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EX-31.1 - EX-31.1 - DIGITALGLOBE, INC.dgi-20140930ex3116bdc1a.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2014

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission file number 001-34299

 

DIGITALGLOBE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

31-1420852

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

1601 Dry Creek Drive, Suite 260

Longmont, Colorado

 

80503

(Address of principal executive office)

 

(Zip Code)

 

(303) 684-4000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

 

Large accelerated filer  

Accelerated filer  

 

 

Non-accelerated filer  

Smaller reporting company  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    No  

 

As of October 23, 2014, there were 75,164,240 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

 


 

DigitalGlobe, Inc.

 

INDEX

 

 

 

 

 

Page

PART I. 

Financial Information

Item 1: 

Financial Statements

Unaudited Condensed Consolidated Statements of Operations 

Unaudited Condensed Consolidated Balance Sheets 

Unaudited Condensed Consolidated Statements of Cash Flows 

Notes to Unaudited Condensed Consolidated Financial Statements 

Item 2: 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23 

Item 3: 

Quantitative and Qualitative Disclosures about Market Risk

40 

Item 4: 

Controls and Procedures

41 

PART II. 

Other Information

41 

Item 1: 

Legal Proceedings

41 

Item 1A: 

Risk Factors

41 

Item 2: 

Unregistered Sales of Equity Securities and Use of Proceeds

41 

Item 3: 

Defaults Upon Senior Securities

41 

Item 4: 

Mine Safety Disclosures

42 

Item 5: 

Other Information

42 

Item 6: 

Exhibit Index

42 

 

Picture 1

2


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

DigitalGlobe, Inc.

 

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

September 30,

 

September 30,

(in millions, except per share data)

    

2014

    

2013

 

2014

    

2013

Revenue

 

$

154.6 

 

$

164.8 

 

$

468.9 

 

$

443.0 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue, excluding depreciation and amortization

 

 

40.9 

 

 

46.7 

 

 

121.5 

 

 

134.9 

Selling, general and administrative

 

 

55.8 

 

 

60.6 

 

 

167.2 

 

 

204.9 

Depreciation and amortization

 

 

57.7 

 

 

59.4 

 

 

172.9 

 

 

165.7 

Restructuring charges

 

 

 —

 

 

3.1 

 

 

1.1 

 

 

37.0 

Loss on abandonment of asset

 

 

 —

 

 

 

 

1.2 

 

 

Income (loss) from operations

 

 

0.2 

 

 

(5.0)

 

 

5.0 

 

 

(99.5)

Loss from early extinguishment of debt

 

 

 

 

 

 

 

 

(17.8)

Other income, net

 

 

0.1 

 

 

0.1 

 

 

0.2 

 

 

0.5 

Interest expense, net

 

 

 

 

(0.7)

 

 

 

 

(3.5)

Income (loss) before income taxes

 

 

0.3 

 

 

(5.6)

 

 

5.2 

 

 

(120.3)

Income tax benefit

 

 

0.6 

 

 

3.8 

 

 

1.1 

 

 

36.9 

Net income (loss)

 

 

0.9 

 

 

(1.8)

 

 

6.3 

 

 

(83.4)

Preferred stock dividends

 

 

(1.0)

 

 

(1.0)

 

 

(3.0)

 

 

(2.6)

Net (loss) income less preferred stock dividends

 

 

(0.1)

 

 

(2.8)

 

 

3.3 

 

 

(86.0)

Income allocated to participating securities

 

 

 

 

 

 

(0.1)

 

 

Net (loss) income available to common stockholders

 

$

(0.1)

 

$

(2.8)

 

$

3.2 

 

$

(86.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings  per share

 

$

0.00 

 

$

(0.04)

 

$

0.04 

 

$

(1.21)

Diluted (loss) earnings per share

 

$

0.00 

 

$

(0.04)

 

$

0.04 

 

$

(1.21)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

75.1 

 

 

74.5 

 

 

75.1 

 

 

70.8 

Diluted

 

 

75.1 

 

 

74.5 

 

 

76.1 

 

 

70.8 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

3


 

 

DigitalGlobe, Inc.

 

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

(in millions, except par value)

 

2014

 

2013

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$

127.4 

 

$

229.1 

Restricted cash

 

 

4.8 

 

 

6.9 

Accounts receivable, net of allowance for doubtful accounts of $0.6 and $2.4, respectively

 

 

127.3 

 

 

116.3 

Short-term deferred contract costs

 

 

10.6 

 

 

10.0 

Prepaid and current assets

 

 

20.6 

 

 

23.8 

Deferred taxes (Note 12)

 

 

5.5 

 

 

5.9 

Total current assets

 

 

296.2 

 

 

392.0 

Property and equipment, net of accumulated depreciation of $1,044.2 and $880.6, respectively

 

 

2,209.6 

 

 

2,177.5 

Goodwill

 

 

484.2 

 

 

459.3 

Intangible assets, net of accumulated amortization of $16.7 and $8.7, respectively

 

 

45.8 

 

 

39.9 

Aerial image library, net of accumulated amortization of $45.2 and $41.3, respectively

 

 

5.2 

 

 

9.1 

Long-term restricted cash

 

 

2.7 

 

 

4.5 

Long-term deferred contract costs

 

 

42.6 

 

 

44.9 

Other assets

 

 

34.4 

 

 

38.6 

Total assets

 

$

3,120.7 

 

$

3,165.8 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

$

10.5 

 

$

20.9 

Current portion of long-term debt

 

 

5.5 

 

 

5.5 

Other accrued liabilities

 

 

60.5 

 

 

80.3 

Current portion of deferred revenue

 

 

103.8 

 

 

81.3 

Total current liabilities

 

 

180.3 

 

 

188.0 

Deferred revenue

 

 

329.4 

 

 

374.6 

Long-term debt, net of discount

 

 

1,133.4 

 

 

1,137.1 

Long-term deferred tax liability, net (Note 12)

 

 

76.8 

 

 

80.0 

Other liabilities

 

 

6.5 

 

 

2.8 

Total liabilities

 

$

1,726.4 

 

$

1,782.5 

COMMITMENTS AND CONTINGENCIES (Note 16)

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

DigitalGlobe, Inc. stockholders’ equity:

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value; 0.08 shares authorized; 0.08 shares issued and outstanding at September 30, 2014; and 0.08 shares issued and outstanding at December 31, 2013

 

 

 —

 

 

Common stock; $0.001 par value; 250.0 shares authorized; 75.9 shares issued and 75.2 shares outstanding at September 30, 2014 and 75.5 shares issued and 75.3 shares outstanding at December 31, 2013

 

 

0.2 

 

 

0.2 

Treasury stock, at cost; 0.7 shares at September 30, 2014 and 0.2 shares at December 31, 2013

 

 

(19.8)

 

 

(3.5)

Additional paid-in capital

 

 

1,476.6 

 

 

1,457.5 

Accumulated deficit

 

 

(64.6)

 

 

(70.9)

Total DigitalGlobe, Inc. stockholders’ equity

 

 

1,392.4 

 

 

1,383.3 

Noncontrolling interest

 

 

1.9 

 

 

Total stockholders’ equity

 

 

1,394.3 

 

 

1,383.3 

Total liabilities and stockholders’ equity

 

$

3,120.7 

 

$

3,165.8 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

 

4


 

DigitalGlobe, Inc.

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

September 30,

(in millions)

    

2014

    

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

6.3 

 

$

(83.4)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

172.9 

 

 

165.7 

Amortization of aerial image library, deferred contract costs and lease incentive

 

 

11.6 

 

 

12.6 

Non-cash stock-based compensation expense, net of capitalized stock-based compensation expense

 

 

13.3 

 

 

19.9 

Excess tax benefit from share-based compensation

 

 

(1.9)

 

 

 —

Amortization of debt issuance costs and accretion of debt discount, net of capitalized interest

 

 

 —

 

 

3.6 

Write-off of debt issuance costs and debt discount

 

 

 —

 

 

12.8 

Deferred income taxes

 

 

(1.3)

 

 

(38.1)

Loss on disposal of assets and other

 

 

1.4 

 

 

(0.3)

Changes in working capital, net of assets acquired and liabilities assumed in business combinations:

 

 

 

 

 

 

Accounts receivable, net

 

 

(8.1)

 

 

15.8 

Deferred contract costs

 

 

(6.4)

 

 

(16.5)

Other current and non-current assets

 

 

4.5 

 

 

3.1 

Accounts payable

 

 

(16.0)

 

 

(3.4)

Accrued liabilities

 

 

(2.0)

 

 

(37.4)

Deferred revenue

 

 

(25.7)

 

 

35.3 

Cash fees paid for early extinguishment of long-term debt and debt discount

 

 

 —

 

 

(13.8)

Net cash flows provided by operating activities

 

 

148.6 

 

 

75.9 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Construction in progress additions

 

 

(193.9)

 

 

(198.9)

Acquisition of businesses, net of cash acquired

 

 

(35.7)

 

 

(524.0)

Other property and equipment additions

 

 

(12.0)

 

 

(12.7)

Decrease in restricted cash

 

 

3.8 

 

 

4.7 

Net cash flows used in investing activities

 

 

(237.8)

 

 

(730.9)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

 —

 

 

1,150.0 

Repayment of debt

 

 

(4.1)

 

 

(483.9)

Payment of debt issuance costs

 

 

 —

 

 

(36.2)

Proceeds from exercise of stock options

 

 

8.6 

 

 

36.9 

Excess tax benefit from share-based compensation

 

 

1.9 

 

 

 —

Preferred stock dividend payment

 

 

(3.0)

 

 

(2.0)

Repurchase of common stock

 

 

(15.0)

 

 

 —

Principal payments on capital lease obligations

 

 

(0.9)

 

 

Net cash flows (used in) provided by financing activities

 

 

(12.5)

 

 

664.8 

Net (decrease) increase in cash and cash equivalents

 

 

(101.7)

 

 

9.8 

Cash and cash equivalents, beginning of period

 

 

229.1 

 

 

246.2 

Cash and cash equivalents, end of period

 

$

127.4 

 

$

256.0 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

Cash paid for interest, net of capitalized amounts of $47.6 million and $32.6 million, respectively

 

 

 —

 

 

 —

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Changes to non-cash property, equipment and construction in progress accruals, including interest

 

 

16.3 

 

 

(5.0)

Changes to non-cash deferred contract cost accruals

 

 

(0.3)

 

 

(2.4)

Additions to capital lease obligations

 

 

(3.1)

 

 

 —

Issuance of shares of common and convertible preferred stock for acquisition of business

 

 

 —

 

 

837.8 

Stock-based compensation awards issued in acquisition of business, net of income taxes

 

 

 —

 

 

13.4 

Non-cash preferred stock dividend accrual

 

 

(1.0)

 

 

(1.0)

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

 

5


 

Table of Contents 

DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1.General Information

 

DigitalGlobe, Inc. (“DigitalGlobe” or the “Company”) is a leading global provider of geospatial information products and services that support users in a wide variety of fields including defense, intelligence and homeland security, mapping and analysis, environmental monitoring, oil and gas exploration and infrastructure management. Each day users depend on DigitalGlobe’s data, information, technology and expertise to better understand our changing planet in order to save lives, resources and time.  The Company offers a range of on-line and off-line distribution options designed to enable customers to easily access and integrate the Company’s imagery into their business operations and applications.

 

As of September 30, 2014, DigitalGlobe owns and operates five in-orbit and fully commissioned imagery satellites, which collect panchromatic (black and white) or multispectral (color) imagery using visible and near-infrared wavelengths.  In addition, on August 13, 2014, the Company successfully launched its sixth imagery satellite, WorldView-3, the world’s highest resolution and most capable commercial earth observation satellite.  The Company is making enhancements to WorldView-4 and anticipates that these enhancements will be completed in the fourth quarter of 2014, at which point the satellite will be placed into storage. The Company also intends to launch and place into service its WorldView-4 satellite in the second half of 2016 for additional capacity as a result of anticipated incremental growth opportunities.  Refer to Note 18 “Subsequent Event” to the Unaudited Condensed Consolidated Financial Statements for further discussion.

 

On January 31, 2013, DigitalGlobe completed its acquisition of 100% of the outstanding stock of GeoEye, Inc. (“GeoEye”), a leading provider of geospatial intelligence solutions in a stock and cash transaction valued at approximately $1.4 billion. The acquisition of GeoEye broadened the Company’s service offerings, enabled it to optimize satellite orbits and collection of imagery, strengthened its production and analytics capabilities, increased the scale of its existing operations and diversified its customer base and product mix. The results of operations of GeoEye have been included in the Company’s Consolidated Financial Statements as of the acquisition date.

 

NOTE 2.Basis of Presentation and Recent Accounting Pronouncements

 

Principles of Consolidation and Basis of Presentation

 

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of DigitalGlobe and its controlled subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.

 

These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s annual audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the accompanying Unaudited Condensed Consolidated Financial Statements have been included. Operating results for the three month and nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any future period. The December 31, 2013 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required in the annual financial statements prepared in accordance with U.S. GAAP. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

There have been no material changes as a result of the adoption of recent accounting pronouncements or to our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

6


 

Table of Contents 

DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard is effective January 1, 2017 and early adoption is not permitted.  ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new standard recognized at the date of initial application. The Company continues to evaluate the impact of ASU 2014-09 and available adoption methods on its consolidated financial statements.

 

In August 2014 the FASB issued FASB ASU 2014-15, Presentation of Financial Statements - Going Concern (“ASU 2014-15”). ASU 2014-15 will be effective for fiscal years and interim periods beginning after December 15, 2016 and early application is permitted. ASU 2014-15 requires that management evaluate at each annual and interim reporting period whether there is a substantial doubt about an entity’s ability to continue as a going concern within one year of the date that the financial statements are issued. We do not expect that the application of ASU 2014-15 will have an impact on the presentation of our results of operations, financial position or disclosures.

 

NOTE 3.Deferred Revenue

 

Deferred revenue represents cash received in advance of revenue recognition.  The Company’s deferred revenue balance varies based on the timing of revenue recognition and the timing of payments within each period presented.  The Company has $433.2 million of deferred revenue recorded on its balance sheet as of September 30, 2014. This balance is primarily attributable to the Company’s EnhancedView and NextView contracts with the National Geospatial-Intelligence Agency (“NGA”), with the remaining balance arising from upfront payments received from its Direct Access Program (“DAP”), imagery hosting arrangements, or arrangements that require that the Company refresh previously delivered imagery.  A rollforward of the deferred revenue balance from December 31, 2013 to September 30, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

Diversified Commercial

 

 

 

 

 

 

 

 

 

 

 

Pre-FOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value

 

Payments

 

 

 

 

 

 

 

 

 

 

 

Enhanced

 

Added

 

Related To

 

 

 

 

 

 

 

 

 

(in millions)

    

View SLA

    

Services

    

NextView

    

DAP

    

Other

    

Total

Balance, December 31, 2013

 

$

194.3 

 

$

99.3 

 

$

111.7 

 

$

45.7 

 

$

4.9 

 

$

455.9 

Deferred revenue acquired in Spatial Energy acquisition

 

 

 

 

 

 

 

 

 

 

2.8 

 

 

2.8 

Cash collections

 

 

187.5 

 

 

39.9 

 

 

 

 

52.4 

 

 

37.9 

 

 

317.7 

Revenue recognized on deferred revenue

 

 

(170.5)

 

 

(63.7)

 

 

(19.1)

 

 

(55.5)

 

 

(34.4)

 

 

(343.2)

Balance, September 30, 2014

 

$

211.3 

 

$

75.5 

 

$

92.6 

 

$

42.6 

 

$

11.2 

 

$

433.2 

 

EnhancedView Contract and Service Level Agreement

 

On August 6, 2010, DigitalGlobe entered into the EnhancedView Contract with NGA. The EnhancedView Contract has a ten-year term, inclusive of nine one-year renewal options exercisable by NGA, and is subject to Congressional appropriations and the right of NGA to terminate or suspend the contract at any time. The EnhancedView Service Level Agreement (“SLA”) totals $2.8 billion over the term of the contract, payable as $250.0 million per year

7


 

Table of Contents 

DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

($20.8 million monthly) for the first four contract years commencing on September 1, 2010, and $300.0 million per year ($25.0 million monthly) for the remaining six years of the contract beginning on September 1, 2014.  The NGA has exercised the first four options under the EnhancedView SLA, which collectively extended the SLA through August 31, 2015.

 

Each monthly EnhancedView SLA payment is subject to a performance penalty of up to 4% depending upon the Company’s performance against pre-defined EnhancedView SLA performance criteria. A performance penalty is assessed in any month that NGA determines that not all of the EnhancedView SLA performance criteria were met. The Company retains the full monthly cash payment; however, the penalty amount will be applied to mutually agreeable future products and services or to a pro-rated extension of the EnhancedView SLA beyond the current contract period. Accordingly, all penalty amounts will cause the Company to defer recognition of a corresponding revenue amount until the performance penalty funds are consumed as described above. During the three and nine months ended September 30, 2014 and 2013, there were no performance penalties.

 

During the first quarter of 2014, DigitalGlobe and NGA agreed to certain modifications of the EnhancedView Contract that included, among other changes, flexibility in the timing of the imaging capacity step-up to accommodate a potential delay of no greater than four months in the launch of WorldView-3. Step-up in the monthly cash payments from NGA remains unchanged, and increased from $20.8 million per month to $25.0 million per month beginning on September 1, 2014. The modifications did not result in a change to the SLA accounting methodology.

 

The Company recognizes revenue for the EnhancedView SLA using a proportional performance method. Under this method, revenue is recognized based on the estimated amount of imaging capacity made available to NGA in any given period compared to the total estimated imaging capacity to be provided over the life of the contract.  The Company will begin to recognize a material increase in revenue once WorldView-3 reaches full operational capability (“FOC”) as a result of the significant increase in satellite capacity across the constellation that will be made available to NGA at that time.  As further discussed in Note 18 “Subsequent Event” to the Unaudited Condensed Consolidated Financial Statements, on October 1, 2014, DigitalGlobe increased constellation capacity made available to NGA and will begin recognizing revenue at the increased annualized rate. 

 

U.S. Government Value Added Services

 

U.S. Government value added services include arrangements whereby the Company meets NGA’s more advanced imagery requirements using its production and dissemination capabilities. Value added services contracts generally include production and hosting of imagery for specified periods of time.

 

NextView

 

In connection with the Company’s NextView agreement with NGA (which was entered into September 2003 and was the predecessor to the current EnhancedView Contract), the Company received $266.0 million from NGA to offset the construction costs of WorldView-1, which was recorded as deferred revenue when received. When WorldView-1 reached FOC in November 2007, the Company began recognizing the deferred revenue on a straight-line basis over the estimated useful life of WorldView-1. If the life of WorldView-1 were to be modified, the amortization of deferred revenue would be modified accordingly. Based on the current estimated useful life of WorldView-1, the Company recognized $6.3 million of revenue related to the pre-FOC payments for each of the three month periods ended September 30, 2014 and 2013 and $19.1 million for each of the nine months periods ended September 30, 2014 and 2013.  The Company is in the process of reviewing the useful lives of its satellites, which it expects to complete in the fourth quarter.  As of September 30, 2014, the remaining balance of deferred revenue associated with the pre-FOC payments is $92.6 million.

 

Direct Access Program

 

Under the DAP, up-front fees are paid by the customer for the initial facility construction and delivery.  The up-front payments are recognized ratably over the estimated customer relationship period, for which the estimated life of the

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Table of Contents 

DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

longest-lived satellite accessed by the customer is used. Customers may also pre-pay for their access minutes resulting in deferred revenue until the minutes are consumed.

 

Other Agreements

 

The Company enters into various commercial relationships that sometimes include obligations that are paid for in advance and recognized over a contractual period of performance. These obligations are typically related to the hosting of imagery or the obligation to refresh previously delivered imagery.

 

NOTE 4.Business Acquisitions

 

On January 31, 2013, DigitalGlobe completed its acquisition of 100% of the outstanding stock of GeoEye. DigitalGlobe is considered the acquirer and has accounted for the transaction under the acquisition method in accordance with U.S. GAAP.

 

GeoEye common stockholders received, in the aggregate, approximately 25.9 million shares of DigitalGlobe’s common stock and $92.8 million in cash in exchange for their shares of GeoEye common stock. In addition, each share of GeoEye’s Series A Convertible Preferred Stock was converted into one newly-designated share of Series A Preferred Stock of DigitalGlobe and $4.10 in cash for each share of GeoEye common stock into which such share of GeoEye Series A Convertible Preferred Stock was convertible. As a result, DigitalGlobe issued 80,000 shares of Series A Preferred Stock and paid approximately $11.0 million in cash to GeoEye’s Series A Convertible Preferred stockholder. The Company also assumed the awards outstanding under GeoEye’s equity incentive plans. The Company incurred total acquisition costs of $33.5 million related to the acquisition of GeoEye, of which $20.6 million was incurred in 2013.  Immediately following the acquisition, the former GeoEye stockholders owned approximately 35% of DigitalGlobe’s common stock.

 

In accordance with the terms of the GeoEye Senior Secured Notes agreements, during the three months ended March 31, 2013, the Company redeemed the outstanding balances of GeoEye’s $400.0 million 9.625% Senior Secured Notes due in 2015 and $125.0 million 8.625% Senior Secured Notes due in 2016 and paid fees and expenses associated with the redemption totaling approximately $55.3 million and accrued interest of $16.4 million.

 

The total purchase price for the acquisition of GeoEye was as follows:

 

 

 

 

 

 

(in millions)

    

Amount

Net cash received

 

$

(76.2)

DigitalGlobe common stock

 

 

723.8 

DigitalGlobe Series A Preferred Stock

 

 

114.0 

DigitalGlobe equity awards issued to replace GeoEye equity awards

 

 

22.4 

Long-term debt issued to redeem GeoEye’s long-term debt, including early termination penalties and accrued interest

 

 

596.7 

Aggregate purchase price

 

$

1,380.7 

 

The Company’s closing share price on January 31, 2013 was $27.97, whereby pursuant to the acquisition method of accounting, it is considered the fair value of each DigitalGlobe common share issued in connection with the acquisition of GeoEye.

 

The Company has recognized the assets and liabilities of GeoEye based on its estimate of their acquisition date fair values. The fair value of GeoEye’s property and equipment was estimated using a market approach. A market approach uses prices and other relevant information generated by market transactions involving comparable assets. The fair value of GeoEye’s satellites was estimated using a replacement cost approach and was based on the amount that would be required to replace the service capacity of the assets. Under the replacement cost approach, the Company estimated the cost of a similar satellite having the nearest equivalent utility to the satellite being valued. The Company then adjusted this value, as necessary, for physical depreciation, functional obsolescence or economic

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Table of Contents 

DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

obsolescence. As of the acquisition date, identifiable intangible assets, excluding technology, were measured at fair value primarily using various income approaches, which required a forecast of expected future cash flows, either for the use of a relief-from royalty method or a multi-period excess earnings method. Technology was valued using a cost approach.  The excess of purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.  None of the goodwill associated with this acquisition is deductible for tax purposes.

 

The following represents DigitalGlobe’s final allocation of the total purchase price to the acquired assets and liabilities assumed from GeoEye at the completion of the one year measurement period:

 

 

 

 

 

 

(in millions)

    

Amount

Current assets, net of cash acquired

 

$

89.0 

Property, plant and equipment, including satellite constellation

 

 

975.4 

Identifiable intangible assets:

 

 

 

Technology

 

 

26.0 

Customer relationships

 

 

14.0 

Trademarks

 

 

5.0 

FCC licenses and other

 

 

2.5 

Other noncurrent assets

 

 

4.6 

Current liabilities

 

 

(51.1)

Deferred revenue

 

 

(12.1)

Long-term deferred tax liability, net

 

 

(119.2)

Fair value of acquired assets and assumed liabilities

 

 

934.1 

Goodwill

 

 

446.6 

Aggregate purchase price

 

$

1,380.7 

 

Pro Forma Financial Information

 

The following unaudited pro forma financial information presents the combined results of DigitalGlobe and GeoEye for the period presented, as though the acquisition of GeoEye had occurred on January 1, 2013.

 

 

 

 

 

 

 

    

 

 

 

Nine Months Ended

(in millions, except per share data)

 

September 30, 2013

Operating revenue

 

$

452.8 

Net loss

 

 

(78.7)

Net loss available to common stockholders

 

 

(81.7)

Basic loss per common share

 

$

(1.11)

Diluted loss per common share

 

$

(1.11)

 

This pro forma information reflects certain adjustments to DigitalGlobe’s previously reported operating results, primarily:

 

·

elimination of non-recurring transaction costs;

·

increased amortization of stock-based compensation;

·

increased amortization expense related to identifiable intangible assets recorded as part of the acquisition;

·

changes to depreciation expense as a result of the fair value adjustment to property and equipment;

·

decreased interest expense due to lower interest rates on long-term debt; and

·

related income tax effects.

 

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Table of Contents 

DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The pro forma information does not reflect the actual results of operations had the acquisition been consummated at January 1, 2013, nor is it necessarily indicative of present or future operating results. The pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition (other than those realized subsequent to the January 31, 2013 acquisition date).

 

Other Acquisitions

 

In February 2014, the Company acquired Spatial Energy, LLC.  Spatial Energy complements the Company’s capabilities, primarily for the oil and gas industry vertical.  The cash paid for this acquisition totaled approximately $35.7 million, net of cash acquired.  The Company recorded goodwill of $25.6 million from this acquisition, of which $19.0 million is deductible for tax purposes.  The determination of fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.  The Company expects to complete its final determinations no later than the first quarter of 2015.  The final determinations may be significantly different than those reflected in its Unaudited Condensed Consolidated Financial Statements as of September 30, 2014. 

 

In February 2013, the Company acquired Tomnod, Inc. for $4.0 million, consisting of $3.5 million of cash and $0.5 million of accrued liabilities. The Company recorded goodwill from this acquisition of $3.3 million.  The goodwill associated with this acquisition is not deductible for tax purposes. 

 

Pro forma results for the Company’s other acquisitions have not been presented as such results would not be materially different from the Company’s actual results.

 

NOTE 5.Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Depreciable Life

    

 

 

    

 

 

(in millions)

 

(in years)

 

September 30, 2014

 

December 31, 2013

Satellites

 

9

12

 

$

1,323.6 

 

$

1,323.6 

Construction in progress

 

 

 

 

 

1,430.5 

 

 

1,283.9 

Computer equipment and software

 

 

3

 

 

 

347.5 

 

 

307.7 

Machinery and equipment, including ground terminals

 

 

5

 

 

 

106.3 

 

 

98.6 

Furniture, fixtures and other

 

3  

7

 

 

39.3 

 

 

37.9 

Land and buildings

 

 

34

 

 

 

6.6 

 

 

6.4 

Total property and equipment

 

 

 

 

 

 

3,253.8 

 

 

3,058.1 

Accumulated depreciation and amortization

 

 

 

 

 

 

(1,044.2)

 

 

(880.6)

Property and equipment, net

 

 

 

 

 

$

2,209.6 

 

$

2,177.5 

 

Depreciation expense for property and equipment was $55.0 million and $57.1 million for the three months ended September 30, 2014, and 2013, respectively, and $164.9 million and $159.6 million for the nine months ended September 30, 2014 and 2013, respectively.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of September 30, 2014, the Company operates a constellation of five in-orbit and fully commissioned satellites. The net book value of each satellite is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Depreciable Life

    

 

 

    

 

 

(in millions)

 

(in years)

 

September 30, 2014

 

December 31, 2013

Quickbird

 

12.2 

 

$

 —

 

$

0.6 

WorldView-1

 

10.5 

 

 

163.2 

 

 

197.0 

WorldView-2

 

11 

 

 

263.2 

 

 

294.7 

IKONOS

 

(1)  

 

 —

 

 

GeoEye-1

 

(1)  

 

141.2 

 

 

173.0 

Satellites, net

 

 

 

$

567.6 

 

$

665.3 

 


(1)

Remaining depreciable life determined as of January 31, 2013, the acquisition date of GeoEye, was 0.5 years for IKONOS and 5 years for GeoEye-1.

 

Construction in progress includes the WorldView-3 and WorldView-4 satellites, ground station construction, infrastructure projects, certain internally developed software costs and capitalized interest.  The Company completed construction and launched its WorldView-3 satellite on August 13, 2014.  As of September 30, 2014, WorldView-3 had not yet reached FOC, and thus remains classified as construction in progress as of that date.  As described in Note 18 “Subsequent Event” to the Unaudited Condensed Consolidated Financial Statements, the Company has completed the needed calibrations on WorldView-3 to enable it to provide visible spectrum imagery to its customers.  Accordingly, the satellite will be classified as depreciable property and equipment beginning on October 1, 2014.

 

The Company is currently completing enhancements to its WorldView-4 satellite and anticipates that those will be completed in the fourth quarter of 2014, at which time the satellite will be placed into storage.  Costs, including interest, associated with enhancements to satellite capability, will be capitalized.  Capitalization of all costs associated with this satellite will cease during the period in which it is in storage and during which no additional enhancements are made. Storage costs and all other incremental costs that result from placing the satellite into storage will be expensed as incurred. The Company intends to launch and place into service its WorldView-4 satellite in the second half of 2016 for additional capacity as a result of anticipated incremental growth opportunities.

 

When the Company places the WorldView-4 satellite into service, all costs associated with removing it from storage and other incremental costs that result from the storage process will be expensed as incurred. However, costs incurred to launch the satellite and perform in-orbit testing prior to the satellite reaching its FOC will be capitalized as these costs are necessary to place the satellite into service. After the satellite has been successfully placed into service, it will be removed from construction-in-process and recorded as depreciable property and equipment.

 

The capitalized costs of the Company’s satellites and related ground systems include internal and external direct labor costs, internally developed software and direct material costs which support the construction and development of the satellites and related ground systems. The cost of DigitalGlobe’s satellites also includes capitalized interest incurred during the construction, development and initial in-orbit testing period. The portion of the launch insurance premium allocable to the period from launch through in-orbit calibration and commissioning has been capitalized as part of the cost of the satellites and is amortized over the useful life of the satellites.

 

The expected depreciable life of a satellite is determined in the reporting period that the satellite has reached FOC. A satellite’s expected depreciable life is determined by considering certain factors including: (i) the orbit in which the satellite is placed; (ii) the supply of fuel; (iii) environmental stress; (iv) the anticipated environmental degradation of solar panels and other components; (v) the anticipated levels of solar radiation; (vi) the probability of design failure of the satellite’s components from design or manufacturing defect; and (vii) the quality of the satellite’s construction. The Company depreciates the cost of a satellite, after the satellite has been successfully placed into

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

service, over its expected useful life using the straight-line method of depreciation as the Company anticipates that the satellite will provide consistent levels of imagery over its useful life.  The Company is in the process of reviewing the useful lives of its in-orbit and fully commissioned satellites, which it expects to complete in the fourth quarter.  Additionally, the Company is evaluating the estimated useful life of its WorldView-3 satellite, which will be determined in the fourth quarter, as discussed in Note 18 “Subsequent Event” to the Unaudited Condensed Consolidated Financial Statements.  

 

If a satellite were to fail to launch or fail while in orbit, the resulting loss would be charged to expense in the period in which such loss was to occur.  The amount of any such loss would be reduced to the extent of insurance proceeds received as a result of the launch or in-orbit failure.

 

 

NOTE 6.Goodwill and Other Intangibles

 

The following table summarizes the change in goodwill during the nine month period ended September 30, 2014:

 

 

 

 

 

 

(in millions)

    

Amount

Balance, December 31, 2013

 

$

459.3 

Purchase accounting adjustment

 

 

(0.7)

Acquisition

 

 

25.6 

Balance, September 30, 2014

 

$

484.2 

 

The following table summarizes the Company’s acquired intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Useful

 

September 30, 2014

 

December 31, 2013

 

    

Life

    

Gross

    

 

 

    

Net

    

Gross

    

 

 

    

Net

 

 

(in

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

(in millions)

 

years)

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Intangible assets:

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

3  

–  

5

 

$

27.2 

 

$

(9.2)

 

$

18.0 

 

$

26.9 

 

$

(5.0)

 

$

21.9 

Customer relationships

 

10

12

 

 

27.0 

 

 

(2.8)

 

 

24.2 

 

 

14.0 

 

 

(1.1)

 

 

12.9 

Trademarks

 

 

3

 

 

 

5.6 

 

 

(2.9)

 

 

2.7 

 

 

5.0 

 

 

(1.5)

 

 

3.5 

FCC licenses and other

 

2

–  

20

 

 

2.7 

 

 

(1.8)

 

 

0.9 

 

 

2.7 

 

 

(1.1)

 

 

1.6 

Total

 

 

 

 

 

$

62.5 

 

$

(16.7)

 

$

45.8 

 

$

48.6 

 

$

(8.7)

 

$

39.9 

 

The gross carrying amounts of intangible assets are removed when the recorded amounts have been fully amortized. During the nine month period ended September 30, 2014, the Company added approximately $13.9 million of intangible assets that were related to the acquisition of Spatial Energy.

 

The Company is in the process of finalizing the valuation of goodwill and intangible assets acquired in the first quarter of 2014.  Such valuations will be completed within one year of purchase.  Accordingly, these amounts represent preliminary estimates, which are subject to change upon finalization of purchase accounting, and any such change may have a material effect on the Company’s results of operations.

 

Total intangible amortization expense was $2.7 million and $2.3 million during the three month periods ended September 30, 2014 and 2013, respectively, and $8.0 million and $6.1 million during the nine month periods ended

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

September 30, 2014 and 2013, respectively.  The estimated future annual amortization expense for acquired intangible assets is as follows:

 

 

 

 

 

 

(in millions)

    

    

Fiscal Years Ending, December 31,

 

Amount

2014(1)

 

$

2.8 

2015

 

 

10.1 

2016

 

 

8.2 

2017

 

 

7.7 

2018

 

 

2.9 

Thereafter

 

 

14.1 

Total amortization expense

 

$

45.8 

(1)

Represents estimated amortization for the three month period ended December 31, 2014.

 

The Company performs its annual test for impairment of goodwill, finite-lived intangible assets, and long-lived tangible assets as of October 1 or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  There were no indicators of impairment of such assets during the nine months ended September 30, 2014 or 2013.

 

 

NOTE 7.Other Accrued Liabilities

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

(in millions)

 

2014

 

2013

Compensation and other employee benefits

 

$

20.4 

 

$

23.0 

Construction in progress accruals

 

 

10.5 

 

 

19.0 

Accrued interest payable

 

 

5.3 

 

 

13.2 

Accrued restructuring costs

 

 

 —

 

 

2.4 

Accrued taxes

 

 

2.8 

 

 

2.6 

Other accrued expense

 

 

21.5 

 

 

20.1 

Total other accrued liabilities

 

$

60.5 

 

$

80.3 

 

Compensation and other employee benefits include payroll, accrued bonus expense and vacation accrual. Construction in progress accruals include amounts for milestone payments due on the procurement and construction of the WorldView-3 and WorldView-4 satellites. Other accruals consist of third party commission expense, professional fees, remote ground terminal maintenance, deferred contract costs and the current portion of deferred lease incentives.

 

NOTE 8.Debt

 

2013 Credit Facility

 

In connection with the acquisition of GeoEye on January 31, 2013, the Company entered into a seven-year $550.0 million Senior Secured Term Loan Facility and a five-year $150.0 million Senior Secured Revolving Credit Facility (collectively, the “2013 Credit Facility”). The 2013 Credit Facility requires quarterly principal payments of $1.375 million starting June 30, 2013 with the remaining balance due February 1, 2020. Borrowings under the 2013 Credit Facility bear interest at an adjusted LIBOR rate, plus a 2.75% margin subject to a 1.0% LIBOR floor. The LIBOR margin becomes 2.5% when the ratio of total debt to Adjusted EBITDA is 2.5:1.0 or lower. The Company is also required to pay a commitment fee between 37.5 to 50.0 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility based on the Company’s leverage ratio.  After February 1, 2014, there is no pre-payment penalty for early repayment of the 2013 Credit Facility. At the closing of the 2013 Credit Facility, the

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Company borrowed the full amount of the Senior Secured Term Loan Facility.  As of September 30, 2014, the Company had not drawn any amounts under the Senior Secured Revolving Credit Facility.

 

The Company’s obligations under the 2013 Credit Facility are guaranteed by certain of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Company’s obligations and the obligations of the guarantor subsidiaries under the 2013 Credit Facility are collateralized by substantially all of the Company’s assets and the assets of the guarantor subsidiaries.

 

The 2013 Credit Facility contains affirmative and negative covenants that the Company believes are usual and customary for a senior secured credit agreement. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with its affiliates. The 2013 Credit Facility also requires that the Company comply with a maximum leverage ratio and minimum interest coverage ratio. The Company was in compliance with its debt covenants as of September 30, 2014.

 

Senior Notes

 

Also in connection with the acquisition of GeoEye on January 31, 2013, the Company issued $600.0 million of Senior Notes (“Senior Notes”), which bear interest at 5.25% per year. Interest on the Senior Notes is payable on February 1 and August 1 of each year, beginning on August 1, 2013. The Senior Notes were issued at par and mature on February 1, 2021. The Company may redeem some or all of the Senior Notes at any time and from time to time on or after February 1, 2017, at the redemption prices set forth in the indenture governing the Senior Notes. The initial redemption price for the Senior Notes is 102.625% of their principal amount plus accrued and unpaid interest to the date of redemption. The Company may redeem some or all of the Senior Notes at any time prior to February 1, 2017, at a redemption price equal to 100% of their principal amount, plus a “make whole” premium, together with accrued and unpaid interest to the date of redemption. In addition, on or prior to February 1, 2016, the Company may redeem up to 35% of the principal amount of the Senior Notes using the net cash proceeds from sales of certain types of capital stock at a redemption price equal to 105.250% of the principal amount of the Senior Notes, plus accrued and unpaid interest to the date of redemption, subject to certain other provisions as set forth in the indenture governing the Senior Notes. If a change of control occurs, the Company must give holders of the Senior Notes an opportunity to sell the Company their Senior Notes at a purchase price of 101% of the principal amount of such Senior Notes, plus accrued and unpaid interest to the date of purchase.

 

The Senior Notes are senior unsecured obligations, ranking equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness and are senior to its existing and future subordinated indebtedness. The Senior Notes are unconditionally guaranteed, jointly and severally, by all of the Company’s existing and certain of its future direct and indirect wholly-owned domestic subsidiaries. Each guarantor’s guarantee ranks pari passu in right of payment with all future senior indebtedness of the guarantor.

 

The Senior Notes have not been registered under the Securities Act of 1933, as amended (“Securities Act”). The Company agreed to file an exchange offer registration statement or, under certain circumstances, a shelf registration statement, pursuant to a registration rights agreement if the Senior Notes were not freely transferable on February 1, 2014 under Rule 144 of the Securities Act, by persons that are not “affiliates” (as defined under Rule 144) of the Company. As of February 1, 2014, the Senior Notes are freely transferable and are eligible for resale pursuant to Rule 144 under the Securities Act.

 

The Company paid $41.6 million of underwriting and other fees and expenses in connection with the 2013 Credit Facility and the Senior Notes, of which $5.0 million was included in “Loss from early extinguishment of debt” for the nine months ended September 30, 2013 because a portion of the refinancing was accounted for as a modification and $36.6 million was capitalized as debt issuance costs and included in other assets.

 

The net proceeds of the 2013 Credit Facility and Senior Notes were used, along with cash on hand, to refinance the Company’s $500.0 million senior secured term loan and $100.0 million senior secured revolving credit facility, to fund the discharge and redemption of GeoEye’s $400.0 million 9.625% Senior Secured Notes due in 2015 and $125.0 million 8.625% Senior Secured Notes due in 2016 assumed in connection with the acquisition of GeoEye, to

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

pay the cash consideration under the merger agreement with GeoEye and to pay fees and expenses related to the foregoing transactions.

 

The following table represents the Company’s future debt payments as of September 30, 2014:

 

 

 

 

 

 

 

    

Long-term debt

 

 

(excluding interest

(in millions)

 

payments)

2014(1)

 

$

1.4 

2015

 

 

5.5 

2016

 

 

5.5 

2017

 

 

5.5 

2018

 

 

5.5 

Thereafter

 

 

1,118.4 

Total

 

$

1,141.8 

(1)

Represents long-term debt principal payment for the three month period ending December 31, 2014.

 

Letters of Credit

 

At each of September 30, 2014 and December 31, 2013, DigitalGlobe had $1.2 million in letters of credit under the lease agreement for its headquarters in Longmont, Colorado. Additionally, at September 30, 2014 and December 31, 2013, the Company had $1.1 million in letters of credit under the lease agreement for its office location in Herndon, Virginia.  At September 30, 2014 and December 31, 2013, the Company had $5.2 million and $9.1 million, respectively, in letters of credit and performance guarantees used in the ordinary course of business primarily to support its obligations to customers under certain of the DAP contracts. These letters of credit are secured by restricted cash. The letters of credit and related restricted cash amounts are released when the respective contractual obligations have been fulfilled by the Company.

 

Interest Expense, net

 

The following table summarizes the Company’s interest expense, accretion of debt discount, amortization of the deferred financing fees, line of credit fees, interest capitalized and interest income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

September 30,

 

September 30,

(in millions)

    

2014

    

2013

    

2014

    

2013

Interest

 

$

13.2 

 

$

13.4 

 

$

39.4 

 

$

37.7 

Accretion of debt discount, deferred financing amortization and line of credit fees

 

 

1.8 

 

 

1.8 

 

 

5.4 

 

 

5.1 

Capitalized interest

 

 

(14.9)

 

 

(14.4)

 

 

(44.6)

 

 

(39.0)

Interest expense

 

$

0.1 

 

$

0.8 

 

$

0.2 

 

$

3.8 

Interest income

 

 

(0.1)

 

 

(0.1)

 

 

(0.2)

 

 

(0.3)

Interest expense, net

 

$

 —

 

$

0.7 

 

$

 —

 

$

3.5 

 

 

 

 

NOTE 9.Fair Values of Financial Instruments

 

The fair value guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs are defined as follows:

 

·

Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

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Notes to Unaudited Condensed Consolidated Financial Statements

 

·

Level 2 — quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

·

Level 3 — unobservable inputs when little or no market data is available.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following table provides information about the assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 and indicates the valuation technique utilized by the Company to determine the fair value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Significant

    

 

 

 

 

 

 

 

Quoted Prices

 

Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

Total Carrying

 

Markets

 

Inputs

 

Inputs

(in millions)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash equivalents at September 30, 2014

 

$

83.5 

 

$

83.5 

 

$

 

$

Cash equivalents at December 31, 2013

 

 

79.1 

 

 

79.1 

 

 

 

 

 

The Company’s cash equivalents consist of investments acquired with maturity dates of less than 90 days, are quoted from market rates and are classified within Level 1 of the valuation hierarchy. At September 30, 2014 and December 31, 2013, the Company’s cash equivalents consisted of funds held in U.S. Treasury money markets. The Company does not have any Level 2 or Level 3 financial instruments as of September 30, 2014 and December 31, 2013.

 

The carrying value of our long-term debt was $1,138.9 million and $1,142.6 million at September 30, 2014 and December 31, 2013, respectively.  The estimated fair value of our long-term debt based upon trading activity among lenders was $1,106.8 and $1,132.9 at September 30, 2014 and December 31, 2013, respectively, and are classified within Level 2 of the valuation hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 10.Stockholders’ Equity

 

Stock-Based Compensation Program

 

The Company has equity incentive plans that provide for grants to employees of stock options, restricted stock and unrestricted shares. The date of grant of the awards is used as the measurement date.  The awards are valued as of the measurement date and are amortized on a straight-line basis over the requisite vesting period.

 

The Company recognized total stock-based compensation expense of $5.5 and $4.0 during the three month periods ended September 30, 2014 and 2013, respectively, and $14.0 and $20.5 during the nine month periods ended September 30, 2014 and 2013, respectively. Stock-based compensation capitalized to assets under construction was $0.2 million and $0.1 million during the three month periods ended September 30, 2014 and 2013, and $0.7 million and $0.6 million during the nine month periods ended September 30, 2014 and 2013, respectively.

 

During the nine month period ended September 30, 2014, the Company awarded 0.7 million unvested restricted stock units at an average grant date price of $38.14 per share.  Of this amount, 0.1 million stock units represents the target amount of grants made to certain key employees whereby vesting is contingent on meeting both a service requirement and either a Company financial performance condition or a Company stock market performance condition.  The number of units granted with the financial performance condition that ultimately will vest is based on a return on invested capital measurement over the three year vesting period of the awards.  The awards granted

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Notes to Unaudited Condensed Consolidated Financial Statements

 

with a financial performance condition have a grant date fair value of $37.37 per share. The number of units granted with the stock market performance condition that ultimately will vest is based on a measurement of  the change in the Company’s average stock price compared to the change in value of the Russell 2000 stock index as determined over the three year vesting period of the awards.  The awards granted with the stock market performance condition were valued at a grant date fair value of $54.10 per share using a Monte Carlo simulation.  For both types of awards with performance conditions, the number of shares that ultimately vest could range from 50% to 200% of the target amount, or zero percent if the minimum threshold is not achieved.

 

As of September 30, 2014, total unrecognized compensation expense related to share options is $2.2 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 1.2 years. As of September 30, 2014, the number of options outstanding was 2.1 million at a weighted-average exercise price of $20.42 and the number of options exercisable was 1.6 million at a weighted-average exercise price of $21.90 per share.

 

As of September 30, 2014, total unrecognized compensation expense related to unvested restricted stock awards and restricted stock units is $29.0 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 2.4 years.  Approximately $4.8 million of the total unrecognized compensation cost, net of estimated forfeitures, is related to awards whereby vesting is contingent on meeting certain financial performance and stock market performance conditions.

 

Certain equity incentive plan participants elect to have the Company withhold shares to pay for minimum taxes due at the time their restricted stock vests. The quantity and value of the shares withheld during the three and nine month periods ended September 30, 2014 and 2013 were immaterial and have been included in treasury shares. 

 

Series A Convertible Preferred Stock

 

In January 2013, upon the closing of the acquisition of GeoEye, the Company issued 80,000 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) with a par value of $0.001 per share to Cerberus Satellite, LLC. In March 2014, Cerberus Satellite, LLC transferred the 80,000 shares of Series A Preferred Stock to Citigroup Global Markets, Inc.  Cumulative dividends on the Series A Preferred Stock are payable at a rate of five percent per annum on the $1,000 liquidation preference per share. At the Company’s option, dividends may be declared and paid in cash out of funds legally available when declared by the Board of Directors or the Audit Committee of the Company. If not paid in cash, an amount equal to the cash dividends due is added to the liquidation preference. Dividends payable in cash are recorded in current liabilities. All dividends payable, whether in cash or as an addition to the liquidation preference, are recorded as a reduction to the Company’s equity. The Company declared dividends on the Series A Preferred Stock of $1.0 million during each of the three months ended September 30, 2014 and September 30, 2013, which were included in current liabilities for the periods then ended.  The Company declared dividends on the Series A Preferred Stock of $3.0 million during each of the nine month periods ended September 30, 2014 and September 30, 2013. For the nine months ended September 30, 2013, $0.4 million of the dividend was recorded by GeoEye as a pre-acquisition obligation. The Series A Preferred Stock is convertible at the option of the holders, at a conversion price of $26.17 per common share, which would convert to 3.1 million shares of common stock of the Company. If at any time after September 22, 2016 the weighted average price of the Company’s common stock exceeds $45.80 per share, in effect for 30 consecutive trading days, the Company has the option to redeem all of the Series A Preferred Stock at an amount equal to the liquidation preference plus accrued dividends as of the redemption date.  The Series A Preferred Stock is classified as equity on the Company’s unaudited condensed consolidated balance sheet.

 

Share Repurchase Program

 

On July, 23, 2014, the Company’s Board of Directors authorized a program to repurchase up to $75.0 million of the Company’s outstanding common stock through December 31, 2015.  The Company may repurchase shares through open market purchases, privately negotiated transactions, structured or derivative transactions such as puts, calls, options, forwards, collars, accelerated share repurchase transactions (with or without collars), other equity contracts or other methods of acquiring shares, in each case on such terms and at such times as shall be permitted by

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Notes to Unaudited Condensed Consolidated Financial Statements

 

applicable securities laws and determined by management.  The stock repurchase program does not obligate the Company to acquire any stock, and it may be limited or terminated at any time without notice.

 

During the three and nine months ended September 30, 2014, the Company repurchased 495,870 shares, or $15.0 million, of its common stock in the open market at an average purchase price of $30.27 per share.  These shares are held in treasury stock at September 30, 2014.  The Company made no open market repurchases of its common stock during the three and nine months ended September 30, 2013.

 

Comprehensive Income

 

For the three and nine months ended September 30, 2014 and 2013, there were no material differences between net income (loss) and comprehensive income (loss).

 

NOTE 11.Net Earnings (Loss) Per Share

 

Basic net earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period excluding issued, but unvested, restricted shares. Diluted EPS is computed by giving effect to all dilutive potential common stock outstanding during the period, including stock options and restricted stock awards. The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options and restricted shares using the treasury stock method. Securities that contain non-forfeitable rights to dividend equivalents (whether paid or unpaid) are participating securities and are required to be included in the computation of basic EPS and dilutive EPS pursuant to the two-class method. Net losses are not allocated to the Company’s participating securities. The shares of the Company’s Series A Preferred Stock are participating securities.

 

The following table sets forth the number of weighted average shares used to compute basic and diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

September 30,

 

September 30,

(in millions, except per share data)

    

2014

    

2013

    

2014

    

2013

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

0.9 

 

$

(1.8)

 

$

6.3 

 

$

(83.4)

Preferred stock dividends

 

 

(1.0)

 

 

(1.0)

 

 

(3.0)

 

 

(2.6)

Net (loss) income less preferred stock dividends

 

 

(0.1)

 

 

(2.8)

 

 

3.3 

 

 

(86.0)

Income allocated to participating securities

 

 

 

 

 

 

(0.1)

 

 

Net (loss) income available to common stockholders

 

$

(0.1)

 

$

(2.8)

 

$

3.2 

 

$

(86.0)

Basic weighted average number of common shares outstanding

 

 

75.1 

 

 

74.5 

 

 

75.1 

 

 

70.8 

Assuming exercise of stock options and restricted shares

 

 

 —

 

 

 

 

1.0 

 

 

Diluted weighted average number of common shares outstanding

 

 

75.1 

 

 

74.5 

 

 

76.1 

 

 

70.8 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00 

 

$

(0.04)

 

$

0.04 

 

$

(1.21)

Diluted

 

$

0.00 

 

$

(0.04)

 

$

0.04 

 

$

(1.21)

 

The potential common shares from the conversion of Series A Preferred Stock that were excluded from the computation of diluted EPS, due to their anti-dilutive impact on weighted common share equivalents were 3.1 million for the three and nine month periods ended September 30, 2014 and 2013.  The number of options and non-vested restricted stock awards that were assumed to be repurchased under the treasury stock method were 2.7 million and 3.1 million for the three and nine month periods ended September 30, 2014, respectively.  The number of options and non-vested restricted stock awards that were excluded from the computation of diluted EPS because the effects thereof were antidilutive were 4.1 million and 4.7 million for the three and nine month periods ended September 30, 2013, respectively.

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Notes to Unaudited Condensed Consolidated Financial Statements

 

 

NOTE 12.Income Taxes

 

In connection with the preparation of the Company’s Unaudited Condensed Consolidated Financial Statements for the quarter ended March 31, 2014, the Company determined that it had incorrectly classified a $37.2 million deferred tax asset as a current asset that should have been classified as a noncurrent asset at December 31, 2013.  The Company concluded that the impact of the error was not material to the previously issued financial statements.  However, the Company has elected to revise its previously issued December 31, 2013 Consolidated Balance Sheet to facilitate comparison among periods. The deferred tax current asset and long-term deferred tax liability, net balances were $43.1 million and $117.2 million as originally reported, respectively, and were revised to $5.9 million and $80.0 million, respectively, as of December 31, 2013.

 

For interim income tax reporting the Company estimates its annual effective tax rate and applies this effective tax rate to its year to date pre-tax income (loss).  For the three and nine month periods ended September 30, 2014, the Company recognized a tax benefit on pre-tax income as a result of the impact of discrete period items.

 

NOTE 13.Restructuring Charges

 

During the first quarter of 2013, following the acquisition of GeoEye, the Company initiated a series of restructuring activities intended to align its infrastructure with demand by its customers so as to optimize its operational efficiency. The Company believes that the restructuring enhanced its ability to provide cost-effective customer service offerings, which it anticipates will enable it to retain and expand its existing relationships with customers and attract new business.  These restructuring activities primarily consisted of reducing redundant workforce, consolidating office and production facilities, consolidating certain ground terminals and systems and other exit costs.

 

The components of the restructuring liability were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

Severance

    

Facilities

    

Other costs

    

Total

Balance, December 31, 2013

 

$

2.3 

 

$

 —

 

$

0.1 

 

$

2.4 

Provision for restructuring charges (1)

 

 

0.3 

 

 

0.7 

 

 

 —

 

 

1.0 

Cash payments

 

 

(2.2)

 

 

(0.7)

 

 

 —

 

 

(2.9)

Balance, March 31, 2014

 

 

0.4 

 

 

 —

 

 

0.1 

 

 

0.5 

Cash payments

 

 

(0.4)

 

 

 

 

(0.1)

 

 

(0.5)

Balance, June 30, 2014

 

 

 

 

 —

 

 

 —

 

 

Cash payments

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance, September 30, 2014

 

$

 —

 

$

 —

 

$

 —

 

$

 —


(1)

Restructuring charges for the three months ended March 31, 2014 exclude $0.1 million of share-based compensation associated with the accelerated vesting of stock awards as such charges are not components of the restructuring liability. 

 

NOTE 14.Non-Controlling Interest

 

In connection with the acquisition of Spatial Energy completed in February 2014, the Company obtained a majority interest in a subsidiary, and control of the subsidiary’s board of directors.  A third party investor owns approximately 25% of the outstanding shares of the subsidiary.  Accordingly, the Unaudited Condensed Consolidated Financial Statements include the financial position of this subsidiary as of September 30, 2014 and the results of operations of this subsidiary since the date of acquisition.  The Company has recognized the carrying value of the non-controlling interest as a component of stockholders’ equity.  The operating results of the subsidiary attributable to the non-controlling interest are immaterial for all of the periods presented and are included in Other income, net.

 

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Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 15.Related Party Transactions

 

Investment in Joint Venture

 

In June 2012, the Company made an investment of approximately $0.3 million for a less than 20% ownership interest in a joint venture in China. During the nine months ended September 30, 2014 and 2013, the joint venture purchased $5.0 million and $7.6 million in products and services from the Company, respectively. Amounts owed to the Company by the joint venture at September 30, 2014 and December 31, 2013, were $1.6 million and $6.7 million, respectively.

 

NOTE 16.Commitments and Contingencies

 

The Company enters into agreements in the ordinary course of business with customers, vendors and others. Most of these agreements require the Company to indemnify the other party against third-party claims alleging that one of its products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require the Company to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by the Company, its employees, agents or representatives. In addition, from time to time the Company has made guarantees regarding the performance of its systems to its customers. The majority of these agreements do not limit the maximum potential future payments the Company could be obligated to make. The Company evaluates and estimates potential losses from such indemnification based on the likelihood that the future event will occur. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such indemnification and guarantees in the Company’s financial statements.

 

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management does not expect that the amount of losses or other costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

 

NOTE 17.Significant Customers and Geographic Information