IRIDIUM COMMUNICATIONS INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
A discussion regarding our financial condition and results of operations for the year ended
December 31, 2020compared to the year ended December 31, 2019can be found in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SECon February 11, 2021.
We were initially formed in 2007 as
GHL Acquisition Corp., a special purpose acquisition company. In 2009, we acquired all the outstanding equity in Iridium Holdings LLCand changed our name to Iridium Communications Inc.
Overview of our company
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, the
U.S.and foreign governments, non-governmental organizations and consumers via our 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. We sell our products and services to commercial end users through a wholesale distribution network, encompassing approximately 100 service providers, 285 value-added resellers, or VARs, and 85 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. At December 31, 2021we had approximately 1,723,000 billable subscribers worldwide, an increase of 247,000, or 17%, from approximately 1,476,000 billable subscribers at December 31, 2020. 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 80% and 79% of total revenue for the years ended December 31, 2021and 2020, 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, principally Aireon, 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.
Service Agreements for Satellite Constellation Upgrade
In 2019, we completed the full replacement of our first generation satellites with our upgraded constellation at a cost of approximately
June 2010, we executed a primarily fixed price full scale development contract, or FSD, with Thales Alenia Spacefor 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 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 with Space Exploration Technologies Corp., or SpaceX, with a total price of $510.8 million. Final payments to SpaceXfor these launches were made during the second quarter of 2019. These costs were capitalized as 42 --------------------------------------------------------------------------------
construction in progress in property, plant and equipment, net in the accompanying consolidated balance sheets. We shared a launch with
November 2019, we borrowed our $1,450.0 millionTerm Loan with an accompanying $100.0 millionrevolving loan available to us, or the Revolving Facility. Both facilities are under a credit agreement with the lenders, or the Credit Agreement. We used the proceeds of the Term Loan, along with our debt service reserve account and cash on hand to repay in full all of the indebtedness outstanding under a previous 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. In February 2020, we borrowed an additional $200.0 millionunder our Term Loan and used the proceeds and approximately $183.5 millionof cash on hand to repay in full all of the indebtedness outstanding under senior unsecured promissory notes, or the Notes, including premiums for early repayment. In January 2021and July 2021, we repriced all borrowings outstanding under our Term Loan and incurred third-party financing costs of $3.6 millionand $1.3 million, respectively. As repriced, the Term Loan bears interest at an annual rate of LIBOR plus 2.50%, with a 0.75% LIBOR floor. All other terms of the Term Loan remain the same as before the repricing, including maturity in November 2026. The Revolving Facility bears interest at an annual rate of 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 to the consolidated financial statements included in this annual report for further discussion of our Term Loan. As of December 31, 2021, we reported an aggregate balance of $1,621.1 millionin borrowings under the Term Loan, before $23.1 millionof net deferred financing costs, for a net principal balance of $1,598.0 millionoutstanding in our consolidated balance sheet. 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. We were in compliance with all covenants under the Credit Agreement as of December 31, 2021. The Credit Agreement 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. The Credit Agreement provides for specified exceptions, including baskets measured as a percentage of trailing twelve months of earnings before interest, taxes, depreciation and amortization, or EBITDA, and unlimited exceptions based on achievement and maintenance of specified leverage ratios, for, among other things, incurring indebtedness and liens and making investments, restricted payments for dividends and share repurchases, and payments of subordinated indebtedness. The Credit Agreement permits repayment, prepayment, and repricing transactions and requires quarterly principal payments of 0.25% of the $1.65 billionprincipal amount as of February 2020. The Credit Agreement also contains a mandatory prepayment sweep mechanism with respect to a portion of our excess cash flow (as defined in the Credit Agreement), which is phased out based on achievement and maintenance of specified leverage ratios. As of December 31, 2021, our leverage ratio was below the specified level, and we were not required to make a mandatory prepayment with respect to 2021 cash flows. As of December 31, 2020, our mandatory excess cash flow prepayment, as specified in the Credit Agreement, was calculated to be $12.7 million. Lenders have the right to decline payment. As such, we paid $4.7 millionto lenders who did not decline payment in May 2021with respect to the 2020 cash flows. This amount counted towards our required quarterly principal payments through December 31, 2021. 43 --------------------------------------------------------------------------------
Derivative financial instruments
November 27, 2019, we executed a two-year interest rate swap (the "Swap") to mitigate variability in forecasted interest payments on a portion of our borrowings under the Term Loan. We paid a fixed rate of 1.565% per annum on the $1.0 billionnotional amount of the Swap, which expired in November 2021. We also entered into an interest rate swaption agreement (the "Swaption"), for which we paid a fixed rate of 0.50% per annum on the $1.0 billionnotional amount. We sold the Swaption in May 2021for $0.7 millionbut continued to pay the fixed rate through the expiration of the Swaption in November 2021. At inception, the Swap and Swaption (collectively, the "swap contracts") were designated as cash flow hedges for hedge accounting. The unrealized changes in market value were recorded in accumulated other comprehensive income (loss) and any remaining balance will be reclassified into earnings during the period in which the hedged transaction affects earnings. As a result of the repricing of the Term Loan in July 2021, we elected to de-designate the Swap as a cash flow hedge. Accordingly, as the related interest payments were still probable, the accumulated balance within other comprehensive income (loss) as of the de-designation date was amortized into earnings through the remaining term, and subsequent to de-designation, the changes in the valuation of the Swap were recorded directly into earnings. On July 21, 2021, we entered into an interest rate cap agreement (the "Cap") that began in December 2021upon the expiration of the Swap. The Cap manages our exposure to interest rate movements on a portion of the Term Loan now that the Swap has expired. The Cap provides the right for us to receive payment if one-month LIBOR exceeds 1.5%. Beginning in December 2021, we began to pay a fixed monthly premium based on an annual rate of 0.31% for the Cap. The Cap carried a notional amount of $1.0 billionas of December 31, 2021. The Cap is designed to mirror the terms of the Term Loan and to offset the cash flows being hedged. We designated the Cap as a cash flow hedge of the variability of the LIBOR-based interest payments on the Term Loan. The effective portion of the Cap's change in fair value will be recorded in accumulated other comprehensive income (loss) and will be reclassified into earnings during the period in which the hedged transaction affects earnings. See Note 8 to our consolidated financial statements included in this report for further discussion of our derivative financial instruments.
Senior Unsecured Notes
March 21, 2018, we issued $360.0 millionin aggregate principal under the Notes, before $9.0 millionof deferred financing costs, for a net principal balance of $351.0 millionin borrowings from the Notes. The Notes bore interest at 10.25% per annum and were due to mature on April 15, 2023. Interest was payable semi-annually on April 15and October 15, beginning on October 15, 2018, and principal would have been repaid in full upon maturity. As described above, the Notes were redeemed in full on February 13, 2020.
Total interest on debt and loss on extinguishment
Total interest incurred includes amortization of deferred financing fees and capitalized interest. To reprice the Term Loan in
January 2021and July 2021, we incurred third-party financing costs of $3.6 millionand $1.3 million, respectively. These costs were expensed and are included within interest expense on the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021. Total interest incurred during the years ended December 31, 2021, 2020 and 2019 was $72.8 million, $99.2 millionand $140.5 million, respectively. Interest incurred includes amortization of deferred financing fees of $4.3 million, $3.8 millionand $21.3 millionfor the years ended December 31, 2021, 2020 and 2019, respectively. Interest capitalized during the year ended December 31, 2021, 2020 and 2019 was $2.1 million, $3.2 millionand $15.1 million, respectively. As of December 31, 2021and 2020, accrued interest on the Term Loan was $0.1 millionand $0.2 million, respectively. As part of the repayment of our previous debt facility in November 2019, we incurred a loss of approximately $111.7 millionfor the early extinguishment. In February 2020, we incurred a loss of approximately $30.2 millionfor the early extinguishment of the Notes. In July 2021, certain lenders did not participate in the repricing of the Term Loan, described above. Those portions of the Term Loan were replaced by new or existing lenders. This resulted in a loss of approximately $0.9 million. These losses were recorded within other income (expense) on our consolidated statements of operations and comprehensive income (loss). 44 --------------------------------------------------------------------------------
Material trends and uncertainties
Our industry and our clientele have historically developed thanks to:
• demand for remote and reliable mobile communications services;
•a growing number of new products and services and associated applications;
•an extensive wholesale distribution network with access to diversified and geographically dispersed niche markets;
•increased demand for communication services by relief and relief organizations and emergency first responders;
•improving data transmission speeds for mobile satellite service offers;
•regulatory mandates requiring the use of mobile satellite services;
•a general fall in the prices of mobile satellite services and subscriber equipment; and
•the geographic expansion of the market thanks to the possibility of offering our services in other 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 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 business gateway and primary satellite network operations center;
•competition from other mobile satellite service providers and, to a lesser extent, the expansion of terrestrial cellular telephone systems and related pricing pressures;
•acceptance of our products by the market;
•regulatory requirements in existing and new geographic markets;
•rapid and significant technological changes in the telecommunications industry;
•our ability to generate sufficient internal cash flow to repay our debt;
•dependency on our wholesale distribution network to effectively market and sell our products, services and applications;
•reliance on a global supply chain, including 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 component parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events, including the COVID-19 pandemic; and •reliance on a few significant customers, particularly agencies of the
U.S.government, for a substantial portion of our revenue, as a result of which the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable.
Significant 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 in
the United States, or U.S.GAAP. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, 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 to the consolidated financial statements included in this report. 45
We sell services and equipment through contracts with our customers. We evaluate whether a contract exists as it relates to collectability 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 collectability is subsequently resolved. Variable consideration estimates are updated at the end of each quarter and collectability 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. We continually monitor the pattern of use for prepaid services. A change in the estimated pattern of use may impact our revenue recognition. 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.
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 and hosted payload revenue. 46 -------------------------------------------------------------------------------- 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. Comparison of Our Results of Operations for the Years Ended
December 31, 2021and 2020 Year Ended December 31, % of Total % of Total Change ($ In thousands) 2021 Revenue 2020 Revenue Dollars Percent Revenue: Service revenue Commercial $ 388,10463 % $ 362,20862 % $ 25,8967 % Government 103,887 17 % 100,887 17 % 3,000 3 % Total service revenue 491,991 80 % 463,095 79 % 28,896 6 % Subscriber equipment 92,071 15 % 86,119 15 % 5,952 7 % Engineering and support services 30,438 5 % 34,225 6 % (3,787) (11) % Total revenue 614,500 100 % 583,439 100 % 31,061 5 % Operating expenses: Cost of services (exclusive of depreciation and amortization) 97,020 16 % 91,097 16 % 5,923 7 % Cost of subscriber equipment 53,376 9 % 51,596 9 % 1,780 3 % Research and development 11,885 2 % 12,037 2 % (152) (1) % Selling, general and administrative 100,474 16 % 90,052 15 % 10,422 12 % Depreciation and amortization 305,431 50 % 303,174 52 % 2,257 1 % Total operating expenses 568,186 93 % 547,956 94 % 20,230 4 % Operating income 46,314 7 % 35,483 6 % 10,831 31 % Other income (expense): Interest expense, net (73,906) (12) % (94,271) (16) % 20,365 (22) % Loss on extinguishment of debt (879) 0 % (30,209) (5) % 29,330 (97) % Other income (expense), net (417) 0 % 33 0 % (450) (1,364) % Total other expense (75,202) (12) % (124,447) (21) % 49,245 (40) % Loss before income taxes (28,888) (5) % (88,964) (15) % 60,076 (68) % Income tax benefit 19,569 3 % 32,910 5 % (13,341) (41) % Net loss $ (9,319)(2) % $ (56,054)(10) % $ 46,735(83) % 47
-------------------------------------------------------------------------------- Commercial Service Revenue Year Ended December 31, 2021 2020 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
$ 175.6370 $ 41 $ 168.6350 $ 40 $ 7.020 $ 1IoT data 110.9 1,193 $ 8.5897.0 962 $ 9.1613.9 231 $ (0.58)Broadband (3) 43.0 13.2 $ 28836.0 11.7 $ 2667.0 1.5 $ 22Hosted payload and other data 58.6 N/A 60.6 N/A (2.0) N/A Total commercial services $ 388.11,576 $ 362.21,324 $ 25.9252 (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. (3)Commercial broadband consists of Iridium OpenPort and Iridium Certus broadband services. For the year ended December 31, 2021, total commercial revenue increased $25.9 million, or 7%, primarily as a result of increases in IoT, broadband, and voice and data revenue mainly driven by increases in billable subscribers. Commercial IoT revenue increased $13.9 million, or 14%, from the prior year. The increase in IoT revenue was driven by a 24% increase in IoT billable subscribers due to continued strength in personal communications devices, as well as the lifting of mobility restrictions that had been imposed due to COVID-19. The subscriber increase effect on revenue was partially offset by a 6% reduction in IoT ARPU, primarily due to the increased proportion of personal communication subscribers using lower ARPU plans, countered in part by an increase in usage and ARPU by aviation subscribers due to increases in air travel from the prior year. Commercial broadband revenue increased $7.0 million, or 20%, from the prior year, primarily due to the increase in broadband billable subscribers and an increase in ARPU associated with the increase in the mix of subscribers utilizing higher ARPU Iridium Certus broadband plans. Commercial voice and data revenue increased $7.0 million, or 4%, from the prior year, primarily due to an increase in volume across all voice and data services. These increases were offset in part by a decrease in hosted payload and other service revenue of $2.0 million, or 3%, compared to the prior year. This decrease was primarily due to a one-time data billing settlement that resulted in recognition of $1.3 millionin the prior year period, plus the recognition of an additional $1.4 millionof hosting data service revenue in the prior year due to an updated estimate of data service usage that did not recur in 2021. Government Service Revenue Year Ended December 31, 2021 2020 Change Billable Billable Billable Revenue Subscribers (1) Revenue Subscribers (1) Revenue Subscribers
(Revenues in millions and subscribers in thousands)
Government service revenue
$ 103.9147 $ 100.9152 $ 3.0(5)
(1)The billable subscriber numbers shown are at the end of the respective period.
We provide airtime and airtime support to
U.S.government and other authorized customers pursuant to our EMSS contract entered into in September 2019. Under this agreement, authorized customers utilize specified Iridium airtime services provided through the U.S.government's dedicated gateway. The fee is not based on subscribers or usage, allowing an unlimited number of users access to these services. The annual rate under the EMSS contract increased from $103.0 millionin the prior year to $106.0 millionduring the third quarter of 2021. 48 --------------------------------------------------------------------------------
Revenue from subscriber equipment
Subscriber equipment revenue increased
$6.0 million, or 7%, to $92.1 millionfor the year ended December 31, 2021compared to the prior year, primarily due to an increase in the volume of handset and IoT device sales, partially offset by a decrease in the volume of Iridium Pilot and L-band transceiver device sales.
Engineering and Support Services Revenue
Year Ended December 31, 2021 2020 Change (In millions) Commercial
$ 4.6 $ 4.5 $ 0.1Government 25.8 29.7 (3.9) Total $ 30.4 $ 34.2 $ (3.8)Engineering and support service revenue decreased by $3.8 million, or 11%, for the year ended December 31, 2021compared to the prior year primarily due to the episodic nature of contract work under certain government contracts.
Cost of services (excluding depreciation and amortization)
Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services, and cost of services for government and commercial engineering and support service revenue. Cost of services (exclusive of depreciation and amortization) increased by
$5.9 million, or 7%, for the year ended December 31, 2021compared to the prior year, primarily as a result of higher product support and network and satellite operation costs. These costs were higher in the current year primarily due to increased management incentive costs. This increase was partially offset by the decrease in work under certain government engineering contracts, as noted above.
Cost of subscriber equipment
The cost of subscriber equipment includes direct costs of equipment sold, which include manufacturing costs, overhead allocation and warranty costs.
Cost of subscriber equipment increased
$1.8 million, or 3%, for the year ended December 31, 2021compared to the prior year period primarily due to an increase in volume of higher margin handsets and an increase in IoT device sales, partially offset by a decrease in the volume of Iridium Pilot and L-band transceiver device sales, as described above.
Research and development
Research and development expenses decreased by
$0.2 million, or 1%, for the year ended December 31, 2021compared to the prior year period based on consistent spending on device-related features for our network.
Selling, general and administrative expenses
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 increased by
$10.4 million, or 12%, for the year ended December 31, 2021, primarily due to higher management incentive costs incurred in the current year. Management incentive costs were higher in the current year based on improved results and were lower in the prior year due to the impacts of the COVID-19 pandemic. The increase was partially offset by a decrease in stock appreciation rights expense in the current year resulting from changes in our stock valuation between the years. The increase was also offset by a decrease in bad debt expense and favorable settlements including social contribution tax credit received in the current year. 49 --------------------------------------------------------------------------------
Depreciation and amortization
Depreciation and amortization expense increased by
$2.3 million, or 1%, for the year ended December 31, 2021compared to the prior year. The increase was primarily due to software enhancements related to our Iridium Certus service line that were placed into service during July 2021. 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 ended December 31, 2021was $73.9 million, compared to $94.3 millionfor the prior year. The decrease resulted primarily from a decrease in the annual interest rate on our Term Loan to LIBOR plus 2.5%, with a 0.75% LIBOR floor, from an annual interest rate of LIBOR plus 3.75%, with a 1.0% LIBOR floor, as a result of the repricing of our Term Loan in January 2021and July 2021. The decrease in interest expense was offset in part by $4.9 millionof third-party financing costs paid in 2021, which were expensed as incurred, in connection with the repricing transactions.
Loss on extinguishment of debt
Loss on extinguishment of debt was
$0.9 millionfor the year ended December 31, 2021, compared to $30.2 millionfor the prior year. During July 2021, we repriced our Term Loan and wrote off unamortized debt issuance costs related to several lenders who did not participate in the repricing and whose portions of the Term Loan were replaced by new or existing lenders. The loss on extinguishment of debt in 2020 resulted from the write off of unamortized debt issuance costs when we closed on an additional $200.0 millionunder our Term Loan in February 2020and used the proceeds, together with cash on hand, to prepay all of the indebtedness outstanding under the Notes, including premiums for early prepayment. Income Tax Benefit For the year ended December 31, 2021, our income tax benefit was $19.6 million, compared to income tax benefit of $32.9 millionfor the prior year. Our effective tax rate was approximately 67.7% for the year ended December 31, 2021compared to 37.0% 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 12 to our consolidated financial statements for more detail on the individual items impacting our effective tax rate for the years.
Net loss was
$9.3 millionfor the year ended December 31, 2021, compared to net loss of $56.1 millionduring the prior year. The improvement primarily resulted from the $29.3 milliondecrease in loss on extinguishment of debt, the $20.4 milliondecrease in interest expense, net, and the $10.8 millionincrease in total operating income partially offset by the $13.3 milliondecrease in income tax benefit.
Cash and capital resources
Our current indebtedness consists exclusively of amounts outstanding under the Term Loan, the terms of which are described above under the section captioned "Term Loan." As of
December 31, 2021, we held non-cancelable purchase obligations of approximately $32.0 millionfor inventory purchases with Benchmark Electronics, Inc., or Benchmark, our primary third-party vendor. Our purchase obligations, all of which are due during 2022, increased $18.5 millionfrom 2020 primarily due to increased demand and recovery from supply-chain constraints experienced during 2021. As of December 31, 2021, our total cash and cash equivalents balance was $320.9 million, and we had $100.0 millionof borrowing availability under our Revolving Facility. In addition to the Revolving Facility, our principal sources of liquidity are cash, cash equivalents and internally generated cash flows. Other than the purchase obligation noted above, our principal liquidity requirements over the next twelve months are primarily required principal and interest on the Term Loan, which we expect to be $16.5 millionand, based on the current interest rate, approximately $60.0 million, respectively, as well as capital 50 -------------------------------------------------------------------------------- expenditures of $45.0 million, working capital and potential share repurchases under the share repurchase program described in Note 10 to our consolidated financial statements included in this report.
We estimate that our sources of liquidity will provide us with sufficient funds to meet our liquidity needs for at least the next 12 months.
Our significant long-term cash requirement is the repayment of the remaining principal amount under the term loan when it matures in 2026, which is expected to be
Cash Flow – Comparison of Years Ended
The following table presents our consolidated cash flows:
Year Ended December 31, Statement of Cash Flows 2021 2020 Change (in thousands)
Net cash flow generated by operating activities
Net cash used in investing activities
$ (36,382) $ (46,470) $ 10,088Net cash used in financing activities $ (182,469)$
Cash flow from operating activities
Net cash provided by operating activities for the year ended
December 31, 2021increased $53.1 millionfrom the prior year. Net loss, as adjusted for non-cash activities, improved by $41.3 millionover the prior year, primarily as a result of improved profitability. Net cash from operating activities also increased related to working capital changes of approximately $11.7 million. Cash flows from working capital increased primarily as a result of a decreased payout on management incentives in 2021 due to the COVID-19 impact on our 2020 financial results as compared to our expectations at the time the management incentives were originally established. Cash flows from working capital also increased as a result of lower interest payments associated with the completed retirement of the Notes in 2020 and the subsequent Term Loan repricing transactions in 2021. These increases were offset by net cash outflows resulting from the timing of customer collections and payments to vendors.
Cash flow from investing activities
Net cash used in investing activities for the year ended
December 31, 2021decreased $10.1 millionfrom the prior year period due primarily to maturities of marketable securities in the current year and purchases of marketable securities in the prior year. The movement in marketable securities was offset in part by a $3.5 millionincrease in capital expenditures. We continue to expect our capital expenditures to average approximately $40.0 millionper year until 2029.
Cash flow from financing activities
Net cash used in financing activities for the year ended
December 31, 2021decreased $5.7 millioncompared to the prior year period primarily due to lower net principal payments as we utilized our cash to pay down additional debt in 2020, offset by share repurchases we made in 2021. We repurchased and subsequently retired 4.3 million shares of our common stock during the year ended December 31, 2021, for a total purchase price of $163.4 million. The combination of full repayment of the Notes and additional borrowings under the Term Loan resulted in net payments of $193.8 millionfor the year ended December 31, 2020compared to net payments of $16.5 millionfor 2021. See Note 7 to our consolidated financial statements included in this report for further discussion of our indebtedness.
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. 51
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