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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-17 · 101 added, 129 removed, 198 unchanged (54% of the section changed)

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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.

Our low-earth orbit L-band satellite network provides reliable, weather-resilient 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.

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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.

We recognize revenue primarily from both the provision of services and the sale of equipment.

Service revenue represented 74% and 80% of total revenue for the years ended December 31, 2022 and 2021, respectively.

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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.

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 $3 billion.

In June 2010, we executed a primarily fixed price full scale development contract, or FSD, with Thales 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 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 SpaceX 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 with GFZ German Research Centre for Geosciences for which we received $29.8 million from them.

In November 2019, we borrowed our $1,450.0 million Term Loan with an accompanying $100.0 million revolving loan available to us, or the Revolving Facility.

Launch Services Agreements

During 2022, we entered into agreements with Space Exploration Technology Corp.

and Thales Alenia Space France for launch and related services, to launch up to five of our ground spare satellites.

The contract price under these agreements is approximately $40.0 million in the aggregate.

We currently expect the launch to occur in mid-2023.

In November 2019 and February 2020, we borrowed a total of $1,650.0 million in aggregate principal amount under a term loan with various lenders administered by Deutsche Bank AG, or the Term Loan, with an accompanying $100.0 million revolving 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 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 senior unsecured promissory notes, or the Notes, including premiums for early repayment.

In January 2021 and July 2021, we repriced all borrowings outstanding under our Term Loan and incurred third-party financing costs of $3.6 million and $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.

The Term Loan was repriced on multiple occasions and in December 2022 was amended to replace the original LIBOR base rate with SOFR.

The Term Loan now bears interest at an annual rate of adjusted SOFR (SOFR plus 0.10%) plus 2.50%, with a 0.75% adjusted SOFR floor.

We typically select a one-month interest period, with the result that interest is calculated using one-month SOFR.

All other terms of the Term Loan remain the same, including maturity in November 2026.

The Revolving Facility was also modified to use adjusted SOFR as the base rate beginning December 30, 2022.

All other material terms remain unchanged.

The Revolving Facility now bears interest at an annual rate of adjusted SOFR plus 3.75% (but without an adjusted SOFR floor) if and as drawn, with no original issue discount, a commitment fee of 0.5% per year on the undrawn amount, and a maturity date in November 2024.

See Note 7 to the consolidated financial statements included in this annual report for further discussion of our Term Loan.

In the fourth quarter of 2022, we elected to prepay $100.0 million of principal on the Term Loan.

As of December 31, 2022, we reported an aggregate balance of $1,504.6 million in borrowings under the Term Loan, before $17.4 million of net deferred financing costs, for a net principal balance of $1,487.2 million outstanding in our consolidated balance sheet.

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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 billion principal amount as of February 2020.

The Credit Agreement permits repayment, prepayment, and repricing transactions and requires quarterly principal payments of 0.25% (or $16.5 million per year), which began in June 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, 2022, our leverage ratio was below the specified level, and we were not required to make a mandatory prepayment with respect to 2022 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 million to lenders who did not decline payment in May 2021 with respect to the 2020 cash flows.

This amount counted towards our required quarterly principal payments through December 31, 2021.

Derivative Financial Instruments

On 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 billion notional 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 billion notional amount.

We previously entered into a long-term interest rate swap, or the Swap, to mitigate variability in forecasted interest payments on a portion of our borrowings under the Term Loan.

The Swap expired in November 2021.

Under the Swap, on the last business day of each month, we received variable interest payments based on one-month LIBOR from the counterparty.

We paid a fixed rate of 1.565% per annum on the Swap.

We also entered into an interest rate swaption agreement, or the Swaption, for which we paid a fixed annual rate of 0.50%.

We sold the Swaption in May 2021 for $0.7 million but 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 2021 upon 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 billion as of December 31, 2021.

At inception, the Swap and Swaption 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 was reclassified into earnings during the period in which the hedged transaction affected earnings.

Due to the changes made to the Term Loan as a result of the July 2021 repricing, at that time, we elected to de-designate the Swap as a cash flow hedge.

In July 2021, we entered into an interest rate cap agreement, or the Cap, that began in December 2021, following the expiration of the Swap.

The Cap manages our exposure to interest rate movements on a portion of the Term Loan through the maturity of the Term Loan in November 2026.

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.

We designated the Cap as a cash flow hedge of the variability of the LIBOR-based interest payments (now SOFR-based interest payments) on the Term Loan.

The effective portion of the Cap’s change in fair value is recorded in accumulated other comprehensive income (loss) and reclassified into earnings during the period in which the hedged transaction affects earnings.

In December 2022, we modified the Cap to replace the LIBOR base rate with SOFR, consistent with the amendment to the Term Loan.

With the replacement of LIBOR to SOFR, we receive a credit risk adjustment from the counterparty of 0.064%.

The adjusted Cap now provides us the right to receive payment from the counterparty if one-month SOFR exceeds 1.436% (1.5% less 0.064%).

Prior to the amendment, we received payment under the terms of the Cap if one-month LIBOR exceeded 1.5%.

We began paying a fixed monthly premium based on an annual rate of 0.31% for the Cap in December 2021.

The Cap carried a notional amount of $1.0 billion as of December 31, 2022 and 2021.

See Note 8 to our consolidated financial statements included in this report for further discussion of our derivative financial instruments.

Senior Unsecured Notes

On March 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 on April 15, 2023.

Interest was payable semi-annually on April 15 and 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 2021 and July 2021, we incurred third-party financing costs of $3.6 million and $1.3 million, respectively.

Due to the prepayments on the Term Loan in the fourth quarter of 2022, we incurred a $1.2 million loss on extinguishment of debt for the write-off of the related unamortized debt issuance costs for the portion of the Term Loan that was prepaid.

To reprice the Term Loan in 2021, we incurred third-party financing costs of $4.9 million.

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.

The repricings of the Term Loan in 2021 resulted in a $0.9 million loss on extinguishment of debt, as we wrote off the unamortized debt issuance costs related to the lenders who were fully repaid in an exchange of principal.

In February 2020, we used the proceeds of the Term Loan, together with cash on hand, to prepay and retire all of the indebtedness outstanding under then outstanding senior unsecured promissory notes, including premiums for early prepayment.

This resulted in a $30.2 million loss on extinguishment of debt during the year ended December 31, 2020, including the write off the remaining unamortized debt issuance costs.

Total interest incurred during the years ended December 31, 2022, 2021 and 2020 was $72.1 million, $72.8 million and $99.2 million, respectively.

Interest incurred includes amortization of deferred financing fees of $4.8 million, $4.3 million and $3.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Interest capitalized during the year ended December 31, 2021, 2020 and 2019 was $2.1 million, $3.2 million and $15.1 million, respectively.

Interest capitalized during the years ended December 31, 2022, 2021 and 2020 was $2.6 million, $2.1 million and $3.2 million, respectively.

As of December 31, 2022 and 2021, accrued interest on the Term Loan was $0.3 million and $0.1 million, respectively.

As part of the repayment of our previous debt facility in November 2019, we incurred a loss of approximately $111.7 million for the early extinguishment.

In February 2020, we incurred a loss of approximately $30.2 million for 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).

Material Trends and Uncertainties

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• regulatory requirements in existing and new geographic markets;

• challenges associated with global operations, including as a result of conflicts in or affecting markets in which we operate;

• rapid and significant technological changes in the telecommunications industry;

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Our accounting policies are more fully described in Note 2 to the consolidated financial statements included in this report.

Revenue Recognition

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.

We account for income taxes using the asset and liability approach.

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Operating income 76,679 10 % 46,314 7 % 30,365 66 %

Other income (expense):

Other expense:

Interest expense, net (65,089) (9) % (73,906) (12) % 8,817 (12) %

Loss on extinguishment of debt (1,187) 0 % (879) 0 % (308) 35 %

Other income (expense), net (417) 0 % 33 0 % (450) (1,364) %

Loss on equity method investments (1,496) 0 % — 0 % (1,496) 100 %

Other expense, net 107 0 % (417) 0 % 524 (126) %

Total other expense (67,665) (9) % (75,202) (12) % 7,537 (10) %

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) %

Income (loss) before income taxes 9,014 1 % (28,888) (5) % 37,902 (131) %

Income tax benefit (expense) (292) 0 % 19,569 3 % (19,861) (101) %

Net income (loss) $ 8,722 1 % $ (9,319) (2) % $ 18,041 (194) %

Commercial Service Revenue

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(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.

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.

For the year ended December 31, 2022, total commercial revenue increased $40.6 million, or 10%, primarily as a result of increases in voice and data, IoT, and broadband revenue mainly driven by increases in billable subscribers.

Commercial voice and data revenue increased $17.5 million, or 10%, 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 million in the prior year period, plus the recognition of an additional $1.4 million of hosting data service revenue in the prior year due to an updated estimate of data service usage that did not recur in 2021.

Commercial IoT revenue increased $14.1 million, or 13%, compared to the prior year, driven by a 21% increase in IoT billable subscribers primarily due to continued strength in personal communications devices.

The subscriber increase effect on revenue was partially offset by an 8% reduction in IoT ARPU, primarily due to the shifting mix of subscribers using lower ARPU plans, including the increased proportion of personal communication subscribers.

Commercial broadband revenue increased $8.1 million, or 19%, compared to the prior year, 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.

Hosted payload and other service revenue remained flat compared to the prior year.

Government Service Revenue

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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 and other authorized customers pursuant to our Enhanced Mobile Satellite Services contract, or the EMSS contract.

Under the terms of this agreement, which we entered into in September 2019, 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 million in the prior year to $106.0 million during the third quarter of 2021.

The annual rate under the EMSS contract increased from $103.0 million to $106.0 million during the third quarter of 2021 and continues at that rate until the third quarter of 2024, which caused the increase of $2.1 million in 2022 compared to the prior year.

Subscriber Equipment Revenue

Subscriber equipment revenue increased $6.0 million, or 7%, to $92.1 million for the year ended December 31, 2021 compared 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.

Subscriber equipment revenue increased $42.6 million, or 46%, to $134.7 million for the year ended December 31, 2022 compared to the prior year, primarily due to an increase in the volume of all device sales.

In 2023, the Company expects equipment sales in line with 2022’s level.

Engineering and Support Service Revenue

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Total $ 51.6 $ 30.4 $ 21.2

Engineering and support service revenue decreased by $3.8 million, or 11%, for the year ended December 31, 2021 compared to the prior year primarily due to the episodic nature of contract work under certain government contracts.

Engineering and support service revenue increased by $21.2 million, or 70%, for the year ended December 31, 2022 compared to the prior year primarily due to the increased work under certain government projects, primarily the contract awarded by the Space Development Agency, or the SDA.

Based on the SDA contract, we expect engineering and support service revenue, as well as associated expenses, to increase in 2023 compared to 2022.

Operating Expenses

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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, 2021 compared 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 services (exclusive of depreciation and amortization) increased by $18.1 million, or 19%, for the year ended December 31, 2022 compared to the prior year, primarily as a result of increased work under certain government projects.

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 $1.8 million, or 3%, for the year ended December 31, 2021 compared 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.

Cost of subscriber equipment increased $32.6 million, or 61%, for the year ended December 31, 2022 compared to the prior year period primarily due to the significant increase in volume of all device sales, as described above.

The percentage increase of subscriber equipment costs exceeded the percentage increase in subscriber equipment revenue primarily due to an increase in inventory component costs and customer mix.

Research and Development

Research and development expenses decreased by $0.2 million, or 1%, for the year ended December 31, 2021 compared to the prior year period based on consistent spending on device-related features for our network.

Research and development expenses increased by $4.3 million, or 36%, for the year ended December 31, 2022 compared to the prior year period based on increased spending on device-related features for our 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 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.

Selling, general and administrative expenses increased by $23.0 million, or 23%, for the year ended December 31, 2022, primarily due to higher management incentive costs incurred in the current year, including equity compensation costs and increased marketing and travel expenses incurred in the current year as compared to the prior year.

We expect an approximate 20% increase in selling, general and administrative expenses in 2023 compared to 2022 associated primarily with higher incentive costs, including equity compensation costs and a larger workforce.

Depreciation and Amortization

Depreciation and amortization expense increased by $2.3 million, or 1%, for the year ended December 31, 2021 compared 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)

Depreciation and amortization expense remained relatively flat compared to the prior year.

We anticipate depreciation and amortization will increase upon the completion of the launch of our ground spares.

Other Expense

Interest Expense, net

Interest expense, net, for the year ended December 31, 2022 was $65.1 million, compared to $73.9 million for 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 2021 and July 2021.

The decrease in interest expense was offset in part by $4.9 million of third-party financing costs paid in 2021, which were expensed as incurred, in connection with the repricing transactions.

The decrease in interest expense, net was primarily a result of lower refinancing fees.

In 2021, we repriced our Term Loan resulting in $4.9 million of third-party financing costs, which were expensed as incurred through interest expense that did not recur in 2022.

We also received more interest income in 2022 due to rising interest rates.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $1.2 million for the year ended December 31, 2022, compared to $0.9 million for the prior year.

During the fourth quarter of 2022, we elected to prepay a total of $100.0 million, and wrote off the related unamortized debt issuance costs.

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 million under our Term Loan in February 2020 and 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 million for the prior year.

Income Tax Benefit (Expense)

For the year ended December 31, 2022, our income tax expense was $0.3 million, compared to income tax benefit of $19.6 million for the prior year.

Our effective tax rate was approximately 3.2% for the year ended December 31, 2022 compared to 67.7% 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.

The increase in income tax expense was primarily related to the net impact of (i) pre-tax book income in the current year compared to pre-tax book loss in the prior year, (ii) a decreased stock compensation tax benefit, and (iii) an increase in state tax expense primarily due to changes in state apportionment.

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 million for the year ended December 31, 2021, compared to net loss of $56.1 million during the prior year.

The improvement primarily resulted from the $29.3 million decrease in loss on extinguishment of debt, the $20.4 million decrease in interest expense, net, and the $10.8 million increase in total operating income partially offset by the $13.3 million decrease in income tax benefit.

Net Income (Loss)

Net income was $8.7 million for the year ended December 31, 2022, compared to net loss of $9.3 million during the prior year.

The improvement primarily resulted from the $30.4 million increase in total operating income and the $8.8 million decrease in interest expense, net, partially offset by the $19.9 million increase in income tax expense.

Liquidity 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 million for 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 million from 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 million of 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 million and, based on the current interest rate, approximately $60.0 million, respectively, as well as capital

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 believe our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.

Our primary sources of liquidity are cash provided by operations, cash and cash equivalents and our Revolving Facility.

At December 31, 2022, there was approximately $1.5 billion of indebtedness consisting exclusively of amounts outstanding under the Term Loan, the terms of which are described above under the section captioned “Term Loan.” We have additional borrowing available to us under our Revolving Facility of $100.0 million at December 31, 2022.

These sources are expected to meet the short-term and long-term liquidity needs for (i) required principal and interest on the Term Loan, which we expect to be $16.5 million and, based on the current interest rate, approximately $80.0 million, respectively, (ii) capital expenditures of $75.0 million including expected costs in connection with the launch of ground spare satellites, (iii) working capital, (iv) share repurchases, and (v) anticipated payments under our cash dividend program.

As of December 31, 2022, our total cash and cash equivalents balance was $168.8 million, down from $320.9 million as of December 31, 2021, principally as a result of the $257.0 million in repurchases of our common stock, $50.0 million investments in Aireon, repayments of our Term Loan, including $100.0 million of prepayments in 2022, and $71.3 million in capital expenditures, offset by internally generated cash flows from operations.

Contractual Obligations

As of December 31, 2022, we held non-cancelable purchase obligations of approximately $56.9 million for inventory purchases with Benchmark, our primary third-party equipment supplier.

Our purchase obligations, all of which are due during 2023, increased $24.9 million from the end of 2021 primarily due to increased demand and recovery from supply-chain constraints experienced during 2021.

Our material long-term cash requirement is the repayment of the remaining principal amount under the Term Loan upon its maturity in 2026, which is expected to be $1,455.1 million.

We expect to refinance this amount at or prior to maturity.

On December 8, 2021, our Board of Directors initiated a quarterly dividend and declared a quarterly cash dividend in the amount of $0.13 per share, to be paid on March 30, 2023.

While we expect to continue the regular cash dividend program, any future dividends declared will be at the discretion of our Board of Directors and will depend, among other factors, upon our results of operations, financial condition and cash requirements, as well as such other factors our Board of Directors deems relevant.

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 Years Ended December 31, 2022 and 2021

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Net cash provided by operating activities for the year ended December 31, 2022 increased $41.9 million from the prior year.

Net loss, as adjusted for non-cash activities, improved by $41.3 million over 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.

Net income, as adjusted for non-cash activities, improved by $56.2 million over the prior year, primarily as a result of improved profitability and an increase in non-cash activities associated with an increase in stock-based compensation expense and deferred taxes.

This was offset by a decrease in working capital of approximately $14.3 million.

Cash flows from working capital decreased primarily as a result of an increase in accounts receivable due to increased sales across all revenue types.

Cash flows from working capital also decreased because of component shortages and an increase in raw material inventory which are awaiting production.

These changes in working capital were offset by changes in deferred revenue related to timing of scheduled payments from Aireon and accounts payable related to the increase in work under certain government projects.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2021 decreased $10.1 million from 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 million increase in capital expenditures.

We continue to expect our capital expenditures to average approximately $40.0 million per year until 2029.

Net cash used in investing activities for the year ended December 31, 2022 increased $84.9 million from the prior year period due primarily to the $50.0 million investment in Aireon and increased capital expenditures, primarily related to the timing of payments for the launch of our remaining ground spares.

We now expect our capital expenditures to average approximately $50.0 million to $60.0 million per year until 2029, up from our previous estimate of $40.0 million per year, due to inflation, network efficiency and business development opportunities.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2021 decreased $5.7 million compared 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 million for the year ended December 31, 2020 compared to net payments of $16.5 million for 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.

Net cash used in financing activities for the year ended December 31, 2022 increased $192.5 million compared to the prior year period primarily due to the $100.0 million in debt prepayments on our Term Loan in the fourth quarter of 2022 and an increase in cash used for the share repurchases we made in 2022 over the prior year period.

Our results of operations have been subject to seasonal usage changes for commercial customers, and we expect that 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis