost of services for government and commercial engineering and support service revenue. Cost of services (exclusive of depreciation and amortization) decreased by$3.9 million , or 4%, for the year endedDecember 31, 2020 compared to the prior year, primarily as a result of a decrease in in-orbit insurance costs, which were amortized over a one-year period from the in-service date, as we completed the placement of upgraded satellites in-orbit inFebruary 2019 . This decrease was offset in part by higher costs to support the new EMSS Contract and an increase in the volume of contracted engineering and support services, as noted above.
Cost of Subscriber Equipment
Cost of subscriber equipment includes the direct costs of equipment sold, which consist of manufacturing costs, allocation of overhead, and warranty costs.
Cost of subscriber equipment increased$1.4 million , or 3%, for the year endedDecember 31, 2020 compared to the prior year period primarily due to the increase in the volume of L-band transceivers and IoT device sales, as described above. Research and Development Research and development expenses decreased by$2.3 million , or 16%, for the year endedDecember 31, 2020 compared to the prior year period primarily due to decreased spend on devices for our upgraded network.
Selling, General and Administrative
Selling, general and administrative expenses that are not directly attributable to the sale of services or products include sales and marketing costs as well as employee-related expenses (such as salaries, wages, and benefits), legal, finance, information technology, facilities, billing and customer care expenses. Selling, general and administrative expenses decreased by$3.1 million , or 3%, for the year endedDecember 31, 2020 compared to the prior year, primarily due to a decrease in management incentive compensation and decreased spend on travel and marketing related events as a result of COVID-19. These decreases were offset by an increase in wages and equity compensation associated with an increase in headcount. Depreciation and Amortization Depreciation and amortization expense increased by$5.5 million , or 2%, for the year endedDecember 31, 2020 compared to the prior year, primarily due to the increased number of upgraded satellites in service during the current period as we completed the replacement of our first-generation satellites inFebruary 2019 . As the upgraded satellites are the largest proportion of our asset base, we anticipate depreciation and amortization to remain relatively consistent over the next several years. Other Income (Expense) Interest Expense, net Interest expense, net, for the year endedDecember 31, 2020 was$94.3 million , compared to$115.4 million for the prior year period. The decrease was primarily related to the impact of the refinancing of our debt including a decrease in the weighted average effective interest rate and lower average outstanding borrowings under our total debt obligations. The decrease was offset in part by less interest being capitalized as the average balance of satellites in construction decreased in 2020 as upgraded satellites were completed in the prior year and less interest income. 49 --------------------------------------------------------------------------------
Loss on Extinguishment of Debt
Loss on extinguishment of debt was$30.2 million for the year endedDecember 31, 2020 , compared to$111.7 million for the prior year period. DuringNovember 2019 , we issued our Term Loan, and used the proceeds of the Term Loan, along with our DSRA and cash on hand to repay in full all of the indebtedness outstanding under the BPIAE Facility, including premiums for early prepayment. DuringFebruary 2020 , we closed on an additional$200.0 million under our Term Loan and used these proceeds, together with cash on hand, to prepay all of the indebtedness outstanding under the Notes, including premiums for early prepayment. In each case, we wrote off the remaining unamortized debt issuance costs, resulting in the loss on extinguishment of debt.
Income Tax Benefit
For the year endedDecember 31, 2020 , our income tax benefit was$32.9 million , compared to an income tax benefit of$56.1 million for the prior year. Our effective tax rate was approximately 37.0% for the year endedDecember 31, 2020 compared to 25.7% for the prior year. The decrease in income tax benefit was primarily related to a decrease in loss before income taxes compared to the prior year. If our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly. See Note 1 2 to our consolidated financial statements for more detail on the individual items impacting our effective tax rate for the years.
Net Loss
Net loss was$56.1 million for the year endedDecember 31, 2020 , compared to net loss of$162.0 million during the prior year. This decrease in net loss was primarily the result of the$81.5 million decrease in loss on extinguishment of debt, the$23.0 million increase in total revenues, and the$21.1 million decrease in interest expense, net, as described above, partially offset by the$23.2 million decrease in income tax benefit, as described above. 50 --------------------------------------------------------------------------------
Comparison of Our Results of Operations for the Year Ended
Year Ended December 31, % of Total % of Total Change ($ In thousands) 2019 Revenue 2018 Revenue Dollars Percent Revenue: Service revenue Commercial$ 350,026 63 %$ 318,757 61 %$ 31,269 10 % Government 97,132 17 % 88,000 17 % 9,132 10 % Total service revenue 447,158 80 % 406,757 78 % 40,401 10 % Subscriber equipment 82,856 15 % 97,848 19 % (14,992) (15) % Engineering and support services 30,430 5 % 18,403 3 % 12,027 65 % Total revenue 560,444 100 % 523,008 100 % 37,436 7 % Operating expenses: Cost of services (exclusive of depreciation and amortization) 94,958 17 % 86,016 16 % 8,942 10 % Cost of subscriber equipment 50,186 9 % 56,857 11 % (6,671) (12) % Research and development 14,310 2 % 22,429 4 % (8,119) (36) % Selling, general and administrative 93,165 17 % 97,846 19 % (4,681) (5) % Depreciation and amortization 297,705 53 % 218,207 42 % 79,498 36 % Total operating expenses 550,324 98 % 481,355 92 % 68,969 14 % Operating income 10,120 2 % 41,653 8 % (31,533) (76) % Other income (expense): Interest expense, net (115,396) (21) % (55,149) (11) % (60,247) 109 % Loss on extinguishment of debt (111,710) (20) % (7,292) (1) % (104,418) 1,432 % Other income (expense), net (1,133) 0 % 139 0 % (1,272) (915) % Total other expense (228,239) (41) % (62,302) (12) % (165,937) 266 % Loss before income taxes (218,119) (39) % (20,649) (4) % (197,470) 956 % Income tax benefit 56,120 10 % 7,265 1 % 48,855 672 % Net loss$ (161,999) (29) %$ (13,384) (3) %$ (148,615) 1,110 % Commercial Service Revenue Year Ended December 31, 2019 2018 Change Billable Billable Billable Revenue Subscribers (1) ARPU (2) Revenue Subscribers (1) ARPU (2) Revenue Subscribers ARPU (Revenue in millions and subscribers in thousands) Commercial services: Voice and data$ 203.6 363$ 47 $ 193.2 361$ 45 $ 10.4 2$ 2 IoT data 96.4 802$ 11.10 85.1 647$ 12.26 11.3 155$ (1.16)
Hosted payload and other data 50.0 N/A 40.4 N/A 9.6 N/A Total Commercial$ 350.0 1,165$ 318.7 1,008$ 31.3 157 (1)Billable subscriber numbers are shown as of the end of the respective period. (2)Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period. Billable subscriber and ARPU data is not applicable for hosted payload and other data service revenue items. 51 -------------------------------------------------------------------------------- For the year endedDecember 31, 2019 , total commercial revenue increased$31.3 million , or 10%, due to increased revenue across all commercial services compared to the prior period. Commercial IoT data revenue increased$11.3 million , or 13%, from the prior year period primarily due to a 24% increase in commercial IoT data billable subscribers primarily from continued strength in consumer personal communications devices. This higher volume of new personal communication subscribers caused overall IoT ARPU to be lower. Commercial voice and data revenue increased$10.4 million , or 5%, from the prior year period. This increase was principally due to price increases in access and roaming fees that were implemented during the second quarter of 2018. The increase in commercial voice and data revenue was also due to increased broadband subscribers. Hosted payload and other data service revenue increased$9.6 million , or 24%, primarily due to revenue recognition from hosting services and increased data services due to an increase in the number of upgraded satellites in service, both related toAireon and L3Harris. Government Service Revenue Year Ended December 31, 2019 2018 Change Billable Billable Billable Revenue Subscribers (1) Revenue Subscribers (1) Revenue Subscribers (Revenue in millions and subscribers in thousands) Government service revenue$ 97.1 135$ 88.0 113$ 9.1 22
(1)Billable subscriber numbers shown are at the end of the respective period.
We provide airtime and airtime support toU.S. government and other authorized customers pursuant to our EMSS Contract. Under the terms of this agreement, authorized customers utilize certain Iridium airtime services provided through theU.S. government's dedicated gateway. The fee is not based on subscribers or usage, allowing an unlimited number of users access to the services. Immediately prior to entering into the EMSS Contract inSeptember 2019 , we were providing airtime service at varying monthly rates to theU.S. government under month-to-month extensions of our previous EMSS contract, following the expiration of a six-month extension onApril 21, 2019 . For the year endedDecember 31, 2019 , government service revenue increased$9.1 million from the prior year period as a result of the month-to-month extensions we agreed to with theU.S. government while the EMSS Contract was being negotiated and the higher monthly rate once the EMSS Contract was executed and became effective onSeptember 15, 2019 . Subscriber Equipment Revenue Subscriber equipment revenue decreased$15.0 million , or 15%, to$82.9 million for the year endedDecember 31, 2019 compared to the prior year. This decrease was primarily due to a decrease in volume of handset sales and Iridium Pilot unit sales, partially offset by an increase in the volume ofShort Burst Data devices and Iridium Certus devices. Handset sales in 2018 were abnormally strong. Engineering and Support Service Revenue Year Ended December 31, 2019 2018 Change (In millions) Commercial$ 2.8 $ 0.7 $ 2.1 Government 27.6 17.7 9.9 Total$ 30.4 $ 18.4 $ 12.0 Engineering and support service revenue increased by$12.0 million , or 65%, for the year endedDecember 31, 2019 compared to the prior year primarily as a result of an increase in the volume of contracted work to enable services for theU.S. government. 52 -------------------------------------------------------------------------------- Operating Expenses Cost of Services (exclusive of depreciation and amortization) Cost of services (exclusive of depreciation and amortization) increased by$8.9 million , or 10%, for the year endedDecember 31, 2019 compared to the prior year, primarily as a result of an increase in the volume of contracted engineering and support services as noted above. This increase was also driven by higher satellite operations support associated with a greater number of upgraded satellites in service during the current period, corresponding with higher levels of activity directed towards operating the completed system. These increases were partially offset by a decrease in in-orbit insurance costs, which are amortized over a one-year period from the launch date, as we have completed the placement of new satellites in-orbit. Cost of Subscriber Equipment Cost of subscriber equipment decreased$6.7 million , or 12%, for the year endedDecember 31, 2019 compared to the prior year period primarily due to the decreased volume of handset and Iridium Pilot unit sales, partially offset by an increase in the volume of Short Burst Data devices and Iridium Certus devices.
Research and Development
Research and development expenses decreased by$8.1 million , or 36%, for the year endedDecember 31, 2019 compared to the prior year period primarily due to decreased spend on devices for our upgraded network.
Selling, General and Administrative
Selling, general and administrative expenses that are not directly attributable to the sale of services or products include sales and marketing costs as well as employee-related expenses (such as salaries, wages, and benefits), legal, finance, information technology, facilities, billing and customer care expenses. Selling, general and administrative expenses decreased by$4.7 million , or 5%, for the year endedDecember 31, 2019 compared to the prior year, primarily due to a decrease in professional fees, including lower consulting and regulatory fees, as well as a decrease in sales and marketing costs. Depreciation and Amortization Depreciation and amortization expense increased by$79.5 million , or 36%, for the year endedDecember 31, 2019 compared to the prior year, primarily due to the increased number of new satellites in service during the current period as we completed the replacement of our first-generation satellites.
Other Income (Expense)
Interest Expense, net
Interest expense, net, for the year endedDecember 31, 2019 was$115.4 million , compared to$55.1 million for the prior year period. The increase in interest expense is primarily related to a decrease in interest being capitalized as the average balance of satellites in construction decreased as upgraded satellites were completed. In addition, during the years endedDecember 31, 2019 and 2018, we incurred approximately$34.1 million and$26.3 million , respectively, in interest on the Notes that were issued inMarch 2018 , resulting in only nine months of interest in 2018.
Loss on Extinguishment of Debt
DuringNovember 2019 , we issued our Term Loan, and used the proceeds of the Term Loan, along with the our DSRA and cash on hand to repay in full all of the indebtedness outstanding under the BPIAE Facility, including premiums for early prepayment. In conjunction with the prepayment of the BPIAE Facility, we wrote off the remaining unamortized debt issuance costs. We also used proceeds received fromAireon and our Notes to extinguish debt. These prepayments resulted in a loss on extinguishment of debt of$111.7 million and$7.3 million for the years endedDecember 31, 2019 and 2018, respectively. The 2018 amount was previously included within interest expense. 53 --------------------------------------------------------------------------------
Income Tax Benefit
For the year endedDecember 31, 2019 , our income tax benefit was$56.1 million , compared to an income tax benefit of$7.3 million for the prior year. Our effective tax rate was approximately 25.7% for the year endedDecember 31, 2019 compared to 35.4% for the prior year. The increase in income tax benefit was primarily related to an increase in loss before income taxes compared to the prior year, stock compensation, tax credits as well as nonrecurring adjustments to our deferred tax assets and liabilities related to state law changes. If our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly. See Note 1 2 to our consolidated financial statements for more detail on the individual items impacting our effective tax rate for the years.
Net Loss
Net loss was$162.0 million for the year endedDecember 31, 2019 , compared to net loss of$13.4 million during the prior year period. This increase in net loss was primarily the result of the$104.4 million increase in loss on extinguishment of debt, the$79.5 million increase in depreciation and amortization expense and the$60.2 million increase in interest expense, net, as described above, partially offset by the$37.4 million increase in total revenues and the$48.9 million increase in income tax benefit, as described above. 54 --------------------------------------------------------------------------------
Liquidity and Capital Resources
InNovember 2019 , we issued our Term Loan totaling$1,450.0 million , with an accompanying$100.0 million Revolving Facility. We used the proceeds of the Term Loan, cash in our DSRA and cash on hand to repay in full all of the indebtedness outstanding under the BPIAE Facility, including premiums for early prepayment. InFebruary 2020 , we issued an additional$200.0 million under our Term Loan and used the proceeds and approximately$183.5 million of cash on hand to repay in full all of the indebtedness outstanding under our Notes, including premiums for early repayment. These additional funds have all of the same terms as the initial borrowing under the Term Loan and were issued at a premium of 1.0% to face value. OnJanuary 20, 2021 , we repriced our Term Loan. The Term Loan now bears interest at an annual rate of LIBOR plus 2.75%, with a 1.00% LIBOR floor. All other terms remain the same. To reprice the Term Loan, we incurred additional financing costs of$3.4 million . As ofDecember 31, 2020 , we reported an aggregate balance of$1,637.6 million in borrowings under the Term Loan in our consolidated balance sheet, net of$24.0 million of deferred financing costs for a net balance of$1,613.6 million outstanding. We have not drawn on our Revolving Facility. Our Term Loan contains no financial maintenance covenants. With respect to the Revolving Facility, we are required to maintain a consolidated first lien net leverage ratio of no greater than 6.25 to 1 if more than 35% of the Revolving Facility has been drawn. The Credit Agreement contains other customary representations and warranties, affirmative and negative covenants, and events of default. The Credit Agreement contains a mandatory prepayment mechanism with respect to a portion of our excess cash flow (as defined in the Credit Agreement). It provides for specified exceptions, baskets measured as a percentage of trailing twelve months of earnings before interest, taxes, depreciation and amortization, and unlimited exceptions in the case of incurring indebtedness and liens and making investments, dividend payments, and payments of subordinated indebtedness, as well as a phase-out of the mandatory excess cash flow prepayments, based on achievement and maintenance of specified leverage ratios. The Credit Agreement permits repayment, prepayment, and repricing transactions. Our mandatory excess cash flow prepayment, as specified in the Credit Agreement, was$12.6 million as ofDecember 31, 2020 . This amount will be paid in 2021 and counts towards our required quarterly principal payments under the Term Loan. We were in compliance with all other covenants under the Credit Agreement as ofDecember 31, 2020 . As ofDecember 31, 2020 , our total cash and cash equivalents balance was$237.2 million , our marketable securities balance was$7.5 million , and we had$100.0 million of borrowing availability under our Revolving Facility. Our principal sources of liquidity are cash, cash equivalents, marketable securities and internally generated cash flows. Our principal liquidity requirements over the next twelve months are primarily principal and interest on the Term Loan and share repurchases under the share repurchase program described in Note 10
.
We believe our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.
Cash Flows - Comparison of the Year Ended
The following table shows our consolidated cash flows:
Year Ended December 31, Statement of Cash Flows 2020 2019 Change (in thousands)
Net cash provided by operating activities
$ (46,470) $ (127,819) $ 81,349 Net cash used in financing activities$ (188,186) $ (313,280) $ 125,094 55
--------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net cash provided by operating activities for the year endedDecember 31, 2020 increased$51.6 million from the prior year period. Net loss, as adjusted for non-cash activities, improved by$36.6 million over the prior year, primarily due to the$105.9 million increase in net income, partially offset by the non-cash$81.5 million decrease in the loss on extinguishment of debt. Net cash from operating activities also increased as a result of working capital changes by approximately$15.0 million . This increase was primarily the result of timing of accounts receivable collections, as well as lower purchases of inventory in 2020, compared to the prior year. In 2019, there was an increase in inventory primarily associated with last-time purchases of manufacturers' discontinued parts that did not recur in 2020. These improvements in cash were offset in part by a decrease in interest payable compared to the prior year. InNovember 2019 andFebruary 2020 , we replaced our Credit Facility and Notes, respectively, with the Term Loan, resulting in monthly interest payments and an increase in cash used compared to previous semi-annual interest payments. As a result, there was minimal interest payable in the 2020 working capital balance for the Term Loan.
Cash Flows from Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2020 decreased$81.3 million from the prior year period primarily due to a decrease in capital expenditures as we completed payments for the construction of our upgraded constellation in 2019. We estimate our capital expenditures will average approximately$40.0 million per year until 2029.
Cash Flows from Financing Activities
Net cash used in financing activities for the year endedDecember 31, 2020 decreased$125.1 million compared to the prior year period primarily due to utilizing our cash to pay down debt. This resulted in principal payments and related costs, net of borrowings of$196.4 million for 2020, compared to$313.8 million for 2019. See Note 7 to our consolidated financial statements included in this report for further discussion of our indebtedness. Cash Flows - Comparison of the Year EndedDecember 31, 2019 and the Year EndedDecember 31, 2018 The following table shows our consolidated cash flows: Year Ended December 31, Statement of Cash Flows 2019 2018 Change (in thousands) Net cash provided by operating activities$ 198,143 $ 263,709 $ (65,566) Net cash used in investing activities$ (127,819) $ (378,912) $ 251,093 Net cash (used in) provided by financing$ (313,280) $ 193,503 $ (506,783) activities
Cash Flows from Operating Activities
Net cash provided by operating activities for the year endedDecember 31, 2019 decreased$65.6 million from the prior year period primarily due to a decrease in working capital of approximately$65.5 million . This is primarily the result of less interest from the Credit Facility being capitalized as the average balance of satellites under construction decreased as satellites were launched and placed into service, which would have been recorded as an investing activity and is now recorded as an operating activity. Additionally, in November of 2019, we refinanced our Credit Facility resulting in monthly interest payments compared to previous semi-annual payments. As such, there is no interest payable in the 2019 working capital balance for the new Term Loan.
Cash Flows from Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2019 decreased$251.1 million from the prior year period primarily due to a decrease in capital expenditures as we completed payments for the construction of our upgraded constellation. 56 --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net cash used in financing activities was$313.3 million for the year endedDecember 31, 2019 , compared to net cash provided by financing activities of$193.5 million for the year endedDecember 31, 2018 . The increase in cash used in financing activities is a direct result of our deleveraging of our outstanding debt. In 2019, the combination of scheduled principal payments and the refinancing resulted in net payments of$313.8 million . In 2018, the issuance of the Notes and scheduled principal payments resulted in net borrowings of$198.5 million . See Note 7 to our condensed consolidated financial statements included in this report for further discussion of our indebtedness.
Off-Balance Sheet Arrangements
We do not currently have, nor have we had in the last three years, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Seasonality
Our results of operations have been subject to seasonal usage changes for commercial customers, and our results will be affected by similar seasonality going forward. March through October are typically the peak months for commercial voice services revenue and related subscriber equipment sales.U.S. government revenue and commercial IoT revenue have been less subject to seasonal usage changes. 57
--------------------------------------------------------------------------------
© Edgar Online, source