DIGITALGLOBE, INC. - FORM 10-Q

Attached files

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EX-31.2 - EX-31.2 - DIGITALGLOBE, INC.	dgi-20150930ex31201e80f.htm
EX-10.1 - EX-10.1 - DIGITALGLOBE, INC.	dgi-20150930ex101b8316e.htm
EX-32.1 - EX-32.1 - DIGITALGLOBE, INC.	dgi-20150930ex321a146fc.htm
EX-32.2 - EX-32.2 - DIGITALGLOBE, INC.	dgi-20150930ex322dc39c9.htm
EX-31.1 - EX-31.1 - DIGITALGLOBE, INC.	dgi-20150930ex311ad86bf.htm

Table of Contents

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, 2015

☐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.)

1300 West 120th Avenue

Westminster, Colorado

80234

(Address of principal executive office)

(Zip Code)

(303) 684-4000

(Registrant’s telephone number, including area code)

1601 Dry Creek Drive, Suite 260

Longmont, Colorado, 80503

(Former address of principal executive office)

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 22, 2015 there were 70,001,652 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

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DigitalGlobe, Inc.

INDEX


		Page
PART I.	Financial Information	3
Item 1:	Financial Statements	3
Unaudited Condensed Consolidated Statements of Operations		3
Unaudited Condensed Consolidated Balance Sheets		4
Unaudited Condensed Consolidated Statements of Cash Flows		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4:	Controls and Procedures	27
PART II.	Other Information	28
Item 1:	Legal Proceedings	28
Item 1A:	Risk Factors	28
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3:	Defaults Upon Senior Securities	28
Item 4:	Mine Safety Disclosures	28
Item 5:	Other Information	28
Item 6:	Exhibit Index	28

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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)	2015		2014		2015		2014
Revenue	$	173.3	$	154.6	$	520.7	$	468.9
Costs and expenses:
Cost of revenue		34.3		40.9		110.8		121.5
Selling, general and administrative		49.6		55.8		159.5		167.2
Depreciation and amortization		69.9		57.7		205.3		172.9
Restructuring charges		0.4		—		3.0		1.1
Loss on abandonment of asset		—		—		—		1.2
Income from operations		19.1		0.2		42.1		5.0
Other income, net		0.7		0.1		0.1		0.2
Interest expense, net		(5.6)		—		(23.7)		—
Income before income taxes		14.2		0.3		18.5		5.2
Income tax (expense) benefit		(4.6)		0.6		(5.8)		1.1
Net income		9.6		0.9		12.7		6.3
Preferred stock dividends		(1.0)		(1.0)		(3.0)		(3.0)
Net income less preferred stock dividends		8.6		(0.1)		9.7		3.3
Income allocated to participating securities		(0.4)		—		(0.4)		(0.1)
Net income (loss) available to common stockholders	$	8.2	$	(0.1)	$	9.3	$	3.2

Earnings per share:
Basic earnings per share	$	0.12	$	0.00	$	0.13	$	0.04
Diluted earnings per share	$	0.12	$	0.00	$	0.13	$	0.04
Weighted average common shares outstanding:
Basic		70.5		75.1		71.7		75.1
Diluted		70.9		75.1		72.4		76.1

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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DigitalGlobe, Inc.

Unaudited Condensed Consolidated Balance Sheets


	September 30,		December 31,
(in millions, except par value)	2015		2014
ASSETS
Current Assets:
Cash and cash equivalents	$	147.6	$	117.8
Restricted cash		2.3		2.3
Accounts receivable, net of allowance for doubtful accounts of $2.4 and $0.5, respectively		87.4		133.6
Deferred contract costs		9.2		9.1
Prepaid and current assets		19.4		22.6
Deferred income taxes, net		24.1		24.1
Total current assets		290.0		309.5
Property and equipment, net of accumulated depreciation of $1,116.6 and $1,095.5, respectively		2,076.9		2,174.7
Goodwill		484.1		484.5
Intangible assets, net of accumulated amortization of $27.1 and $19.5, respectively		35.4		43.0
Long-term restricted cash		4.9		4.0
Long-term deferred contract costs		49.7		41.8
Other assets		35.4		37.7
Total assets	$	2,976.4	$	3,095.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	7.3	$	4.4
Current portion of long-term debt		5.5		5.5
Deferred revenue		80.1		91.0
Other accrued liabilities		50.1		62.2
Total current liabilities		143.0		163.1
Long-term debt, net of discount		1,128.4		1,132.1
Deferred revenue, non-current		290.7		335.1
Deferred income taxes, net, non-current		106.1		101.9
Other liabilities		29.9		9.5
Total liabilities	$	1,698.1	$	1,741.7
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, 2015 and December 31, 2014		—		—
Common stock; $0.001 par value; 250.0 shares authorized; 76.5 shares issued and 70.0 shares outstanding at September 30, 2015 and 76.1 shares issued and 73.2 shares outstanding at December 31, 2014		0.2		0.2
Treasury stock, at cost; 6.5 shares at September 30, 2015 and 2.9 shares at December 31, 2014		(181.6)		(80.1)
Additional paid-in capital		1,499.4		1,484.0
Accumulated deficit		(39.7)		(52.4)
Total DigitalGlobe, Inc. stockholders’ equity		1,278.3		1,351.7
Noncontrolling interest		—		1.8
Total stockholders’ equity		1,278.3		1,353.5
Total liabilities and stockholders’ equity	$	2,976.4	$	3,095.2

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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DigitalGlobe, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows


	For the nine months ended
	September 30,
(in millions)	2015		2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12.7	$	6.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		205.3		172.9
Amortization of aerial image library, deferred contract costs and lease incentive		12.3		11.6
Non-cash stock-based compensation expense, net of capitalized stock-based compensation expense		14.2		13.3
Amortization of debt issuance costs and accretion of debt discount, net of capitalized interest		5.0		—
Deferred income taxes		4.2		(1.3)
Excess tax benefit from share-based compensation		(1.3)		(1.9)
Other		0.8		1.4
Changes in working capital, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable, net		46.2		(8.1)
Deferred contract costs		(13.1)		(6.4)
Other current and non-current assets		2.5		4.5
Accounts payable		(1.8)		(16.0)
Accrued liabilities		5.8		(2.0)
Deferred revenue		(55.3)		(25.7)
Net cash flows provided by operating activities		237.5		148.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress additions		(97.9)		(193.9)
Property and equipment additions		(2.5)		(12.0)
Acquisition of businesses, net of cash acquired		—		(35.7)
(Increase) decrease in restricted cash		(0.9)		3.8
Loan to joint venture		(5.0)		—
Net cash flows used in investing activities		(106.3)		(237.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt		(4.1)		(4.1)
Repurchase of common stock		(100.5)		(15.0)
Proceeds from exercise of stock options		5.4		8.6
Preferred stock dividend payment		(3.0)		(3.0)
Excess tax benefit from share-based compensation		1.3		1.9
Other		(0.5)		(0.9)
Net cash flows used in financing activities		(101.4)		(12.5)
Net increase (decrease) in cash and cash equivalents		29.8		(101.7)
Cash and cash equivalents, beginning of period		117.8		229.1
Cash and cash equivalents, end of period	$	147.6	$	127.4

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized amounts of $28.2 million and $47.6 million, respectively		22.6		—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Changes to non-cash property, equipment and construction in progress accruals, including interest		1.3		16.3
Additions to capital lease obligations		—		(3.1)
Non-cash preferred stock dividend accrual		(1.0)		(1.0)

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1.General Information

DigitalGlobe, Inc., together with its consolidated subsidiaries (“DigitalGlobe,” “Company,” “we,” “us,” and “our”) is a leading global provider of geospatial information products and services sourced from our own advanced satellite constellation and third party providers. Our products and services support users in a wide variety of fields including defense, intelligence, 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.

Our principal customers include U.S. and foreign governments, location-based services (“LBS”) providers, and those in energy and other industry verticals. The imagery that forms the foundation of our products, services and analysis is collected daily from our constellation of high-resolution imaging satellites and maintained in our imagery archives (“ImageLibrary”).

NOTE 2.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of DigitalGlobe, Inc. and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

These Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, all adjustments of a normal recurring nature that are necessary for a fair statement of the accompanying Unaudited Condensed Consolidated Financial Statements have been included. The results of operations for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or for any future period.

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 U.S. Securities and Exchange Commission (“SEC”). The December 31, 2014 Condensed Consolidated Balance Sheet was derived from the Company’s annual 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.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in these Unaudited Condensed Consolidated Financial Statements and accompanying notes. Due to the inherent uncertainties in making estimates, actual results could differ materially from those estimates.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements


		Effect on the
Standard	Description	Financial Statements
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)	The standard will replace nearly all existing revenue recognition guidance under U.S. GAAP and requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard permits retrospective or modified retrospective (cumulative effect) adoption methods. In August 2015, the Financial Accounting Standards Board issued ASU 2015-14 to defer the effective date of the standard by one year. The new guidance will be effective for the Company beginning on January 1, 2018, with early adoption permitted as of the original effective date of January 1, 2017.	The Company is evaluating the impacts of adopting this standard on our consolidated financial statements.
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs	The standard requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, consistent with the presentation for debt discounts. The standard must be applied on a retrospective basis and is effective for the Company beginning on January 1, 2016. Early adoption is permitted.	The adoption of this standard is a change in financial statement presentation only and will not have a material impact on our consolidated financial statements.
ASU 2015-05, Customers Accounting for Fees Paid in a Cloud Computing Arrangement	The standard amends internal use software guidance to clarify how customers in cloud computing arrangements should determine whether the arrangement includes a software license. It also eliminates the requirement to analogize to the lease guidance when determining the asset acquired in a software licensing arrangement. The standard may be applied retrospectively or prospectively and is effective for the Company beginning on January 1, 2016.	The Company is evaluating the impacts of adopting this standard on our consolidated financial statements.

NOTE 3.Property and Equipment

Property and equipment consisted of the following:


	Depreciable Life
(in millions)	(in years)			September 30, 2015		December 31, 2014
Satellites	9	–	13	$	1,797.7	$	1,973.1
Construction in progress		–			764.0		765.1
Computer equipment and software	3	–	12		461.1		376.2
Machinery and equipment, including ground terminals		5			108.9		109.3
Furniture, fixtures and other	3	–	7		55.2		39.9
Land and buildings		34			6.6		6.6
Total property and equipment					3,193.5		3,270.2
Accumulated depreciation					(1,116.6)		(1,095.5)
Property and equipment, net				$	2,076.9	$	2,174.7

Depreciation expense for property and equipment was $67.4 million and $55.0 million for the three months ended September 30, 2015 and 2014, respectively, and $197.7 million and $164.9 million for the nine months ended September 30, 2015 and 2014, respectively.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Satellite Constellation

As of September 30, 2015, the Company operates a constellation of four in-orbit and fully commissioned satellites: GeoEye-1, WorldView-1, WorldView-2 and WorldView-3. In the first quarter of 2015, we retired QuickBird, as the satellite stopped capturing images in December 2014 and ceased operating in the first quarter of 2015. Additionally, the Company stopped making new IKONOS imagery commercially available in the first quarter of 2015 and decommissioned the satellite in the second quarter of 2015. The net book value of each satellite is as follows:


		September 30, 2015						December 31, 2014
	Depreciable	Gross				Net		Gross				Net
	Life	Carrying		Accumulated		Book		Carrying		Accumulated		Book
(in millions)	(in years)	Amount		Depreciation		Value		Amount		Depreciation		Value
QuickBird	12.2	$	—	$	—	$	—	$	174.4	$	(174.4)	$	—
IKONOS	9.0		—		—		—		1.0		(1.0)		—
GeoEye-1	9.0		211.8		(113.0)		98.8		211.8		(81.2)		130.6
WorldView-1	13.0		473.2		(336.7)		136.5		473.2		(316.8)		156.4
WorldView-2	13.0		463.2		(231.8)		231.4		463.2		(207.9)		255.3
WorldView-3	11.5		649.5		(56.5)		593.0		649.5		(14.1)		635.4
Satellites, net		$	1,797.7	$	(738.0)	$	1,059.7	$	1,973.1	$	(795.4)	$	1,177.7

Our WorldView-4 satellite is classified as construction in progress. During the first quarter of 2015, we removed WorldView-4 from storage to commence work on certain necessary enhancements. On commencement of the work, we also began capitalizing interest to the satellite.

NOTE 4.Business Acquisition

In February 2014, the Company acquired Spatial Energy, LLC (“Spatial Energy”) to grow its existing oil and gas industry vertical for an aggregate cash consideration, net of cash acquired, of $35.7 million. Of the total purchase price, $25.7 million was allocated to goodwill, of which $19.0 million is deductible for tax purposes, $13.9 million to acquired intangible assets, and $3.9 million to net liabilities assumed. Pro forma results have not been presented as such results would not be materially different from the Company’s actual results.

NOTE 5.Goodwill and Intangible Assets

The following table summarizes the change in goodwill during the nine month period ended September 30, 2015:


(in millions)	Amount
December 31, 2014	$	484.5
Disposition of subsidiary (Note 13)		(0.4)
September 30, 2015	$	484.1

Intangible assets consisted of the following:


				September 30, 2015						December 31, 2014
				Gross				Net		Gross				Net
	Useful Life			Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
(in millions)	(in years)			Amount		Amortization		Amount		Amount		Amortization		Amount
Technology	3	–	5	$	27.2	$	(14.8)	$	12.4	$	27.2	$	(10.6)	$	16.6
Customer relationships	10	–	12		27.0		(5.2)		21.8		27.0		(3.4)		23.6
Trademarks		3			5.6		(4.8)		0.8		5.6		(3.4)		2.2
FCC licenses and other	2	–	20		2.7		(2.3)		0.4		2.7		(2.1)		0.6
Total				$	62.5	$	(27.1)	$	35.4	$	62.5	$	(19.5)	$	43.0

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Intangible amortization expense was $2.5 million and $2.7 million for the three months ended September 30, 2015 and 2014, respectively, and $7.6 million and $8.0 million for the nine months ended September 30, 2015 and 2014, respectively.

The estimated annual amortization expense for acquired intangible assets for each of the next five years and thereafter is as follows:


(in millions)	Amount
Remainder of 2015	$	2.5
2016		8.2
2017		7.7
2018		2.9
2019		2.5
Thereafter		11.6
Total	$	35.4

NOTE 6.Debt

The Company’s debt obligations consist of a $550.0 million Senior Secured Term Loan due February 1, 2020 (“Term Loan”) and a $150.0 million Senior Secured Revolving Credit Facility due February 1, 2018 (“Revolving Credit Facility” and, together with the Term Loan, the “2013 Credit Facility”), in addition to $600.0 million in 5.25% senior notes due February 1, 2021 (“Senior Notes”). As of September 30, 2015, the Company had not drawn any amounts under the Revolving Credit Facility. The 2013 Credit Facility requires that the Company comply with a maximum leverage ratio and minimum interest coverage ratio. As of September 30, 2015, we were in compliance with our debt covenants.

Long-term debt consisted of the following:


(in millions)	September 30, 2015		December 31, 2014
$550.0 million Term Loan due February 1, 2020	$	536.3	$	540.4
$150.0 million Revolving Credit Facility due February 1, 2018		—		—
$600.0 million Senior Notes due February 1, 2021		600.0		600.0
Total borrowings		1,136.3		1,140.4
Less: unamortized discounts		(2.4)		(2.8)
Total borrowings, net		1,133.9		1,137.6
Less: current maturities of long-term debt		(5.5)		(5.5)
Total long-term debt, net	$	1,128.4	$	1,132.1

The Company’s future debt payments, excluding interest payments, consisted of the following as of September 30, 2015:


(in millions)	Amount
Remainder of 2015	$	1.4
2016		5.5
2017		5.5
2018		5.5
2019		5.5
Thereafter		1,112.9
Total	$	1,136.3

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Interest expense, net consisted of the following:


	For the three months ended				For the nine months ended
	September 30,				September 30,
(in millions)	2015		2014		2015		2014
Interest	$	13.1	$	13.2	$	39.2	$	39.4
Accretion of debt discount, deferred financing amortization and line of credit fees		1.8		1.8		5.4		5.4
Capitalized interest		(9.2)		(14.9)		(20.7)		(44.6)
Interest expense	$	5.7	$	0.1	$	23.9	$	0.2
Interest income		(0.1)		(0.1)		(0.2)		(0.2)
Interest expense, net	$	5.6	$	—	$	23.7	$	—

NOTE 7.Fair Values of Financial Instruments

The fair value of our long-term debt, estimated using inputs that incorporate certain active market quotations based upon trading activity among lenders as well as other indirect inputs, was $1,099.2 million and $1,102.0 million at September 30, 2015 and December 31, 2014, respectively, and is classified within Level 2 of the valuation hierarchy. Our cash equivalents primarily consist of U.S. Treasury and demand deposit money market accounts. The carrying values of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.

NOTE 8.Deferred Revenue

A rollforward of deferred revenue from December 31, 2014 to September 30, 2015 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
December 31, 2014	$	210.0	$	77.7	$	88.8	$	39.4	$	10.2	$	426.1
Cash collections		225.0		37.0		—		59.5		42.9		364.4
Revenue recognized on deferred revenue		(252.9)		(44.8)		(11.4)		(65.4)		(45.2)		(419.7)
September 30, 2015	$	182.1	$	69.9	$	77.4	$	33.5	$	7.9	$	370.8

NOTE 9.Restructuring Charges

In February 2015, the Company initiated a restructuring plan intended to improve our operational efficiency. Under the restructuring plan, the Company has and expects to continue to reduce global headcount and rationalize its real estate footprint. The Company may incur up to approximately $10.0 million in restructuring charges as a result of these efforts, which we expect to complete in the first quarter of 2016. The components of the restructuring liability were as follows:


(in millions)	Severance		Other		Total
December 31, 2014	$	—	$	—	$	—
Provision for restructuring charges		2.5		0.5		3.0
Cash payments		(2.3)		(0.5)		(2.8)
September 30, 2015	$	0.2	$	—	$	0.2

The restructuring liability is included in the Unaudited Condensed Consolidated Balance Sheet in Other accrued liabilities. The provision for restructuring charges is included in the Unaudited Condensed Consolidated Statements of Operations in Restructuring charges.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 10.Other Accrued Liabilities

Other accrued liabilities consisted of the following:


	September 30,		December 31,
(in millions)	2015		2014
Compensation and other employee benefits	$	15.4	$	22.1
Construction in progress accruals		10.4		2.8
Accrued interest		5.3		16.6
Other accrued expense		19.0		20.7
Total	$	50.1	$	62.2

NOTE 11.Income Taxes

The Company’s effective tax rate is estimated based upon the effective tax rate expected to be applicable for the full year. The effective tax rates for the three and nine months ended September 30, 2015 were 32.4% and 31.4%, respectively, differing from the statutory federal rate of 35.0% primarily as a result of the impact of certain discrete items.

NOTE 12.Stock-Based Compensation

During the nine months ended September 30, 2015, the Company awarded 0.9 million unvested restricted stock units at an average grant date fair value of $31.59 per share. Of this amount, 0.2 million stock units represent performance shares that are subject to service, performance and market vesting conditions with an average grant date fair value of $35.72 per share. We did not grant any stock options during the nine months ended September 30, 2014 or 2015.

Stock-based compensation expense, net of amounts capitalized to assets under construction, was $4.7 million and $5.3 million during the three months ended September 30, 2015 and 2014, respectively, and $14.2 million and $13.3 million during the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, unrecognized compensation expense related to unvested restricted stock awards and units, including those subject to service, performance and market vesting conditions, is $33.1 million, net of estimated forfeitures, to be recognized over a weighted-average remaining vesting period of 2.3 years.

As of September 30, 2015, unrecognized compensation expense related to share options is $0.4 million, net of estimated forfeitures, to be recognized over a weighted-average remaining vesting period of 0.4 years. As of September 30, 2015, the number of options outstanding was 1.6 million at a weighted-average exercise price of $20.58 per share, and the number of options exercisable was 1.5 million at a weighted-average exercise price of $21.56 per share.

NOTE 13.Stockholders’ Equity

Share Repurchase Program

In the second half of 2014, the Company’s Board of Directors authorized a program to repurchase up to $205.0 million of the Company’s outstanding common stock through December 31, 2015. During the three months ended September 30, 2015, the Company repurchased 1,491,098 shares at an average purchase price of $24.62 per share, for a total of $36.7 million. For the nine months ended September 30, 2015, the Company repurchased 3,575,835 at an average purchase price of $28.11 per share, for a total of $100.5 million. As of September 30, 2015, we have repurchased a total of 6,302,584 shares at an average purchase price of $27.86, for a total of $175.6 million under the program. The average purchase price and total dollar value purchased include broker transaction fees and commissions.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Series A Convertible Preferred Stock

In January 2013, upon the closing of the acquisition of GeoEye, Inc. (“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. 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 Company’s Board of Directors or the Audit Committee of the Board of Directors. If not paid in cash, an amount equal to the cash dividends due is added to the liquidation preference. The Company declared dividends on the Series A Preferred Stock of $1.0 million during each of the three months ended September 30, 2015 and 2014 and $3.0 million during each of the nine months ended September 30, 2015 and 2014.

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.

Non-Controlling Interest

In connection with the acquisition of Spatial Energy completed in February 2014, we obtained a controlling financial interest in a joint venture, which was not a significant component of the Spatial Energy business. In the third quarter of 2015, we divested from all of our interest in that subsidiary. The divestiture resulted in a $1.6 million gain, which was included in Other income, net in the Unaudited Condensed Consolidated Statements of Operations. The Company recognized the carrying value of the non-controlling interest as a component of stockholders’ equity for applicable periods presented. Prior to the disposition, the operating results of the subsidiary attributable to the non-controlling interest were immaterial for the periods presented and included in Other income, net.

Comprehensive Income

For the three and nine months ended September 30, 2015 and 2014, there were no material differences between net income (loss) and comprehensive income (loss).

NOTE 14.Earnings Per Share

The following table sets forth the computations of basic and diluted earnings per share:


	Three months ended				Nine months ended
	September 30,				September 30,
(in millions, except per share data)	2015		2014		2015		2014
Net income	$	9.6	$	0.9	$	12.7	$	6.3
Preferred stock dividends		(1.0)		(1.0)		(3.0)		(3.0)
Net income less preferred stock dividends		8.6		(0.1)		9.7		3.3
Income allocated to participating securities		(0.4)		—		(0.4)		(0.1)
Net income (loss) available to common stockholders	$	8.2	$	(0.1)	$	9.3	$	3.2
Basic weighted average number of common shares outstanding		70.5		75.1		71.7		75.1
Assuming exercise of stock options and restricted shares		0.4		—		0.7		1.0
Diluted weighted average number of common shares outstanding		70.9		75.1		72.4		76.1
Earnings per share:
Basic	$	0.12	$	0.00	$	0.13	$	0.04
Diluted	$	0.12	$	0.00	$	0.13	$	0.04

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The potential common shares from the conversion of Series A Preferred Stock that were excluded from the computation of diluted earnings per share, due to their anti-dilutive impact on weighted common share equivalents, were 3.1 million for each of the three and nine month periods ended September 30, 2015 and 2014. The number of stock options and non-vested restricted stock awards and units that were excluded from the computation of diluted earnings per share because they were assumed to be repurchased under the treasury stock method were 3.0 million and 2.7 million for the three month periods ended September 30, 2015 and 2014, respectively, and 2.8 million and 3.1 million for the nine month periods ended September 30, 2015 and 2014, respectively.

NOTE 15.Related Party Transactions

In the ordinary course of business, the Company is involved in related party transactions with its equity method investees.

In June 2012, the Company made an investment in a joint venture in China. The Company sold $3.7 million and $1.8 million for the three months ended September 30, 2015 and 2014, respectively, and $9.3 million and $5.0 million for the nine months ended September 30, 2015 and 2014, respectively, in products and services to the joint venture. Amounts owed to the Company by the joint venture at September 30, 2015 and December 31, 2014 were $5.7 million and $4.6 million, respectively.

In May 2015, in exchange for a 50% equity interest in a joint venture, Vricon, Inc., we have an ongoing commitment to provide imagery to the joint venture from our ImageLibrary for the purpose of producing photo-realistic three- dimensional (“3D”) products and digital elevation models. Upon formation of the joint venture, we contributed $5.0 million in the form of a note receivable to the joint venture, which is due May 2018. Additionally, we may be obligated in 2016 to provide equity financing of up to $10.0 million to the joint venture to the extent third-party financing is not obtained.

NOTE 16.Commitments and Contingencies

The Company enters into agreements in the ordinary course of business with resellers and others. Most of these agreements require the Company to indemnify the other party against third-party claims alleging that one of the Company’s 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 amounts of losses and other costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 17.Significant Customers and Geographic Information

The Company operates in a single segment, in which it provides imagery and imagery information products and services to customers around the world. The Company uses common infrastructure and technology to collect, process and distribute its imagery products and services to all customers. The Company measures performance based on consolidated operating results and achievement of individual performance goals.

We have organized our sales leadership and marketing efforts around U.S. Government and Diversified Commercial customer groups. Revenue recognized for products or services provided to U.S. Government customers consists primarily of the EnhancedView Service Level Agreement (“EnhancedView SLA”) with the United States National Geospatial-Intelligence Agency (“NGA”), amortization of pre-FOC payments related to the NextView agreement with the NGA, and other value added services. Diversified Commercial consists of revenue generated from the following types of customers: Direct Access Program (“DAP”), other international defense and intelligence, international civil government, LBS, energy, and other industry verticals.

The following table summarizes revenue for these two groups:


	For the three months ended				For the nine months ended
	September 30,				September 30,
(in millions)	2015		2014		2015		2014
U.S. Government	$	111.0	$	87.8	$	338.9	$	280.9
Diversified Commercial		62.3		66.8		181.8		188.0
Total	$	173.3	$	154.6	$	520.7	$	468.9

We classify revenue geographically according to the ship to address. U.S. and international revenue was as follows:


	For the three months ended				For the nine months ended
	September 30,				September 30,
(in millions)	2015		2014		2015		2014
U.S.	$	123.2	$	106.6	$	376.9	$	326.5
International		50.1		48.0		143.8		142.4
Total	$	173.3	$	154.6	$	520.7	$	468.9

NOTE 18.Subsequent Events

We evaluate subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. We identified the following as non-recognized subsequent events:

In October 2015, the Company approved a separate re-engineering and restructuring plan, in which the Company may incur up to an additional $18.0 million in an effort to further reduce global headcount, rationalize its real estate footprint, realize efficiencies from re-engineering processes and enhancing system workflows, and undertake other efficiency initiatives. We expect to complete this plan by the end of the fourth quarter of 2016.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained herein and other of our reports, filings, and public announcements may contain or incorporate forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words, although not all forward-looking statements contain these words.

Any forward-looking statements are based upon our historical performance and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions. A number of important factors could cause our actual results or performance to differ materially from those indicated by such forward looking statements, including: the loss, reduction or change in terms of any of our primary contracts or decisions by customers not to exercise renewal options; the availability of government funding for our products and services both domestically and internationally; changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of Congress and the administration, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011); the risk that U.S. government sanctions against specified companies and individuals in Russia may limit our ability to conduct business with potential or existing customers; the outcome of pending or threatened litigation; the loss or impairment of any of our satellites; delays in the construction and launch of any of our satellites or our ability to achieve and maintain full operational capacity of all our satellites; delays in implementation of planned ground system and infrastructure enhancements; loss or damage to the content contained in our ImageLibrary; interruption or failure of our ground system and other infrastructure; decrease in demand for our imagery products and services; increased competition, including possibly from companies with substantial financial and other resources and services, that may reduce our market share or cause us to lower our prices; our inability to fully integrate acquisitions or to achieve planned synergies; changes in satellite imaging technology; our failure to obtain or maintain required regulatory approvals and licenses; changes in U.S. or foreign law or regulation that may limit our ability to distribute our imagery products and services; the costs associated with being a public company; and other important factors, all as described more fully in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2014.

We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on any of these forward looking statements.

References in this filing to “DigitalGlobe,” “Company,” “we,” “us,” and “our” refer to DigitalGlobe, Inc. and its consolidated subsidiaries.

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Overview

DigitalGlobe is a leading global provider of geospatial information products and services sourced from our own advanced satellite constellation and third party providers. Our products and services support users in a wide variety of fields including defense, intelligence, 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.

Our principal customers include U.S. and foreign governments, LBS providers, and those in energy and other industry verticals. The imagery that forms the foundation of our products, services and analysis is collected daily from our constellation of high-resolution imaging satellites and maintained in our ImageLibrary. We believe that our ImageLibrary is the largest, most up-to-date and comprehensive archive of high-resolution earth imagery commercially available, containing more than 6.1 billion square kilometers of imagery, an area the equivalent of 41 times the landmass of the earth, accumulated since 1999. As of September 30, 2015, our collection capacity capability was approximately 1.37 billion square kilometers of imagery per year, or the equivalent of roughly 9 times the earth’s land surface area, and offers intraday revisit around the globe.

2015 Highlights

Re-engineering and Restructuring Plans

In February 2015, the Company initiated a re-engineering and restructuring plan intended to improve our operational efficiency. We expect to complete this plan and realize the benefits resulting from our restructuring and other re-engineering efforts by the end of the first quarter of 2016. These benefits, however, may be partially offset by higher operating costs associated with growth in our business.

Restructuring charges represent costs incurred to reduce global headcount and rationalize our real estate footprint. The Company may incur up to approximately $10.0 million as a result of these efforts. For the three and nine months ended September 30, 2015, we have incurred $0.4 million and $3.0 million of restructuring charges, respectively. Other re-engineering charges represent costs incurred to realize efficiencies from reducing internal and contractor headcount, such as re-engineering processes and enhancing system workflows, as well as costs related to the decision to proactively decommission IKONOS. The Company may incur up to approximately $5.0 million as a result of these efforts. For the three and nine months ended September 30, 2015, we have incurred $2.5 million and $2.9 million of other re-engineering charges, respectively.

Share Repurchase Program

In October 2015, the Company’s Board of Directors approved an additional $130.0 million of authorized share repurchases of the Company’s outstanding common stock through December 31, 2016. The approval increases the total authorized amount under the program to $335.0 million. As of September 30, 2015, we have repurchased a total of 6,302,584 shares at an average purchase price of $27.86, for a total of $175.6 million under the program, including broker transaction fees and commissions.

Recent Satellite Developments

During the first quarter of 2015, we removed WorldView-4 from storage to commence work on certain necessary enhancements. On commencement of the work, we also began capitalizing interest to the satellite. We intend to launch WorldView-4 in the third quarter of 2016 for additional capacity as a result of anticipated incremental growth opportunities.

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Vricon Joint Venture

In May 2015, we entered into a joint venture, Vricon, Inc., to produce photo-realistic 3D products and digital elevation models globally for enterprise and government geospatial markets, accessible through a unique visualization platform and standard based data formats.

Results of Operations

During the first quarter of 2015, changes in certain reporting relationships between our Chief Operating Decision Maker and other members of management took place, which have not resulted in changes to our reportable segments in the current year. We operate in a single segment in which we use a common infrastructure and technology to collect, process and distribute imagery products and services to customers around the world. The following table summarize our results of operations:


	For the three months ended							For the nine months ended
	September 30,							September 30,
(in millions)	2015		2014		% Change			2015		2014		% Change
U.S. Government revenue	$	111.0	$	87.8		26.4	%	$	338.9	$	280.9		20.6	%
Diversified Commercial revenue		62.3		66.8		(6.7)			181.8		188.0		(3.3)
Total revenue		173.3		154.6		12.1			520.7		468.9		11.0
Cost of revenue		34.3		40.9		(16.1)			110.8		121.5		(8.8)
Selling, general and administrative		49.6		55.8		(11.1)			159.5		167.2		(4.6)
Depreciation and amortization		69.9		57.7		21.1			205.3		172.9		18.7
Restructuring charges		0.4		—		*			3.0		1.1		*
Loss on abandonment of asset		—		—		—			—		1.2		*
Income from operations		19.1		0.2		*			42.1		5.0		*
Other income, net		0.7		0.1		*			0.1		0.2		(50.0)
Interest expense, net		(5.6)		—		*			(23.7)		—		*
Income before income taxes		14.2		0.3		*			18.5		5.2		*
Income tax (expense) benefit		(4.6)		0.6		*			(5.8)		1.1		*
Net income	$	9.6	$	0.9		*		$	12.7	$	6.3		101.6	%

*Not meaningful

The following table summarizes our results of operations as a percentage of total revenue:


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2015		2014		2015		2014
U.S. Government revenue	64.1	%	56.8	%	65.1	%	59.9	%
Diversified Commercial revenue	35.9		43.2		34.9		40.1
Total revenue	100.0		100.0		100.0		100.0
Cost of revenue	19.8		26.5		21.3		25.9
Selling, general and administrative	28.6		36.1		30.6		35.7
Depreciation and amortization	40.3		37.3		39.4		36.9
Restructuring charges	0.3		—		0.6		0.2
Loss on abandonment of asset	—		—		—		0.2
Income from operations	11.0		0.1		8.1		1.1
Other income, net	0.4		0.1		—		—
Interest expense, net	(3.2)		—		(4.5)		—
Income before income taxes	8.2		0.2		3.6		1.1
Income tax (expense) benefit	(2.7)		0.4		(1.2)		0.2
Net income	5.5	%	0.6	%	2.4	%	1.3	%

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Revenue

Our principal source of revenue is the licensing of earth imagery products and provision of other services to end users, resellers and partners. We have organized our sales leadership and marketing efforts around U.S. Government and Diversified Commercial customer groups. Revenue recognized for services provided to U.S. Government customers consists primarily of the EnhancedView SLA, amortization of pre-FOC payments related to the NextView agreement with the NGA, and other value added services. Diversified Commercial consists of revenue generated from the following types of customers: DAP, other international defense and intelligence, international civil government, LBS, energy, and other industry verticals.

U.S. Government


	For the three months ended									For the nine months ended
	September 30,									September 30,
(in millions)	2015			2014			% Change			2015			2014			% Change
U.S. Government Revenue:
EnhancedView SLA	$	84.3		$	56.9			48.2	%	$	252.9		$	170.5			48.3	%
Other revenue and value added services		22.9			24.6			(6.9)			74.6			91.3			(18.3)
Amortization of pre-FOC payments related to NextView		3.8			6.3			(39.7)			11.4			19.1			(40.3)
Total	$	111.0		$	87.8			26.4	%	$	338.9		$	280.9			20.6	%

Reseller and Direct Sales:
Direct		100.0	%		99.9	%		0.1	%		99.9	%		99.9	%		—	%
Resellers		—			0.1			*			0.1			0.1			—
Total		100.0	%		100.0	%		—	%		100.0	%		100.0	%		—	%

*Not meaningful

The NGA purchases our imagery products and services on behalf of various U.S. Government entities, including the military and other agencies. We also sell to other U.S. defense and intelligence customers, including defense and intelligence contractors, providing value-added services with our imagery to deliver a final end product to a customer. We sell to the U.S. Government primarily through direct sales, with sales arising from contractor relationships to a lesser extent, and we expect this trend to continue.

Our U.S. Government customers focus on image quality, including resolution, accuracy, spectral diversity, frequency of area revisit and coverage, as well as ensuring availability of a certain amount of our capacity as they integrate our products and services into their operational planning. Our customers typically operate under contracts with purchase commitments through which we receive monthly or quarterly payments in exchange for delivering specific orders to the customer. Revenue from customers in the U.S. Government is generated largely from service level agreements, tasking orders, and sales of imagery from our ImageLibrary, in addition to sales of geospatial analytic products and expert services to obtain insight from our imagery.

U.S. Government revenue increased $23.2 million, or 26.4%, and $58.0 million, or 20.6%, for the three and nine months ended September 30, 2015, respectively, compared to the three and nine months ended September 30, 2014, respectively. EnhancedView SLA revenue increased as a result of WorldView-3 becoming fully operational on October 1, 2014, which increased constellation capacity made available to the NGA. Other revenue and value added services declined primarily due to a decrease in non-cash amortization of Global Enhanced GEOINT Delivery (“Global EGD”) deferred revenue. Additionally, there was a decrease in the non-cash amortization of pre-FOC payments related to NextView, as the period over which these payments are amortized was extended to reflect the fourth quarter of 2014 extension of the useful life of WorldView-1.

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Diversified Commercial


	For the three months ended									For the nine months ended
	September 30,									September 30,
(in millions)	2015			2014			% Change			2015			2014			% Change
Diversified Commercial Revenue:
DAP	$	28.9		$	27.2			6.3	%	$	85.1		$	84.3			0.9	%
Other diversified commercial		33.4			39.6			(15.7)			96.7			103.7			(6.8)
Total	$	62.3		$	66.8			(6.7)	%	$	181.8		$	188.0			(3.3)	%

U.S. and International Sales:
U.S.	$	12.2		$	18.8			(35.1)	%	$	38.0		$	45.6			(16.7)	%
International		50.1			48.0			4.4			143.8			142.4			1.0
Total	$	62.3		$	66.8			(6.7)	%	$	181.8		$	188.0			(3.3)	%

Reseller and Direct Sales:
Direct		70.9	%		76.2	%		(7.0)	%		73.2	%		78.4	%		(6.6)	%
Resellers		29.1			23.8			22.3			26.8			21.6			24.1
Total		100.0	%		100.0	%		—	%		100.0	%		100.0	%		—	%

We sell products and services to our Diversified Commercial customers throughout the world both directly and through resellers. We have DAP agreements in 10 countries, earning revenue from sales of the DAP facility hardware and software, as well as from service fees to access our satellite constellation. Other diversified commercial revenue is generated from customers in international defense and intelligence, international civil government, LBS, energy, and other industry verticals, who use our content for mapping, monitoring, analysis and planning activities.

Diversified Commercial revenue decreased $4.5 million, or 6.7%, and $6.2 million, or 3.3%, for the three and nine months ended September 30, 2015, respectively, compared to the three and nine months ended September 30, 2014, respectively, as other diversified commercial decreased primarily due to lower revenue from LBS and Russian customers, partially offset by an increase in DAP revenue primarily from additional image deliveries and access minutes to meet customer demands.

Expenses

Cost of Revenue

The following table summarizes our cost of revenue:


	For the three months ended						For the nine months ended
	September 30,						September 30,
(in millions)	2015		2014		% Change		2015		2014		% Change
Labor and labor-related costs	$	14.3	$	17.4	(17.8)	%	$	47.6	$	52.0	(8.5)	%
Facilities, subcontracting and equipment costs		15.8		18.0	(12.2)			51.5		54.4	(5.3)
Consulting and professional fees		1.4		1.7	(17.6)			3.8		4.5	(15.6)
Aerial imagery		0.6		1.0	(40.0)			2.0		3.9	(48.7)
Other direct costs		2.2		2.8	(21.4)			5.9		6.7	(11.9)
Total	$	34.3	$	40.9	(16.1)	%	$	110.8	$	121.5	(8.8)	%

There is not a significant direct relationship between our cost of revenue and changes in our revenue. Our cost of revenue consists primarily of the cost of personnel, as well as the costs of operating our satellites, retrieving information from the satellites and processing the data retrieved.

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Cost of revenue decreased $6.6 million, or 16.1%, and $10.7 million, or 8.8%, for the three and nine months ended September 30, 2015, respectively, compared to the three and nine months ended September 30, 2014, respectively. Labor and labor-related costs decreased primarily as a result of our re-engineering and restructuring efforts, in addition to a reduction in incentive compensation due to lower than expected revenue growth. Consulting and professional fees decreased primarily from our re-engineering and restructuring efforts. Facilities, subcontracting and equipment costs decreased in connection with our re-engineering and restructuring efforts, partially offset by remote ground terminal service fees following the launch and commissioning of WorldView-3. Aerial imagery is amortized on an accelerated basis and consists of costs associated with previously purchased aerial imagery.

Selling, General and Administrative

The following table summarizes our selling, general and administrative expenses:


	For the three months ended						For the nine months ended
	September 30,						September 30,
(in millions)	2015		2014		% Change		2015		2014		% Change
Labor and labor-related costs	$	26.2	$	33.0	(20.6)	%	$	91.0	$	96.4	(5.6)	%
Consulting and professional fees		8.9		10.9	(18.3)			26.1		35.1	(25.6)
Rent and facilities		4.2		2.8	50.0			12.2		8.5	43.5
Computer hardware and software		3.7		3.6	2.8			11.1		11.0	0.9
Satellite insurance		2.8		2.2	27.3			8.8		6.9	27.5
Other		3.8		3.3	15.2			10.3		9.3	10.8
Total	$	49.6	$	55.8	(11.1)	%	$	159.5	$	167.2	(4.6)	%

Selling, general, and administrative expenses decreased $6.2 million, or 11.1%, and $7.7 million, or 4.6%, for the three and nine months ended September 30, 2015, respectively, compared to the three and nine months ended September 30, 2014, respectively. Labor and labor-related costs decreased primarily as a result of our re-engineering and restructuring efforts, in addition to a reduction in incentive compensation due to lower than expected revenue growth. Consulting and professional fees decreased primarily from our re-engineering and restructuring efforts. The increase in rent and facilities represents costs associated with our new headquarters, as we are in the process of consolidating our real estate footprint. Satellite insurance increased as a result of WorldView-3 insurance, partially offset by a decrease in current year rates to insure our other in-orbit satellites. The increase in other costs is primarily due to bad debt expense associated with Russian receivables.

Depreciation and Amortization


	For the three months ended						For the nine months ended
	September 30,						September 30,
(in millions)	2015		2014		% Change		2015		2014		% Change
Depreciation and amortization	$	69.9	$	57.7	21.1	%	$	205.3	$	172.9	18.7	%

Depreciation and amortization increased $12.2 million, or 21.1%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to $14.2 million in depreciation expense incurred following the launch and commissioning of WorldView-3 and a $5.1 million increase in hardware and software expense, primarily from assets placed into service since the third quarter of 2014, partially offset by a $7.1 million decrease in depreciation expense as a result of the fourth quarter of 2014 extension of the useful lives of our WorldView-1 and WorldView-2 satellites.

Depreciation and amortization expense increased $32.4 million, or 18.7%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to $42.4 million in depreciation expense incurred following the launch and commissioning of WorldView-3 and a $12.2 million increase in hardware and software expense, primarily from assets placed into service since the third quarter of 2014, partially offset by a $21.3 million decrease in depreciation expense as a result of the fourth quarter of 2014 extension of the useful lives of our WorldView-1 and WorldView-2 satellites.

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Restructuring Charges


	For the three months ended					For the nine months ended
	September 30,					September 30,
(in millions)	2015		2014		% Change	2015		2014		% Change
Restructuring charges	$	0.4	$	—	*	$	3.0	$	1.1	*

*Not meaningful

Restructuring charges in 2014 were incurred in conjunction with our acquisition of GeoEye to optimize our operational efficiency by realigning our infrastructure with customer demand. These restructuring activities primarily consisted of reducing redundant workforce, consolidating office and production facilities, consolidating certain ground terminals and systems and other exit costs.

Interest Expense, net


	For the three months ended					For the nine months ended
	September 30,					September 30,
(in millions)	2015		2014		% Change	2015		2014		% Change
Interest expense, net	$	(5.6)	$	—	*	$	(23.7)	$	—	*

*Not meaningful

Our interest charges consist primarily of expense on borrowings used to finance satellite construction, which are capitalized as a cost of our satellite construction.

Interest expense, net of capitalized interest and interest income, increased $5.6 million for the three months ended September 30, 2015 primarily as a result of 61.7% of our interest being capitalized to capital projects during the three months ended September 30, 2015 compared to 99.3% during the three months ended September 30, 2014.

Interest expense, net of capitalized interest and interest income, increased $23.7 million for the nine months ended September 30, 2015 primarily as a result of 46.4% of our interest being capitalized to capital projects during the nine months ended September 30, 2015 compared to 99.6% during the nine months ended September 30, 2014.

Following the launch and commissioning of our WorldView-3 satellite on October 1, 2014, we are no longer capitalizing interest on the cost basis of the satellite. Additionally, we did not capitalize interest on the cost basis of WorldView-4 while the satellite was in storage from December 2014 until mid-March 2015.

Income Tax (Expense) Benefit


	For the three months ended					For the nine months ended
	September 30,					September 30,
(in millions)	2015		2014		% Change	2015		2014		% Change
Income tax (expense) benefit	$	(4.6)	$	0.6	*	$	(5.8)	$	1.1	*

*Not meaningful

Income tax expense increased $5.2 million and $6.9 million for the three and nine months ended September 30, 2015. The tax expense in 2015 is due to the impact of discrete items on higher pre-tax income for the period, whereas the tax benefit in 2014 was due to the impact of discrete items on lower pre-tax income reported in the period.

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Backlog

The following table represents our backlog as of September 30, 2015. “Next 12 Months” backlog refers to the backlog expected to be recognized as revenue during the period between October 1, 2015 and September 30, 2016.


	Backlog to be recognized
(in millions)	Next 12 Months		Life of Contracts
U.S. Government:
EnhancedView SLA	$	337.1	$	1,657.2
Amortization of pre-FOC payments related to NextView		15.1		77.4
Other revenue and value added services		63.2		122.7
Total U.S. Government		415.4		1,857.3

Diversified Commercial:
DAP		67.2		167.2
Other diversified commercial		51.2		78.3
Total Diversified Commercial		118.4		245.5

Total Backlog	$	533.8	$	2,102.8

Backlog consists of all contractual commitments, including those under the anticipated ten-year term of the EnhancedView SLA we entered into with the NGA in August 2010, amounts committed under DAP agreements, firm orders, minimum commitments under signed customer contracts, remaining pre-paid subscriptions, firm fixed price reimbursement, and funded and unfunded task orders from our customers. Our backlog also includes amounts of obligated funding on indefinite delivery/indefinite quantity (“IDIQ”) contracts for products and services that we believe we are qualified to provide.

The EnhancedView SLA is structured as a ten-year term, inclusive of nine annual renewal options that may be exercised by the NGA. In July 2015, the NGA exercised its renewal option for year six under the EnhancedView SLA. Although the NGA may terminate the contract at any time and is not obligated to exercise any of the remaining four renewal options, we include the full remaining term in backlog. While such funding contains an inherent level of uncertainty, we believe it is the NGA’s intention to exercise the remaining options, subject only to annual Congressional appropriation of funding and the federal budget process.

The amortization of pre-FOC payments related to our NextView agreement with the NGA is recognized over the expected useful life of WorldView-1. The recognition of this revenue has no effect on our ability to generate additional revenue from the usage of the satellite, and we do not consider it a reduction in our capacity to generate additional sales.

Other revenue and value added services primarily include the Global EGD program under the EnhancedView Contract and various other products and services provided to the NGA. In September 2015, the NGA executed a contract for an additional year of the Global EGD program.

Although backlog reflects business that is considered to be firm, terminations, amendments or cancellations may occur, which could result in a reduction in our total backlog. In addition, failure to receive task orders under IDIQ contracts could also result in a reduction in our total backlog. Any such terminations, amendments or cancellations of contractual commitments, or failure to receive task orders under IDIQ contracts may also negatively impact the timing of our realization of backlog.

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Balance Sheet Measures

Total assets decreased $118.8 million, or 3.8%, primarily due to a $97.8 million decrease in property, plant and equipment, net, as a result of current year depreciation expense, partially offset by costs incurred related to WorldView-4, leasehold improvements associated with our new headquarters and various other infrastructure projects, in addition to a $46.2 million decrease in accounts receivable, net, primarily due to improved customer collections. These decreases were partially offset by a $29.8 million increase in cash and cash equivalents primarily from the step-up of the EnhancedView SLA and improved customer collections, partially offset by cash used in connection with our share repurchase program.

Total liabilities decreased $43.6 million, or 2.5%, due to a $55.3 million decrease in deferred revenue primarily resulting from current year recognition of U.S. government revenue and a $12.1 million decrease in other accrued liabilities primarily due to the timing of interest payments on our long-term debt, partially offset by a $20.4 million increase in other liabilities primarily related to our new headquarters.

Liquidity and Capital Resources

As of September 30, 2015, we had $147.6 million in cash and cash equivalents and $150.0 million available for borrowing under our Revolving Credit Facility. We believe that the combination of funds currently available to us and funds expected to be generated from operations will be adequate to finance our operations and development activities for at least the next twelve months.

If the U.S. Government, our largest customer, was not to renew or extend the EnhancedView SLA at similar levels or similar terms, we believe we would be able to maintain operations at a reduced level with existing cash and cash equivalents and borrowings under our Revolving Credit Facility for at least the next twelve months. We believe we are adequately reserved for all credit risks, including risks related to receivables denominated in U.S. dollars from foreign customers experiencing fluctuations in the value of their local currencies. Further fluctuations in the value of our customers’ local currencies may impact future results.

In summary, our cash flows were:


	Nine months ended September 30,
(in millions)	2015		2014
Net cash provided by operating activities	$	237.5	$	148.6
Net cash used in investing activities		(106.3)		(237.8)
Net cash used in financing activities		(101.4)		(12.5)

Operating Activities

Our largest source of cash provided by operations is revenue generated by sales of satellite imagery products and services. Additionally, we generate cash through sales of geospatial analytic products and expert services to obtain insight from our imagery. The primary uses of cash from our operating activities include payments for labor and labor-related costs, costs associated with operating our ground terminals, construction of DAP facilities, interest on our long-term debt, and other general corporate expenditures.

Cash provided by operating activities increased $88.9 million, or 59.8%, from the nine months ended September 30, 2014 to the nine months ended September 30, 2015 primarily due to increased net income adjusted for non-cash items, including depreciation and amortization, stock compensation expense, and amortization of debt related costs, and a net increase in cash from changes in working capital, primarily driven by accounts receivable, accounts payable, and accrued liabilities.

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Investing Activities

Cash used in investing activities primarily consists of purchases of property and equipment, including assets under construction, as well as business acquisitions. As of September 30, 2015, we have incurred $100.4 million in capital expenditures, which includes capitalized interest of $28.2 million and a tenant improvement allowance of $20.3 million associated with our new headquarters. Cash used in investing activities decreased $131.5 million, or 55.3%, from the nine months ended September 30, 2014 to the nine months ended September 30, 2015 primarily due to the acquisition of Spatial Energy, net of cash acquired, in the first quarter of 2014, and a decrease in capital expenditures primarily resulting from placing our WorldView-3 satellite into service in October 2014.

During the first quarter of 2015, we removed WorldView-4 from storage to commence work on certain enhancements. We expect to make capital expenditures on our WorldView-4 satellite until its completion and launch, which we anticipate to be in the third quarter of 2016. Additionally, as part of our agreement with Vricon, Inc., we may be obligated in 2016 to provide equity financing of up to $10.0 million to the joint venture to the extent third-party financing is not obtained.

Financing Activities

Cash used in financing activities consists primarily of stock buybacks as part of our share repurchase program, principal payments made on our long-term debt, proceeds from stock option exercises and preferred stock dividend payments.

Cash used in financing activities increased $88.9 million from the nine months ended September 30, 2014 to the nine months ended September 30, 2015 primarily as a result of our share repurchase program.

Non-U.S. GAAP Financial Measures

Reconciliation of Net Cash Flows Provided by Operating Activities to Free Cash Flow


	For the nine months ended
	September 30,
(in millions)	2015		2014
Net cash flows provided by operating activities	$	237.5	$	148.6
Net cash flows used in investing activities		(106.3)		(237.8)
Acquisition of businesses, net of cash acquired		—		35.7
Free cash flow	$	131.2	$	(53.5)

Free cash flow is defined as net cash flows provided by operating activities less net cash flows used in investing activities (excluding acquisition of businesses, net of cash acquired). Free cash flow is not a recognized term under U.S. GAAP and may not be defined similarly by other companies. Free cash flow should not be considered an alternative to “operating income (loss),” “net income (loss),” “net cash flows provided by (used in) operating activities” or any other measure determined in accordance with U.S. GAAP. Since free cash flow includes investments in operating assets, we believe this non-GAAP liquidity measure is useful in addition to the most comparable U.S. GAAP measure — “net cash flows provided by (used in) operating activities” because it provides information about the amount of cash generated before acquisitions of businesses that is then available to repay debt obligations, make investments, fund acquisitions, and for certain other activities. There are limitations to using non-U.S. GAAP financial measures, including the difficulty associated with comparing companies in different industries that use similar performance measures whose calculations may differ from ours.

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Reconciliation of Net Income to EBITDA and Adjusted EBITDA


	For the three months ended				For the nine months ended
	September 30,				September 30,
(in millions)	2015		2014		2015		2014
Net income	$	9.6	$	0.9	$	12.7	$	6.3
Depreciation and amortization		69.9		57.7		205.3		172.9
Interest expense, net		5.6		—		23.7		—
Income tax expense (benefit)		4.6		(0.6)		5.8		(1.1)
EBITDA		89.7		58.0		247.5		178.1
Restructuring charges (1)		0.4		—		3.0		1.1
Other re-engineering charges		2.5		—		2.9		—
Integration costs		—		3.5		—		12.9
Joint venture loss (gain)		0.4		—		0.4		—
Gain on disposition of subsidiary		(1.6)		—		(1.6)
Loss on abandonment of asset		—		—		—		1.2
Adjusted EBITDA	$	91.4	$	61.5	$	252.2	$	193.3

(1)

Restructuring costs incurred in 2014 consist of charges related to the acquisition of GeoEye. Restructuring charges incurred in 2015 relate to our restructuring plan announced in February 2015.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and may not be defined similarly by other companies. EBITDA and Adjusted EBITDA should not be considered alternatives to net income as indications of financial performance or as alternatives to cash flow from operations as measures of liquidity. There are limitations to using non-U.S. GAAP financial measures, including the difficulty associated with comparing companies in different industries that use similar performance measures whose calculations may differ from ours.

EBITDA and Adjusted EBITDA are key measures used in our internal operating reports by management and our Board of Directors to evaluate the performance of our operations and are also used by analysts, investment banks and lenders for the same purpose. Adjusted EBITDA is a measure being used as a key element of the company-wide bonus incentive plan. We believe that the presentation of EBITDA and Adjusted EBITDA enables a more consistent measurement of period to period performance of our operations, and EBITDA facilitates comparison of our operating performance to companies in our industry. We believe that EBITDA and Adjusted EBITDA measures are particularly important in a capital intensive industry such as ours, in which our current period depreciation is not a good indication of our current or future period capital expenditures. The cost to construct and launch a satellite and to build the related ground infrastructure may vary greatly from one satellite to another, depending on the satellite’s size, type and capabilities. Current depreciation expense is not indicative of the revenue generating potential of the satellites.

EBITDA excludes interest income, interest expense and income taxes because these items are associated with our capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which are not indicative of future capital expenditure requirements.

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Adjusted EBITDA further adjusts EBITDA to exclude restructuring, other re-engineering and integration costs, as these are non-core items. Restructuring charges incurred in 2014 are costs incurred to realize efficiencies from the acquisition of GeoEye, such as reducing excess workforce, consolidating facilities and systems, and relocating ground terminals. Restructuring charges incurred in 2015 relate to our re-engineering and restructuring plan announced in February 2015, pursuant to which the Company has and expects to continue to reduce global headcount and rationalize our real estate footprint. Other re-engineering charges are associated with the restructuring plan announced in February 2015 and represent costs incurred to realize efficiencies from reducing internal and contractor headcount, such as re-engineering processes and enhancing system workflows, as well as costs related to the decision to proactively decommission IKONOS. Integration costs consist primarily of professional fees incurred to assist us with system and process improvements associated with integrating operations as part of the GeoEye acquisition. Additionally, it excludes joint venture gains and losses, the gain on subsidiary disposition, and the loss on abandonment of asset because these are non-core items that are not related to our primary operations.

We use EBITDA and Adjusted EBITDA in conjunction with traditional U.S. GAAP operating performance measures as part of our overall assessment of our performance and we do not place undue reliance on these non-GAAP measures as our only measures of operating performance. EBITDA and Adjusted EBITDA should not be considered as substitutes for other measures of financial performance reported in accordance with U.S. GAAP.

Off-Balance Sheet Arrangements, Contractual Obligations, Guaranty and Indemnification Obligations

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2015.

Contractual Obligations

As of September 30, 2015, there were no significant changes to the contractual obligations table presented in our Annual Report on Form 10-K for the year ended December 31, 2014.

Guaranty and Indemnification Obligations

We enter into agreements in the ordinary course of business with resellers and others. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require us to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by us, our employees, agents or representatives. In addition, from time to time we have made guarantees regarding the performance of our systems to our customers. The majority of these agreements do not limit the maximum potential future payments the Company could be obligated to make.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in these Unaudited Condensed Consolidated Financial Statements. Due to the inherent uncertainties in making estimates, actual results could differ materially from those estimates.

Refer to the critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014, where we discuss our significant judgments and estimates. We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Accounting Pronouncements

See Note 2 “Summary of Significant Accounting Policies” to the Unaudited Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements and our expectation of their impact on our Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our exposure to market risk since December 31, 2014. Refer to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2014 for further detail.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (our principal executive officer and our principal financial officer, respectively), we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934) as of September 30, 2015. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2015.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which, we believe, would have a material adverse effect on our business, operating results, financial condition or cash flows.

ITEM 1A. RISK FACTORS

Investment in our securities involves risk. In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors described under the caption “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on February 26, 2015. There have been no material changes to our Risk Factors from those included in our Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In the second half of 2014, the Company’s Board of Directors authorized a program to repurchase up to $205.0 million of the Company’s outstanding common stock through December 31, 2015. As of September 30, 2015, we have repurchased 6,302,584 shares at an average purchase price of $27.86, for a total of $175.6 million under the program, including broker transaction fees and commissions. 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 and pursuant to Rule 10b5-1, in each case on such terms and at such times as shall be permitted by 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. Share repurchase activity during the quarter ended September 30, 2015 was as follows:


				Total Number	Approximate
				of Shares	Dollar Value
	Total	Average		Purchased as Part	of Shares That
	Number	Price		of Publicly	May Yet be
	of Shares	Paid Per		Announced	Purchased
	Purchased	Share		Program	Under Program(1)
July 1, 2015 to July 31, 2015	562,813		26.67
August 1, 2015 to August 31, 2015	853,692		23.47
September 1, 2015 to September 30, 2015	74,593		22.40
Total	1,491,098	$	24.62	6,302,584	$	29,552,550

(1)

Excludes broker transaction fees and commissions

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBIT INDEX

The exhibits listed in the Exhibit Index (following the signatures page of this Form 10-Q) are filed with, or incorporated by reference in, this Form 10-Q.

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SIGNATURE

DIGITALGLOBE, INC.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: October 29, 2015		/s/Gary W. Ferrera
		Gary W. Ferrera
		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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EXHIBIT INDEX

Incorporated by Reference

Exhibit No

Exhibit Description

Form

SEC File No.

Exhibit

Filing Date

Filed
Herewith

10.1#

Modification P00020 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

31.1

Certification of the Company’s Chief Executive Officer, Jeffrey R. Tarr, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Company’s Chief Financial Officer, Gary W. Ferrera, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1†

Certification of the Company’s Chief Executive Officer, Jeffrey R. Tarr, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2†

Certification of the Company’s Chief Financial Officer, Gary W. Ferrera, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following materials for the DigitalGlobe, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, Commission File No. 001-34299, formatted in eXtensible Business Reporting Language (XBRL):

(i.) Unaudited Condensed Consolidated Statements of Operations

(ii.) Unaudited Condensed Consolidated Balance Sheets

(iii.) Unaudited Condensed Consolidated Statements of Cash Flows

(iv.) Related notes, tagged or blocks of text

#Certain portions of this exhibit have been omitted by redacting a portion of the text. This exhibit has been filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment.

†Furnished herewith.

DIGITALGLOBE, INC. - FORM 10-Q - October 29, 2015

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