Inmarsat

Overview

2010 has been another excellent and exciting year for Inmarsat both from a financial and operational perspective. We managed to deliver solid revenue and EBITDA growth and continue to deliver substantial expansion in our operating cash flows. We ended the year with a strong balance sheet and significant available liquidity. In line with our strategy of increasing dividends based on the growth of normalised free cash flow, we are pleased to report that we have raised our dividend by 10% year-over-year.

We have reported solid revenue growth for the Group as a whole, but in particular Inmarsat Global’s MSS business has again delivered impressive performances in the aeronautical sector and in leasing. MSS growth has been driven by services such as BGAN, which benefited from increased usage as a result of the natural disasters earlier in the year, Swift 64 and FleetBroadband, as well as from new leasing business. We recognised contributions from both our newly acquired subsidiary, Segovia, as well as from our Cooperation Agreement with LightSquared. Our Stratos business has maintained its market share of Inmarsat Global’s MSS revenues of approximately 40%, which is encouraging given the increased competition and pricing pressures within the distribution channel.

Whilst we are very pleased with the progress this year, the economic climate continues to look uncertain, especially in our core government and maritime markets. This, together with the impact of migration to new services and continuing competition in our traditional MSS sectors, particularly maritime and aeronautical, means that we are cautious on our prospects for revenue growth in 2011. We did see a slowdown in the rate of growth in the second half of the year and we remain watchful as to how long these market and economic conditions will persist. However, we believe the introduction of the IsatPhone Pro positions us well to compete and win customers and grow revenue in the handheld voice market. Our acquisition of Segovia gives us the foothold to strengthen and leverage our relationships with key United States government agencies and other commercial customers and enhance our revenue growth in those markets. In addition, we announced our next generation service offering, Global Xpress, and are extremely excited by the incremental opportunities and long-term prospects which this programme offers in the future. However, our focus remains on growing our existing core business and delivering maximum value to shareholders, which we believe we are well positioned to achieve.

As mentioned, 2010 has been an exciting year operationally. Last year we commented on the acquisition of Segovia which was completed on 12 January 2010 for an initial consideration of US$110.0m. Additional amounts may be payable depending on the performance of the acquired business over the three years following the acquisition. We accounted for the acquisition of Segovia using the purchase method of accounting in accordance with IFRS 3, ‘Business Combinations (2008)’. The consolidated results of the Group for 2010 include the financial results of Segovia for the period from 12 January 2010 to 31 December 2010. The contingent consideration element relating to 2010 is estimated at US$13.0m and will be paid during 2011. We accounted for US$10.9m of the contingent consideration as part of the initial purchase accounting, with the additional US$2.1m, which arose due to better than expected performance in 2010, being recorded directly in the income statement in line with IFRS 3 (2008).

In August 2010, we announced a major new investment project called Global Xpress. Global Xpress will be supported by a global network of Ka-band satellites, the Inmarsat-5 generation, and will be primarily focused on providing super-high bandwidth services to the wider maritime, energy, aeronautical and government satellite communications sectors, which represent incremental long-term growth opportunities. The total expected cost of the Global Xpress programme is US$1.2bn and we expect to start bringing the Inmarsat-5 satellite network into commercial service in 2013. We have agreed a contract with Boeing for the delivery of three Inmarsat-5 satellites. Under a separate arrangement, Boeing has agreed to become a distribution partner for our Global Xpress services and has pre-committed to capacity purchases representing more than 10% of Inmarsat’s target Global Xpress revenues in the first five years after global service launch.

In December 2007, Inmarsat and LightSquared entered into a Cooperation Agreement for the efficient use of L-band spectrum over North America. On 17 August 2010, LightSquared triggered Phase 1 of this agreement under which we agreed a plan to re-band L-band spectrum over an eighteen month transition period. In order to implement Phase 1, Inmarsat has begun a process of transition to a modified spectrum plan to increase spectrum contiguity for both Inmarsat and LightSquared. In addition, Inmarsat will incur the cost of certain network and terminal modifications. During this process, LightSquared will make a series of payments to Inmarsat under the Cooperation Agreement totalling US$368.8m, which includes US$31.25m paid in December 2009 to maintain the Cooperation Agreement. To date, LightSquared has made payments totalling US$192.5m. We will be accounting for these and future Phase 1 payments using the percentage of completion method. During 2010, we recognised US$17.5m of revenue in relation to Phase 1 of the Cooperation Agreement.

On 28 January 2011, we received notice from LightSquared triggering Phase 2 of the agreement together with a first partial quarterly payment of US$20.1m. Under Phase 2, Inmarsat will support a phased transition to a further spectrum plan that increases the total spectrum capacity available to LightSquared for ATC services in North America. In return, Inmarsat will receive payments of US$115.0m per annum, increasing at a rate of 3% annually, with effect from 28 January 2011. The implementation of Phase 2 will cause an eventual reduction in aggregate L-band spectrum available for Inmarsat services over North America. While it is too soon to predict the impact that this early notice and subsequent reduction of spectrum will have on our MSS revenue growth in North America in the coming years, we are confident that we will be able to minimise the service impact on our existing users in this area. We have already taken measures as part of the migration programme to offer enhanced services for customers (such as the Inmarsat B to FleetBroadband migration incentive and safety services over SwiftBroadband programme), and we will continue to encourage users to progressively upgrade to much more spectrum efficient BGAN, SwiftBroadband and FleetBroadband services. Furthermore, starting in 2013, Inmarsat customers will start to benefit from extensive Ka-band services following the launch of our Global Xpress services, which will greatly augment our available spectrum resources in North America.

In April 2010, we signed a favourable 8-year facility agreement from the European Investment Bank (‘EIB Facility’) to fund the build and launch of our Alphasat satellite. In 2010 we drew down a total of US$308.4m under the facility, which matures on 30 April 2018 and is repayable in equal annual instalments beginning on 30 April 2012. Interest is equal to 3-month USD LIBOR plus a margin and is payable in January, April, July and October each year.

The results are the consolidated results of operations and financial condition of Inmarsat plc for the year ended 31 December 2010. We report two operating segments, namely Inmarsat Global and Stratos. The Stratos segment includes Segovia, which we acquired on 12 January 2010. The table below sets out the results of the Group for the years indicated:

Total Group revenues for 2010 increased by 12.9% compared with 2009. The table below sets out the components, by segment, of the Group’s total revenue for each of the years indicated:

Total Group net operating costs for 2010 increased by 7.1% compared with 2009. The table below sets out the components, by segment, of the Group’s net operating costs for each of the years indicated:

EBITDA
Group EBITDA for 2010 was US$696.1m, an increase of US$101.9m, or 17.1%, compared with 2009. EBITDA margin has increased to 59% for 2010, compared with 57% for 2009, primarily as a result of the inclusion of the results of Segovia from 12 January 2010, the inclusion of revenue from our Cooperation Agreement with LightSquared and expansion of margins in Inmarsat Global due to MSS revenue growth.

Depreciation and amortisation
The increase in depreciation and amortisation of US$3.0m is due to the inclusion of the results of Segovia from 12 January 2010 and depreciation of assets relating to our Global Satellite Phone Service (‘GSPS’) following commercial launch at the end of June 2010. Partially offsetting the increase is a reduction in depreciation due to four out of the five Inmarsat-3 satellites becoming fully depreciated.

Gain on disposal of assets
No gain on disposal of assets was recognised during 2010. The gain on disposal of assets recognised during 2009 of US$2.1m arose from the transfer and disposal of assets by Stratos.

Share of results of associates
During 2010, we recorded US$1.2m in respect of earnings from associates compared to US$0.9m during 2009. The earnings from associates arose from equity accounted investments held by Stratos.

Acquisition-related adjustments
During 2010, we recorded an adjustment of US$2.1m relating to increased contingent consideration in respect of our acquisition of Segovia. In line with IFRS 3 (2008), the contingent consideration adjustment is charged as an expense to the income statement. This is due to the better-than-expected performance of Segovia against the earn-out targets in 2010. During 2009, we recorded a US$8.8m adjustment to the carrying amount of goodwill following the recognition of a deferred tax asset relating to unutilised capital allowances arising in Stratos’s UK entities.

Operating profit
As a result of the factors discussed above, operating profit during 2010 was US$460.6m, an increase of US$103.8m, or 29%, compared with 2009.

Interest
Net interest payable for 2010 was US$127.1m, a decrease of US$32.8m, or 21%, compared with 2009.

Interest payable for 2010 was US$128.5m, a decrease of US$33.1m, or 20%, compared with 2009. Accounting for the majority of the decrease were the one-off items amounting to US$29.3m that we incurred in 2009 in connection with our refinancing activity. In addition, I am very pleased to report that we were able to lower our underlying interest costs as a result of the refinancing. The retirement of the Stratos external borrowings and the new EIB Facility for Alphasat should allow us to maintain attractively low interest costs in the coming years. We also recorded a small unrealised foreign exchange gain on Inmarsat Global’s pension and post-retirement scheme liabilities in 2010 compared to a loss in 2009.

Partially offsetting the decrease in interest payable is an increase in interest incurred on the interest rate swaps and the Convertible Bond in 2010. In addition we recognised net redemption premia of US$3.1m and wrote-off US$5.8m of unamortised arrangement costs in respect of the Stratos Refinancing in 2010.

Interest receivable for 2010 was US$1.4m compared to US$1.7m in 2009.

Profit before tax
For 2010, profit before tax was US$333.5m, an increase of US$136.6m, or 69% compared with 2009. The increase is due primarily to increased underlying Group revenues and EBITDA, the inclusion of revenue in respect of our Cooperation Agreement with LightSquared, the inclusion of Segovia’s results from 12 January 2010 and decreased net interest payable. The increase is partially offset by increased underlying Group operating costs in the year.

Income tax expense
The tax charge for 2010 was US$72.4m, an increase of US$28.3m, or 64%, compared with 2009. The increase in the tax charge is largely driven by the underlying increase in profits for 2010 and the inclusion of the results of Segovia from 12 January 2010.

The effective tax rate for 2010 was 21.7% compared to 22.4% for 2009. The 2010 effective tax rate was reduced by US$7.0m of non-recurring current year tax benefits and a US$13.5m credit on prior year tax positions. The 2009 effective tax rate was reduced due to a one-off tax credit of US$8.8m recognised during 2009, which arose from the recognition of a deferred tax asset relating to unutilised capital allowances in Stratos’ UK entities.

Profit for the period
As a result of the factors discussed above, profit for 2010 was US$261.1m, an increase of US$108.3m, or 71%, compared with 2009.

Earnings per share
For 2010, basic and diluted earnings per share for profit attributable to the equity holders of the Company were 57 cents (US$) and 57 cents (US$), respectively, compared with 33 cents (US$) and 35 cents (US$), respectively for 2009.

The 2009 basic and diluted earnings per share adjusted to exclude the after tax effect of the one-off costs of US$28.8m (US$20.7m net of tax) in relation to the refinancing of our previous debt facilities, the goodwill adjustment of US$8.8m and the associated tax credit of US$8.8m, were 38 cents (US$) and 39 cents (US$), respectively. There are no comparable adjustments in 2010. Therefore we do not present adjusted basic and diluted earnings per share for 2010.

Revenues
During 2010, revenues from Inmarsat Global were US$764.1m, an increase of US$69.3m, or 10.0%, compared with 2009. Growth in MSS revenues accounted for 6.4 percentage points of the overall percentage revenue growth year on year. Revenues from the LightSquared Cooperation Agreement accounted for 2.5 percentage points and revenues from the sale of terminals accounted for 1.0 percentage point of the overall percentage growth in revenue year over year. The growth in MSS revenues has been driven by services such as BGAN, Swift 64 and FleetBroadband, as well as from new leasing business. The table below sets out the components of Inmarsat Global’s revenue for each of the years indicated:

Total active terminal numbers as at 31 December 2010 increased by 10.1%, compared with 31 December 2009.

Seasonality – Impact of volume discounts
There is generally very little seasonality in the markets we serve, although data traffic tends to slow down at holiday periods, eg Christmas. However, in previous years our Volume Discount Scheme (‘VDS’) led to significant seasonality in our revenues. The terms of the VDS changed following the signing of the new distribution agreements by Inmarsat Global’s distribution partners, effective from 1 May 2009. This resulted in the removal of volume discounts on BGAN services and the implementation of a more even phasing of discounts during the year with respect to Existing and Evolved services (being all services other than our broadband services, SPS and our GSPS). Historically, volume discounts under the old VDS progressively increased over the course of the year, with lower discount levels in early quarters and higher discount levels in later quarters. Volume discounts for the period 1 January 2009 to 30 April 2009 were based on the old VDS, condensed from a twelve-month period into a four-month period. Volume discounts after 1 May 2009 are based on the new structure where discounts remain constant throughout the period.

During 2010, volume discounts were US$41.8m, a decrease of US$11.6m, or 22%, compared with 2009. The decrease reflects the changes in the VDS discussed above and lower revenues from the services remaining eligible for VDS. Although we removed our BGAN services from the VDS, we have implemented certain price reductions for BGAN services, resulting in a neutral position for wholesale BGAN prices.

Maritime Sector
During 2010, revenues from the maritime sector were US$360.6m, an increase of US$3.6m, or 1.0%, compared with 2009.

Revenues from data services in the maritime sector during 2010 were US$262.5m, an increase of US$10.2m, or 4.0%, compared with 2009. The increase in revenues from data services reflects strong growth in our FleetBroadband service. We have added over 10,000 FleetBroadband terminals in the year, more than double the number added in 2009 and a strong indicator of the success of this service. However, we believe that the accelerated adoption of our FleetBroadband service has partially constrained our rate of revenue growth as the price of services using FleetBroadband is typically less than the price of equivalent services on the terminals being replaced or upgraded. However, over time, we expect to offset this effect through usage growth in response to increased service capability and faster speeds available through FleetBroadband. Although a lesser factor, competition from VSAT service offerings has also increased since the announcement of our Global Xpress service. In addition, we believe the challenging economic and competitive environment for the shipping industry during 2010 has also impacted our rate of revenue growth when compared to prior periods.

As expected, revenue from our Inmarsat B service is decreasing due to the natural run-off of this mature service, which will be discontinued on 31 December 2014. Active Inmarsat B terminal numbers are reducing due to older ships being decommissioned or re-fitted with FleetBroadband terminals. In addition, there was a decrease in revenues from our Mini M service, where there is an expected long-term decline in demand for fax and low speed data. The rates of the decline of both these services accelerated as the year progressed.

Revenues from voice services in the maritime sector during 2010 were US$98.1m, a decrease of US$6.6m or 6.3% compared with 2009. Growth in demand for voice services among users of our FleetBroadband service was more than offset by the ongoing decline in our mature Inmarsat B and Mini M services. The decline in revenues from voice services in the maritime sector can be attributed to a combination of factors, including the current economic environment for the shipping industry, the substitution effect of voice usage to email and Voice Over IP and some increased competition. Revenues are also negatively impacted by product mix changes as users transition from our older services to our newer FleetBroadband service where the price of voice services is lower.

Land Mobile Sector
During 2010, revenues from the land mobile sector were US$153.7m, an increase of US$7.2m, or 4.9%, compared with 2009.

Revenues from data services in the land mobile sector during 2010 were US$146.4m, an increase of US$8.4m, or 6.1%, compared with 2009. Growth in BGAN revenue was partially offset by the decline in GAN high-speed data traffic, particularly following reduced traffic levels from government users in the Middle East. Usage of our BGAN service in this region has historically been volatile and has affected our results from time to time.

Revenues from BGAN services for 2010 were US$117.4m, an increase of US$18.7m, or 18.9%, compared with 2009. These figures include voice, data and subscription revenues. As at 31 December 2010, active BGAN subscribers were 49,172 compared with 33,571 as at 31 December 2009, an increase of 15,601 or 46% year-on-year. BGAN subscribers include 5,800 low usage subscribers activated at the end of March 2010 for the May 2010 election in the Philippines. Disaster relief efforts by aid agencies and government organisations and additional usage by media companies, in response to the earthquakes in Haiti and Chile, resulted in an estimated US$5.5m in incremental BGAN revenues during 2010.

Revenues from voice services in the land mobile sector during 2010 were US$7.3m, a decrease of US$1.2m, or 14.1%, compared with 2009. We continue to experience declining traffic volumes resulting from competition, principally for our Mini M service, from other MSS operators, however we are seeing growth in our BGAN voice service which now accounts for over 50% of voice revenues. Although we launched our handheld satellite phone, IsatPhone Pro, at the end of June 2010, the early stage of service introduction meant it made no material contribution during the year, however we are confident that this will contribute to land voice revenue growth in the coming years.

Aeronautical Sector
During 2010, revenues from the aeronautical sector were US$101.0m, an increase of US$25.2m, or 33%, compared with 2009. The increase is a result of continued demand for our Swift 64 high-speed data service which experienced a 4.1% increase in active channels compared with 2009. In addition, we experienced strong growth in revenues from our SwiftBroadband service, which has now gained widespread industry acceptance, with growth in active channels of 140% year-on-year. Our low-speed data services also benefited from increased industry demand. Our Swift 64 and SwiftBroadband services target the government aircraft and business jet markets as well as being used by commercial airlines.

Leasing
During 2010, revenues from leasing were US$111.7m, an increase of US$8.2m, or 7.9%, compared with 2009. The increase is a result of additional government contracts for land-based services and the expansion of Swift 64 leases for certain aeronautical customers, partially offset by the non-renewal of an aeronautical contract and the reduction of a maritime contract, towards the end of 2010.

Other income
Other income for 2010 was US$37.1m, an increase of US$25.1m or 209%, compared with 2009. The increase is predominantly due to US$17.5m of revenue recorded in respect of the LightSquared Cooperation Agreement and US$8.1m of revenue relating to the sale of IsatPhone Pro terminals and accessories.

Net operating costs
Net operating costs in 2010 decreased by 4.0% compared with 2009. The table below sets out the components of Inmarsat Global’s net operating costs for each of the years indicated:

Impact of hedged foreign exchange rate
The functional currency of the Group’s principal subsidiaries is US dollars. Approximately 60% of Inmarsat Global’s costs are denominated in Pounds Sterling. Net operating costs in 2010 have been affected by a favourable movement in Inmarsat Global’s hedged rate of exchange from US$1.92/£1.00 in 2009 to US$1.49/£1.00 in 2010. The movement in the hedged rate of exchange in the year has resulted in a decrease in comparative costs of US$26.0m. We have completed hedging arrangements for our anticipated sterling costs in both 2011 and 2012. As a result, we expect our hedged rate of exchange for 2011 to be US$1.52/£1.00 and for 2012 to be US$1.48/£1.00.

Employee benefit costs
Employee benefit costs decreased by US$18.8m in 2010 compared to 2009, due primarily to the favourable movement in Inmarsat Global’s hedged rate of exchange. In addition, we recorded costs in respect of an award of shares to employees under the Share Incentive Plan in 2009. Partially offsetting the decrease were additional staff costs due to an increase in total full-time equivalent headcount (510 at 31 December 2010 compared to 490 at 31 December 2009) and employee cost increases in 2010.

Network and satellite operations costs. Network and satellite operations costs for 2010 were broadly in line with 2009.

Other operating costs
Other operating costs for 2010 increased by US$5.2m compared to 2009. The increase relates predominantly to a foreign exchange loss of US$0.2m in 2010, compared to a foreign exchange gain of US$8.1m in 2009 and to higher direct cost of sales due to IsatPhone Pro terminal sales. Partially offsetting the increase was a decrease in accommodation costs due to the favourable movement in Inmarsat Global’s hedged rate of exchange. In addition, we expensed US$3.9m of fees in relation to our acquisition of Segovia, in 2009. We did not expense any fees in relation to the Segovia acquisition in 2010.

Own work capitalised
The decrease in own work capitalised for 2010 of US$5.2m, compared 2009, is predominantly a result of the movement in the Group’s hedged rate of exchange.

Operating profit

The increase in operating profit for 2010 of US$87.8m, compared to 2009, is a result of higher revenues, lower net operating costs and lower depreciation and amortisation.

On 12 January 2010, we acquired the business assets of Segovia. As a result of a group reorganisation completed earlier in the year and the acquisition of Segovia, we now include the Stratos and Segovia businesses in a single operating segment.

Revenues
During 2010, revenues from Stratos increased by 11.3%, compared with 2009, primarily as a result of the inclusion of the revenues of Segovia in the Stratos operating segment. The table below sets out the components of Stratos’ revenues for each of the years indicated:

Total MSS revenue
Revenues from MSS for 2010 increased by US$4.4m, or 0.8% compared with 2009. Growth has been driven primarily by increased Swift 64 revenue, leasing revenue, sales of equipment and increased revenues from Inmarsat’s broadband services, partially offset by decreases in revenues from Inmarsat’s Existing and Evolved services and network services provided to certain distributors.

Inmarsat MSS
Revenues derived from Inmarsat MSS for 2010 increased by US$6.6m, or 1.5% compared with 2009. The increase is primarily due to increases in the aeronautical, maritime and leasing sectors, partially offset by a decrease in the land mobile sector. Competitive pricing, as a result of the market entry of new Inmarsat distributors, continued to negatively impact revenues from Inmarsat broadband services. Inmarsat’s Existing and Evolved services offered by Stratos have also experienced pricing pressure.

For 2010, Stratos’ share of Inmarsat Global’s MSS revenues was 40%, broadly in line with 2009.

Other MSS
Other MSS primarily consists of sales of equipment, mobile telecommunications services sourced on a wholesale basis from other MSS providers, network services provided to certain distributors and other ancillary services. Other MSS services, in general, have lower gross margins than Inmarsat services.

Revenues from Other MSS during 2010 decreased by US$2.2m, or 1.7% compared with 2009. The decrease is primarily due to a reduction in network services provided to other Inmarsat distributors, partially offset by increased sales of equipment.

Broadband
During 2010, revenues from Broadband services increased by US$68.3m, or 75%, compared with 2009. The increase is primarily due to the inclusion of Segovia revenues during 2010 and increased revenues from our microwave network in the Gulf of Mexico. Partially offsetting the increase was a decrease in VSAT revenue as a result of the expiry of certain contracts, the sale of certain customer contracts in Germany and decreased revenue from VSAT and microwave network equipment sales.

Net operating costs
Net operating costs in 2010 increased by US$49.7m or 9.1%, compared with 2009 primarily as a result of the inclusion of the operating costs of Segovia in the Stratos operating segment. The table below sets out the components of Stratos’ net operating costs and shows the allocation of costs to the Group’s cost categories for each of the years indicated:

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 Stratos’ 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 2010 increased by US$38.0m, compared with 2009. The increase is predominantly due to the addition of Segovia, as well as increased cost of airtime and equipment as a result of the increase in revenues and higher network infrastructure operating costs resulting primarily from higher salary costs and exchange rates. Partially offsetting the increase in cost of goods and services was a decrease in costs relating to the Broadband business, predominantly due to the reduction of costs as a result of lower revenue and ceasing operations in Germany.

Operating costs
Operating costs during 2010 increased by US$11.7m, compared with 2009. The increase is primarily due to the addition of Segovia, partially offset by a decrease in the operating expenses for the remaining Stratos business, mainly as a result of a decrease in salaries and benefits costs due to reduced incentive plan costs.

Operating profit

Stratos’ operating profit for 2010 increased by US$14.4m, compared with 2009, primarily as a result of the addition of Segovia, partially offset by the US$2.1m additional deferred consideration in respect of the acquisition of Segovia.

Gross margin consists of revenues less cost of goods and services. Gross margin and gross margin percentage for 2010 increased as a result of the addition of Segovia, partially offset by changes in MSS product mix and declines in the VSAT business. Changes in product mix include the increased sales of equipment, which have a lower gross margin, and a migration by customers to lower margin services such as BGAN and FleetBroadband. In addition, margins have been negatively impacted by competitive pricing as discussed earlier.

At 31 December 2010, the Group had cash and cash equivalents of US$343.8m and available but undrawn borrowing facilities of US$300.0m under our Senior Credit Facility. We are operating well within the financial covenant limitations of our Senior Credit Facility and EIB Facility. As a result, we believe our liquidity position is more than sufficient to meet the Group’s needs for the next 12 months. In addition, among satellite companies, the Group has historically maintained one of the lowest levels of debt leverage, as measured by the ratio of Net Borrowings to EBITDA. As a result of this prudent approach we remain well-positioned to access the capital markets when needed to meet our financing needs.

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 borrowing facilities and debt securities.

On 15 April 2010, we signed an 8-year facility agreement from the EIB to fund the build and launch of the Alphasat satellite. Under the agreement, we were able to borrow up to €225m at any time before 23 December 2010. The facility is available in Euros and US dollars. An initial draw-down of US$180.0m was made on 30 April 2010 and a final draw-down of US$128.4m was made on 28 October 2010. This facility matures on 30 April 2018 and is repayable in equal annual instalments beginning 30 April 2012. Interest is equal to 3-month USD LIBOR plus a margin and is payable in January, April, July and October each year. The facility ranks pari passu with our Senior Credit Facility and ahead of our 7.375% Senior Notes due 2017.

On 10 May 2010 and 2 June 2010 we used available liquidity within the Group to pre-pay and cancel the Stratos Senior Credit Facility and redeem the Stratos Senior Unsecured Notes, respectively. On the pre-payment date of the Stratos Senior Credit Facility, the amount outstanding under the facility was US$207.0m. We redeemed the entire principal amount of US$150.0m outstanding under Stratos’ Senior Unsecured Notes (US$62.4m, net of US$87.6m Stratos Senior Unsecured Notes held by the Group at the date of redemption) and paid the associated note redemption premium of US$3.1m (US$7.4m less US$4.3m received by virtue of the Groups investment in the Stratos Senior Unsecured Notes). In addition, as a result of the pre-payment and redemption, we wrote-off US$1.9m and US$3.9m in respect of unamortised debt issue costs in relation to the Stratos Senior Credit Facility and the Stratos Senior Unsecured Notes, respectively.

The Group’s net borrowings (gross of deferred finance costs) for the years ended 31 December 2010 and 2009 are presented in the table below:

The table below shows the condensed consolidated cash flow for the Group for the years ended 31 December 2010 and 2009:

The increase in net cash generated from operating activities in 2010, compared to 2009, of US$122.2m primarily relates to US$121.2m received from LightSquared in 2010 in respect of our Cooperation Agreement and higher EBITDA in 2010 offset by movements in working capital.

The increase in net cash used in investing activities in 2010, compared to 2009, of US$103.4m primarily relates to the acquisition of Segovia for an initial cash consideration of US$110.0m (including transaction fees) in 2010. In the prior year we paid US$11.9m (including transaction fees) for our investment in SkyWave.

Capital expenditure, including own work capitalised, increased by US$18.1m in 2010, compared to in 2009. The increase relates to milestone payments in respect of our Inmarsat-5 investment in 2010 of US$59.8m, offset by lower capital expenditure on our handheld network and terminals, Inmarsat-4 satellites and network and our third Satellite Access Station. Capital expenditure may fluctuate with the timing of milestone payments on current projects. Stratos’ cash outflow in respect of capital expenditure for property, plant and equipment and additions to capitalised development costs, including software, was US$26.4m for 2010 (2009: US$24.0m).

Net cash used in financing activities, excluding the payment of dividends, decreased by US$57.1m in 2010, compared to 2009. During 2010, the Group repaid US$90.0m principal of the Senior Credit Facility, drew down US$308.4m from the EIB Facility, repaid US$209.2m principal of the Stratos Senior Credit Facility and redeemed US$65.5m principal of the Stratos Senior Unsecured Notes. In addition, the Group paid cash interest of US$93.3m, arrangement fees in respect of new borrowing facilities of US$3.3m and purchased US$24.4m principal amount of its own debt securities.

During 2009, the Group drew down US$290.0m on the Senior Credit Facility and pre-paid and cancelled its previous Senior Credit Facility of US$390.0m. During 2009, the Group received US$645.2m aggregate gross proceeds from the offering of its Senior Notes due 2017, paid US$465.6m (US$450.0m principal amount together with US$15.6m redemption premium) to redeem 100% of the principal amount of its Senior Discount Notes and paid US$164.5m (US$160.4m principal amount together with US$4.1m redemption premium) to redeem 100% of the principal amount of its Senior Notes due 2012. In addition, the Group paid cash interest of US$110.5m, arrangement costs in relation to new borrowing facilities of US$23.8m and purchased US$8.6m principal amount of its own debt securities.

The Group has continued to expand its free cash flow generation and in 2010 generated positive free cash flow of US$470.3m, an increase of US$121.3m, or 35%, compared with 2009. The increase is due to an increase in EBITDA as a result of higher revenues and lower operating costs and a favourable movement in working capital due mainly to the amounts received from LightSquared in respect of our Cooperation Agreement with them. In addition we experienced reduced cash interest paid, offset in part by increased cash tax paid and capital expenditure, which included milestone payments in relation to our Inmarsat-5 investment.

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 in note 32 to the consolidated financial statements.

The Inmarsat plc Board of Directors intends to recommend a final dividend of 22.69 cents (US$) per ordinary share in respect of the year ended 31 December 2010 to be paid on 27 May 2011 to ordinary shareholders on the register of members at the close of business on 13 May 2011. Shareholders will be asked to approve the final dividend payment at the Annual General Meeting to be held on 3 May 2011. Dividend payments will be made in Pounds Sterling based on the exchange rate prevailing in the London market four business days prior to payment. In accordance with IAS 10, this final dividend has not been recorded as a liability in the financial statements at 31 December 2010. This, added to the interim dividend of 14.00 cents (US$) per ordinary share paid on 29 October 2010 for the year ended 31 December 2010, equals 36.69 cents (US$) per ordinary share, a 10% increase over 2009, and amounts to US$168.8m. The increase in dividend is in accordance with our strategy of increasing dividends based on the growth of free cash flow, adjusted to normalised capital expenditure.

The Group continues to maintain a strong financial position, with net assets increasing by US$118.7m to US$1,088.7m at 31 December 2010. The table below shows the consolidated Group balance sheet at 31 December 2010 and 2009:

The increase in the Group’s non-current assets of US$96.1m is due primarily to the recognition of US$117.0m of non-current assets and US$27.2m of goodwill following the acquisition of the assets and liabilities of Segovia on 12 January 2010 (see note 29 for details) and additions during 2010. The increase was offset in part by the decrease in derivative financial instruments relating to our foreign exchange rate hedging of US$5.1m and depreciation and amortisation of capital assets, during 2010.

The increase in current assets of US$156.3m is due predominantly to the increase in cash and cash equivalents from US$226.8m at 31 December 2009 to US$343.8m at 31 December 2010. The increase in cash and cash equivalents is due primarily to cash received in relation to our Cooperation Agreement with LightSquared. In addition, trade and other receivables increased by US$27.7m to US$255.2m at 31 December 2010, inventory increased by US$10.7m to US$20.2m at 31 December 2010, and we recorded US$5.6m restricted cash relating to Segovia at 31 December 2010. Partially offsetting the increase was a decrease in derivative financial instruments relating to foreign exchange rate hedging of US$4.7m to US$7.4m at 31 December 2010.

The increase in current liabilities of US$102.8m relates primarily to deferred revenue recognised in relation to our Cooperation Agreement with LightSquared. In addition, current income tax liabilities increased by US$12.8m to US$46.8m at 31 December 2010. Partially offsetting the increase in current liabilities was the decrease in short-term borrowings of US$50.8m to US$58.6m at 31 December 2010. This decrease in short-term borrowings was due to the repayment of US$90.0m of the Senior Credit Facility, offset by US$50.0m of the Senior Credit Facility being transferred from non-current to current in the year.

The increase in non-current liabilities of US$30.9m relates primarily to the increase in other payables and deferred income tax of US$30.7m and US$14.0m, respectively. Partially offsetting the increase is the decrease in provisions of US$13.3m to US$42.5m at 31 December 2010, which is due predominantly to Inmarsat Global’s pension and post-retirement scheme liabilities following the review of actuarial assumptions for accounting purposes at 31 December 2010.

The decrease in net non-current borrowings of US$1.2m is due to a number of offsetting transactions during the year. We drew down US$308.4m under the EIB Facility, repaid the entire outstanding amount of US$209.2m of the Stratos Senior Credit Facility and redeemed the outstanding Stratos Senior Unsecured Notes of US$62.4m (US$150.0m principal amount of the Stratos Senior Unsecured Notes less US$87.6m principal amount which was held by the Group at the date of redemption). In addition, US$50.0m relating to the Senior Credit Facility was transferred from non-current to current in the year.

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 the 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. They should also be carefully considered in conjunction with the statement on internal control and risk management in the Statement on Corporate Governance, the forward-looking statements in this document and the cautionary statement regarding forward-looking statements.

Satellites
Our satellites are subject to significant operational risk while in orbit which, if they were to occur, could adversely affect our revenues, profitability and liquidity. Although we have in-orbit insurance on our Inmarsat-4 satellite fleet, this may be insufficient to cover all losses if we had a satellite failure. Even if our insurance were sufficient, delays in building and launching a replacement satellite could adversely affect our revenues, profitability and liquidity.

Distribution
Although we now own one of our largest distribution partners (Stratos), we continue to rely 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. Since the acquisition of Stratos and the signing of new distribution agreements and new distribution partners, this risk has been mitigated to some extent.

Spectrum
We rely on radio spectrum to provide our services. This has historically been allocated by the International Telecommunications Union without charge, and usage has to be co-ordinated with other satellite operators in our spectrum band. In the future, we may not be successful in co-ordinating 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
The implementation of ATC services by MSS operators 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 such interference it could have an effect on our operations, revenues, profitability and liquidity.

LightSquared Cooperation Agreement
Our Cooperation Agreement with LightSquared presents us with operational and financial risks. 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 co-exist in North America with ATC services in adjacent frequencies. Whilst we are confident 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. In order to mitigate this risk, we have already taken measures as part of the migration programme envisaged under the Cooperation Agreement to offer enhanced services for customers (such as the Inmarsat B to FleetBroadband migration incentive and safety services over SwiftBroadband programme), and we will continue to encourage users to progressively upgrade to much more spectrum-efficient BGAN, SwiftBroadband and FleetBroadband services. The migration of customers off our Existing and Evolved services to our broadband services gives rise to the risk of customers choosing to move to other competitive services, which could have an adverse effect on our revenues and profitability.

In addition, we are subject to the risk that LightSquared may default on their payments under the Cooperation Agreement or that they may elect to terminate the implementation of Phase 2 and return to Phase 1 (which they may do from 28 January 2016), which may have a material adverse effect on our future profitability.

Regulation
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 in some countries.

Competition
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 users of mobile satellite services. 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 aeronautical 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.

Next generation services and satellites
Our major new investment project, Global Xpress, which will be deployed over a global network of Ka-band satellites, is currently being developed. The development, which includes the satellites, ground network, terminals and related services, may be subject to delays and/or material cost over-runs. 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. Failure or 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.

Financial risks
The Group’s operations and significant debt financing expose it to a variety of financial risks that include the effects of changes in foreign exchange rates, debt market prices, credit risks, liquidity risks and interest rates. The Group has in place a financial risk management programme that seeks to limit the adverse effects on the financial performance by using forward exchange contracts to limit exposure to foreign currency risk and interest rate swaps to reduce the impact of fluctuating interest rates on its floating rate long-term debt. Details of financial risk are in note 3 to the consolidated financial statements.

Economic conditions
The global economic environment continues to remain unstable and any further weakening may lead to a fall in demand for our services, particularly in the maritime and aeronautical sectors. However, many of the customers we serve are government and industrial corporations who, because of their own business needs, rely on our communications solutions and services even as economic conditions fluctuate. In addition, our business benefits from diversity of sectors, services offered and customer types on land, sea and air.

In our Inmarsat Global maritime business, we expect the ongoing strong growth of FleetBroadband to continue to constrain our revenue growth given the lower price of data services as usage levels build. In addition, we expect maritime voice revenue to continue to be impacted by email substitution and increased competition.

While land mobile revenues will remain susceptible to volatility, both BGAN and IsatPhone Pro are attracting new users and traffic to our network which will drive growth. Overall growth in the early part of 2011 will be impacted by comparability due to non-recurring event revenues in the early part of 2010.

In our aeronautical business, we expect increasing demand for SwiftBroadband from existing and new users to drive incremental revenues. However, the high government customer usage levels seen in 2010 have normalised and we expect our aeronautical growth in 2011 overall to be affected by the continuation of a lower level of activity and by budget constraints.

Our pipeline for new leasing business is encouraging and therefore we expect to rebuild our total leasing inventory during the year.

Overall we expect growth in our core MSS revenues for 2011 to be between 2% and 4%, with growth weighted to the second half of the year due to comparability affected by the high level of event revenue seen in early 2010. Although we expect some incremental operating costs in relation to our Global Xpress programme, we see no trend changes in our underlying costs, cash flow and profitability. In addition we expect to recognise between US$187.0m and US$207.0m of revenue in connection with our Cooperation Agreement with LightSquared and expect to incur up to US$20.0m of operating costs in relation to Phase 1 of our Cooperation Agreement with LightSquared.

Our Alphasat and Global Xpress investment plans remain on track as to schedule and total capital costs. We expect that cash used for capital expenditure in 2011 will be between US$450.0m and US$550.0m.

We see no change in our dividend growth commitments and therefore expect dividend growth of at least 10% for 2011 compared to 2010.

Rick Medlock
Chief Financial Officer