DIGITALGLOBE, INC. - FORM 10-Q

Attached files

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EX-32.2 - EX-32.2 - DIGITALGLOBE, INC.	dgi-20170630ex322f06346.htm
EX-32.1 - EX-32.1 - DIGITALGLOBE, INC.	dgi-20170630ex3210b795f.htm
EX-31.2 - EX-31.2 - DIGITALGLOBE, INC.	dgi-20170630ex312a7ca1a.htm
EX-31.1 - EX-31.1 - DIGITALGLOBE, INC.	dgi-20170630ex3110efea1.htm
EX-10.5 - EX-10.5 - DIGITALGLOBE, INC.	dgi-20170630ex105036c45.htm
EX-10.4 - EX-10.4 - DIGITALGLOBE, INC.	dgi-20170630ex104683a1d.htm
EX-10.3 - EX-10.3 - DIGITALGLOBE, INC.	dgi-20170630ex1039c9c4f.htm
EX-10.2 - EX-10.2 - DIGITALGLOBE, INC.	dgi-20170630ex102c74116.htm
EX-10.1 - EX-10.1 - DIGITALGLOBE, INC.	dgi-20170630ex1016ac97c.htm

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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: June 30, 2017

☐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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer ☒	Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if smaller reporting company)	Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July 21, 2017, there were 62,250,895 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	16
Item 3	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4	Controls and Procedures	26
PART II.	Other Information	27
Item 1	Legal Proceedings	27
Item 1A	Risk Factors	27
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3	Defaults Upon Senior Securities	27
Item 4	Mine Safety Disclosures	27
Item 5	Other Information	27
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				For the six months ended
	June 30,				June 30,
(in millions, except per share data)	2017		2016		2017		2016
Revenue	$	225.7	$	175.5	$	435.4	$	350.9
Costs and expenses:
Cost of revenue, excluding depreciation and amortization		69.7		38.1		131.0		72.6
Selling, general and administrative		54.0		42.8		117.1		89.2
Depreciation and amortization		86.3		66.9		165.8		137.9
Restructuring charges		0.3		1.6		0.6		4.5
Income from operations		15.4		26.1		20.9		46.7
Interest expense, net		(13.3)		(4.7)		(22.8)		(9.8)
Loss from early extinguishment of debt		—		—		(0.5)		—
Income (loss) before income taxes		2.1		21.4		(2.4)		36.9
Income tax (expense) benefit		(0.2)		(7.9)		2.1		(13.9)
Equity in earnings from joint ventures, net of tax		0.8		(1.3)		0.8		(2.2)
Net income		2.7		12.2		0.5		20.8
Preferred stock dividends		(1.0)		(1.0)		(2.0)		(2.0)
Net income less preferred stock dividends		1.7		11.2		(1.5)		18.8
Income allocated to participating securities		(0.1)		(0.5)		—		(0.9)
Net income (loss) available to common stockholders	$	1.6	$	10.7	$	(1.5)	$	17.9

Earnings (loss) per share:
Basic earnings (loss) per share	$	0.03	$	0.17	$	(0.02)	$	0.28
Diluted earnings (loss) per share	$	0.03	$	0.17	$	(0.02)	$	0.28
Weighted average common shares outstanding:
Basic		62.1		62.9		61.9		63.9
Diluted		63.3		63.4		61.9		64.2

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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DigitalGlobe, Inc.

Unaudited Condensed Consolidated Balance Sheets


	June 30,		December 31,
(in millions, except par value)	2017		2016
ASSETS
Current assets:
Cash and cash equivalents	$	107.3	$	109.3
Restricted cash		3.4		2.4
Accounts receivable, net of allowance for doubtful accounts of $1.7 and $1.6, respectively		147.5		114.6
Deferred contract costs		12.5		10.3
Prepaid and other current assets		19.9		23.8
Total current assets		290.6		260.4
Property and equipment, net of accumulated depreciation of $1,544.7 and $1,387.8, respectively		1,885.6		2,002.5
Goodwill		578.1		578.1
Intangible assets, net of accumulated amortization of $47.6 and $39.0, respectively		78.4		87.0
Long-term restricted cash		8.6		4.8
Long-term deferred contract costs		48.8		49.3
Other assets		32.1		27.8
Total assets	$	2,922.2	$	3,009.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11.2	$	15.0
Current portion of long-term debt		12.8		47.2
Deferred revenue		85.9		86.3
Other accrued liabilities		50.8		70.7
Total current liabilities		160.7		219.2
Long-term debt, net of discount and debt issuance costs		1,237.7		1,242.1
Deferred revenue, non-current		181.9		216.9
Deferred income taxes, net, non-current		119.8		124.0
Other liabilities		37.0		34.8
Total liabilities	$	1,737.1	$	1,837.0
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY
Stockholders’ equity:
Series A convertible preferred stock, $0.001 par value; 0.08 shares authorized; 0.08 shares issued and outstanding at June 30, 2017 and December 31, 2016		—		—
Common stock; $0.001 par value; 250.0 shares authorized; 77.9 shares issued and 62.3 shares outstanding at June 30, 2017 and 77.0 shares issued and 61.4 shares outstanding at December 31, 2016		0.2		0.2
Treasury stock, at cost; 15.6 shares at June 30, 2017 and December 31, 2016		(342.0)		(342.0)
Additional paid-in capital		1,527.9		1,518.3
Accumulated deficit		(1.0)		(3.6)
Total stockholders’ equity		1,185.1		1,172.9
Total liabilities and stockholders’ equity	$	2,922.2	$	3,009.9

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 six months ended
	June 30,
(in millions)	2017		2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	0.5	$	20.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		165.8		137.9
Stock-based compensation expense, net of capitalized stock-based compensation expense		12.3		8.3
Amortization of aerial image library, deferred contract costs and lease incentive		6.1		8.4
Deferred income taxes		(2.1)		14.0
Amortization of debt issuance costs, accretion of debt discount, and other		1.6		6.0
Changes in working capital:
Accounts receivable, net		(32.9)		(8.5)
Deferred contract costs		(9.1)		(8.0)
Other current and non-current assets		(0.1)		(2.4)
Accounts payable		(3.8)		5.7
Accrued liabilities		(17.5)		(4.1)
Deferred revenue		(35.4)		(27.4)
Net cash flows provided by operating activities		85.4		150.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(35.8)		(85.8)
Investment in joint venture		—		(7.5)
Net cash flows used in investing activities		(35.8)		(93.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt and capital lease obligations		(42.7)		(3.9)
Repurchase of common stock		—		(76.8)
Value of shares surrendered to satisfy employee tax obligations		(7.4)		(2.0)
Proceeds from exercise of stock options and other		3.3		(0.8)
Net cash flows used in financing activities		(46.8)		(83.5)
Net increase (decrease) in cash, cash equivalents and restricted cash		2.8		(26.1)
Cash, cash equivalents and restricted cash, beginning of period		116.5		134.0
Cash, cash equivalents and restricted cash, end of period	$	119.3	$	107.9

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized amounts of $5.1 and $21.8, respectively		21.0		7.4
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Changes to accruals for capital expenditures, including interest, and additions to capital lease obligations		(4.0)		0.4
Non-cash preferred stock dividend accrual		(1.0)		(1.0)

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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NOTE 1.General Information

DigitalGlobe, Inc., together with its consolidated subsidiaries (“DigitalGlobe,” and “Company”), is a global leader in Earth imagery and information about our changing planet, with unique capabilities that enable users to analyze and extract information from imagery at global scale. Sourced from its own advanced satellite constellation and third-party providers, DigitalGlobe’s imagery solutions and other services provide customers with accurate and mission-critical information about our changing planet, and support a wide variety of uses, including mission-planning, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. Additionally, more than one thousand developers are building new applications and machine learning algorithms on DigitalGlobe’s Geospatial Big Data platform and in the Company’s recently expanded Services business. Each day users depend on DigitalGlobe to better understand our changing planet in order to save lives, resources and time.

DigitalGlobe’s 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 the Company’s products, services and analysis is collected daily from DigitalGlobe’s constellation of high-resolution imaging satellites and maintained in the Company’s 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 management’s 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 six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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. The December 31, 2016 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 period amounts have been reclassified to conform to the current period 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.

Comprehensive Income

For the three and six months ended June 30, 2017 and 2016, there were no material differences between net income and comprehensive income.

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Recent Accounting Pronouncements

Recently Adopted Accounting Standards


Standard			Description and Impact on the Financial Statements
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash			This standard is intended to reduce the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted-cash equivalents. Therefore, amounts generally described as restricted cash and restricted-cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company retrospectively adopted Accounting Standards Update (“ASU”) 2016-18 on January 1, 2017, and this adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting			This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The Company adopted ASU 2016-09 on January 1, 2017, and it did not have a material impact on its Consolidated Financial Statements and related disclosures.

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Standards Not Yet Adopted



Standard		Description
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)		In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), a new revenue recognition model that will replace nearly all existing revenue recognition guidance under U.S. GAAP. Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Topic 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is planning to adopt Topic 606, including several amendments issued by the FASB, on January 1, 2018. The new standard permits i) retrospective adoption, under which each prior reporting period presented will be presented as if the new standard had always been applied, or ii) adoption by recognizing the cumulative effect of applying the guidance to all prior activity at the date of initial application. Management currently anticipates adopting the standard using the full retrospective method; however, the Company’s ability to do so is dependent on system readiness and whether the Company has the information necessary to apply Topic 606 to prior periods. The Company is still in the process of evaluating the effects of adopting Topic 606. However, management has completed its initial review of the EnhancedView Contract (“EnhancedView Contract”) with the United States National Geospatial-Intelligence Agency ("NGA"), the NextView Agreement and Direct Access Program (“DAP”) contracts. Revenue from these sources represented 58% of DigitalGlobe’s revenue for the six months ended June 30, 2017. While the Company has not quantified the effects of anticipated changes to reflect Topic 606, the Company's initial conclusions are summarized below: • U.S. Government – Management expects the recognition of NextView amortization (as defined in Note 14 of the Notes to the Unaudited Condensed Consolidated Financial Statements) to differ because management believes the EnhancedView Contract would be considered a modification to the NextView Agreement. This is expected to result in NextView amortization being recognized as capacity is provided to the NGA over the term of the EnhancedView Contract as opposed to being recognized straight-line over the estimated useful life of WorldView-1. • DAP – Under Topic 606, customer facility payments are expected to be recognized over the life of the related contract, which will be a shorter recognition period than the current practice of recognizing the payments over the longest estimated remaining useful life of the satellites accessed by the customer. In addition, while direct incremental costs incurred in the construction of the facility will continue to be deferred under the new standard, the period over which these costs are recognized may change. Management will continue to evaluate Topic 606 (including how it may impact other customer contracts) and the resulting impact to the Consolidated Financial Statements through the date of adoption.
ASU 2016-02, Leases (Topic 842)		This 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 the Consolidated Financial Statements and related disclosures.

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NOTE 3.Property and Equipment

Property and equipment consisted of the following:


	Depreciable Life
(in millions)	(in years)			June 30, 2017		December 31, 2016
Satellites	9	–	13	$	2,681.9	$	1,797.7
Construction in progress		–			24.4		948.5
Computer equipment and software	3	–	12		558.7		484.8
Machinery and equipment, including ground terminals	5	–	7		109.1		103.3
Leasehold improvements	3	–	15		51.2		51.1
Furniture, fixtures and other	5	–	7		5.0		4.9
Total property and equipment					3,430.3		3,390.3
Accumulated depreciation					(1,544.7)		(1,387.8)
Property and equipment, net				$	1,885.6	$	2,002.5

Depreciation expense for property and equipment, inclusive of losses on disposals of assets, was $82.0 million and $65.0 million for the three months ended June 30, 2017 and 2016, respectively, and $157.2 million and $133.7 million for the six months ended June 30, 2017 and 2016, respectively.

Satellite Constellation

As of June 30, 2017, the Company operated a constellation of five in-orbit and fully commissioned satellites: GeoEye-1, WorldView-1, WorldView-2, WorldView-3, and WorldView-4. The net book value of each in-orbit satellite was as follows:


		June 30, 2017						December 31, 2016
	Depreciable	Gross				Net		Gross				Net
	Life	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
(in millions)	(in years)	Amount		Depreciation		Amount		Amount		Depreciation		Amount
GeoEye-1	9.0	$	211.8	$	(187.1)	$	24.7	$	211.8	$	(165.9)	$	45.9
WorldView-1	13.0		473.2		(383.4)		89.8		473.2		(370.1)		103.1
WorldView-2	13.0		463.2		(287.7)		175.5		463.2		(271.7)		191.5
WorldView-3	11.5		649.5		(155.3)		494.2		649.5		(127.1)		522.4
WorldView-4	10.5		884.2		(35.1)		849.1		—		—		—
Satellites, net		$	2,681.9	$	(1,048.6)	$	1,633.3	$	1,797.7	$	(934.8)	$	862.9

On February 1, 2017, WorldView-4 was placed into service and commercial operations began. As a result, the Company began depreciating the satellite based on its estimated useful life of 10.5 years.

NOTE 4.Business Acquisitions

In November 2016, the Company acquired all of the outstanding shares of The Radiant Group, Inc. for aggregate cash consideration, net of cash acquired, of $135.1 million. As a result of the transaction, the Company recognized $90.0 million of goodwill (not deductible for tax purposes), $62.1 million of acquired intangible assets and $17.0 million of net liabilities excluding cash acquired, which were primarily comprised of deferred tax liabilities. The Company’s valuation of the acquired assets and liabilities will be completed within one year of the acquisition and the actual fair values may differ significantly from these preliminary estimates.

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NOTE 5.Goodwill and Intangible Assets

There have been no changes in the Company’s goodwill of $578.1 million from December 31, 2016 to June 30, 2017.

Intangible assets consisted of the following:


				June 30, 2017						December 31, 2016
				Gross				Net		Gross				Net
	Useful Life			Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
(in millions)	(in years)			Amount		Amortization		Amount		Amount		Amortization		Amount
Customer relationships	10	–	12	$	62.5	$	(11.4)	$	51.1	$	62.5	$	(8.7)	$	53.8
Technology	3	–	5		50.7		(27.2)		23.5		50.7		(22.2)		28.5
Trademarks		3			9.7		(6.5)		3.2		9.7		(5.7)		4.0
FCC licenses and other	2	–	20		3.1		(2.5)		0.6		3.1		(2.4)		0.7
Total				$	126.0	$	(47.6)	$	78.4	$	126.0	$	(39.0)	$	87.0

Intangible asset amortization expense was $4.3 million and $1.9 million for the three months ended June 30, 2017 and 2016, respectively, and $8.6 million and $4.2 million for the six months ended June 30, 2017 and 2016, 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 2017	$	8.5
2018		12.2
2019		11.4
2020		9.9
2021		9.4
Thereafter		27.0
Total	$	78.4

NOTE 6.Debt

The Company’s debt obligations consist of a $1.275 billion Senior Secured Term Loan Facility (“Term Loan”) and a $200.0 million Senior Secured Revolving Credit Facility (“Revolving Credit Facility,” and together with the Term Loan, the “2016 Credit Facility”). As of June 30, 2017, the Company had not drawn any amounts under the Revolving Credit Facility. The 2016 Credit Facility requires that the Company comply with a maximum leverage ratio. The Company was in compliance with its debt covenants as of June 30, 2017.

In December 2016, the Company commenced a tender offer for the $600.0 million aggregate principal amount of its outstanding 5.25% senior notes due February 1, 2021 (“Senior Notes”). In January 2017, the Company completed the subsequent redemption of the remaining outstanding Senior Notes for a total redemption price of $36.1 million, inclusive of accrued interest and related premiums.

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


(in millions)	June 30, 2017		December 31, 2016
Term Loan due January 15, 2024	$	1,268.6	$	1,275.0
Senior Notes due February 1, 2021		—		34.4
Total borrowings		1,268.6		1,309.4
Less: unamortized discounts and issuance costs		(18.1)		(20.1)
Total borrowings, net		1,250.5		1,289.3
Less: current maturities of long-term debt		(12.8)		(47.2)
Total long-term debt, net	$	1,237.7	$	1,242.1

The Company’s future debt payments, excluding interest payments, consisted of the following as of June 30, 2017:


(in millions)	Amount
Remainder of 2017	$	6.4
2018		12.8
2019		12.8
2020		12.8
2021		12.8
Thereafter		1,211.0
Total	$	1,268.6

Interest expense, net consisted of the following:


	For the three months ended				For the six months ended
	June 30,				June 30,
(in millions)	2017		2016		2017		2016
Interest	$	12.3	$	14.5	$	23.8	$	28.9
Accretion of debt discount, debt issuance cost amortization and line of credit fees		1.1		2.0		2.3		4.0
Capitalized interest		—		(11.7)		(3.1)		(22.9)
Interest expense	$	13.4	$	4.8	$	23.0	$	10.0
Interest income		(0.1)		(0.1)		(0.2)		(0.2)
Interest expense, net	$	13.3	$	4.7	$	22.8	$	9.8

NOTE 7.Fair Value of Financial Instruments

The fair value of 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 $1,268.6 million and $1,310.3 million at June 30, 2017 and December 31, 2016, respectively, and is classified within Level 2 of the valuation hierarchy. Cash equivalents primarily consist of demand deposit money market accounts. The carrying values of cash and cash equivalents, receivables, other current assets, accounts payable and accrued liabilities approximate fair value.

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NOTE 8.Deferred Revenue

A rollforward of deferred revenue from December 31, 2016 to June 30, 2017 is as follows:


	U.S. Government						Diversified Commercial
			Value-
	Enhanced		Added		NextView
(in millions)	View SLA		Services		Amortization		DAP		Other		Total
December 31, 2016	$	135.8	$	64.1	$	58.6	$	37.2	$	7.5	$	303.2
Deferred revenue on cash collections		150.0		29.3		—		39.6		37.6		256.5
Deferred revenue recognized		(168.6)		(33.1)		(7.6)		(46.2)		(36.4)		(291.9)
June 30, 2017	$	117.2	$	60.3	$	51.0	$	30.6	$	8.7	$	267.8

NOTE 9.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 differed from the statutory federal rate of 35.0% primarily as a result of several immaterial discrete items.

NOTE 10.Stock-Based Compensation

During the six months ended June 30, 2017, the Company awarded 0.9 million unvested restricted stock units at an average grant date fair value of $29.89 per share. Of this amount, 0.3 million stock units represent performance shares that are subject to service, performance and market vesting conditions with an average grant date fair value of $33.73 per share. The Company did not grant any stock options during the six months ended June 30, 2017.

Stock-based compensation expense, net of amounts capitalized to assets under construction, was $5.7 million and $4.3 million during the three months ended June 30, 2017 and 2016, respectively, and $12.3 million and $8.3 million during the six months ended June 30, 2017 and 2016, respectively.

As of June 30, 2017, unrecognized compensation expense related to unvested restricted stock awards and units, including those subject to service, performance and market vesting conditions, was $42.9 million, net of estimated forfeitures, to be recognized over a weighted-average remaining vesting period of 2.5 years.

As of June 30, 2017, the number of options outstanding and exercisable were 1.0 million at a weighted-average exercise price of $20.37 per share.

Most participants elect to have the Company withhold shares to pay for minimum taxes due at the time their restricted stock vests. The value of shares surrendered to satisfy employee tax obligations was $7.4 million and $2.0 million for the six months ended June 30, 2017 and 2016, respectively.

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NOTE 11. Earnings (Loss) Per Share

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


	For the three months ended				For the six months ended
	June 30,				June 30,
(in millions, except per share data)	2017		2016		2017		2016
Earnings (loss) per share:
Net income	$	2.7	$	12.2	$	0.5	$	20.8
Preferred stock dividends		(1.0)		(1.0)		(2.0)		(2.0)
Net income less preferred stock dividends		1.7		11.2		(1.5)		18.8
Income allocated to participating securities		(0.1)		(0.5)		—		(0.9)
Net income (loss) available to common stockholders	$	1.6	$	10.7	$	(1.5)	$	17.9
Basic weighted average number of common shares outstanding		62.1		62.9		61.9		63.9
Weighted-average common share equivalents from stock options, restricted stock and convertible preferred stock		1.2		0.5		—		0.3
Diluted weighted average number of common shares outstanding		63.3		63.4		61.9		64.2
Earnings (loss) per share:
Basic	$	0.03	$	0.17	$	(0.02)	$	0.28
Diluted	$	0.03	$	0.17	$	(0.02)	$	0.28

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 and six month periods ended June 30, 2017 and 2016.

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 0.7 million and 2.0 million for the three month periods ended June 30, 2017 and 2016, respectively, and 2.3 million for the six month period ended June 30, 2016. Due to the Company’s net loss after deducting preferred stock dividends for the six month period ended June 30, 2017, potentially dilutive shares were not included in the calculation of diluted loss per share as their effect would have been anti-dilutive.

NOTE 12.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 a small investment in a joint venture in China. The Company sold $2.2 million and $1.9 million in products and services to the joint venture for the three months ended June 30, 2017 and 2016, respectively, and $4.2 million and $4.1 million for the six months ended June 30, 2017 and 2016, respectively. Amounts owed to the Company by the joint venture at June 30, 2017 and December 31, 2016 were $5.1 million and $3.6 million, respectively.

In May 2015, in exchange for a 50% equity interest in a joint venture, Vricon, Inc., the Company committed to provide imagery to the joint venture from the Company’s ImageLibrary on an ongoing basis for the purpose of producing photo-realistic three-dimensional products and digital elevation models. Upon formation, the Company contributed $5.0 million in the form of a note receivable to the joint venture, which is due May 2018. The Company provided $7.5 million in equity financing to the joint venture during the first quarter of 2016 and provided an additional $2.5 million during the third quarter of 2016.

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NOTE 13.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, the Company has made guarantees regarding the performance of its systems to its customers. Some 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 has entered into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to entering into contracts for its products and services from certain customers in foreign countries. These agreements are designed to return economic value to the foreign country and may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects. These agreements may provide for penalties in the event the Company fails to perform in accordance with offset requirements. The Company has historically not been required to pay any such penalties.

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.

Additionally, DigitalGlobe and its Board of Directors are named as defendants in six putative class action lawsuits filed by purported stockholders of DigitalGlobe that challenge the upcoming merger with MacDonald, Dettwiler and Associates Ltd. (“MDA”). The lawsuits include George Assad v. DigitalGlobe, Inc., et al., Case No. 1:17-cv-01097-PAB-NYW, Jeweltex Manufacturing Inc. Retirement Plan v. DigitalGlobe, Inc., et al., Case No. 1:17-cv-01140-PAB-NYW, Royce Bussey v. DigitalGlobe, Inc., et al., Case No. 1:17-cv-01159-PAB-NYW, Dane Gussin v. DigitalGlobe, Inc., et al., Case No. 1:17-cv-01190-PAB-NYW Stuart Zand v. DigitalGlobe, Inc., et al., Case No. 1:17-cv-01570-PAB-NYW, and Matthew Machion v. DigitalGlobe, Inc., Case No. 1:17-cv-01692-NYW et al., all filed in the U.S. District Court for the District Court of Colorado except for Stuart Zand (filed in the U.S. District Court for the District of Delaware and subsequently transferred to U.S. District Court for the District Court of Colorado). The complaints allege, among other things, that in connection with MDA’s proposed acquisition of DigitalGlobe, DigitalGlobe and its Board of Directors purportedly agreed to a supposedly inadequate price for the DigitalGlobe capital stock, omitted to disclose information in the F-4 registration statement necessary to make the statements therein not materially false or misleading, and potentially engaged in self-dealing. MDA is named as a defendant in three of the lawsuits; SSL MDA Holdings, Inc., a wholly-owned subsidiary of MDA, and Merlin Merger Sub, Inc., a wholly-owned subsidiary of SSL MDA Holdings, Inc., are named as defendants in two of the lawsuits. Plaintiffs seek as relief, among other things, declaratory and injunctive relief, including enjoining or rescinding the transaction and rescissory damages to the extent already implemented, an order directing the dissemination of a registration statement that is not false or misleading, and an award of attorneys’ and experts’ fees. On June 5, 2017, and June 14, 2017, plaintiffs in Zand and Gussin, respectively, filed motions for preliminary injunction to enjoin the merger until supplemental disclosures have been made to address the alleged omissions in the F-4 registration statement. On July 14, 2017, the court held a consolidated hearing on both motions, and took the motions under submission. On July 21, 2017, these motions for preliminary injunction were denied by the court. While it is too early to predict the outcome of litigation or a reasonable range of potential losses, DigitalGlobe and MDA believe these lawsuits are without merit. Additional lawsuits arising out of or relating to the merger agreement or the merger may be filed in the future.

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NOTE 14.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 provide services to all customers, and measures performance based on consolidated operating results and achievement of individual strategic objectives and 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 NGA, other revenue and value-added services, and amortization of payments received from the NGA to offset the construction costs of WorldView-1 under the NextView agreement (“NextView amortization”). Diversified Commercial consists of the following types of customers: DAP, LBS, international civil government, other international defense and intelligence, energy and other industry verticals.

The following table summarizes revenue for each customer group:


	For the three months ended				For the six months ended
	June 30,				June 30,
(in millions)	2017		2016		2017		2016
U.S. Government	$	149.5	$	111.9	$	287.8	$	222.2
Diversified Commercial		76.2		63.6		147.6		128.7
Total	$	225.7	$	175.5	$	435.4	$	350.9

The Company classifies revenue geographically according to the customer address. U.S. and international sales were as follows:


	For the three months ended				For the six months ended
	June 30,				June 30,
(in millions)	2017		2016		2017		2016
U.S.	$	166.5	$	126.5	$	318.9	$	248.1
International		59.2		49.0		116.5		102.8
Total	$	225.7	$	175.5	$	435.4	$	350.9

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

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,” “can,” “will,” “should,” “expects,” “plans,” “anticipates,” “would,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “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 risks and uncertainties related to the proposed transaction with MacDonald, Dettwiler and Associates Ltd. (“MDA”) include the possibility that the parties may be unable to obtain required stockholder approvals or regulatory approvals or that other conditions to closing the transaction may not be satisfied, such that the transaction will not close or that the closing may be delayed; the potential adverse effect on partner and customer relationships, operating results and business generally resulting from the proposed transaction; the proposed transaction will require significant time, attention and resources, potentially diverting attention from the conduct of DigitalGlobe’s business; the anticipated benefits of the proposed transaction may not be realized; the anticipated and unanticipated costs, fees, expenses and liabilities related to the transaction; the outcome of any legal proceedings related to the transaction; and the occurrence of any event, change or other circumstances that could give rise to the termination of the transaction agreement. Additional information concerning these and other risk factors can be found in our filings with the U.S. Securities and Exchange Commission (“SEC”), including Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. 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

We are a global leader in Earth imagery and information about our changing planet, with unique capabilities that enable users to analyze and extract information from imagery at global scale. Sourced from our own advanced satellite constellation and third-party providers, our imagery solutions and other services provide customers with accurate and mission-critical information about our changing planet, and support a wide variety of uses, including mission-planning, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. Additionally, more than one thousand developers are building new applications and machine learning algorithms on our Geospatial Big Data platform and in our recently expanded Services business. 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”). 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 8.1 billion square kilometers of imagery, an area the equivalent of 54 times the landmass of the Earth. As of June 30, 2017, our collection capacity capability was approximately 1.62 billion square kilometers of imagery per year, or the equivalent of roughly 11 times the Earth’s land surface area, and offers intraday revisit around the globe.

2017 Highlights

Pending Transaction with MDA

On February 24, 2017, we entered into a Merger Agreement with MDA, a corporation organized under the laws of British Columbia, upon which we will become an indirect wholly-owned subsidiary of MDA (“Merger”). Under the terms of the Merger Agreement, MDA will provide US$17.50 in cash and 0.3132 of an MDA common share in exchange for each outstanding common and preferred shares of the Company at the closing date.

The closing of the Merger is subject to customary closing conditions, including required regulatory approvals, adoption of the Merger Agreement by our stockholders and approval of the issuance of common shares of MDA in connection with the Merger by MDA’s shareholders. The closing of the Merger is not subject to a financing condition.

The Merger is expected to close in the third quarter of 2017 or shortly thereafter. Following completion of the Merger, our common stock will be delisted from the New York Stock Exchange and deregistered under the Securities Exchange Act of 1934, as amended, and as such, we will no longer file periodic reports with the SEC.

In connection with the Merger, we have incurred, and expect to continue to incur through the closing of the Merger, significant expenses such as transaction, professional services, employee-related and other costs. As of June 30, 2017, we have incurred Merger costs of $12.0 million.

Recent Satellite Developments

On February 1, 2017, WorldView-4 was placed into service and commercial operations began. WorldView-4 has an estimated useful life of 10.5 years, resulting in depreciation expense of $84.2 million annually. In February 2017, we began providing direct access capacity to certain of our international defense and intelligence customers.

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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 provide services to customers around the world. The following table summarizes our results of operations:


	For the three months ended							For the six months ended
	June 30,							June 30,
(in millions)	2017		2016		% Change			2017		2016		% Change
U.S. Government revenue	$	149.5	$	111.9		33.6	%	$	287.8	$	222.2		29.5	%
Diversified Commercial revenue		76.2		63.6		19.8			147.6		128.7		14.7
Total revenue		225.7		175.5		28.6			435.4		350.9		24.1
Cost of revenue, excluding depreciation and amortization		69.7		38.1		82.9			131.0		72.6		80.4
Selling, general and administrative		54.0		42.8		26.2			117.1		89.2		31.3
Depreciation and amortization		86.3		66.9		29.0			165.8		137.9		20.2
Restructuring charges		0.3		1.6		(81.3)			0.6		4.5		(86.7)
Income from operations		15.4		26.1		(41.0)			20.9		46.7		(55.2)
Interest expense, net		(13.3)		(4.7)		*			(22.8)		(9.8)		*
Loss from extinguishment of debt		—		—		*			(0.5)		—		*
Income (loss) before income taxes		2.1		21.4		*			(2.4)		36.9		*
Income tax (expense) benefit		(0.2)		(7.9)		*			2.1		(13.9)		*
Equity in earnings from joint ventures, net of tax		0.8		(1.3)		*			0.8		(2.2)		*
Net income	$	2.7	$	12.2		*	%	$	0.5	$	20.8		*	%

*Not meaningful

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


	For the three months ended				For the six months ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S. Government revenue	66.2	%	63.8	%	66.1	%	63.3	%
Diversified Commercial revenue	33.8		36.2		33.9		36.7
Total revenue	100.0		100.0		100.0		100.0
Cost of revenue, excluding depreciation and amortization	30.9		21.7		30.1		20.7
Selling, general and administrative	23.9		24.4		26.9		25.4
Depreciation and amortization	38.3		38.1		38.1		39.3
Restructuring charges	0.1		0.9		0.1		1.3
Income from operations	6.8		14.9		4.8		13.3
Interest expense, net	(5.9)		(2.7)		(5.3)		(2.8)
Loss from extinguishment of debt	—		—		(0.1)		—
Income (loss) before income taxes	0.9		12.2		(0.6)		10.5
Income tax (expense) benefit	(0.1)		(4.5)		0.5		(4.0)
Equity in earnings from joint ventures, net of tax	0.4		(0.7)		0.2		(0.6)
Net income	1.2	%	7.0	%	0.1	%	5.9	%

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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. We have two primary customer groups: U.S. Government and Diversified Commercial.

U.S. Government

ions
	For the three months ended							For the six months ended
	June 30,							June 30,
(in millions)	2017		2016		% Change			2017		2016		% Change
U.S. Government Revenue:
EnhancedView SLA	$	84.3	$	84.3		—	%	$	168.6	$	168.6		—	%
Other revenue and value-added services		61.4		23.8		*			111.6		46.0		*
NextView amortization		3.8		3.8		—			7.6		7.6		—
Total	$	149.5	$	111.9		33.6	%	$	287.8	$	222.2		29.5	%

U.S. Government revenue consists primarily of the EnhancedView Service Level Agreement (“EnhancedView SLA”), other revenue and value-added services, and amortization of payments received from the United States National Geospatial-Intelligence Agency (“NGA”) to offset the construction costs of WorldView-1 under the NextView agreement (“NextView amortization”). 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, primarily purchase geospatial analytic products and services.

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 increased $37.6 million, or 33.6%, and $65.6 million, or 29.5%, for the three and six months ended June 30, 2017, respectively, compared to the three and six months ended June 30, 2016, respectively, due to an increase in other revenue and value-added services, primarily as a result of contracts obtained in our acquisition of The Radiant Group, Inc. (“Radiant”).

Diversified Commercial


	For the three months ended							For the six months ended
	June 30,							June 30,
(in millions)	2017		2016		% Change			2017		2016		% Change
Diversified Commercial Revenue:
DAP	$	36.8	$	28.5		29.1	%	$	72.9	$	61.7		18.2	%
Other diversified commercial		39.4		35.1		12.3			74.7		67.0		11.5
Total	$	76.2	$	63.6		19.8	%	$	147.6	$	128.7		14.7	%

U.S. and International Sales:
U.S.	$	17.0	$	14.6		16.4	%	$	31.1	$	25.9		20.1	%
International		59.2		49.0		20.8			116.5		102.8		13.3
Total	$	76.2	$	63.6		19.8	%	$	147.6	$	128.7		14.7	%

Direct and Reseller Sales:
Direct	$	54.0	$	47.3		14.1	%	$	109.3	$	96.4		13.4	%
Resellers		22.2		16.3		36.2			38.3		32.3		18.6
Total	$	76.2	$	63.6		19.8	%	$	147.6	$	128.7		14.7	%

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Diversified Commercial consists of the following types of customers: Direct Access Program (“DAP”), LBS, international civil government, other international defense and intelligence, energy 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 ten 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 $12.6 million, or 19.8%, and $18.9 million, or 14.7%, for the three and six months ended June 30, 2017, respectively, compared to the three and six months ended June 30, 2016, respectively. DAP revenue increased primarily from incremental revenue generated by demand for capacity on our WorldView-4 satellite and the timing of access minute consumption. Other diversified commercial revenue increased primarily due to increased revenue from civil government customers and increased demand for our Global Basemap product suite.

Expenses

Cost of Revenue

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


	For the three months ended						For the six months ended
	June 30,						June 30,
(in millions)	2017		2016		% Change		2017		2016		% Change
Labor and labor-related costs	$	39.6	$	20.7	91.3	%	$	79.5	$	38.7	*	%
Facilities, subcontracting and equipment costs		22.6		14.3	58.0			41.1		27.9	47.3
Consulting and professional fees		0.7		0.9	(22.2)			1.2		1.5	(20.0)
Other direct costs		6.8		2.2	*			9.2		4.5	*
Total	$	69.7	$	38.1	82.9	%	$	131.0	$	72.6	80.4	%

Outside of certain U.S. Government contracts within our Services business, where revenue is generally recognized on the basis of time plus reimbursable costs incurred during the period, 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.

Cost of revenue increased $31.6 million, or 82.9%, and $58.4 million, or 80.4%, for the three and six months ended June 30, 2017, respectively, compared to the three and six months ended June 30, 2016, respectively. Labor and labor-related costs increased primarily due to expenses for employees assumed in connection with our acquisition of Radiant, along with increased headcount to support revenue-generating activities, including the operation of WorldView-4. Facilities, subcontracting and equipment costs and other direct costs increased primarily due to expenses incurred to support contracts obtained in the Radiant acquisition.

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Selling, General and Administrative

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


	For the three months ended						For the six months ended
	June 30,						June 30,
(in millions)	2017		2016		% Change		2017		2016		% Change
Labor and labor-related costs	$	31.3	$	26.1	19.9	%	$	64.9	$	52.5	23.6	%
Consulting and professional fees		10.8		6.1	77.0			28.3		11.9	*
Rent and facilities		2.6		2.8	(7.1)			5.8		7.1	(18.3)
Computer hardware and software		2.9		2.7	7.4			5.5		6.0	(8.3)
Satellite insurance		3.4		2.3	47.8			6.3		4.6	37.0
Other		3.0		2.8	7.1			6.3		7.1	(11.3)
Total	$	54.0	$	42.8	26.2	%	$	117.1	$	89.2	31.3	%

Selling, general, and administrative expenses increased $11.2 million, or 26.2%, and $27.9 million, or 31.3%, for the three and six months ended June 30, 2017, respectively, compared to the three and six months ended June 30, 2016, respectively. Labor and labor-related costs increased primarily due to expenses for employees assumed in connection with our acquisition of Radiant. The increase in other employee labor costs is primarily driven by increased headcount to support growth in our business, annual merit-based salary increases, and a decrease in labor capitalized following the launch of WorldView-4. Consulting and professional fees increased primarily due to costs incurred in connection with the Merger.

Depreciation and Amortization


	For the three months ended						For the six months ended
	June 30,						June 30,
(in millions)	2017		2016		% Change		2017		2016		% Change
Depreciation and amortization	$	86.3	$	66.9	29.0	%	$	165.8	$	137.9	20.2	%

Depreciation and amortization increased $19.4 million, or 29.0%, and $27.9 million, or 20.2%, for the three and six months ended June 30, 2017, respectively, compared to the three and six months ended June 30, 2016, respectively, primarily due to placing WorldView-4 in service in February 2017. This increase was partially offset by assets that were fully depreciated in 2016.

Interest Expense, net


	For the three months ended					For the six months ended
	June 30,					June 30,
(in millions)	2017		2016		% Change	2017		2016		% Change
Interest expense, net	$	(13.3)	$	(4.7)	*	$	(22.8)	$	(9.8)	*

Our interest charges are primarily associated with borrowings used to finance the construction of our satellites.

Interest expense increased $8.6 million for the three months ended June 30, 2017, primarily as a result of none of our interest being capitalized to capital projects during the three months ended June 30, 2017 compared to 70.9% during the three months ended June 30, 2016. Interest expense, net of capitalized interest of $3.1 million, increased $13.0 million for the six months ended June 30, 2017, primarily as a result of 11.9% of our interest being capitalized to capital projects during the six months ended June 30, 2017 compared to 69.6% during the six months ended June 30, 2016. The decrease in interest capitalized was primarily due to placing WorldView-4 in service in February 2017. This was partially offset by the lower interest rate on our outstanding debt as a result of our debt refinancing in the fourth quarter of 2016. The interest rate on our long-term debt is variable and may fluctuate in future periods.

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Income Tax (Expense) Benefit


	For the three months ended						For the six months ended
	June 30,						June 30,
(in millions)	2017		2016		% Change		2017		2016		% Change
Income tax (expense) benefit	$	(0.2)	$	(7.9)	*	%	$	2.1	$	(13.9)	*	%

Income tax expense decreased $7.7 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to lower current year pre-tax income. We recognized an income tax benefit of $2.1 million for the six months ended June 30, 2017 as compared to income tax expense of $13.9 million for the six months ended June 30, 2016 primarily due to generating a pre-tax loss in 2017 compared to pre-tax income in 2016.

Balance Sheet Measures

Total assets decreased $87.7 million, or 2.9%, from December 31, 2016 to June 30, 2017 primarily due to a decrease in property and equipment, net, as a result of current year depreciation expense, partially offset by costs incurred related to WorldView-4 and various other infrastructure projects. This decrease was offset by an increase in accounts receivable primarily driven by the timing of payments received from customers.

Total liabilities decreased $99.9 million, or 5.4%, from December 31, 2016 to June 30, 2017 primarily due to a decrease in deferred revenue resulting primarily from recognition of U.S. government revenue in excess of billings and the redemption of our remaining outstanding 5.25% senior notes (“Senior Notes”).

Liquidity and Capital Resources

As of June 30, 2017, we had $107.3 million in cash and cash equivalents and $200.0 million available for borrowing under our Senior Secured Revolving Credit Facility. At June 30, 2017, 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 12 months. If the NGA, 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 12 months.

In summary, our cash flows were:


	For the six months ended
	June 30,
(in millions)	2017		2016
Net income	$	0.5	$	20.8
Non-cash items		183.7		174.6
Changes in working capital		(98.8)		(44.7)
Net cash provided by operating activities		85.4		150.7
Net cash used in investing activities		(35.8)		(93.3)
Net cash used in financing activities	$	(46.8)	$	(83.5)

Operating Activities

Our largest source of cash provided by operations is revenue generated by sales of 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, subcontractor costs, costs associated with operating our ground terminals, construction of DAP facilities, interest on our long-term debt and other general corporate expenditures.

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Cash provided by operating activities decreased $65.3 million, or 43.3%, from the six months ended June 30, 2016 to the six months ended June 30, 2017 primarily due to a net decrease in cash from changes in working capital, which was primarily driven by accounts receivable and other accrued liabilities, along with decreased net income, primarily driven by an increase in depreciation and amortization and interest expense, net.

Investing Activities

Cash used in investing activities consists of purchases of property and equipment, including assets under construction, as well as investments in other businesses.

During the six months ended June 30, 2017, we incurred $35.8 million in capital expenditures, which includes capitalized interest of $5.1 million. Cash used in investing activities decreased $57.5 million from the six months ended June 30, 2016 to the six months ended June 30, 2017 due to a decrease in capital expenditures, primarily resulting from placing our WorldView-4 satellite into service in February 2017, and equity financing provided to Vricon, Inc. in the prior year.

Financing Activities

Cash used in financing activities consists primarily of principal payments made on our long-term debt and stock buybacks as part of our share repurchase program.

Cash used in financing activities decreased $36.7 million, or 44.0% from the six months ended June 30, 2016 to the six months ended June 30, 2017 primarily due to our share repurchase program, which we completed in the fourth quarter of 2016, partially offset by an increase in payments on our debt due to the redemption of our remaining outstanding Senior Notes in January 2017.

Non-U.S. GAAP Financial Measures

Reconciliation of Net Income to EBITDA and Adjusted EBITDA


	For the three months ended				For the six months ended
	June 30,				June 30,
(in millions)	2017		2016		2017		2016
Net income	$	2.7	$	12.2	$	0.5	$	20.8
Depreciation and amortization		86.3		66.9		165.8		137.9
Interest expense, net		13.3		4.7		22.8		9.8
Income tax expense (benefit)		0.2		7.9		(2.1)		13.9
EBITDA		102.5		91.7		187.0		182.4
Merger and integration costs		2.1		—		12.3		—
Restructuring charges		0.3		1.6		0.6		4.5
Other re-engineering charges		—		0.7		—		1.6
Equity in earnings from joint ventures, net of tax		(0.8)		1.3		(0.8)		2.2
Loss from early extinguishment of debt		—		—		0.5		—
Adjusted EBITDA	$	104.1	$	95.3	$	199.6	$	190.7

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.

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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 our 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.

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.

EBITDA 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. EBITDA also excludes interest income, interest expense and income taxes because these items are associated with our capitalization and tax structures.

Adjusted EBITDA further adjusts EBITDA to exclude restructuring and other re-engineering charges related to specific restructuring and re-engineering actions because we do not believe these costs are indicative of the underlying operating performance of our business and our ongoing operations. The amount and timing of these restructuring and other re-engineering costs are dependent on the size, type and status of the specific actions undertaken as part of our restructuring or re-engineering plans. Restructuring charges incurred in 2017 relate to the restructuring plan initiated in 2016 in conjunction with our acquisition of Radiant. Restructuring and other re-engineering charges incurred in 2016 relate to the re-engineering and restructuring plans announced in 2015.

Adjusted EBITDA also excludes merger and integration costs, equity in earnings from joint ventures, net of tax, and the loss from early extinguishment of debt as these are non-core items that are not directly related to our primary operations. Merger costs are costs incurred to effect the Merger with MDA, such as advisory, legal, accounting, consulting and other professional fees. Integration costs consist primarily of professional fees incurred to assist us with system and process improvements associated with integrating operations as part of the Radiant acquisition. Loss from early extinguishment of debt is related to the redemption of our remaining outstanding Senior Notes in January 2017.

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


	For the six months ended
	June 30,
(in millions)	2017		2016
Net cash flows provided by operating activities	$	85.4	$	150.7
Capital expenditures		(35.8)		(85.8)
Free cash flow (1)	$	49.6	$	64.9

(1) We modified our definition of free cash flow in the fourth quarter of fiscal year 2016. Prior period amounts have been revised to conform to the current definition.

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Free cash flow is defined as net cash flows provided by operating activities less Capital expenditures as disclosed in the Unaudited Condensed Consolidated Statements of Cash Flows. 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 June 30, 2017.

Contractual Obligations

As of June 30, 2017, there were no material changes outside the ordinary course of business to the contractual obligations table presented in our Annual Report on Form 10-K for the year ended December 31, 2016.

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. Some of these agreements do not limit the maximum potential future payments we 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, 2016, 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, 2016.

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company’s exposure to market risk since December 31, 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 Annual Report on Form 10-K for the year ended December 31, 2016.

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 June 30, 2017. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2017.

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, as well as in connection with the upcoming merger with MacDonald, Dettwiler and Associates Ltd (“MDA”), upon completion of which we will become an indirect wholly-owned subsidiary of MDA. Refer to Note 13 “Commitments and Contingencies” to the Unaudited Condensed Consolidated Financial Statements for further detail. 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 27, 2017. There have been no material changes to our Risk Factors from those included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

None.

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: July 26, 2017		/s/ Gary W. Ferrera
		Gary W. Ferrera
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: July 26, 2017		/s/ Jose A. Torres, Jr.
		Jose A. Torres, Jr.
		Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

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EXHIBIT INDEX

Incorporated by Reference

Exhibit No

Exhibit Description

Form

SEC File No.

Exhibit

Filing Date

Filed or Furnished
Herewith

3.1

Amended and Restated Certificate of Incorporation of DigitalGlobe, Inc., as filed with the Secretary of the State of Delaware.

10-K

001-34299

3.1

2/24/10

3.2.1

Amended and Restated Bylaws of DigitalGlobe, Inc., effective January 5, 2016.

8-K

001-34299

3.1

1/05/16

3.2.2

Amendment, dated February 23, 2017, to the Amended and Restated Bylaws of DigitalGlobe, Inc.

8-K

001-34299

3.1

2/23/17

3.3

Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of DigitalGlobe, Inc., as filed with the Secretary of the State of Delaware.

8-K

001-34299

3.1

1/31/13

10.1#

Modification P00041 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.2#

Modification P00042 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.3#

Modification P00043 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.4#

Modification P00044 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

10.5#

Modification P00045 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

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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 June 30, 2017, 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 - July 26, 2017

Attached files

DIGITALGLOBE, INC. Reports