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, 2015

 

OR

 

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

 

For the transition period from                      to                     

 

Commission file number 001-34299

 

DIGITALGLOBE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(303) 684-4000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

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

 

 

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 23 , 2015 there were 7 2,509,288 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

 

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DigitalGlobe, Inc.

 

INDEX

 

 

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PART I — FINANCIAL INFORMATIO N

 

ITEM 1.  FINANCIAL STATEMENT S

 

DigitalGlobe, Inc.

 

Unaudited Condensed Consolidated Statements of Operation s

 

 

		For the three months ended
		March 31,
(in millions, except per share data)		2015			2014
Revenue		$	169.4		$	156.5
Costs and expenses:
Cost of revenue, excluding depreciation and amortization			39.3			39.5
Selling, general and administrative			57.0			53.0
Depreciation and amortization			67.3			57.6
Restructuring charges			2.2			1.1
Loss on abandonment of asset			—			1.2
Income from operations			3.6			4.1
Other income, net			—			0.1
Interest expense, net			(12.7)			—
(Loss) income before income taxes			(9.1)			4.2
Income tax benefit (expense)			4.2			(3.8)
Net (loss) income			(4.9)			0.4
Preferred stock dividends			(1.0)			(1.0)
Net loss less preferred stock dividends		$	(5.9)		$	(0.6)
Loss per share:
Basic loss per share		$	(0.08)		$	(0.01)
Diluted loss per share		$	(0.08)		$	(0.01)
Weighted average common shares outstanding:
Basic			72.4			75.0
Diluted			72.4			75.0

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

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Table of Contents  

 

DigitalGlobe, Inc.

 

Unaudited Condensed Consolidated Balance Sheet s

 

 

		March 31,			December 31,
(in millions, except par value)		2015			2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	114.9		$	117.8
Restricted cash			2.3			2.3
Accounts receivable, net of allowance for doubtful accounts of $1.5 and $0.5 , respectively			130.0			133.6
Short-term deferred contract costs			8.5			9.1
Prepaid and current assets			18.3			22.6
Deferred taxes			24.1			24.1
Total current assets			298.1			309.5
Property and equipment, net of accumulated depreciation of $985.8 and $1,095.5 , respectively			2,138.3			2,174.7
Goodwill			484.5			484.5
Intangible assets, net of accumulated amortization of $22.1 and $19.5 , respectively			40.4			43.0
Long-term restricted cash			4.0			4.0
Long-term deferred contract costs			45.1			41.8
Other assets			35.1			37.7
Total assets		$	3,045.5		$	3,095.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	12.7		$	4.4
Current portion of long-term debt			5.5			5.5
Other accrued liabilities			51.2			62.2
Current portion of deferred revenue			85.0			91.0
Total current liabilities			154.4			163.1
Deferred rev e nue			321.3			335.1
Long-term debt, net of discount			1,130.9			1,132.1
Long-term deferred tax liability, net			96.0			101.9
Other liabilities			19.6			9.5
Total liabilities		$	1,722.2		$	1,741.7
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS’ EQUITY
DigitalGlobe, Inc. stockholders’ equity:
Series A convertible preferred stock, $0.001 par value; 0.08 shares authorized; 0.08 shares issued and outstanding at March 31, 2015 and December 31, 2014			—			—
Common stock; $0.001 par value; 250.0 shares authorized; 76.5 shares issued and 72.5 shares outstanding at March 31, 2015 and 76.1 shares issued and 73.2 shares outstanding at December 31, 2014			0.2			0.2
Treasury stock, at cost; 4.0 shares at March 31, 2015 and 2.9 shares at December 31, 2014			(111.7)			(80.1)
Additional paid-in capital			1,490.3			1,484.0
Accumulated deficit			(57.3)			(52.4)
Total DigitalGlobe, Inc. stockholders’ equity			1,321.5			1,351.7
Noncontrolling interest			1.8			1.8
Total stockholders’ equity			1,323.3			1,353.5
Total liabilities and stockholders’ equity		$	3,045.5		$	3,095.2

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

 

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DigitalGlobe, Inc.

 

Unaudited Condensed Consolidated Statements of Cash Flow s

 

 

		For the three months ended
		March 31,
(in millions)		2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(4.9)		$	0.4
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense			67.3			57.6
Amortization of aerial image library, deferred contract costs and lease incentive			4.5			5.0
Non-cash stock-based compensation expense, net of capitalized stock-based compensation expense			4.6			3.9
Amortization of debt issuance costs and accretion of debt discount, net of capitalized interest			1.7			—
Deferred income taxes			(5.9)			3.8
Excess tax benefit from share-based compensation			(0.9)			—
Other			0.4			1.2
Changes in working capital, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable, net			3.6			0.1
Deferred contract costs			(4.8)			(0.4)
Other current and non-current assets			4.8			6.7
Accounts payable			5.8			(12.1)
Accrued liabilities			0.5			(12.7)
Deferred revenue			(19.8)			(13.6)
Net cash flows provided by operating activities			56.9			39.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction in progress additions			(30.1)			(61.8)
Property and equipment additions			(1.2)			(2.2)
Acquisition of businesses, net of cash acquired			—			(35.7)
Decrease in restricted cash			—			2.0
Net cash flows used in investing activities			(31.3)			(97.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt			(1.4)			(1.4)
Principal payments on capital lease obligations			(0.2)			(0.2)
Repurchase of common stock			(31.1)			—
Proceeds from exercise of stock options			4.3			1.8
Preferred stock dividend payment			(1.0)			(1.0)
Excess tax benefit from share-based compensation			0.9			—
Net cash flows used in financing activities			(28.5)			(0.8)
Net decrease in cash and cash equivalents			(2.9)			(58.6)
Cash and cash equivalents, beginning of period			117.8			229.1
Cash and cash equivalents, end of period		$	114.9		$	170.5
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized amounts of $11.5 million and $21.1 million, respectively			9.6			—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Changes to non-cash property, equipment and construction in progress accruals, including interest			3.2			12.0
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 Informatio n

 

DigitalGlobe is a leading global provider of geospatial information products and services sourced from our own advanced satellite constellation and third party providers .  Our products and services support users in a wide variety of fields including defense, intelligence and homeland security, mapping and analysis, environmental monitoring, oil and gas exploration and   infrastructure management.  Each day users depend on DigitalGlobe’s data, information, technology and expertise to better understand our changing planet in order to save lives, resources and time.  

 

Our principal customers include U.S. and foreign governments, defense and intelligence providers, 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 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 5.6 billion square kilometers of imagery, an area the equivalent of 37 times the landmass of the earth, accumulated since 1999. As of March 31, 2015, our collection capacity capability was approximately 1.4 billion square kilometers of imagery per year , or the equivalent of roughly nine times the earth’s land surface area , and offers intraday revisit around the globe.

 

NOTE 2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of DigitalGlobe, Inc. and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. These Unaudited Condensed Consolidated Financial Statements   have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).   Certain prior year amounts have been reclassified to conform to the current year presentation.

 

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”). 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 December 31, 2014 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required in the annual financial statements prepared in accordance with U.S. GAAP. The results of operations for the three month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or for any future period.

 

Use of Estimates

 

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

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,   Revenue from Contracts with Customers (Topic 606)   (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. ASU 2014-09 provides for a single five-step model to be applied to all revenue contracts with customers and significantly expands disclosure requirements. ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the new standard recognized at the date of initial application.  

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The new standard is effective beginning on January 1, 2017 for the Company and early adoption is not permitted.  The Company continues to evaluate the impact of ASU 2014-09 and available adoption methods on our consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03,   Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  The new standard is effective beginning on January 1, 2016 for the Company and early adoption is permitted for financial statements not previously issued.  The Company continues to evaluate the impact of ASU 2015-03 and available adoption methods on our consolidated financial statements.

 

NOTE 3. Property and Equipment

 

Property and equipment consisted of the following:

 

		Depreciable Life
(in millions)		(in years)				March 31, 2015			December 31, 2014
Satellites		9	–	13		$	1,798.7		$	1,973.1
Construction in progress			–				765.8			765.1
Computer equipment and software		3	–	12			403.6			376.2
Machinery and equipment, including ground terminals			5				109.3			109.3
Furniture, fixtures and other		3	–	7			40.1			39.9
Land and buildings			34				6.6			6.6
Total property and equipment							3,124.1			3,270.2
Accumulated depreciation and amortization							(985.8)			(1,095.5)
Property and equipment, net						$	2,138.3		$	2,174.7

 

Depreciation expense for property and equipment was $ 6 4.7 million and $55.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

Satellite Constellation

 

As of March 31, 2015, the Company operates a constellation of four in-orbit and fully commissioned satellites :   GeoEye-1, WorldView-1, WorldView-2 and W orldView-3. We retired QuickBird , as the satellite stopped capturing images in December 2014 and ceased operating in the first quarter of 2015 . Additionally, in the first quarter of 2015, the Company stopped making new IKONOS imagery commercially available and committed to a plan to decommission the satellite. The net book value o f each satellite is as follows:

 

				As of March 31, 2015									As of December 31, 2014
		Depreciable		Gross						Net			Gross						Net
		Life		Carrying			Accumulated			Book			Carrying			Accumulated			Book
(in millions)		(in years)		Amount			Depreciation			Value			Amount			Depreciation			Value
QuickBird		12.2		$	—		$	—		$	—		$	174.4		$	(174.4)		$	—
IKONOS		9.0			1.0			(1.0)			—			1.0			(1.0)			—
GeoEye-1		9.0			211.8			(91.8)			120.0			211.8			(81.2)			130.6
WorldView-1		13.0			473.2			(323.4)			149.8			473.2			(316.8)			156.4
WorldView-2		13.0			463.2			(215.8)			247.4			463.2			(207.9)			255.3
WorldView-3		11.5			649.5			(28.2)			621.3			649.5			(14.1)			635.4
Satellites, net				$	1,798.7		$	(660.2)		$	1,138.5		$	1,973.1		$	(795.4)		$	1,177.7

 

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

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NOTE 4. Business Acquisition

 

In February 2014, the Company acquired Spatial Energy, LLC to grow its existing oil and gas industry vertical for an aggregate cash consideration, net of cash acquired, of $35.7  m illion.  Of the total purchase price, $25. 7 million w as allocated to goodwill, of which $19.0 million is deductible for tax purposes, $13.9 million to acquired intangible assets, and $3.9 million to net liabilities assumed.  Pro forma results have not been presented as such results would not be materially different from the Company’s actual results.

 

NOTE 5 . Goodwill and Intangible Assets

 

There have been no changes in goodwill from December 31, 2014 to March 31, 2015.

 

Intangible assets consisted of the following :

 

						March 31, 2015									December 31, 2014
						Gross						Net			Gross						Net
		Useful Life				Carrying			Accumulated			Carrying			Carrying			Accumulated			Carrying
(in millions)		(in years)				Amount			Amortization			Amount			Amount			Amortization			Amount
Technology		3	–	5		$	27.2		$	(12.1)		$	15.1		$	27.2		$	(10.6)		$	16.6
Customer relationships		10	–	12			27.0			(4.0)			23.0			27.0			(3.4)			23.6
Trademarks			3				5.6			(3.8)			1.8			5.6			(3.4)			2.2
FCC licenses and other		2	–	20			2.7			(2.2)			0.5			2.7			(2.1)			0.6
Total						$	62.5		$	(22.1)		$	40.4		$	62.5		$	(19.5)		$	43.0

 

I ntangible amortization expense was $2.6 million and $2. 5 million for the three month s ended March 31, 2015 and 2014 , respectively.

 

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

 

 

(in millions)		Amount
Remainder of 2015		$	7.5
2016			8.2
2017			7.7
2018			2.9
2019			2.5
Thereafter			11.6
Total amortization expense		$	40.4

 

NOTE 6. Debt

 

The Company’s debt obligations consist of a $550.0 million Senior Secured Term Loan Facility (“Term Loan”) and a $150.0 million Senior Secured Revolving Credit Facility (“Revolving Credit Facility” and, together with the Term Loan, the “2013 Credit Facility” ), in addition to $600.0 million in Senior Notes. As of March 31, 2015, the Company had not drawn any amounts under the Revolving Credit Facility. The 2013 Credit Facility requires that the Company comply with a maximum leverage ratio and minimum interest coverage ratio. As of March 31, 2015, we were in compliance with our debt covenants.

 

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Long-term debt consisted of the following:

 

 

(in millions)		March 31, 2015			December 31, 2014
$550.0 million Term Loan due February 1, 2020		$	539.0		$	540.4
$150.0 million Revolving Credit Facility due February 1, 2018			—			—
$600.0 million Senior Notes due February 1, 2021			600.0			600.0
Total borrowings			1,139.0			1,140.4
Less: unamortized discounts			(2.6)			(2.8)
Total borrowings, net			1,136.4			1,137.6
Less: current maturities of long-term debt			(5.5)			(5.5)
Total long-term debt, net		$	1,130.9		$	1,132.1

 

The Company’s future debt payments consisted of the following as of March 31, 2015:

 

		Long-term debt
		(excluding interest
(in millions)		payments)
Remainder of 2015		$	4.1
2016			5.5
2017			5.5
2018			5.5
2019			5.5
Thereafter			1,112.9
Total		$	1,139.0

 

Interest expense, net consisted of the following:

		For the three months ended
		March 31,
(in millions)		2015			2014
Interest		$	13.0		$	13.1
Accretion of debt discount, deferred financing amortization and line of credit fees			1.8			1.8
Capitalized interest			(2.1)			(14.8)
Interest expense		$	12.7		$	0.1
Interest income			—			(0.1)
Interest expense, net		$	12.7		$	—

 

NOTE 7. Fair Values of Financial Instruments

 

The f air value of our long-term debt, estimated using inputs that incorporate certain active market quotations for similar, but not identical, assets based upon trading activity among lenders as well as other indirect inputs, was $1,134.5   million and $1,102.0 million at March 31, 2015 and December 31, 2014, respectively, and is classified within Level 2 of the valuation hierarchy.

 

Our cash equivalents primarily consist of   U.S. Treasury   and demand deposit money market accounts.  The carrying value s of our cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.   

 

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 expects to reduce global headcount, rationalize its real estate footprint, and undertake other efficiency initiatives.  The Company may spend up to approximately   $10.0   million in restructuring charges as a result of these efforts, which we expect to complete by the end of the first quarter of 2016.  

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The components of the restructuring liability were as follows:

 

 

(in millions)		Severance
Balance, December 31, 2014		$	—
Provision for restructuring charges			2.2
Cash payments			(1.6)
Balance, March 31, 2015		$	0.6

 

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

 

NOTE 9 . Other Accrued Liabilities

 

Other accrued liabilities consisted of the following:

 

		March 31,			December 31,
(in millions)		2015			2014
Compensation and other employee benefits		$	13.1		$	22.1
Construction in progress accruals			9.4			2.8
Accrued interest			8.7			16.6
Other accrued expense			20.0			20.7
Total other accrued liabilities		$	51.2		$	62.2

 

NOTE 10. Deferred Revenue

 

A rollforward of deferred revenue from December 31, 201 4 to March 31, 2015 is as follows:

 

		U.S. Government									Diversified Commercial
								Pre-FOC
					Value			Payments
		Enhanced			Added			Related To
(in millions)		View SLA			Services			NextView			DAP			Other			Total
Balance, December 31, 2014		$	210.0		$	77.7		$	88.8		$	39.4		$	10.2		$	426.1
Cash collections			75.0			11.3			—			14.4			14.4			115.1
Revenue recognized on deferred revenue			(84.3)			(15.5)			(3.8)			(15.4)			(15.9)			(134.9)
Balance, March 31, 2015		$	200.7		$	73.5		$	85.0		$	38.4		$	8.7		$	406.3

 

NOTE 11. Income Taxes

 

For interim income tax reporting the Company estimates its annual effective tax rate and applies this effective tax rate to its year to date pre-tax (loss) income .  The Company’s effective income tax rate was 46.2% and 90.5% for the three months ended March 31, 2015 and 2014, respectively. The 2015 effective tax rate differed from the statutory federal rate of 35.0% primarily as a result of the impact of certain discrete period items. The 2014 effective tax rate was higher than the statutory rate primarily due to the amount of forecasted non-deductible expenses relative to the forecasted full year pre-tax profit.

 

NOTE 12. Stock-Based Compensation

 

T otal stock-based compensation expense was $4.8   million and $4. 1   million during the three months ended March 31, 2015 and 2014, respectively. Stock-based compensation capitalized to assets under construction was $0.2 million during each of the three month s ended March 31, 2015 and 2014.

 

 

 

 

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During the three month s ended March 31, 201 5, the company awarded 0.8 million unvested restricted stock units at an average grant date price of $ 31.64 per share.  Of this amount, 0 .2 million stock units represents the target amount of grants made to certain key employees whereby vesting is contingent on meeting both a service requirement and either a Company financial performance condition or a Company stock market performance condition. 

 

The number of units granted with the financial performance condition that ultimately will vest is based on a return on invested capital measurement over the three year vesting period of the awards.  The awards granted with a financial performance condition have a grant date fair value of $ 30.10 per share. The number of units granted with the stock market performance condition that ultimately will ve st is based on a measurement of the change in the Company’s average stock price compared to the change in value of the Russell 2000 stock index as determined over the three year vesting period of the awards.  The awards granted with the stock market performance condition were valued at a grant date fair value of $ 40.30 per share using a Monte Carlo simulation.  For both types of awards with performance conditions, the number of shares that ultimately vest could range from 50% to 200% of the target amount, or zero percent if the minimum threshold is not achieved.

 

As of March 31, 2015, total unrecognized compensation expense related to unvested restricted stock awards and restricted stock units is $41.4 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 2.6 years.  Approximately $8.4 million of the total unrecognized compensation cost, net of estimated forfeitures, is related to awards whereby vesting is contingent on meeting certain financial performance and stock market performance conditions.

 

As of March 31, 2015 , total unrecognized compensation expense related to share options is $ 1. 0 million, net of estimated forfeitures, and will be recognized over a weighted-average remaining vesting period of 0.8 years. As of March 31, 2015 , the number of options outstanding was 1.7 million at a weighted-average exercise price of $ 20.47 and the number of options exercisable was 1.5 million at a weighted-average exercise price of $ 21.39 per share.

 

Certain equity incentive plan participants elect to have the Company withhold shares to pay for minimum taxes due at the time their restricted stock vests. The quantity and value of the shares withhel d during the three months ended March 31, 2015 and 2014 were immaterial and have been included in treasury shares. 

 

NOTE 13. Stockholders’ Equity

 

Share Repurchase Program

 

In 2014, the Company’s Board of Directors authorized a program to repurchase up to   $205.0   million of the Company’s outstanding common stock through December 31, 2015.  During the three months ended March 31, 2015, the Company repurchased 1 ,009,700 shares, or $ 31 .1 million, at an average purchase price of $ 30.79 per share. As of March 31, 2015, we have repurchased a total of 3,736,449 shares, or $106.2 million, at an average purchase price of $28.41 to date under the program (including broker transaction fees and commissions) .  

 

Series A Convertible Preferred Stock

 

In January 2013, upon the closing of the acquisition of GeoEye , Inc. (“GeoEye”) , the Company issued 80,000 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) with a par value of $0.001 per share to Cerberus Satellite, LLC. In March 2014, Cerberus Satellite, LLC transferred the 80,000 shares of Series A Preferred Stock to Citigroup Global Markets, Inc.

 

Cumulative dividends on the Series A Preferred Stock are payable at a rate of five percent per annum on the $1,000 liquidation preference per share. At the Company’s option, dividends may be declared and paid in cash out of funds legally available when declared by the Board of Directors or the Audit Committee of the Company. If not paid in cash, an amount equal to the cash dividends due is added to the liquidation preference. The Company declared dividends of $1.0 million during each of the three months end ed March 31, 2015 and 2014 .

 

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The Series A Preferred Stock is convertible at the option of the holders, at a conversion price of $26.17 per common share, which would convert to 3.1 million shares of common stock of the Company. If at any time after September 22, 2016 the weighted average price of the Company’s common stock exceeds $45.80 per share, in effect for 30 consecutive trading days, the Company has the option to redeem all of the Series A Preferred Stock at an amount equal to the liquidation preference plus accrued dividends as of the redemption date. 

 

Non-Controlling Interest

 

In connection with the acquisition of Spatial Energy completed in February 2014, the Company obtained a majority interest in a subsidiary, and control of the subsidiary’s board of directors.  A third party investor owns   approximately 25% of the outstanding shares of the subsidiary.  T he Unaudited Condensed Consolidated Financial Statements include the financial position of this subsidiary as of March 31, 2015 and March 31, 2014 and the results of operations of this subsidiary since the date of acquisition.  The Company has recognized the carrying value of the non-controlling interest as a component of stockholders’ equity.  The operating results of the subsidiary attributable to the non-controlling interest are immaterial for the periods presented and are included in Other income, net.

 

Comprehensive Income

 

For the three months ended March 31, 2015 and 2014, there were no material differences between net income (loss) and comprehensive income (loss).

 

NOTE 14. Net Earnings (Loss) Per Share

 

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

 

 

		Three months ended
		March 31,
(in millions, except per share data)		2015			2014
Net (loss) income		$	(4.9)		$	0.4
Preferred stock dividends			(1.0)			(1.0)
Net loss less preferred stock dividends		$	(5.9)		$	(0.6)
Basic weighted average number of common shares outstanding			72.4			75.0
Assuming exercise of stock options and restricted shares			—			—
Diluted weighted average number of common shares outstanding			72.4			75.0
Loss per share:
Basic		$	(0.08)		$	(0.01)
Diluted		$	(0.08)		$	(0.01)

 

The potential common shares from the conversion of Series A Preferred Stock that were excluded fro m 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, 2015 and 2014.  The number of options and non-vested restricted stock awards that were excluded from the computation of diluted earnings per share because they were assumed to be repurchased under the treasury stock method were 2.8 million and 2.9 million for the three month periods ended March 31, 2015 and 2014, respectively. 

 

NOTE 15. Related Party Transactions

 

In June 2012, the Company made an investment of $0.3 million for a less than 20% ownership interest in a joint ve nture in China. During the three months ended March 31, 2015 and 201 4 , the joint venture purchased $ 1.5   million and $ 1.2 million in products and services from the Company, respectively . Amounts owed to the Company by the joint venture at March 31, 2015 and December 31, 2014 were $ 1.3 million and $ 4.6 million, respectively.

 

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NOTE 16. Commitments and Contingencies

 

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

 

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management does not expect that the 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.

 

NOTE 17. Significant Customers and Geographic Information

 

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

 

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

 

The following table summari zes revenue for these two groups:

		For the three months ended
		March 31,
(in millions)		2015			2014
U.S. Government		$	114.8		$	97.6
Diversified Commercial			54.6			58.9
Total		$	169.4		$	156.5

 

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

		For the three months ended
		March 31,
(in millions)		2015			2014
U.S.		$	127.9		$	111.6
International			41.5			44.9
Total		$	169.4		$	156.5

 

 

 

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

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

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Overview

 

DigitalGlobe is a leading global provider of geospatial information products and services sourced from our own advanced satellite constellation and third party providers .  Our products and services support users in a wide variety of fields including defense, intelligence and homeland security, mapping and analysis, environmental monitoring, oil and gas exploration and   infrastructure management.  Each day users depend on DigitalGlobe’s data, information, technology and expertise to better understand our changing planet in order to save lives, resources and time.  

 

Our principal customers   include U.S. and foreign governments, defense and intelligence providers , 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 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 5.6  billion square kilometers of imagery, an area the equivalent of 37 times the landmass of the earth, accumulated since 1999. As of March 31, 2015, our collection capacity capability was approximately 1.4  billion square kilometers of imagery per year , or the equivale nt of roughly nine times the earth’s land surface area , and offers intraday revisit around the globe.

 

2015 Highlights

 

Recent Satellite Developments

 

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

 

Share Repurchase Program

 

In 2014, the Company’s Board of Directors authorized a program to repurchase up to $205.0 million of the Company’s outstanding common stock through December 31, 2015.  As of March 31, 2015, we have repurchased a total of 3,736,449 shares, or $106.2 million, at an average purchase price of $28.41 to date under the program (including broker transaction fees and commissions).

 

Re-engineering and Restructuring Plan

 

In Februa ry 2015, the Company initiated a re-engineering and  r estructuring plan intended to improve our operational efficiency, which we expect to complete by the end of the first quarter of 2016 .

 

Restructuring charges represent costs incurred to reduce global headcount, rationalize our real estate footprint, and undertake other efficiency initiatives. The Company may spend up to approximately   $10.0   million as a result of these efforts.   For the three months ended March 31, 2015, we have incurred $ 2.2 million of restructuring charges.

 

Other Re - engineering c harges   represent costs incurred to realize efficiencies from reducing internal and contractor headcount, such as re-engineering processes and enhancing system workflows , as well as costs related to the decision to proactively decommission IKONOS .   The Company may spend up to approximately   $5.0   million as a result of these efforts.   For the three months ended March 31, 2015, we have not incurred any   other re-engineering charges.

 

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Results of Operations

 

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

 

 

		For the three months ended March 31,
(in millions)		2015			2014			$ Change			% Change
Results of operations:
U.S. Government revenue		$	114.8		$	97.6		$	17.2		17.6	%
Diversified Commercial revenue			54.6			58.9			(4.3)		(7.3)
Total revenue			169.4			156.5			12.9		8.2
Cost of revenue, excluding depreciation and amortization			39.3			39.5			(0.2)		(0.5)
Selling, general and administrative			57.0			53.0			4.0		7.5
Depreciation and amortization			67.3			57.6			9.7		16.8
Restructuring charges			2.2			1.1			1.1		100.0
Loss on abandonment of asset			—			1.2			(1.2)		*
Income from operations			3.6			4.1			(0.5)		(12.2)
Other income, net			—			0.1			(0.1)		*
Interest expense, net			(12.7)			—			(12.7)		*
(Loss) income before income taxes			(9.1)			4.2			(13.3)		*
Income tax benefit (expense)			4.2			(3.8)			8.0		*
Net (loss) income		$	(4.9)		$	0.4		$	(5.3)		*

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* Not meaningful

 

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

 

	For the three months ended
	March 31,
	2015		2014
U.S. Government revenue	67.8	%	62.4	%
Diversified Commercial revenue	32.2		37.6
Total revenue	100.0		100.0
Cost of revenue, excluding depreciation and amortization	23.2		25.2
Selling, general and administrative	33.7		33.9
Depreciation and amortization	39.7		36.8
Restructuring charges	1.3		0.7
Loss on abandonment of asset	—		0.8
Income from operations	2.1		2.6
Other income, net	—		0.1
Interest expense, net	(7.5)		—
(Loss) income before income taxes	(5.4)		2.7
Income tax benefit (expense)	2.5		(2.4)
Net (loss) income	(2.9)	%	0.3	%

 

During the first quarter of 2015, changes in certain reporting relationships between our Chief Operating Decision Maker (“CODM”) and other members of management took place.  As a result of those changes, we are in the process of modifying our internal reporting to provide information to the CODM and certain of his direct reports consistent with a revised management structure. Accord ingly, during 2015 we expect to reevaluate the definition of our operating segments, reportable segments, and reporting units. This reevaluation could result in changes to our reportable segments. It also could result in the reallocation of goodwill to reporting units. If we reallocate goodwill during an interim reporting period we will perform an interim goodwill impairment test at that time, as required by U.S. GAAP . 

 

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Revenue

 

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

 

U.S. Government

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
U.S. Government Revenue:
EnhancedView SLA		$	84.3		$	56.8			48.4	%
Other revenue and value added services			26.7			34.4			(22.4)
Amortization of pre-FOC payments related to NextView			3.8			6.4			(40.6)
Total		$	114.8		$	97.6			17.6	%
Reseller and Direct Sales:
Direct			99.9	%		100.0	%		(0.1)	%
Resellers			0.1			—			*
Total			100.0	%		100.0	%		—	%

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* Not meaningful

 

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

 

Our U.S. Government customers focus on image quality, including resolution, accuracy, spectral diversity, frequency of area revisit and coverage, as well as ensuring availability of a certain amount of our capacity as they integrate our products and services into their operational planning. Our customers typically operate under contracts with purchase commitments through which we receive monthly or quarterly payments in exchange for delivering specific orders to the customer.

 

Revenue from customers in the U.S. Government has historically been largely from service level agreements and tasking orders, with a smaller portion from sales of imagery from our ImageLibrary. EnhancedView SLA revenue comprised 49.8% and 36.3% for the three months ended March 31, 2015 and 2014, respectively. Other revenue and value added services comprised 15.8% and 22.0% for the three months ended March 31, 2015 and 2014, respectively.

 

U.S Government revenue increased   $17.2 million, or 17.6%,   from 2014 to 2015 .   EnhancedView revenue increased $27.5 million as a result of WorldView-3 becoming fully operational on October 1, 2014 , which increased constellation capacity made available to the NGA. Other revenue and value added services decreased $7.7 million primarily due to a decrease in non-cash amortization of Global Enhanced GEOINT   Delivery (“GEGD” ) deferred revenue .   Additionally , there was a decrease of $2.6 million in the non-cash amortizat ion of pre-FOC payments related to NextView, as the period over which these payments   are   amortized was extended to reflect the new useful life of WorldView-1.

 

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Diversified Commercial

 

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
Diversified Commercial Revenue:
DAP		$	24.6		$	26.5			(7.2)	%
Other diversified commercial			30.0			32.4			(7.4)
Total		$	54.6		$	58.9			(7.3)	%
U.S. and International Sales:
U.S.		$	13.1		$	14.0			(6.4)	%
International			41.5			44.9			(7.6)
Total		$	54.6		$	58.9			(7.3)	%
Reseller and Direct Sales:
Direct			75.8	%		80.5	%		(5.8)	%
Resellers			24.2			19.5			24.1
Total			100.0	%		100.0	%		—	%

 

 

Our Diversified Commercial customers are located throughout the world , a majority of which purchase our products and services through contracts that span one or more years, which may include one-time data deliveries, depending on the solution that best suits their application. We sell to these customers through a combination of direct sales and through resellers.

 

We have DAP agreements in 10 countries, earning revenue from sales of the DAP facility hardware and software, as well as from service fees to access our satellite constellation. The revenue to access our satellite constellation is recognized over time based on minutes of actual usage. The revenue and costs associated with the sales of a DAP facility are generally deferred until we commission into operation the ground terminal and can provide contractually specified access to our satellites. The facilities related revenue and costs are then recognized ratably over the customer relationship period, which is based on the estimated useful life of the satellite being accessed, except when deferred contract costs are in excess of deferred revenue, in which case the excess costs are recognized over the initial contract period. If more than one satellite is used, generally the satellite with the longest remaining useful life is used as the basis for the amortization of deferred revenue and deferred costs.

 

Other diversified c ommercial revenue also arises from customers in international defense and intelligence, international civil government, LBS, energy, and other industry verticals, who use our content for mapping, monitoring, analysis and planning activities.

 

Diversified Commercial revenue decreas ed $4.3 million, or 7.3%, from 2014 to 2015 .   DAP revenue decreased $1.9 million primarily   due   to the timing of contract renewals , which was impacted by the committed decommissioning of our IKONOS satellite. Other diversified commercial revenue decreased $2.4 million  primarily due to lower   revenue from customers in Russia totaling $1.1 million and a decrease in revenue from our other industry verticals .

 

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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)		2015			2014			% Change
Labor and labor related costs		$	16.4		$	16.8		(2.4)	%
Facilities, subcontracting and equipment costs			19.4			18.2		6.6
Consulting and professional fees			1.1			0.9		22.2
Aerial imagery			0.7			1.6		(56.3)
Other direct costs			1.7			2.0		(15.0)
Total cost of revenue, excluding depreciation and amortization		$	39.3		$	39.5		(0.5)	%

 

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.  Costs of acquiring aerial imagery from third parties have been capitalized and are amortized on an accelerated basis as a cost of revenue.

 

Cost of revenue decreased $ 0.2 million, or 0.5 %, from 2014 to 2015.   F acilities, subcontracting and equipment costs increased $1.2 million primarily due to $1.6 million in WorldView-4 storage costs and $1.4 million in remote ground terminal service fees following the launch and commissioning of WorldView-3, partially offset by a decrease of approximately $1.8 million in connection with our restructuring efforts .   Aerial imagery , which is amortized on an accelerated basis,   decreased $0.9 million and consists of costs associated with previously purchased aerial   imagery.

 

Selling, General and Administrative

 

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

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
Labor and labor related costs		$	33.1		$	30.2		9.6	%
Consulting and professional fees			9.4			11.4		(17.5)
Rent and facilities			4.0			3.0		33.3
Satellite insurance			3.1			2.4		29.2
Other			7.4			6.0		23.3
Total selling, general and administrative		$	57.0		$	53.0		7.5	%

 

Selling, general and administrative expenses increased $ 4.0 million, or 7.5 %, from 2014 to 2015. Labor and labor related costs increased $2.9 million primarily due to annual compensation increases and higher avera ge headcount .  Consulting and professional fees decreased $2.0 million p rimarily due to reduced services needed to support the integration of GeoEye.  Rent and facilities increased $1.0 million from rent expense for our new headquarters.  Satellite insurance increased $0.7 million as a result of $1.2 million in WorldView-3 launch insurance, partially offset by a decrease in current year rates to insure our other in-orbit satellites.  Other costs increased $1.4 million primarily due to an increase in bad debt expense related to Russian receivables.      

 

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Depreciation and Amortization

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
Depreciation and amortization		$	67.3		$	57.6		16.8	%

 

Depreciation and amortization increased $ 9.7 million, or 16.8%, primarily due to $14.1 million in depreciation expense incurred following the launch and commissioning of WorldView-3 and a $1.7 million increase in hardware and software expense from assets placed into service in the current quarter , partially offset by a $7.1 million decrease in expense as a result of the extension of the useful lives of our WorldView-1 and WorldView-2 satellites.

 

Restructuring Charges

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
Restructuring charges		$	2.2		$	1.1		100.0	%

 

In February 2015, the Company initiated a restructuring plan intended to improve our operational efficiency . Under the restructuring plan, the Company expects to reduce global headcount, rationalize its real estate footprint, and undertake other efficiency initiatives.  Restructuring charges incurred in 2015 relate to this plan.  

 

Restructuring charges in 2014 were incurred   in conjunction with our acquisition of GeoEye to optimize our operational efficiency by realigning our infrastructure with customer demand. We believe   that the restructuring enhanced   our ability to provide cost-effective customer service offerings, which enabled   us to retain and expand our existing relationships with customers and attract new business. These restructuring activities primarily consisted   of reducing redundant workforce, consolidating office and production facilities, consolidating certain ground terminals and systems and other exit costs.

 

Interest Expense, net

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
Interest expense, net		$	(12.7)		$	—		*

---

* Not meaningful

 

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

 

Interest expense increased $12.7 million primarily as a result of 14.2 % of interest being capitalized to capital projects in 2015 compared to 99.3 % in 2014.  Following the launch and commissioning of our WorldView-3 satellite on October 1, 2014, we are no longer capitalizing interest on the cost basis of the satellite.     Additionally, we were not capitalizing interest o n the cost basis of WorldView-4 while the satellite was in storage until mid-March 2015 .

 

Income Tax Benefit ( Expense )

 

		For the three months ended
		March 31,
(in millions)		2015			2014			% Change
Income tax benefit (expense)		$	4.2		$	(3.8)		*

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* Not meaningful

 

Income tax expense decr eased by $8.0 million   primarily due to generating a pre-tax loss in 2015 compared to pre-tax income in 2014.

 

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Backlog

 

The following table represents our backlog as of March 31, 2015.  “Next 12 Months” backlog refers to the backlog expected to be recognized as revenue during the period between April 1, 2015 and March 31, 2016.

 

 

		Backlog to be recognized
(in millions)		Next 12 Months			Life of Contracts
U.S. Government:
EnhancedView SLA		$	337.1		$	1,825.7
Amortization of pre-FOC payments related to NextView			15.1			85.0
Other revenue and value added services			48.4			115.3
Total U.S. Government			400.6			2,026.0
Diversified Commercial:
DAP			70.5			134.6
Other Diversified Commercial(1)			70.5			109.2
Total Diversified Commercial			141.0			243.8
Total Backlog		$	541.6		$	2,269.8

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(1) Other Diversified Commercial backlog consists of firm orders, minimum commitments under signed customer contracts, remaining amounts under pre-paid subscriptions, firm fixed price reimbursement and funded and unfunded task orders from Diversified Commercial customers.

 

Backlog consists of all contractual commitments, including those under the anticipated ten-year term of the EnhancedView Contract with the NGA, amounts committed under DAP agreements, firm orders, remaining pre-paid subscriptions and task orders from our government 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 Contract is structured as a ten-year term, inclusive of nine annual renewal options that may be exercised by the NGA. Although the NGA may terminate the contract at any time and is not obligated to exercise any of the remaining five renewal options, we include the full remaining term in backlog.  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.  Such funding contains an inherent level of uncertainty in the current budget environment. 

 

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

 

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 $ 4 9.7 million, or 1.6 %, primarily due to a decrease in property, plant and equipment, net as a result of current quarter depreciation, partially offset by costs incurred related to various infrastructure project s .    

 

Total liabilities decreased $ 19.5 million, or 1.1%, due to a decrease in deferred revenue primarily related to the recognition of U.S. government revenue in the current quarter.  Refer to Note 10 “Deferred Revenue” to the Unaudited Condensed Consolidated Financial Statements for additional detail.

 

Liquidity and Capital Resources

 

As of March 31, 2015, we had $ 114.9 million in cash and cash equivalents and $150 .0 million available for borrowing under our Revolving Credit Facility .  We believe that the combination of funds currently available to us and funds expected to be generated from operations will be adequate to finance our operations and development activities for the next twelve months.

 

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

 

In summary, our cash flows were:

 

		Three months ended   March 31,
(in millions)		2015			2014
Net cash provided by operating activities		$	56.9		$	39.9
Net cash used in investing activities			(31.3)			(97.7)
Net cash used in financing activities			(28.5)			(0.8)

 

Operating Activities

 

Cash provided by operating activities increased $ 17.0 million, 42.6%, primarily due to a decrease in spend incurred in connection with our acquisition of GeoEye. 

 

Investing Activities

 

Cash used in investing activities decreased $ 66.4 million, or 68.0%, primarily due to the prior period acquisition of Spatial Energy, net of cash acquired totaling $35.7 million , and a decrease in capital expenditures primarily resulting from placing our WorldView-3 satellite into service in August 2014.   During the first quarter of 2015, we removed WorldView-4 from storage to commence work on certain enhancements. We will make capital expenditures on our WorldView-4 satellite until its completion and launch, which we anticipate to be in mid-2016.

 

Financing Activities

 

Cash used in financing activities increased $27.7 million primarily due to $31.1 million in spend as part of our share repurchase program .  

 

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Non-U.S. GAAP Financial Measures

 

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

 

 

		For the three months ended
		March 31,
(in millions)		2015			2014
Net cash flows provided by operating activities		$	56.9		$	39.9
Net cash flows used in investing activities			(31.3)			(97.7)
Acquisition of businesses, net of cash acquired			—			35.7
Free cash flow		$	25.6		$	(22.1)

 

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

 

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

 

 

		For the three months ended
		March 31,
(in millions)		2015			2014
Net (loss) income		$	(4.9)		$	0.4
Depreciation and amortization			67.3			57.6
Interest expense, net			12.7			—
Income tax (benefit) expense			(4.2)			3.8
EBITDA			70.9			61.8
Restructuring charges (1)			2.2			1.1
Integration costs (1)			—			3.8
Loss on abandonment of asset			—			1.2
Adjusted EBITDA		$	73.1		$	67.9

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(1)

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

 

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

 

EBITDA and Adjusted EBITDA are key measures used in our internal operating reports by management and our Board of Directors to evaluate the performance of our operations and are also used by analysts, investment banks and lenders for the same purpose. EBITDA, excluding certain restructuring and other r e-engineering costs , is a measure being used as a key element of the company-wide bonus incentive plan.

 

 

 

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We believe that the presentation of EBITDA and Adjusted EBITDA enables a more consistent measurement of period to period performance of our operations,   and   EBITDA   facilitates comparison of our operating performance to companies in our industry. We believe that EBITDA and Adjusted EBITDA measures are particularly important in a capital intensive industry such as ours, in which our current period depreciation is not a good indication of our current or future period capital expenditures. The cost to construct and launch a satellite and to build the related ground infrastructure may vary greatly from one satellite to another, depending on the satellite’s size, type and capabilities. Current depreciation expense is not indicative of the revenue generating potential of the satellites.

 

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

 

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

 

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

 

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

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of March 31, 2015 .

 

Contractual Obligations

 

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

 

Guaranty and Indemnification Obligations

 

We enter into agreements in the ordinary course of business with resellers and others. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require us to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by us, our employees, agents or representatives. In addition, from time to time we have made guarantees regarding the performance of our systems to our customers.

 

 

 

 

 

 

 

 

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Critical Accounting Policies and Estimates

 

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

 

Use of Estimates

 

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

 

New 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 QUALITATIV E DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4.  CONTROLS AND PROCEDURE S

 

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 Securities Exchange Act Rule 13a-15(e)) as of March 31, 2015 . Based upon that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2015 .

 

Changes in Internal Control over Financial Reporting

 

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

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PART II OTHER INFORMATIO N

 

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 FACTOR S

 

Investment in our securities involves risk. In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors described under the caption “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on February 26, 201 5 . 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 2014, the Company’s Board of Directors authorized a program to repurchase up to $205.0 million of the Company’s outstanding common stock through December 31, 2015.  As of March 31, 2015, we have repurchased 3,736,449 shares, or $106.2 million, at an average purchase price of $28.41 to date under the program (including broker transaction fees and commission s ) . 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, 2015 was as follows:

 

 

							Total Number		Approximate
							of Shares		Dollar Value
		Total		Average			Purchased as Part		of Shares That
		Number		Price			of Publicly		May Yet be
		of Shares		Paid Per			Announced		Purchased
		Purchased		Share			Program		Under Program(1)
January 1, 2015 to January 31, 2015		570,674		$	30.69
February 1, 2015 to February 28, 2015		293,498			28.98
March 1, 2015 to March 31, 2015		145,528			34.83
Total		1,009,700		$	30.79		3,736,449		$	98,940,882

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(1)

Excludes broker transaction fees and commissions

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

None.

 

ITEM 6.  EXHIBIT INDEX

 

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

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SIGNATURE

 

DIGITALGLOBE, INC.

 

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

 

 

Date: April 30 , 201 5		/s/ Gary W. Ferrera
		Gary W. Ferrera
		Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)