Operationally and financially, this has been one of the toughest years for Inmarsat since we went public in 2005. The reorganisation of our business into the vertical market focus and the continuing investment in Global Xpress, Alphasat and our products and services has placed huge challenges on our people and systems.
Our underlying revenue excluding the LightSquared Cooperation Agreement was up $72.9m year-on-year. LightSquared revenue for 2012 was US$60.2m (2011: US$203.8m).
Strong growth in terminal subscribers across all sectors of maritime, land and aviation.
Our adjusted basic earnings per share for 2012 was 61 cents (US$) (2011: 53 cents (US$)).
We have delivered on our commitment to raise our dividend by 10% year-on-year.
The economic backdrop, uncertainty over government spending programmes and intense, sometimes irrational, competition has made it extremely tough to win business and the impact of reduced revenues from LightSquared has meant that, for the first time in nine years, we are not able to report growth in revenue and EBITDA. However, in our core underlying MSS business, we have shown a return to growth and, excluding LightSquared, the Global Xpress investment and non-recurring items, our underlying EBITDA is up on last year. This is testimony to the underlying strength and resilience of our business model, and the launch of Global Xpress in 2013 will only enhance our ability to generate growth.
Overall, Inmarsat recorded a solid performance during 2012, amidst continuing difficult market and economic conditions. We saw growth returning to our core wholesale MSS business and have made good progress on both the operational and commercial preparations for the launch of our Global Xpress programme, including good initial take-up of the hybrid XpressLink maritime product. We have continued to exercise tight control over both our operating costs and capital expenditures, and are therefore able, as promised, once again to increase our final dividend by 10% to a figure of 27.45 cents per share in line with our strategy of a sustainable dividend based on our normalised free cash flow.
Revenue growth of 2.5% in our core wholesale MSS business during 2012 was encouraging, although our total revenue fell year-on-year due to the significant reduction in revenue recognised from our Cooperation Agreement with LightSquared. Maritime turned in a strong performance, where growth in usage and active users was maintained despite increasing some prices during the year. The trend of migration from older services (Inmarsat B, Mini M, Fleet 77) to FleetBroadband continues, and an increasing proportion of FleetBroadband revenues – estimated at around 50% – is now earned through contractually recurring subscription charges rather than through more variable usage-based payments. In our Land Mobile segment, as expected, we saw a significant reduction in BGAN revenues due to reduced activity in Afghanistan, and an absence of events comparable with those which took place in North Africa and Japan in 2011. We estimate that the impact of these factors on our wholesale revenue is a reduction of $30m year-on-year. Whilst we have seen encouraging levels of activity in other regions during the year, this usage remains volatile. Although our Aviation business has also been similarly affected by reduced traffic over Afghanistan, at the wholesale level it has shown encouraging growth during the year, reflecting the growth in activations and usage of our SwiftBroadband service both in the business jet and commercial air transport segments. Some of this growth reflects a switch out of lease contracts into pay-as-you-go. Revenue from Leases has reduced in 2012, in part due to transfers to demand-assigned usage, in part due to customers migrating to new technologies, as well as planned spectrum reallocations, following our Cooperation Agreement with LightSquared.
Wholesale MSS growth was however not matched in our Inmarsat Solutions business, and 2012 revenue was below that achieved in 2011. This is because Inmarsat Solutions is more exposed to both Leasing and BGAN business which have shown a slow down over the period. For 2012 Inmarsat Solutions market share was 39%, slightly lower than the 41% share for 2011.
Outside MSS, we have benefited from strong growth in our US Government network services based around our Segovia acquisition of 2010, as well as a full year of revenues from the Ship Equip business that was acquired in April 2011.
Overall, the economic environment remains very difficult, and both our Commercial and Government end user markets face significant pressure on spending. We therefore remain cautious in respect of our outlook. However, we remain confident in the ability of our core new services, FleetBroadband, SwiftBroadband and IsatPhone Pro, to continue to deliver growth. Handset deliveries and activations of the IsatPhone Pro are particularly pleasing – we ended the year with over 84,000 active subscribers, compared to approximately 43,000 at the beginning of the year.
On 3 January 2012, we announced a new organisational structure for our Inmarsat Solutions business that aligns its operations more closely to our core vertical market segments and strengthens our ability to support to our direct and indirect distribution channels.
With the reorganisation, Inmarsat Solutions became responsible for our global direct and indirect sales, marketing and delivery, and operates through four market-facing business units:
The former Stratos, Segovia and Ship Equip operations are now providing their services within the relevant business units, and are using the 'Inmarsat' brand name. As the new business units continue to separately address wholesale and retail sales activities, the reorganisation has had no impact on our two primary reporting segments, Inmarsat Global and Inmarsat Solutions. However, during the course of 2013 we expect to make changes to the presentation of our financial results, so that the revenue analysis for Inmarsat Solutions is more closely aligned to the business unit structure. We expect these reporting changes to be implemented by the time of our first quarter Interim Management Statement. We believe these changes will also be helpful to analysts and investors and allow for a better understanding of operational trends within our Inmarsat Solutions reporting segment.
At the end of 2012 we had more than 330 ships using our recently launched XpressLink product, the hybrid L- and Ku-band maritime service which will transition customers to Global Xpress. Whilst we believe that the ships installing XpressLink primarily reflect increased market share rather than migration from L-band customers it should be noted that, to the extent that customers do transfer from L-band to the hybrid service, customer revenue on a ship-by-ship basis will largely migrate from our Inmarsat Global segment to our Inmarsat Solutions segment. Operationally we continue to increase our focus on preparation for the launch of our Global Xpress services.
As I noted earlier, revenue and EBITDA fell in 2012 as a result of decreased revenue from our Cooperation Agreement with LightSquared. This agreement was originally entered into in 2007, and set out arrangements through which Inmarsat agreed to reorganise and lease some of our L-band radio spectrum over North America to LightSquared in return for substantial cash payments.
In April 2012, we agreed with LightSquared to amend our Cooperation Agreement, resulting in the receipt of a Phase 1 completion payment of US$56.25m. Under the terms of the amendment, we renegotiated and agreed to suspend Phase 2 of the Cooperation Agreement until 31 March 2014. The amended terms of the Cooperation Agreement are designed to allow LightSquared more time to secure regulatory consents that may ultimately lead to the deployment of its ATC network in North America.
LightSquared has made total payments to us in respect of all the phases of the Cooperation Agreement of US$546.4m, of which US$85.8m was received during 2012. We have, thus far, recognised US$281.5m of revenue and US$19.9m of operating costs under all the phases of the Cooperation Agreement. At 31 December 2012, we recorded a balance of US$264.9m of deferred income, within trade and other payables on the Balance Sheet.
The table below sets out the contribution of our Cooperation Agreement with LightSquared to our profit for the periods indicated:
|(US$ in millions)||2012||2011|
|Net operating costs||(8.3)||(11.2)|
|Income tax expense||(12.7)||(51.0)|
|Profit for the year||39.2||141.6|
Under Phase 1 (including the previous Phase 1.5), LightSquared has made payments to us totalling US$408.7m. We are accounting for the Phase 1 payments using the percentage of completion method. We have recognised US$30.6m of revenue and US$8.3m of operating costs during 2012 (2011: US$95.7m and US$11.2m, respectively).
Under the original Phase 2, LightSquared has made payments to us totalling US$137.7m. Revenue has been recognised on a straight-line basis over the period from commencement of the original Phase 2 until 31 March 2012. We have recognised US$29.6m of revenue during 2012 (2011: US$108.1m). As a result of the suspension of Phase 2, we do not expect to recognise any further revenue under Phase 2 of the Cooperation Agreement until this phase recommences.
As part of our continuing policy of ensuring that an appropriate financing structure remains in place for the Group, on 11 April 2012, our indirect subsidiary Inmarsat Finance plc, issued a further US$200m aggregate principal amount of our 7.375% Senior Notes due 1 December 2017. The aggregate gross proceeds were US$212m, including US$12m premium on issuance and we capitalised issuance costs of US$3.8m.
Under the terms of our outstanding Convertible Bonds, holders had an option to require us to redeem the bonds at the accreted principal amount together with interest on 16 November 2012. This holder right expired on 17 October 2012 at which point no holders had exercised their rights. As a result, we were not required to redeem any of the Convertible Bonds on 16 November 2012. In connection with the expiry of this option we have made accounting adjustments impacting the amount of net interest payable reported for the year ended 31 December 2012 and the principal amount recorded in the balance sheet at 31 December 2012.
The results are the consolidated results of operations and financial condition of Inmarsat plc for the year ended 31 December 2012. We report two operating segments: Inmarsat Global and Inmarsat Solutions. The Inmarsat Solutions segment includes the operations of formerly acquired businesses: Stratos, Segovia, Ship Equip (acquired on 28 April 2011) and NewWave (acquired on 13 January 2012).
The table below sets out the results of the Group for the years indicated:
|(US$ in millions)||2012||2011||Increase/
|Employee benefit costs||(233.0)||(206.5)||12.8%|
|Network and satellite operations costs||(295.1)||(241.7)||22.1%|
|Other operating costs||(139.1)||(127.0)||9.5%|
|Own work capitalised||24.1||21.1||14.2%|
|Total net operating costs||(643.1)||(554.1)||16.1%|
|Depreciation and amortisation||(255.2)||(245.8)||3.8%|
|Loss on disposal of assets||(0.5)||–||–|
|Share of profit of associates||2.1||1.5||40.0%|
|Interest receivable and similar income||3.2||5.0||(36.0%)|
|Interest payable and similar charges||(56.0)||(104.6)||(46.5%)|
|Net interest payable||(52.8)||(99.6)||(47.0%)|
|Profit before income tax||293.6||366.9||(20.0%)|
|Income tax expense||(76.2)||(117.4)||(35.1%)|
|Profit for the year||217.4||249.5||(12.9%)|
Total Group revenues for 2012 decreased by 5.0% compared with 2011. However, underlying revenues (excluding LightSquared) increased by US$72.9m, or 6.1%, as a result of growth in our wholesale MSS revenues, new US Government contracts in Segovia and a full year contribution from Ship Equip. The table below sets out the components, by segment, of the Group's total revenue for each of the years indicated:
|(US$ in millions)||2012||2011||Increase/
|Total Inmarsat Global segment||835.9||958.4||(12.8%)|
|Inmarsat Solutions segment||810.3||758.2||6.9%|
|Intercompany eliminations and adjustments||(308.4)||(308.1)|
Total Group net operating costs for 2012 increased by 16.1% compared with 2011. Cost increases primarily arose from additional costs to support the new contracts in Segovia and the full year impact of costs from Ship Equip. The table below sets out the components, by segment, of the Group's net operating costs for each of the years indicated:
|(US$ in millions)||2012||2011||Increase|
|Intercompany eliminations and adjustments||(308.7)||(306.9)|
|Total net operating costs||643.1||554.1||16.1%|
Group EBITDA for 2012 decreased by 18.7% compared with 2011; this was primarily as a result of decreased revenue from our Cooperation Agreement with LightSquared. As a consequence, EBITDA margin has decreased to 51.9% for 2012, compared with 60.7% for 2011.
Depreciation and amortisation
The increase in depreciation and amortisation of US$9.4m is due to an impairment recognised in the year through accelerated depreciation of previously capitalised S-band assets and the inclusion of depreciation on the assets acquired through the purchase of Ship Equip. In addition, in 2012 there was amortisation of the intangible assets recognised in the NewWave acquisition and additional depreciation on additions to tangible fixed assets in our Inmarsat Solutions segment. Partially offsetting the increase was a decrease in depreciation and amortisation in Inmarsat Global due to the Inmarsat-3 satellites becoming fully depreciated and a decrease in amortisation as a result of the reduction in the carrying amount of the Stratos, Segovia and Ship Equip trade names to US$nil at the end of 2011.
During 2011, we recorded an adjustment of US$2.1m (2012: US$nil) relating to increased consideration in respect of our acquisition of Segovia in 2010. This was due to the better-than-expected performance of the Segovia business against previously agreed financial targets. In line with IFRS 3, the contingent consideration adjustment was charged as an expense to the income statement.
During the year we continued to implement operational changes arising from our vertical market reorganisation and our preparations for the introduction of GX services. These changes, and certain other external factors, gave rise to an impairment loss within our Inmarsat Solutions segment of US$94.7m for the year ended 31 December 2012 (2011: US$141.5m). Some of the factors that gave rise to the impairment within the Inmarsat Solutions segment will have an offsetting positive benefit within the Inmarsat Global segment and therefore should not result in an equivalent gross impact at the Group level. This loss is related to a partial impairment of the goodwill that was originally recognised when we acquired the Stratos and Ship Equip businesses (impairment of US$58.7m and US$36.0m, respectively). Operating profit forecasts for the Stratos and Ship Equip cash-generating units ('CGUs') have been adjusted downwards due to both internal and external factors. Internally, the Group has made certain business decisions during the year which will affect the future profitability of each CGU, but with offsetting benefits elsewhere in the Inmarsat Group. In relation to the Stratos CGU, the Group has appointed a number of significant service providers as distribution partners of the Inmarsat Global segment for GX, therefore redirecting future revenues to the Inmarsat Global segment that would previously have been forecast as received in the Stratos CGU. In addition, certain revenue development plans for value-added services are now expected to be progressed within the Inmarsat Global segment and therefore not contribute to the Stratos CGU. For the Ship Equip CGU, we now intend for Ship Equip to become a Value-Added Reseller for GX, which carries lower margins at the CGU level than its historic standalone VSAT business. Externally, we have considered two further factors in our CGU forecasts. Firstly, we have seen delays in purchase decision-making for maritime VSAT systems, impacting the Ship Equip CGU. We believe these delays are due to ship operators preferring to wait for the launch of our GX services in order to compare GX to existing VSAT alternatives. Secondly, for the Stratos CGU there has been a decline in demand for certain products throughout 2012 resulting from reduced military activities in Afghanistan, reduced event-driven traffic and termination of some lease business. The combination of these factors is expected to result in reduced operating profits at the Inmarsat Solutions level and have therefore been reflected in the revised forecasts, giving rise to the impairment of the Stratos and Ship Equip CGUs.
In 2011, the total US$141.5m impairment loss related to a US$120.0m impairment of the goodwill that was originally recognised when we acquired Stratos and a write-off of US$21.5m of intangible assets associated with the Stratos, Segovia and Ship Equip trade names following the rebranding and reorganisation of the Inmarsat Solutions business. The prior year impairment of the Stratos goodwill was again a combination of internal and external factors which resulted in profit forecasts to be revised downwards. In 2011, changes in prices between Inmarsat Global and the distribution channel were not passed onto the end customers of Stratos, resulting in reduced margins for the Stratos CGU. In addition, commitments under our LightSquared Cooperation Agreement resulted in the expected discontinuance of certain customer leases for Inmarsat B and certain other services which directly impacted the Stratos CGU. While this business was expected to be partly retained through agreements using non-lease services, these are at a lower margin. There was also a reduction in Inmarsat MSS revenues, changes in product mix and competitive pricing, all of which contributed to lower than expected revenues.
As a result of the factors discussed above, operating profit during 2012 was US$346.4m, a decrease of US$120.1m, or 26%, compared with 2011.
Net interest payable for 2012 was US$52.8m, a decrease of US$46.8m, or 47%, compared with 2011.
Interest payable for 2012 was US$56.0m, a decrease of US$48.6m, or 46%, compared with 2011. In November 2012, we recognised a non-recurring US$30.2m credit to interest payable on the Convertible Bonds arising from an adjustment to the expected maturity date. In addition, there was a significant increase in the amount of interest that we are required to capitalise in the year. During 2012 we capitalised US$42.9m of interest that was attributable to the construction of our Alphasat and Inmarsat-5 satellites and associated ground infrastructure, compared with US$24.4m capitalised in 2011. In addition, in 2011, we recorded US$7.9m of interest in respect of unwinding of the discount we applied to the Segovia acquisition deferred consideration compared with US$nil in 2012 and wrote off unamortised issue costs of US$3.8m following the refinancing of our previous Senior Credit Facility. The decrease was partially offset by increased interest following further drawdowns of our Ex-Im Bank Facility and the issue of additional Senior Notes due 2017.
Interest receivable for 2012 was US$3.2m compared with US$5.0m for 2011. The decrease is primarily due to a non-recurring hedge accounting gain of US$3.0m recorded in 2011 in relation to the repayment of Ship Equip long-term debt.
Profit before tax
For 2012, profit before tax was US$293.6m, a decrease of US$73.3m, or 20%, compared with 2011. The reduction is due primarily to decreased revenues from our Cooperation Agreement with LightSquared and increased net operating costs, partially offset by decreased net interest payable and a reduced impairment charge during 2012.
Income tax expense
The tax charge for 2012 was US$76.2m, a decrease of US$41.2m, or 35%, compared with 2011. The decrease in the tax charge is largely driven by the underlying decrease in profits for 2012, together with a prior year adjustment for the year ended 31 December 2012 which resulted in a non-recurring tax credit of US$12.6m (prior year adjustment for the year ended 31 December 2011 resulted in a US$6.7m non-recurring tax credit). The reduction in the substantively enacted tax rate at which deferred tax is recognised from 25% to 23% has also given rise to a non-recurring tax credit of US$8.4m on the revaluation of deferred tax liabilities. These adjustments are offset by the non-deductible impairment of goodwill (tax effect US$23.2m) and other non-deductible items (tax effect US$1.7m) for the year ended 31 December 2012. For the year ended 31 December 2011 the tax effect relating to the non-deductible impairment of Stratos goodwill was US$31.8m.
The effective tax rate for 2012 was 26.0% compared with 32.0% for 2011. In the absence of the above adjustments, the effective rates would have been 24.6% for 2012 and 25.2% for 2011. This decrease is primarily due to the reduction in the UK main rate of corporation tax from 26% to 24%. While the reduction did not become effective until 1 April 2012, this has the effect of lowering the average UK statutory rate for 2012 to 24.5%. The average UK statutory tax rate for the year ended 31 December 2011 was 26.5%.
Profit for the period
As a result of the factors discussed above, profit for 2012 was US$217.4m, a decrease of US$32.1m, or 12.9%, compared with 2011.
Earnings per share
For 2012, basic and diluted earnings per share for profit attributable to the equity holders of the Company were 48 cents (US$) and 48 cents (US$), respectively, compared with 55 cents (US$) and 54 cents (US$), respectively, for 2011.
The 2012 basic and diluted earnings per share adjusted to exclude the after-tax effect of the LightSquared contribution and the impairment losses, were 61 cents (US$) and 60 cents (US$), respectively, compared with 53 cents (US$) and 53 cents (US$), respectively, for 2011.
During 2012, although revenues from Inmarsat Global were US$835.9m, a decrease of US$122.5m, or 12.8%, compared with 2011, MSS revenues increased by US$17.7m, or 2.5%, year-on-year. The decrease in total revenues in 2012 is due to the reduction in revenues recognised in relation to our Cooperation Agreement with LightSquared.
The MSS revenue growth was primarily driven by increased activations and usage of our FleetBroadband and SwiftBroadband services and by the effect of price initiatives for maritime data services. We have also seen encouraging growth in our land mobile IsatPhone Pro service. As in recent periods, this growth has been partly offset by the continued expected decline in revenues from our BGAN and GAN services due to the combination of troop withdrawals from Afghanistan and lower event revenues in 2012 compared to 2011. In addition, we experienced a decline in maritime voice revenues due to the impact of product mix changes and, more generally, we have experienced a decline in revenues from older services such as Inmarsat B, Mini M, Fleet, GAN and Swift 64, year-on-year. The results also reflect the termination of certain lease business during the year, which was expected.
The table below sets out the components of Inmarsat Global's revenue for each of the years indicated:
|(US$ in millions)||2012||2011||Increase/
|Total maritime sector||411.2||358.9||14.6%|
|Land mobile sector:|
|Total land mobile sector||132.4||151.7||(12.7%)|
|Total MSS revenue||738||720.3||2.5%|
|Other income (including LightSquared)||97.9||238.1||(58.9%)|
Total active terminal numbers as at 31 December 2012 increased by 14.5%, compared with 31 December 2011. The table below sets out the active terminals by sector for each of the years indicated:
The growth of active terminals in the maritime sector is primarily due to take-up of our FleetBroadband service, where we have seen active terminal numbers grow by 31% year-over-year. This growth has been partially offset by the expected decline in active terminals of older services such as Inmarsat B and Fleet, where users have been migrating to our FleetBroadband service. The growth of active terminals in the land mobile sector is predominantly due to our IsatPhone Pro service, which was introduced in 2010. In the aviation sector, we have seen growth in SwiftBroadband active terminals of 52%, year-over-year, partially offset by the decline in our other older aviation services.
During 2012, revenues from the maritime sector were US$411.2m, an increase of US$52.3m, or 14.6%, compared with 2011.
Revenues from data services in the maritime sector during 2012 were US$331.5m, an increase of US$62.8m, or 23%, compared with 2011. Growth in our maritime data revenues was primarily driven by pricing and service package changes implemented in January and May 2012 and increased take-up and usage of our FleetBroadband terminals. During the year we have seen significant migration of end-users from usage-based pricing plans to subscription-based plans with higher monthly fees and inclusive usage. We estimate that at the end of the year nearly half of our FleetBroadband revenues now come from recurring customer subscriptions. We have also seen strong terminal activations and increasing average revenue per user ('ARPU'). During 2012, we added 7,980 FleetBroadband subscribers. Despite the overall revenue growth reported, customer migration to FleetBroadband from older services continues to be a constraint on our rate of revenue growth as the price of FleetBroadband services is typically lower than the price of equivalent services on the terminals being replaced.
Revenues from some older services continue to decline due to the natural run-off and migration of these services, for example, active Inmarsat B and Fleet terminal numbers are reducing due to older ships being decommissioned or refitted with FleetBroadband terminals.
Revenues from voice services in the maritime sector during 2012 were US$79.7m, a decrease of US$10.5m, or 11.6%, compared with 2011. We have continued to see voice revenues being negatively impacted by product mix changes as users transition from our older services to our FleetBroadband service where the price of voice services is lower and also by the substitution effect of voice usage moving to email and Voice Over IP, which we record as data revenues.
We continue to believe that the current economic environment for the shipping industry and increased competition are also factors impacting revenues in the maritime sector. In addition, the take-up of XpressLink by ships currently using our existing L-band maritime services is expected to increasingly impact the wholesale maritime revenues we report for Inmarsat Global, as the customer revenue on a ship-by-ship basis will largely migrate to our Inmarsat Solutions segment. While this impact has so far been limited due to the early stage of the XpressLink service, customer interest is gaining traction and the impact may be more pronounced in future reporting periods.
Land mobile sector
During 2012, revenues from the land mobile sector were US$132.4m, a decrease of US$19.3m, or 12.7%, compared with 2011.
Revenues from data services in the land mobile sector during 2012 were US$118.1m, a decrease of US$25.9m, or 18.0%, compared with 2011. This expected decline in revenues is due to the combination of troop withdrawals from Afghanistan and the comparative impact of significant event revenue in 2011. We estimate that Afghanistan and events in North Africa and Japan in 2011 contributed US$30m more revenue year-over-year, compared with 2012. Although we continue to see growth in BGAN usage from new subscribers, this growth is unable to fully offset the impact of reduced revenues from Afghanistan and other world events.
Revenues from voice services in the land mobile sector during 2012 were US$14.3m, an increase of US$6.6m, or 86%, compared with 2011. The increase is due to growth in revenues from our IsatPhone Pro service. Take-up of the IsatPhone Pro service has remained strong and we ended the year with over 84,000 active subscribers, compared to approximately 43,000 at the beginning of the year. The increase in our installed subscriber base is driving overall traffic growth and is the primary contributor to our voice revenue growth. In addition, our IsatPhone Pro revenues also benefited from pricing and package changes made in June 2012 and, during the fourth quarter, we recognised approximately US$1.0m of non-recurring revenues which related to a customer contract adjustment and the unused portion of certain expired prepay agreements.
During 2012, revenues from the aviation sector were US$100.8m, an increase of US$1.3m, or 1.3%, compared with 2011. We have seen strong growth in revenues from our SwiftBroadband service, year-over-year. However, this increase has been offset by a decline in Swift 64 revenues, due to a reduction in usage by certain government customers, including usage related to reduced activity in Afghanistan.
During 2012, revenues from leasing were US$93.6m, a decrease of US$16.6m, or 15.1%, compared with 2011. The expected decrease is predominantly due to a reduction in revenues from a number of government maritime contracts. In addition, we terminated some Inmarsat-B leases in connection with our Cooperation Agreement with LightSquared.
Other income for 2012 was US$97.9m, a decrease of US$140.2m, or 59%, compared with 2011. The decrease is due to lower revenues from LightSquared (US$60.2m, in 2012, compared with US$203.8m for 2011). During 2012, we had US$23.5m of revenues from the sale of terminals and accessories (predominantly in relation to IsatPhone Pro) compared with US$18.1m in 2011.
Net operating costs
Net operating costs for 2012 increased by 1.2%, compared with 2011. Included within net operating costs for 2012 are net costs in relation to our GX programme totalling US$15.6m (2011: US$11.2m) and costs in relation to the LightSquared Cooperation Agreement of US$8.3m (2011: US$11.2m).
The table below sets out the components of Inmarsat Global's net operating costs for each of the periods indicated:
|(US$ in millions)||2012||2011||Increase/
|Employee benefit costs||109.4||105.1||4.1%|
|Network and satellite operations costs||39.6||45.7||(13.3%)|
|Other operating costs||108.7||101.3||7.3%|
|Own work capitalised||(19.1)||(16.4)||16.5%|
|Net operating costs||238.6||235.7||1.2%|
Impact of hedged foreign exchange rate
The functional currency of the Group's principal subsidiaries is US Dollars. Approximately 50% of Inmarsat Global's costs are denominated in Pounds Sterling. Inmarsat Global's hedged rate of exchange for 2012 was US$1.48/£1.00 compared to US$1.51/£1.00 in 2011, which did not give rise to a material variance in comparative costs. We have completed our hedging arrangements for our anticipated Sterling costs in 2013 and as a result expect our hedged rate of exchange for 2013 to be US$1.57/£1.00.
Employee benefit costs
Employee benefits costs increased by US$4.3m, or 4.1% for 2012, compared with 2011, primarily due to an increase in total full-time equivalent headcount (on average in 2012 there were 569 employees compared to 546 in 2011), primarily to support our GX programme. During the fourth quarter, we recognised additional employee benefit costs of approximately US$3.3m in relation to some limited employee redundancies. In addition, the phasing of costs in the fourth quarter was more pronounced in 2012 than in previous years.
Network and satellite operations costs
Network and satellite operations costs fell by US$6.1m, or 13.3%, for 2012 compared with 2011, primarily due to lower in-orbit insurance costs following the annual contract renewals in August 2012. In addition, costs of service contracts, warranties and maintenance decreased year-on-year.
Other operating costs
Other operating costs for 2012 increased by US$7.4m, or 7.3%, compared with 2011. The increase relates to higher direct cost of sales due to IsatPhone Pro terminal sales and increased interconnect charges as voice traffic grew. In addition, in 2012 a US$5.4m provision was made against certain trade receivables and a foreign exchange translation loss of US$5.2m was recorded (2011: US$1.4m). Partially offsetting the increase was a decrease in professional fees incurred in 2012, including reduced professional fees incurred in relation to our Cooperation Agreement with LightSquared and the absence of US$2.0m non-recurring professional fees expensed in 2011 in relation to our acquisition of Ship Equip.
Own work capitalised
Own work capitalised increased by US$2.7m, or 16.5%, compared with 2011, predominantly a result of increased activity on our GX programme.
|(US$ in millions)||2012||2011||Increase/
|Net operating costs||(238.6)||(235.7)||1.2%|
|EBITDA margin %||(71.5%)||(75.4%)|
|EBITDA excluding LightSquared and Global Xpress||561.0||541.3||3.6%|
|EBITDA margin % excluding LightSquared and Global Xpress||(72.3%)||(71.7%)|
|Depreciation and amortisation||(158.1)||(161.9)||(2.3%)|
The decrease in operating profit for 2012 of US$121.6m, compared with 2011, is primarily a result of decreased revenues from our Cooperation Agreement with LightSquared, partially offset by higher MSS revenues year-on-year.
On 28 April 2011, we completed the acquisition of Ship Equip. On 13 January 2012, we completed the acquisition of NewWave. We include the operations of formerly acquired businesses: Stratos, Segovia, Ship Equip and NewWave in a single reporting segment, Inmarsat Solutions.
During 2012, revenues from Inmarsat Solutions increased by US$52.1m, or 6.9%, compared to 2011. The table below sets out the components of Inmarsat Solutions' revenues for each of the years indicated:
|(US$ in millions)||2012||2011||Increase/
|Broadband and Other MSS(a)||409.8||334.8||22.4%|
Revenues derived from Inmarsat MSS for 2012 decreased by US$22.9m, or 5.4%, compared to 2011. The decrease in Inmarsat MSS revenue at the Inmarsat Solutions level was driven primarily by a combination of lower leasing revenue and by lower BGAN revenue from Afghanistan and other world events year-over-year. As Inmarsat Solutions has a disproportionately higher share of both our leasing and BGAN business, the negative impact of these factors contributed to an overall decrease in revenue, even though Inmarsat Solutions benefited from strong growth in maritime revenues and other factors that contributed to an overall increase in MSS revenues at the wholesale level.
In addition, growth in maritime MSS revenues at Inmarsat Solutions lagged the growth reported at the Inmarsat Global level as effective wholesale price increases, resulting from the elimination of certain volume discounts in January 2012, were not wholly passed on by Inmarsat Solutions to end-users. As a result, certain price increases at the Inmarsat Global wholesale level did not result in equivalent revenue increases at the Inmarsat Solutions retail level.
For 2012, Inmarsat Solutions' share of Inmarsat Global's MSS revenues was 39%, slightly lower than the 41% share for 2011.
Broadband and Other MSS
'Broadband and Other MSS' revenues primarily consist of sales of VSAT and microwave services, mobile terminal and equipment sales, rental and repairs, mobile telecommunications services sourced on a wholesale basis from other MSS providers, network services provided to certain distributors and other ancillary services. Also included within 'Broadband and Other MSS' are revenues from our Inmarsat Government business unit (primarily drawn from the operations of Segovia), relating to the provision of secure IP managed solutions and services to United States government agencies and an element of revenues from our Inmarsat Maritime business unit (primarily drawn from the operations of Ship Equip), relating to the provision of VSAT maritime communications services, including our XpressLink service, to the shipping, offshore energy and fishing markets.
Revenues from 'Broadband and Other MSS' during 2012 increased by US$75.0m, or 22%, compared with 2011. The increase is due to increased revenues in our Inmarsat Government business unit from growth in network services and equipment sales and the inclusion of Ship Equip for the full year in 2012 compared to the period from 28 April to 31 December in 2011. There were also increases in mobile terminal and equipment sales and other ancillary revenues from other business units, which were partially offset by a reduction in VSAT revenues from energy operations.
Net operating costs
Net operating costs in 2012 increased by US$87.9m, or 14.1%, compared to 2011, primarily as a result of increased costs in Inmarsat Government related to the increased revenue, the inclusion of Ship Equip for the full year in 2012 compared to the period from 28 April to 31 December in 2011 and increased cost for airtime from Inmarsat Global as a result of price increases. The table below sets out the components of Inmarsat Solutions' net operating costs and shows the allocation of costs to the Group's cost categories for each of the periods indicated:
|(US$ in millions)||2012||2011||Increase|
|Cost of goods and services||602.6||538.0||12.0%|
|Total operating costs||713.2||625.3||14.1%|
|Allocated as follows:|
|Employee benefit costs||123.6||101.4||21.9%|
|Network and satellite operations costs(a)||555.6||497.2||11.7%|
|Other operating costs||38.7||31.4||23.2%|
|Own work capitalised||(4.7)||(4.7)||–|
|Net operating costs||713.2||625.3||14.1%|
Cost of goods and services
Cost of goods and services includes variable expenses such as the cost of airtime and satellite capacity purchased from satellite operators (predominantly from Inmarsat Global), cost of equipment, materials and services, and variable labour costs related to our repair and service workforce. Cost of goods and services also includes costs such as network infrastructure operating costs, customer support centre costs, telecommunications services purchased from terrestrial providers, rents and salaries that do not vary significantly with changes in volumes of goods and services sold.
Cost of goods and services during 2012 increased by US$64.6m, or 12.0%, compared to 2011. The increase is predominantly due to increased costs in Inmarsat Government, related to the increased revenues, the inclusion of Ship Equip for the full year in 2012 compared to the period from 28 April to 31 December in 2011 and increased cost for airtime from Inmarsat Global as a result of price increases.
Operating costs during 2012 increased by US$23.3m, or 27%, compared to 2011. The increase is primarily due to increased costs in Inmarsat Government related to an increased number of employees, increased benefits and higher sales, marketing and rent costs and the inclusion of Ship Equip for the full year in 2012 compared to the period from 28 April to 31 December in 2011. Within the fourth quarter, we recognised certain costs that are not expected to be recurring in nature. These costs amount to approximately US$5.0m, of which US$2.2m relates to some limited employee redundancies.
|(US$ in millions)||2012||2011||Increase/
|Cost of goods and services||(602.6)||(538.0)||12.0%|
|Gross margin %||0.3||0.3|
|EBITDA margin %||12.0%||17.5%|
|Depreciation and amortisation||(97.1)||(83.9)||15.7%|
|Loss on the disposal of assets||(0.5)||–||–|
|Share of profit of associates||2.1||1.5||40.0%|
Inmarsat Solutions' operating loss for 2012 was US$93.1m in line with 2011. US$94.7m of impairment losses were recognised in 2012 relating to the impairment of goodwill, compared to US$120.0m in 2011 relating to the impairment of goodwill and US$21.5m in 2011 for the reduction of the carrying amounts of the Stratos, Segovia and Ship Equip trade names to US$nil. Offsetting the decrease in impairment losses year-on-year was a decrease in EBITDA and an increase in depreciation and amortisation. The EBITDA reduction is due primarily to a decreased contribution from the sales of Inmarsat MSS as a result of lower revenues, an increase in the cost of airtime from Inmarsat Global, increased operating costs and changes in product mix. The increase in depreciation and amortisation is primarily a result of the inclusion of Ship Equip for the full year in 2012 compared to the period from 28 April to 31 December in 2011, the amortisation of NewWave intangibles and increased capital expenditures, partially offset by a decrease in amortisation as a result of the reduction in the carrying amount of the Stratos, Segovia and Ship Equip trade names to US$nil at the end of 2011.
Gross margin consists of revenues less cost of goods and services. Gross margin and gross margin percentage have decreased by US$12.5m and 3.4%, respectively, in 2012 compared to 2011. These decreases are a result of a decrease in Inmarsat MSS revenue along with increased cost of airtime from Inmarsat Global and migration to newer lower margin services, as well as reduced gross margin percentages in Inmarsat Government and Inmarsat Maritime as a result of the newer revenues being at lower margins and changes in product mix. These decreases have been partially offset by the additional operations of Ship Equip which has a higher gross margin.
At 31 December 2012, the Group had cash and cash equivalents of US$332.1m and available but undrawn borrowing facilities of US$1,052.4m under our Senior Credit Facility and Ex-Im Bank Facility. We believe our liquidity position is more than sufficient to meet the Group's needs for the foreseeable future. In addition, we remain well-positioned to access the capital markets when needed, to meet new financing needs or to improve our liquidity or change the mix of our liquidity sources.
The Group continually evaluates sources of capital and may repurchase, refinance, exchange or retire current or future borrowings and/or debt securities from time to time in private or open-market transactions, or by any other means permitted by the terms and conditions of our borrowing facilities and debt securities.
The Group's net borrowings (gross of deferred finance costs) are presented below:
|(US$ in millions)||As at
|Ex-Im Bank Facility||397.6||277.3|
|Senior Notes due 2017||850.0||650.0|
|– Net issuance premium/(discount)||7.5||(3.6)|
|– accretion of principal||2.9||2.7|
|Deferred satellite payments||28.7||34.7|
|Cash and cash equivalents||(332.1)||(183.5)|
|Net borrowings (gross of deferred finance costs)||1520.2||1394.1|
The table below shows the condensed consolidated cash flow for the Group for the years ended 31 December 2012 and 2011:
|(US$ in millions)||2012||2011|
|Net cash from operating activities||659.5||881.6|
|Net cash used in investing activities excluding capital expenditure||(15.1)||(171.0)|
|Capital expenditure, including own work capitalised||(484.0)||(531.0)|
|Net cash from/(used in) financing activities, excluding dividends paid||175.5||(168.3)|
|Foreign exchange adjustment||–||0.2|
|Net increase/(decrease) in cash and cash equivalents||149.3||(160.7)|
The decrease in net cash generated from operating activities in 2012, compared with 2011, of US$222.1m primarily relates to decreased EBITDA in 2012 and movements in working capital, partially offset by lower cash tax paid. Our LightSquared Cooperation Agreement contributed to US$219.4m of the decrease in net cash from operating activities year-on-year (this excludes the impact on cash tax paid due to reduced profit before tax year-on-year).
The decrease in net cash used in investing activities excluding capital expenditure in 2012, compared with 2011, was US$155.9m. During 2012 we acquired 100% of the outstanding shares of NewWave for a total cash consideration of US$7.7m (net of cash acquired) and paid US$7.4m of deferred consideration in relation to previous acquisitions. During 2011 we purchased Ship Equip for a cash consideration of US$113.2m (excluding the repayment of debt which was treated as a financing activity and net of cash acquired and foreign exchange risk hedging gains), paid US$54.5m of deferred consideration in relation to previous acquisitions and paid US$3.2m relating to Inmarsat Solutions' acquisition of certain operational assets.
Capital expenditure, including own work capitalised, decreased by US$47.0m in 2012, compared with 2011. Capital expenditure may fluctuate with the timing of milestone payments on current projects.
During 2012 the Company paid dividends of US$186.6m, compared with US$172.2m in 2011.
During 2012 net cash from financing activities, excluding the payment of dividends, was US$175.5m, compared to net cash used in financing activities, excluding the payment of dividends of US$168.3m in 2011. During 2012 we received gross proceeds of US$212.0m on the April 2012 issue of additional Senior Notes due 2017, we drew down US$120.3m of our Ex-Im Bank Facility and we received US$3.5m from the issue of ordinary shares in connection with certain staff incentive programmes. In addition, we paid cash interest of US$97.5m, repaid US$44.1m of our EIB Facility, paid fees in relation to debt issuance of US$8.1m and paid US$9.9m to repurchase our own shares.
During 2011, the Group repaid US$200.0m outstanding under our previous Senior Credit Facility, repaid US$44.7m of outstanding debt in Ship Equip (net of US$3.0m of hedge gains), paid cash interest of US$79.7m, paid US$98.4m to repurchase our own shares and paid arrangement costs in respect of new financing of US$22.4m. In addition, we received US$277.3m from the drawdown of our Ex-Im Bank Facility during 2011.
|(US$ in millions)||2012||2011|
|Cash generated from operations||726.9||991.2|
|Capital expenditure, including own work capitalised||(484.0)||(531.0)|
|Net cash interest paid||(95.7)||(76.7)|
|Cash tax paid||(69.2)||(112.6)|
|Free cash flow||78.0||270.9|
Free cash flow decreased by US$192.9m, or 71%, during 2012, compared with 2011. The decrease is due to a reduction in cash generated from operations (of which US$219.4m related to our Cooperation Agreement with LightSquared) and an increase in net cash interest paid, partially offset by lower capital expenditure and reduced cash tax paid.
Foreign exchange and treasury policy
The Group's treasury activities are managed by its corporate finance department under the direction of a Treasury Review Committee whose chairman is the Chief Financial Officer, and are consistent with Board-approved treasury policies and guidelines. The overriding objective of treasury activities is to manage financial risk. Details of financial instruments and policies are shown in note 32 to the consolidated financial statements.
On 25 May 2012, the Company paid a final dividend for the year ended 31 December 2011 of 24.96 cents (US$) per ordinary share. On 25 October 2012, the Company paid an interim dividend of 16.94 cents (US$) per ordinary share in respect of the year ended 31 December 2012, a 10.0% increase over 2011.
The Inmarsat plc Board of Directors intends to recommend a final dividend of 27.45 cents (US$) per ordinary share in respect of the year ended 31 December 2012 to be paid on 24 May 2013 to ordinary shareholders on the register of members at the close of business on 17 May 2013. Shareholders will be asked to approve the final dividend payment at the Annual General Meeting to be held on 2 May 2013. Dividend payments will be made in Pounds Sterling based on the exchange rate prevailing in the London market four business days prior to payment. In accordance with IAS 10, this final dividend has not been recorded as a liability in the financial statements at 31 December 2012. The total dividend paid and proposed for the year ended 31 December 2012 equals 44.39 cents (US$) per ordinary share, a 10.0% increase over 2011, and amounts to US$198.7m.
The table below shows the consolidated Group balance sheet at 31 December 2012 and 2011:
|(US$ in millions)||As at
The increase in the Group's non-current assets of US$162.0m is due primarily to an increase in property, plant and equipment due to additions in 2012 predominantly as a result of our GX and Alphasat programmes. Offsetting the increase was a US$94.7m impairment relating to partial impairments of goodwill previously recognised when we acquired our Stratos and Ship Equip businesses of US$58.7m and US$36.0m, respectively.
The increase in current assets of US$181.9m is due predominantly to an increase in cash and cash equivalents from US$183.5m at 31 December 2011 to US$332.1m at 31 December 2012. The increase in cash and cash equivalents is due primarily to the gross proceeds of US$212.0m received on the April 2012 issue of additional Senior Notes due 2017. In addition, trade and other receivables rose by US$32.8m to US$290.0m at 31 December 2012.
The decrease in current liabilities of US$300.6m relates primarily to the reclassification of the liability component of the Convertible Bonds from current to non-current. Although our outstanding Convertible Bonds do not mature until November 2017, holders had the right to require the Company to redeem any or all of the bonds at their accreted principal amount on 16 November 2012. As no holders elected to redeem their bonds in November 2012 a revised maturity assumption based on the next date that holders can redeem their bonds of 16 November 2014 has subsequently been adopted. In addition, during 2012, current income tax liabilities decreased US$19.6m to US$32.7m at 31 December 2012. The decrease has been partially offset by a US$25.6m increase in deferred revenue recognised in relation to our Cooperation Agreement with LightSquared during 2012.
The increase in non-current liabilities of US$599.7m relates primarily to an increase in non-current borrowings of US$580.1m to US$1,769.0m at 31 December 2012. The increase in non-current borrowings is due to the reclassification of the liability component of the Convertible Bonds to non-current liabilities, the additional Senior Notes due 2017 issued in April 2012 (gross proceeds of US$212.0m) and the drawdown of US$120.3m of our Ex-Im Bank Facility, partially offset by the repayment of US$44.1m of our EIB Facility. In addition, during 2012, deferred income tax liabilities increased US$32.4m to US$141.3m at 31 December 2012.
Details of our critical accounting policies are in note 4 to the consolidated financial statements.
The Group faces a number of risks and uncertainties that may adversely affect our business, operations, liquidity, financial position or future performance, not all of which are wholly within our control. Although many of the risks and uncertainties influencing our performance are macroeconomic and likely to affect the performance of businesses generally, others are particular to our operations in mobile satellite services.
Our principal risks and uncertainties are discussed below; however this summary is not intended to be an exhaustive analysis of all risks and uncertainties affecting our business. Some risks and uncertainties may be unknown to us and other risks and uncertainties, currently regarded as immaterial, could turn out to be material. All of them have the potential to impact our business, operations, liquidity, financial position or future performance adversely.
Our satellites are subject to significant operational risks at launch or while in orbit which, if they were to occur, could adversely affect our revenues, profitability and liquidity. Although we maintain in-orbit insurance on our Inmarsat-4 satellite fleet and have obtained launch insurance for Alphasat and our Inmarsat-5 satellites, this may be insufficient to cover all losses if we had a satellite failure. Even if our insurance cover was sufficient, delays in building and launching a replacement satellite could adversely affect our revenues, profitability and liquidity.
We continue to rely in part on other third party distribution partners and service providers to sell our services to end-users and they determine the prices end-users pay. There is a risk that our distribution partners or service providers could fail to distribute our services effectively, or fail to offer services at prices which are competitive. In addition, the loss of any key distribution partners could materially affect our routes to market, reduce customer choice or represent a significant bad debt risk.
We rely on radio spectrum to provide our services. This has historically been allocated by the International Telecommunications Union without charge, and usage is coordinated with other satellite operators in our spectrum band. In the future, we may not be successful in coordinating our satellite operations under applicable international regulations and procedures or in obtaining sufficient spectrum or orbital resources necessary for our operations.
Development of hybrid networks, including ATC
Proposed ATC services in North America or other countries may result in increased competition for the right to use L-band spectrum, and such competition may make it difficult for us to obtain or retain the spectrum resources we require for our existing and future services. We cannot be certain that the development of hybrid networks, including ATC, in North America or other countries will not result in harmful interference to our operations. If we are unable to prevent or mitigate against such interference it could have an effect on our operations, revenues, profitability and liquidity.
LightSquared Cooperation Agreement
Our Cooperation Agreement with LightSquared may present us with operational and financial risks. If fully implemented, the Cooperation Agreement will ultimately result in a reduction in available L-band spectrum for Inmarsat services over North America and the need for our L-band services to coexist in North America with ATC services in adjacent frequencies. Whilst we believe that we can continue to operate our services over North America with minimal impact to our users following the launch of ATC services, there is a risk that our L-band services may be congested, interrupted and/or interfered with, which could have an adverse affect on our future L-band service performance in North America.
Our business is subject to regulation and we face increasing regulation with respect to the transmission of our satellite signals. The provision of our mobile satellite communication services in some countries could cause us to incur additional costs, could expose us to fines and could limit our ability to provide services.
Next generation services and satellites
We are currently implementing a major investment programme, Global Xpress, which includes the deployment of a global network of Ka-band satellites. This programme, which includes satellites, ground network, terminals and related services, may be subject to delays and/or material cost overruns. There can be no assurance that the development of new satellites, ground networks, or terminals and/or the introduction of new services will proceed according to anticipated schedules or cost estimates, or that the level of demand for the new services will justify the cost of setting up and providing such new services. A delay in the completion of such networks and/or services and/or the launch or deployment or operation of such satellites and/or new services, or increases in the associated costs, could have a material adverse effect on our revenue, profitability and liquidity.
Although Inmarsat is a market leader in MSS, the global communications industry is highly competitive. We face competition today from a number of communications technologies in the various target sectors for our services. It is likely that we will continue to face increasing competition from other network operators in some or all of our target sectors in the future, particularly from existing mobile satellite network operators. In addition, communications providers who operate private networks using VSAT or hybrid systems also continue to target MSS users. Technological innovation in VSAT, together with increased C-band, Ku-band and Ka-band coverage and commoditisation, have increased, and we believe will continue to increase, the competitiveness of VSAT and hybrid systems in some traditional MSS sectors, including maritime and aviation sectors. Furthermore, the gradual extension of terrestrial wireline and wireless communications networks to areas not currently served by them may reduce demand for some of our land mobile services in those areas. We believe that our acquisition of Ship Equip and our investment in GX will position us favourably to compete with alternate technology providers and reduce the impact of such competition on our L-band MSS business.
Despite ongoing uncertainty in the macro-economic environment, we are seeing continued growth momentum in our key MSS services of FleetBroadband, SwiftBroadband and IsatPhone Pro. Growth in revenue from these services is the result of both increased subscriber numbers and higher ARPUs. With the continuation of these trends we would expect organic new revenue growth to continue to outpace the expected loss of revenue from the ongoing withdrawal of troops from Afghanistan. As a result, we remain confident that we will report net revenue growth in 2013 in our Inmarsat Global MSS business. We believe our existing medium-term wholesale revenue targets including Global Xpress (8–12% CAGR: 2014–2016) continue to reflect our expectations for the performance of the Group and these are therefore reiterated and unchanged.
We remain highly confident in the Global Xpress opportunity and pleased by our technical and commercial progress to date. We remain on track for a first satellite deployment before the end of the 2013 and the completion of global coverage in 2014. Our expectations as to total programme capital costs remain unchanged at US$1.2bn. We also expect the launch of Alphasat, our latest L-band satellite, to occur in the third quarter of 2013.
Across all our investment and maintenance programmes, we expect our 2013 capital expenditure on a cash basis to be in the range of US$575m to US$625m.
Chief Financial Officer
7 March 2013