DIGITALGLOBE, INC. - FORM 10-Q

Attached files

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EX-10.2 - EX-10.2 - DIGITALGLOBE, INC.	dgi-20160331ex10297a9da.htm
EX-10.1 - EX-10.1 - DIGITALGLOBE, INC.	dgi-20160331ex101b2e9e0.htm
EX-10.4 - EX-10.4 - DIGITALGLOBE, INC.	dgi-20160331ex1047d6246.htm
EX-10.3 - EX-10.3 - DIGITALGLOBE, INC.	dgi-20160331ex103dedf06.htm
EX-32.2 - EX-32.2 - DIGITALGLOBE, INC.	dgi-20160331ex3221ff2bb.htm
EX-31.1 - EX-31.1 - DIGITALGLOBE, INC.	dgi-20160331ex31188258a.htm
EX-31.2 - EX-31.2 - DIGITALGLOBE, INC.	dgi-20160331ex312b1ddf9.htm
EX-32.1 - EX-32.1 - DIGITALGLOBE, INC.	dgi-20160331ex3216b622a.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: March 31, 2016

☐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)

N/A

(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 April 20, 2016 there were 62,959,256 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

Table of Contents

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	25
Item 4:	Controls and Procedures	25
PART II.	Other Information	26
Item 1:	Legal Proceedings	26
Item 1A:	Risk Factors	26
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3:	Defaults Upon Senior Securities	26
Item 4:	Mine Safety Disclosures	26
Item 5:	Other Information	26
Item 6:	Exhibit Index	27

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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
	March 31,
(in millions, except per share data)	2016		2015
Revenue	$	175.4	$	169.4
Costs and expenses:
Cost of revenue, excluding depreciation and amortization		32.2		39.3
Selling, general and administrative		48.7		57.0
Depreciation and amortization		71.0		67.3
Restructuring charges		2.9		2.2
Income from operations		20.6		3.6
Interest expense, net		(5.1)		(12.7)
Income (loss) before income taxes		15.5		(9.1)
Income tax (expense) benefit		(6.0)		4.2
Equity in earnings from joint ventures, net of tax		(0.9)		—
Net income (loss)		8.6		(4.9)
Preferred stock dividends		(1.0)		(1.0)
Net income (loss) less preferred stock dividends		7.6		(5.9)
Income allocated to participating securities		(0.3)		—
Net income (loss) available to common stockholders	$	7.3	$	(5.9)

Earnings per share:
Basic earnings (loss) per share	$	0.11	$	(0.08)
Diluted earnings (loss) per share	$	0.11	$	(0.08)
Weighted average common shares outstanding:
Basic		64.9		72.4
Diluted		65.1		72.4

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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DigitalGlobe, Inc.

Unaudited Condensed Consolidated Balance Sheets


	March 31,		December 31,
(in millions, except par value)	2016		2015
ASSETS
Current Assets:
Cash and cash equivalents	$	72.8	$	126.1
Restricted cash		4.0		3.6
Accounts receivable, net of allowance for doubtful accounts of $2.9 and $2.8, respectively		101.7		90.8
Deferred contract costs		12.2		13.5
Prepaid and other current assets		18.8		17.4
Total current assets		209.5		251.4
Property and equipment, net of accumulated depreciation of $1,242.6 and $1,179.4, respectively		2,043.6		2,080.2
Goodwill		484.1		484.1
Intangible assets, net of accumulated amortization of $31.9 and $29.6, respectively		30.6		32.9
Long-term restricted cash		5.1		4.3
Long-term deferred contract costs		48.3		47.1
Other assets		21.0		13.2
Total assets	$	2,842.2	$	2,913.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	6.9	$	3.9
Current portion of long-term debt		5.5		5.5
Deferred revenue		83.5		80.3
Other accrued liabilities		45.7		64.4
Total current liabilities		141.6		154.1
Long-term debt, net of discount and debt issuance costs		1,104.4		1,104.4
Deferred revenue, non-current		269.6		284.0
Deferred income taxes, net, non-current		94.6		86.4
Other liabilities		36.7		36.2
Total liabilities	$	1,646.9	$	1,665.1
COMMITMENTS AND CONTINGENCIES (Note 15)
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 March 31, 2016 and December 31, 2015		—		—
Common stock; $0.001 par value; 250.0 shares authorized; 76.8 shares issued and 63.5 shares outstanding at March 31, 2016 and 76.6 shares issued and 67.4 shares outstanding at December 31, 2015		0.2		0.2
Treasury stock, at cost; 13.3 shares at March 31, 2016 and 9.2 shares at December 31, 2015		(286.9)		(225.8)
Additional paid-in capital		1,502.5		1,502.8
Accumulated deficit		(20.5)		(29.1)
Total stockholders’ equity		1,195.3		1,248.1
Total liabilities and stockholders’ equity	$	2,842.2	$	2,913.2

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 three months ended
	March 31,
(in millions)	2016		2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	8.6	$	(4.9)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		71.0		67.3
Stock-based compensation expense, net of capitalized stock-based compensation expense		4.0		4.6
Amortization of aerial image library, deferred contract costs and lease incentive		4.2		4.5
Deferred income taxes		8.2		(5.9)
Excess tax benefit from share-based compensation		(0.1)		(0.9)
Amortization of debt issuance costs and accretion of debt discount, and other		0.8		2.1
Changes in working capital:
Accounts receivable, net		(10.9)		3.6
Deferred contract costs		(4.4)		(4.8)
Other current and non-current assets		(3.5)		4.8
Accounts payable		0.7		5.8
Accrued liabilities		(9.8)		0.5
Deferred revenue		(11.2)		(19.8)
Net cash flows provided by operating activities		57.6		56.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress additions		(38.6)		(30.1)
Property and equipment additions		—		(1.2)
Increase in restricted cash		(1.2)		—
Investment in joint venture		(7.5)		—
Net cash flows used in investing activities		(47.3)		(31.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt and capital lease obligations		(1.9)		(1.6)
Repurchase of common stock		(60.9)		(31.1)
Proceeds from exercise of stock options		0.1		4.3
Preferred stock dividend payment		(1.0)		(1.0)
Excess tax benefit from share-based compensation		0.1		0.9
Net cash flows used in financing activities		(63.6)		(28.5)
Net decrease in cash and cash equivalents		(53.3)		(2.9)
Cash and cash equivalents, beginning of period		126.1		117.8
Cash and cash equivalents, end of period	$	72.8	$	114.9

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized amounts of $16.6 million and $11.5 million, respectively		5.9		9.6
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Changes to non-cash property, equipment and construction in progress accruals, including interest		6.8		3.2
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 high-resolution Earth-imagery products and services sourced from our own advanced satellite constellation and third party providers. Our imagery solutions support a wide variety of users in defense and intelligence, civil agencies, mapping and analysis, environmental monitoring, oil and gas exploration, infrastructure management, Internet portals, and navigation technology. Each day users depend on us 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 Unaudited Condensed Consolidated Financial Statements include the accounts of DigitalGlobe, Inc. and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

The 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 month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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, 2015 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 of assets and liabilities at the reporting date, and amounts of revenue and expenses during the periods presented. Due to the inherent uncertainties in making estimates, actual results could differ materially from those estimates and such differences may be material to the Unaudited Condensed Consolidated Financial Statements.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Standard			Description and Impact on the Financial Statements
ASU 2015-17, Balance Sheet Classification of Deferred Taxes			This standard requires an entity to classify all deferred tax liabilities and assets as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The standard is effective for fiscal years beginning after December 15, 2016 and interim periods therein. The standard permits retrospective or prospective adoption methods and early adoption is permitted. The Company early adopted this standard in the first quarter of 2016 on a retrospective basis. Adoption of this standard did not have a material effect on our consolidated financial statements. As a result of adoption, the Company has retrospectively adjusted the previously issued December 31, 2015 Consolidated Balance Sheet to facilitate comparison among periods by reclassifying current deferred tax assets as a direct deduction to non-current deferred tax liabilities, decreasing current deferred tax assets and non-current deferred tax liabilities by $11.9 million.
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 Company early adopted the standard as of December 31, 2015 and applied the guidance retrospectively. The Company has presented debt issuance costs of $22.7 million as a direct deduction from the associated liability for the period ended December 31, 2015.

Standards Not Yet Adopted



Standard		Description
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. Companies will need to use more judgment and make more estimates than under existing guidance. This may include 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 standard permits retrospective or modified retrospective (cumulative effect) adoption methods. In August 2015, the Financial Accounting Standards Board issued Accounting Standards Update ("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. We have not yet selected a transition method and continue to evaluate the impact of this guidance on our consolidated financial statements and related disclosures.
ASU 2016-02, Leases (ASC Topic 842)		The standard requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new guidance also requires additional disclosure regarding leasing arrangements. This standard requires the use of a modified retrospective transition method and is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting		This standard requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, and to make a policy election to account for forfeitures as they occur. The standard is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2016-09 will have on our consolidated financial statements and related disclosures.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 3.Property and Equipment

Property and equipment consisted of the following:


	Depreciable Life
(in millions)	(in years)			March 31, 2016		December 31, 2015
Satellites	9	–	13	$	1,797.7	$	1,797.7
Construction in progress		–			836.5		815.3
Computer equipment and software	3	–	12		481.2		470.5
Machinery and equipment, including ground terminals		5			105.3		110.6
Furniture, fixtures and other	3	–	7		58.9		58.9
Land and buildings		34			6.6		6.6
Total property and equipment					3,286.2		3,259.6
Accumulated depreciation					(1,242.6)		(1,179.4)
Property and equipment, net				$	2,043.6	$	2,080.2

Depreciation expense for property and equipment, inclusive of losses on disposals of assets, was $68.7 million and $64.7 million for the three months ended March 31, 2016 and 2015, respectively.

Satellite Constellation

As of March 31, 2016, the Company operates a constellation of four in-orbit and fully commissioned satellites: GeoEye-1, WorldView-1, WorldView-2 and WorldView-3. Our WorldView-4 satellite is classified as construction in progress. The net book value of each in-orbit satellite is as follows:


		March 31, 2016						December 31, 2015
	Depreciable	Gross				Net		Gross				Net
	Life	Carrying		Accumulated		Book		Carrying		Accumulated		Book
(in millions)	(in years)	Amount		Depreciation		Value		Amount		Depreciation		Value
GeoEye-1	9.0	$	211.8	$	(134.2)	$	77.6	$	211.8	$	(123.6)	$	88.2
WorldView-1	13.0		473.2		(350.1)		123.1		473.2		(343.4)		129.8
WorldView-2	13.0		463.2		(247.8)		215.4		463.2		(239.8)		223.4
WorldView-3	11.5		649.5		(84.7)		564.8		649.5		(70.6)		578.9
Satellites, net		$	1,797.7	$	(816.8)	$	980.9	$	1,797.7	$	(777.4)	$	1,020.3

NOTE 4.Goodwill and Intangible Assets

There have been no changes in goodwill from December 31, 2015 to March 31, 2016.

Intangible assets consisted of the following:


				March 31, 2016						December 31, 2015
				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	$	(17.6)	$	9.6	$	27.2	$	(16.2)	$	11.0
Customer relationships	10	–	12		27.0		(6.5)		20.5		27.0		(5.8)		21.2
Trademarks		3			5.6		(5.4)		0.2		5.6		(5.2)		0.4
FCC licenses and other	2	–	20		2.7		(2.4)		0.3		2.7		(2.4)		0.3
Total				$	62.5	$	(31.9)	$	30.6	$	62.5	$	(29.6)	$	32.9

Intangible amortization expense was $2.3 million and $2.6 million for the three months ended March 31, 2016 and 2015, respectively.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 2016	$	5.9
2017		7.7
2018		2.9
2019		2.5
2020		2.5
Thereafter		9.1
Total	$	30.6

NOTE 5.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 March 31, 2016, 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 a minimum interest coverage ratio. As of March 31, 2016, we were in compliance with our debt covenants.

The following table provides a summary of the Company’s long-term debt:


(in millions)	March 31, 2016		December 31, 2015
Term Loan due February 1, 2020	$	533.5	$	534.9
Senior Notes due February 1, 2021		600.0		600.0
Total borrowings		1,133.5		1,134.9
Less: unamortized discounts and issuance costs		(23.6)		(25.0)
Total borrowings, net		1,109.9		1,109.9
Less: current maturities of long-term debt		(5.5)		(5.5)
Total long-term debt, net	$	1,104.4	$	1,104.4

The Company’s future debt payments, excluding interest payments, consisted of the following as of March 31, 2016:


(in millions)	Amount
Remainder of 2016	$	4.1
2017		5.5
2018		5.5
2019		5.5
2020		512.9
Thereafter		600.0
Total	$	1,133.5

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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
	March 31,
(in millions)	2016		2015
Interest	$	14.4	$	13.0
Accretion of debt discount, debt issuance cost amortization and line of credit fees		2.0		1.8
Capitalized interest		(11.2)		(2.1)
Interest expense	$	5.2	$	12.7
Interest income		(0.1)		—
Interest expense, net	$	5.1	$	12.7

NOTE 6.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 $1,075.2 million and $1,028.2 million at March 31, 2016 and December 31, 2015, 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, receivables, other current assets, accounts payable, and accrued liabilities approximate fair value.

NOTE 7.Deferred Revenue

A rollforward of deferred revenue from December 31, 2015 to March 31, 2016 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, 2015	$	172.9	$	68.9	$	73.7	$	41.5	$	7.3	$	364.3
Deferred revenue on cash collections		75.0		17.6		—		25.5		16.5		134.6
Deferred revenue recognized		(84.3)		(14.8)		(3.8)		(27.2)		(15.7)		(145.8)
March 31, 2016	$	163.6	$	71.7	$	69.9	$	39.8	$	8.1	$	353.1

NOTE 8.Restructuring Charges

In February 2015, the Company initiated a restructuring plan intended to improve our operational efficiency. Under the restructuring plan, the Company reduced global headcount and rationalized its real estate footprint. The Company incurred $7.0 million in restructuring charges as a result of these efforts, which were completed in the first quarter of 2016. The components of the restructuring liability were as follows:


(in millions)	Severance		Facilities		Other costs		Total
December 31, 2015	$	—	$	—	$	—	$	—
Provision for restructuring charges		—		0.2		—		0.2
Cash payments		—		(0.2)		—		(0.2)
March 31, 2016	$	—	$	—	$	—	$	—

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In October 2015, the Company initiated a separate restructuring plan, in which the Company may incur up to $10.0 million in an effort to further reduce global headcount and rationalize its real estate footprint. We expect to complete this plan and realize the benefits resulting from our efforts by the end of the fourth quarter of 2016. The components of the restructuring liability, which are included in other accrued liabilities in the Unaudited Condensed Consolidated Balance Sheet, were as follows:


(in millions)	Severance		Facilities		Other costs		Total
December 31, 2015	$	0.4	$	—	$	—	$	0.4
Provision for restructuring charges		1.7		1.0		—		2.7
Cash payments		(1.7)		(1.0)		—		(2.7)
March 31, 2016	$	0.4	$	—	$	—	$	0.4

NOTE 9.Other Accrued Liabilities

Other accrued liabilities consisted of the following:


	March 31,		December 31,
(in millions)	2016		2015
Compensation and other employee benefits	$	12.8	$	13.9
Construction in progress accruals		7.2		8.3
Accrued interest		5.5		13.4
Other accrued expense		20.2		28.8
Total	$	45.7	$	64.4

NOTE 10.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 rate for the three months ended March 31, 2016 was 38.7%, differing from the statutory federal rate of 35.0% primarily as a result of the impact of certain discrete items.

NOTE 11.Stock-Based Compensation

During the three months ended March 31, 2016, the Company awarded 1.3 million unvested restricted stock units at an average grant date fair value of $15.54 per share. Of this amount, 0.4 million stock units represent performance shares that are subject to service, performance and market vesting conditions with an average grant date fair value of $16.99 per share. We did not grant any stock options during the three months ended March 31, 2016.

Stock-based compensation expense, net of amounts capitalized to assets under construction, was $4.0 million and $4.6 million during the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, unrecognized compensation expense related to unvested restricted stock awards and units, including those subject to service, performance and market vesting conditions, was $41.1 million, net of estimated forfeitures, to be recognized over a weighted-average remaining vesting period of 3.0 years.

As of March 31, 2016, the number of options outstanding was 1.6 million at a weighted-average exercise price of $20.60 per share, and the number of options exercisable was 1.6 million at a weighted-average exercise price of $20.61 per share.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 12.Stockholders’ Equity

Share Repurchase Program

Series A Convertible Preferred Stock

The Company declared dividends on the outstanding shares of Series A Convertible Preferred Stock of $1.0 million during each of the three months ended March 31, 2016 and 2015.

Comprehensive Income

For the three months ended March 31, 2016 and 2015, there were no material differences between net income (loss) and comprehensive income (loss).

NOTE 13.Earnings (Loss) Per Share

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


	Three months ended
	March 31,
(in millions, except per share data)	2016		2015
Net income (loss)	$	8.6	$	(4.9)
Preferred stock dividends		(1.0)		(1.0)
Net income (loss) less preferred stock dividends		7.6		(5.9)
Income allocated to participating securities		(0.3)		—
Net income (loss) available to common stockholders	$	7.3	$	(5.9)
Basic weighted average number of common shares outstanding		64.9		72.4
Assuming exercise of stock options and restricted shares		0.2		—
Diluted weighted average number of common shares outstanding		65.1		72.4
Earnings (loss) per share:
Basic	$	0.11	$	(0.08)
Diluted	$	0.11	$	(0.08)

The potential common shares from the conversion of Series A Convertible 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 month periods ended March 31, 2016 and 2015. 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 2.6 million and 2.8 million for the three month periods ended March 31, 2016 and 2015, respectively.

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 14.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 $2.2 million and $1.5 million for the three months ended March 31, 2016 and 2015, respectively, in products and services to the joint venture. Amounts owed to the Company by the joint venture at March 31, 2016 and December 31, 2015 were $3.9 million and $3.0 million, respectively.

In May 2015, in exchange for a 50% equity interest in a joint venture, Vricon, Inc., we committed to provide imagery to the joint venture from our ImageLibrary on an ongoing basis for the purpose of producing photo-realistic three- dimensional products and digital elevation models. Upon formation, we contributed $5.0 million in the form of a note receivable to the joint venture, which is due May 2018. During the three months ended March 31, 2016, the Company provided $7.5 million in equity financing to the joint venture, and may be obligated to provide an additional $2.5 million in 2016.

NOTE 15.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 16.Significant Customers and Geographic Information

The Company operates in a single segment, in which it provides imagery 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, and measures performance based on consolidated operating results and achievement of individual performance goals.

The Company has two primary customer groups: U.S. Government and Diversified Commercial. U.S. Government revenue consists primarily of the EnhancedView Service Level Agreement (“EnhancedView SLA”) with the United States National Geospatial-Intelligence Agency (“NGA”), other revenue and value-added services, and amortization of pre-full operational capability (“FOC”) payments related to the NextView agreement with the NGA. Diversified Commercial consists the following types of customers: Direct Access Program (“DAP”), international civil government, LBS, energy, other international defense and intelligence, and other industry verticals.

The following table summarizes revenue for each customer group:


	For the three months ended
	March 31,
(in millions)	2016		2015
U.S. Government	$	110.3	$	114.8
Diversified Commercial		65.1		54.6
Total	$	175.4	$	169.4

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


	For the three months ended
	March 31,
(in millions)	2016		2015
U.S.	$	121.6	$	127.9
International		53.8		41.5
Total	$	175.4	$	169.4

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Forward-looking statements are based upon our current expectations and assumptions of future events and are subject to risks and uncertainties that could cause our actual results or performance to differ materially from those indicated by such forward looking statements. Some of the risks or uncertainties that could cause actual results to differ include, but are not limited to: the loss or reduction in scope 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; our ability to meet our obligations under the EnhancedView contract; our reliance on a limited number of vendors to provide certain key products or services to us; breach of our system security measures or loss of our secure facility clearance and accreditation; the loss or damage to 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; loss or damage to the content contained in our ImageLibrary; interruption or failure of our ground systems and other infrastructure; decrease in demand for our imagery products and services; increased competition that may reduce our market share or cause us to lower our prices; changes in political or economic conditions, including fluctuations in the value of foreign currencies, interest rates, energy and commodity prices, trade laws and the effects of governmental initiatives to manage economic conditions; our ability to recruit, hire or retain key employees or a highly skilled and diverse workforce; failure to obtain or maintain required regulatory approvals and licenses; and, changes in U.S. or foreign law or regulation that may limit our ability to distribute our imagery products and services. Additional information concerning these and other risk factors can be found in our filings with the U.S. Securities and Exchange Commission, including Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015. We undertake no obligation to revise or update any forward-looking statements, except as required by law. 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 high-resolution Earth-imagery products and services sourced from our own advanced satellite constellation and third-party providers. Our imagery solutions support a wide variety of users in defense and intelligence, civil agencies, mapping and analysis, environmental monitoring, oil and gas exploration, infrastructure management, Internet portals, and navigation technology. Each day users depend on us 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 6.7 billion square kilometers of imagery, an area the equivalent of 44 times the landmass of the earth, accumulated since 1999. As of March 31, 2016, 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.

2016 Highlights

Share Repurchase Program

In October 2015, the Company’s Board of Directors increased authorized share repurchases of the Company’s outstanding common stock to $335.0 million through December 31, 2016. As of March 31, 2016, we have repurchased a total of 13,079,057 shares at an average purchase price of $21.45, for a total of $280.5 million under the program, including broker transaction fees and commissions.

Re-engineering and Restructuring Plans

In February 2015, the Company initiated a re-engineering and restructuring plan intended to improve our operational efficiency. We completed this plan and realized the benefits resulting from our efforts in the first quarter of 2016. The Company incurred approximately $10.8 million of the originally anticipated $15.0 million as a result of these efforts, which included restructuring charges to reduce global headcount and rationalize our real estate footprint, and other re-engineering charges to realize efficiencies from reducing headcount, such as re-engineering processes and enhancing system workflows, as well as costs related to the decision to proactively decommission IKONOS. The decrease in spend resulted primarily from lower than anticipated lease termination fees associated with the consolidation of our real estate footprint.

In October 2015, the Company initiated a separate re-engineering and restructuring plan, in which the Company may incur up to $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 and realize the benefits resulting from our efforts by the end of the fourth quarter of 2016.


	October 2015 Plan
			Expected
(in millions)	Incurred		Remaining		Total
Restructuring charges	$	4.9	$	5.1	$	10.0
Other re-engineering charges		2.3		5.7		8.0
Total	$	7.2	$	10.8	$	18.0

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Recent Satellite Developments

The Company has one satellite under construction, WorldView-4, which it intends to launch in the third quarter of 2016. The Company has received early contractual agreements and letters of intent for direct access capacity from international defense and intelligence customers. We anticipate that these pre-launch commitments will generate incremental revenue in 2017, when the satellite is expected to begin commercial operations.

In February 2016, the Company signed an agreement with two Saudi Arabian entities to form a joint venture to develop a constellation of six or more sub-meter resolution satellites. The Saudi Arabian entities will be responsible for the construction, integration and launch of the satellites. The constellation will leverage the Company's ground infrastructure and global distribution capabilities. The satellites are expected to launch in late 2018 or early 2019.

Results of Operations

We operate in a single segment in which we use common infrastructure and technology to collect, process and distribute imagery products and services to customers around the world. The following table summarizes our results of operations:


	For the three months ended
	March 31,
(in millions)	2016		2015		% Change
U.S. Government revenue	$	110.3	$	114.8		(3.9)	%
Diversified Commercial revenue		65.1		54.6		19.2
Total revenue		175.4		169.4		3.5
Cost of revenue, excluding depreciation and amortization		32.2		39.3		(18.1)
Selling, general and administrative		48.7		57.0		(14.6)
Depreciation and amortization		71.0		67.3		5.5
Restructuring charges		2.9		2.2		31.8
Income from operations		20.6		3.6		*
Interest expense, net		(5.1)		(12.7)		(59.8)
Income (loss) before income taxes		15.5		(9.1)		*
Income tax (expense) benefit		(6.0)		4.2		*
Equity in earnings from joint ventures, net of tax		(0.9)		—		*
Net income (loss)	$	8.6	$	(4.9)		*	%

*Not meaningful

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


	For the three months ended
	March 31,
	2016		2015
U.S. Government revenue	62.9	%	67.8	%
Diversified Commercial revenue	37.1		32.2
Total revenue	100.0		100.0
Cost of revenue, excluding depreciation and amortization	18.4		23.2
Selling, general and administrative	27.8		33.7
Depreciation and amortization	40.5		39.7
Restructuring charges	1.6		1.3
Income from operations	11.7		2.1
Interest expense, net	(2.9)		(7.5)
Income (loss) before income taxes	8.8		(5.4)
Income tax (expense) benefit	(3.4)		2.5
Equity in earnings from joint ventures, net of tax	(0.5)		—
Net income (loss)	4.9	%	(2.9)	%

Revenue

Our principal source of revenue is the licensing of Earth-imagery products and the provision of other services to end users, resellers and partners. The Company has two primary customer groups: U.S. Government and Diversified Commercial.

U.S. Government


	For the three months ended
	March 31,
(in millions)	2016			2015			% Change
U.S. Government Revenue:
EnhancedView SLA	$	84.3		$	84.3			—	%
Other revenue and value-added services		22.2			26.7			(16.9)
Amortization of pre-FOC payments related to NextView		3.8			3.8			—
Total	$	110.3		$	114.8			(3.9)	%

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

U.S. Government revenue consists primarily of the EnhancedView SLA, other revenue and value-added services, and amortization of pre-FOC payments related to the NextView agreement with the NGA. The NGA purchases our imagery products and services on behalf of various U.S. Government entities, including the military and other agencies. Other U.S. defense and intelligence customers, including contractors, purchase value-added services with our imagery. Our U.S. Government customers focus on image quality, including resolution, accuracy, spectral diversity, frequency of area revisit, coverage, and availability of certain amounts of our capacity, as they integrate our products and services into their operational planning. Revenue 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 that obtain insight from our imagery. We sell to the U.S. Government primarily through direct sales.

U.S. Government revenue decreased $4.5 million, or 3.9%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Other revenue and value-added services declined primarily due to a decrease in non-cash amortization of Global EGD deferred revenue.

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Diversified Commercial


	For the three months ended
	March 31,
(in millions)	2016			2015			% Change
Diversified Commercial Revenue:
DAP	$	33.2		$	24.6			35.0	%
Other diversified commercial		31.9			30.0			6.3
Total	$	65.1		$	54.6			19.2	%

U.S. and International Sales:
U.S.	$	11.3		$	13.1			(13.7)	%
International		53.8			41.5			29.6
Total	$	65.1		$	54.6			19.2	%

Reseller and Direct Sales:
Direct		75.5	%		75.8	%		(0.4)	%
Resellers		24.5			24.2			1.2
Total		100.0	%		100.0	%		—	%

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

Diversified Commercial revenue increased $10.5 million, or 19.2%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. DAP revenue increased due to additional image deliveries and access minutes to meet customer demands, primarily driven by events in the Middle East. Other diversified commercial increased primarily due to increased revenue from civil government and other international defense and intelligence customers.

Expenses

Cost of Revenue

The following table summarizes our cost of revenue, excluding depreciation and amortization:


	For the three months ended
	March 31,
(in millions)	2016		2015		% Change
Labor and labor-related costs	$	16.3	$	16.4	(0.6)	%
Facilities, subcontracting and equipment costs		13.2		19.4	(32.0)
Consulting and professional fees		0.4		1.1	(63.6)
Other direct costs		2.3		2.4	(4.2)
Total	$	32.2	$	39.3	(18.1)	%

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 $7.1 million, or 18.1%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Facilities, subcontracting and equipment costs decreased primarily as a result of procurement savings on various operating expenses and our re-engineering and restructuring efforts.

Selling, General and Administrative

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


	For the three months ended
	March 31,
(in millions)	2016		2015		% Change
Labor and labor-related costs	$	28.1	$	33.1	(15.1)	%
Consulting and professional fees		6.1		9.4	(35.1)
Rent and facilities		4.4		4.0	10.0
Computer hardware and software		3.5		3.7	(5.4)
Satellite insurance		2.3		3.1	(25.8)
Other		4.3		3.7	16.2
Total	$	48.7	$	57.0	(14.6)	%

Selling, general, and administrative expenses decreased $8.3 million, or 14.6%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Labor and labor-related costs decreased primarily from lower headcount in connection with our restructuring efforts. Consulting and professional fees decreased primarily from our re-engineering efforts.

Depreciation and Amortization


	For the three months ended
	March 31,
(in millions)	2016		2015		% Change
Depreciation and amortization	$	71.0	$	67.3	5.5	%

Depreciation and amortization increased $3.7 million, or 5.5%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase is primarily driven by impairment charges of $2.6 million to reduce the carrying value of assets held for sale to their estimated fair value, less costs to sell. The Company expects to sell certain assets as part of continued efforts to rationalize its real estate footprint.

Restructuring Charges


	For the three months ended
	March 31,
(in millions)	2016		2015		% Change
Restructuring charges	$	2.9	$	2.2	31.8	%

In 2015, the Company initiated two restructuring plans intended to improve our operational efficiency. Under the restructuring plans, the Company has and expects to continue to reduce global headcount and rationalize its real estate footprint. Restructuring charges incurred during the three month periods ended March 31, 2015 and 2016 relate to these plans. Refer to Note 8 “Restructuring Charges” to the Unaudited Condensed Consolidated Financial Statements for further detail.

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Interest Expense, net


	For the three months ended
	March 31,
(in millions)	2016		2015		% Change
Interest expense, net	$	(5.1)	$	(12.7)	(59.8)	%

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 of $11.2 million, decreased $7.6 million for the three months ended March 31, 2016 primarily as a result of 68.3% of our interest being capitalized to capital projects during the three months ended March 31, 2016 compared to 14.2% during the three months ended March 31, 2015. 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
	March 31,
(in millions)	2016		2015		% Change
Income tax (expense) benefit	$	(6.0)	$	4.2	*

Income tax expense increased $10.2 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 primarily due to generating pre-tax income in 2016 compared to a pre-tax loss in 2015.

Backlog

The following table represents our backlog as of March 31, 2016:


	Backlog
(in millions)	Next 12 Months		Life of Contracts
Total Backlog	$	539.0	$	2,141.9

We define backlog as our estimate of future revenue from 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 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 through August 31, 2016. 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.

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 $71.0 million, or 2.4%, from December 31, 2015 to March 31, 2016 driven by a $53.3 million decrease in cash and cash equivalents primarily as a result of our share repurchase program, and a $36.6 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. These decreases were partially offset by a $10.9 million increase in accounts receivable due to the timing of customer payment receipts and a $7.8 million increase in other assets primarily due to equity financing provided to Vricon, Inc.

Total liabilities decreased $18.2 million, or 1.1%, from December 31, 2015 to March 31, 2016 primarily due to an $18.7 million decrease in other accrued liabilities as a result of interest payments made on our long-term debt.

Liquidity and Capital Resources

As of March 31, 2016, we had $72.8 million in cash and cash equivalents and $150.0 million available for borrowing under our Revolving Credit Facility. At March 31, 2016, we were in compliance with our debt covenants.

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, were 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 borrowing capacity for at least the next twelve months. Furthermore, we believe we are adequately reserved for receivables denominated in U.S. dollars from foreign customers experiencing fluctuations in the value of foreign currencies.

In summary, our cash flows were:


	Three months ended March 31,
(in millions)	2016		2015
Net income (loss)	$	8.6	$	(4.9)
Non-cash items		88.1		71.7
Changes in working capital		(39.1)		(9.9)
Net cash provided by operating activities		57.6		56.9
Net cash used in investing activities		(47.3)		(31.3)
Net cash used in financing activities	$	(63.6)	$	(28.5)

Operating Activities

Our largest source of cash provided by operations is revenue generated by sales of satellite imagery products and services. We also 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 $0.7 million, or 1.2%, from the three months ended March 31, 2015 to the three months ended March 31, 2016 primarily due to increased net income adjusted for non-cash items, including depreciation and amortization, partially offset by a net decrease in cash from changes in working capital, primarily driven by deferred revenue, accounts receivable 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.

In the three months ended March 31, 2016, we incurred $38.6 million in capital expenditures, which includes capitalized interest of $16.6 million. Cash used in investing activities increased $16.0 million, or 51.1%, from the three months ended March 31, 2015 to the three months ended March 31, 2016, primarily due to capital expenditures related to WorldView-4 and equity financing provided to Vricon, Inc.

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 $35.1 million from the three months ended March 31, 2015 to the three months ended March 31, 2016 primarily as a result of activity in our share repurchase program.

Non-U.S. GAAP Financial Measures

Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA


	For the three months ended
	March 31,
(in millions)	2016		2015
Net income (loss)	$	8.6	$	(4.9)
Depreciation and amortization		71.0		67.3
Interest expense, net		5.1		12.7
Income tax expense (benefit)		6.0		(4.2)
EBITDA		90.7		70.9
Restructuring charges		2.9		2.2
Other re-engineering charges		0.9		—
Joint venture losses, net		0.9		—
Adjusted EBITDA	$	95.4	$	73.1

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 (loss) 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 also not indicative of the revenue generating potential of the satellites.

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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. Adjusted EBITDA further adjusts EBITDA to exclude restructuring and other re-engineering costs, as these are non-core items. Additionally, it excludes joint venture losses because this is a non-core item that is not related to our primary operations.

Restructuring charges relate to our re-engineering and restructuring plans announced in 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 re-engineering and restructuring plans announced in 2015 and represent costs incurred to realize efficiencies from reducing headcount, such as re-engineering processes and enhancing system workflows, as well as costs related to the decision to proactively decommission IKONOS.

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.

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


	For the three months ended
	March 31,
(in millions)	2016		2015
Net cash flows provided by operating activities	$	57.6	$	56.9
Net cash flows used in investing activities		(47.3)		(31.3)
Investment in joint venture		7.5		—
Free cash flow	$	17.8	$	25.6

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 and excluding other strategic investments). 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.

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

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2016.

Contractual Obligations

As of March 31, 2016, 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, 2015.

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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.

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, 2015, 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, 2015.

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 material changes to the Company’s market risk during the first quarter of 2016. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of the 2015 Form 10-K.

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 March 31, 2016. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2016.

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 25, 2016. 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. In October 2015, the Company’s Board of Directors increased authorized share repurchases of the Company’s outstanding common stock by an additional $130.0 million through December 31, 2016. The approval increased the total authorized amount under the program to $335.0 million. As of March 31, 2016, we have repurchased 13,079,057 shares at an average purchase price of $21.45, for a total of $280.5 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 March 31, 2016 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)
January 1, 2016 to January 31, 2016	2,385,704		14.29
February 1, 2016 to February 29, 2016	720,208		13.90
March 1, 2016 to March 31, 2016	1,010,359		16.64
Total	4,116,271	$	14.80	13,079,057	$	54,760,986

(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.

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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: April 27, 2016		/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 P00025 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.2#

Modification P00026 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.3#

Modification P00027 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.4#

Modification P00029 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 March 31, 2016, 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 - April 27, 2016

Attached files

DIGITALGLOBE, INC. Reports