Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. General Information
DigitalGlobe, Inc. (DigitalGlobe or the Company) is a leading global provider of commercial high-resolution
earth imagery products and services that support users in a wide variety of fields including defense, intelligence and homeland security, mapping and analysis, environmental monitoring, oil and gas exploration and infrastructure management. Each day
these users depend on DigitalGlobe data, information, technology and expertise to better understand the changing planet in order to save lives, resources and time. DigitalGlobe owns and operates five imagery satellites, which collect panchromatic
(black and white) or multispectral (color) imagery using visible and near-infrared wavelengths. The Company offers a range of on-line and off-line distribution options designed to enable customers to easily access and integrate the Companys
imagery into their business operations and applications.
On January 31, 2013, DigitalGlobe completed its acquisition of 100% of the
outstanding stock of GeoEye, Inc. (GeoEye), a leading provider of geospatial intelligence solutions in a stock and cash transaction valued at approximately $1.4 billion. The acquisition of GeoEye broadened the Companys service
offerings, enabled it to optimize satellite orbits and collection of imagery, strengthened its production and analytics capabilities, increased the scale of its existing operations and diversified its customer and product mix. The results of
operations of GeoEye have been included in the Companys Unaudited Condensed Consolidated Financial Statements beginning as of the acquisition date of January 31, 2013.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements include the accounts of DigitalGlobe and its wholly owned subsidiaries. The accompanying Unaudited Condensed Consolidated Financial Statements for
the three and six month periods ended June 30, 2013 and 2012 included herein have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements
and notes included in the Companys most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments
that are necessary for a fair presentation of the accompanying Unaudited Condensed Consolidated Financial Statements have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2013 or for any future period. The year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required in the
annual financial statements by U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. However, due to the inherent uncertainties in making estimates, actual results could materially
differ from those estimates.
Comprehensive Income
For the three and six month periods ended June 30, 2013 and 2012, there were no material differences between net income and comprehensive income.
Accounting for Business Acquisitions
The fair value of the net assets acquired and the results of operations of the acquired businesses are included in the Unaudited Condensed Consolidated Financial Statements from the acquisition date
forward. The Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates are used in accounting for, among other things, the fair
value of acquired net operating assets, property and equipment, deferred revenue, intangible assets and related deferred tax liabilities, useful lives of plant and equipment, and amortizable lives for acquired intangible assets. Any excess of the
purchase consideration over the identified fair value of the assets and liabilities acquired is recognized as goodwill.
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Page 5 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company estimated the preliminary fair value of acquired assets and liabilities as of the date of
acquisition based on information available at that time. The Company has not yet completed its evaluation of the acquired assets and assumed liabilities in connection with the GeoEye acquisition. The valuation of these tangible and identifiable
intangible assets and liabilities is subject to further management review and may change materially between the preliminary allocation and the end of the purchase price allocation period on January 31, 2014 with respect to the acquisition of
GeoEye. Any changes in these estimates may have a material impact on the Companys Unaudited Condensed Consolidated Results of Operations or Unaudited Condensed Consolidated Balance Sheets.
Goodwill, Intangibles and Other Long-Lived Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company evaluates goodwill for impairment on an annual basis. During the three months ended June 30, 2013,
the Company changed its annual impairment testing date from December 31 to October 1. The Company believes this new date is preferable as it provides additional time prior to the Companys year-end to complete the goodwill impairment
testing and report the results in its Annual Report on Form 10-K. The Company also evaluates goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from its estimated future cash
flows. Recoverability of goodwill is measured at the reporting unit level by either performing a qualitative assessment in certain circumstances or by comparing the reporting units carrying amount, including goodwill, to the fair value of the
reporting unit, which is measured based upon, among other factors, market multiples for comparable companies as well as a discounted cash flow analysis. If the recorded value of the assets, including goodwill, and net of liabilities of the reporting
unit exceeds its fair value, an impairment loss may be required to be recognized. Further, to the extent the net book value of the Company as a whole is greater than its market capitalization, all, or a significant portion of its goodwill may be
considered impaired. There were no impairments of goodwill during the three and six months ended June 30, 2013 or 2012.
Intangible
assets (identified as technology, customer list, trademarks, U.S. Federal Communications Commission (FCC) licenses and other) are recorded at fair value at the time of acquisition. Finite-lived intangibles are stated at cost less
accumulated amortization. Amortization is recorded using the straight-line method, which approximates the expected pattern of economic benefit, over the estimated lives of the assets.
The Company reviews the carrying value of its long-lived tangible and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of the asset group may
not be recoverable. Factors that would require an impairment assessment include, among other things, a significant change in the extent or manner in which an asset is used, a significant adverse change in the operations of the Companys
satellites, a change in government spending or customer demand that could affect the value of the asset group, a significant decline in the observable market value of an asset group or a significant decline in the Companys stock price.
All of the Companys long-lived tangible and finite-lived intangible assets, including its satellites and ground terminals, comprise a
single asset group and its impairment testing is performed at the DigitalGlobe entity level as separately identifiable cash flows attributable to any given satellite cannot be derived. The Companys impairment analysis includes anticipated
future cash flows from its satellite constellation as well as costs necessary to complete the construction of its satellites.
An impairment
loss is recognized when the carrying amount of these long-lived assets exceeds their fair value. Recoverability of long-lived assets is measured by comparing their carrying amount to the projected cash flows the assets are expected to generate. If
such assets are considered to be impaired, the impairment loss, if any, recognized is the amount by which the carrying amount of the property and equipment and finite-lived intangible assets exceeds fair value. There were no impairments of
long-lived assets during the three and six months ended June 30, 2013 or 2012.
Revenue Recognition
DigitalGlobes principal source of revenue is the licensing of earth imagery products and services for end users and resellers. Revenue is recognized
when the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and the collection of funds is reasonably assured. The Companys
revenue is generated from: (i) sales of or royalties arising from licenses of imagery; and (ii) subscription services and other service arrangements.
Sales of Licenses.
Revenue from sales of imagery licenses is recognized when the images are physically delivered to the customer or, in the case of electronic delivery, when the customer is
able to directly download the image from the Companys system. In some customer arrangements, certain acceptance provisions must be satisfied. For these arrangements, revenue is recognized upon acceptance by these customers. Revenue is
recognized net of contractually agreed discounts.
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Page 6 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Royalties.
Revenue from royalties is based on agreements or licenses with third parties that
allow the third party to incorporate the Companys product into their value added product for commercial distribution. Revenue from these royalty arrangements is recorded in the period earned or on a systematic basis over the term of the
license agreement. For those royalties that are due to third parties based on the Companys revenue sharing arrangements, royalty revenue is reported on a net basis.
Subscriptions.
DigitalGlobe sells online subscriptions to its products. These arrangements allow customers access to the Companys products via the internet for a set period of time and a
fixed fee. The subscription revenue is recorded as deferred revenue and recognized ratably over the subscription period. In addition, the Company has other arrangements in which customers pay for their subscription to one of DigitalGlobes
web-based products by paying for a predetermined amount of access. In the case of prepayment, each time a product is accessed, a portion of the customers prepayment is earned. These prepayments are recorded as deferred revenue when received
and revenue is recognized based on the number of times the product is accessed. Revenue is recognized net of discounts.
Service Level
Agreements (SLA).
The Company recognizes service level agreement revenue net of any allowances resulting from failure to meet certain stated monthly performance metrics. Revenue is either recognized ratably over time for a
defined and fixed level of service or based on proportional performance when the level of service changes based on certain criteria stated in the agreement.
Multiple Deliverable Arrangements
. DigitalGlobe enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings based on the needs of its
customers. These arrangements may include products delivered at the onset of the agreement, as well as products or services that are delivered over multiple reporting periods. The revenue for the majority of the Companys multiple-element
arrangements are recognized in accordance with the provisions under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements and ASU 2009-14
Certain Revenue Arrangements That Include Software Elements which were each prospectively adopted as of January 1, 2011.
The
Companys EnhancedView contract (the EnhancedView Contract) with the National Geospatial-Intelligence Agency (NGA) and four of its Direct Access Program (DAP) agreements were entered into prior to the
January 1, 2011 adoption of ASU 2009-13 and ASU 2009-14 and none have been subsequently materially modified. As the Company adopted the new guidance on a prospective basis, these agreements will continue to be accounted for under the
pre-adoption guidance unless they are materially modified. The Companys agreements are accounted for as follows:
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EnhancedView Contract.
The EnhancedView Contract contains multiple deliverables, including an SLA portion (EnhancedView
SLA), infrastructure enhancements and other services. DigitalGlobe determined that these deliverables do not qualify as separate units of accounting due to a lack of standalone value for the delivered elements and a lack of objective reliable
evidence of fair value for any of the undelivered elements in the arrangement. The Company recognizes revenue on a single unit of accounting using a proportional performance method based on the estimated capacity of its constellation made available
to NGA compared to the total estimated capacity to be provided over the life of the contract.
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Direct Access Program.
The DAP generally includes construction of the direct access facility, an arrangement to allow the customer access
to the satellite to task and download imagery and other potential deliverables. In these arrangements, the facility is generally delivered and accepted at the beginning of the contractual period of performance and access services occur over several
subsequent reporting periods. These arrangements have generally been treated as a single unit of accounting due to a lack of standalone value for the facility. Access fees under each arrangement are recognized based on the minutes used by the
customer in each period. Any up-front fees are recorded as deferred revenue and amortized ratably over the estimated customer relationship period, which is consistent with the estimated remaining useful life of the satellite being used.
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Series A Convertible Preferred Stock
Upon the closing of the acquisition of GeoEye, the Company issued 80,000 shares of Series A Convertible Preferred Stock (Series A Preferred Stock) with a par value of $0.001 per share to
Cerberus Satellite, LLC. Cumulative dividends on the Series A Preferred Stock are payable at a rate of five percent per annum of the $1,000 liquidation preference per share. At the Companys option, dividends may be declared and paid in cash
out of funds legally available when declared by the Board of Directors or the Audit Committee of the Company. If not paid in cash, an amount equal to the cash dividends due is added to the liquidation preference. Dividends payable in cash are
recorded in current liabilities. All dividends payable, whether in cash or as an addition to the liquidation preference, are recorded as a reduction to the Companys equity. The Company declared dividends on the Series A Preferred Stock of
$1.0 million during the three months ended March 31, 2013 of which $0.4 million was recorded by GeoEye as a pre-acquisition obligation. The Company declared dividends on the Series A Preferred Stock of $1.0 million during the three
months ended June 30, 2013, which was included in accrued liabilities at June 30, 2013. The Series A Preferred Stock is convertible on issuance, at the option of the holders, at a conversion rate of $26.17 per common share, which would
convert to 3.1
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Page 7 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
million shares of common stock of the Company. If at any time after September 22, 2016 the weighted average price of the Companys common stock exceeds $45.80 per share, in effect for
30 consecutive trading days, the Company has the right to redeem at its option all, but not less than all, of the Series A Convertible Preferred Stock at an amount equal to the liquidation preference plus accrued dividends as of the redemption date.
Earnings per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding
during the period. Net income available to common stockholders is equal to net income less preferred stock dividends and income allocated to participating securities. The Companys preferred shares are participating securities and require the
two-class method of computing earnings per share. Diluted earnings per share is calculated by dividing net income available to common stockholders as adjusted for the effect of dilutive common equivalent shares by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the common shares issuable upon the conversion of the convertible preferred shares and those issuable related to stock options,
restricted stock awards and non-vested stock (using the treasury stock method). For purposes of computing diluted earnings per share, the if-converted method will be used to the extent that the result is more dilutive than the application of the
two-class method.
New Accounting Pronouncements
From time to time, the FASB or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (ASC) are communicated through issuance
of an ASU. During the six months ended June 30, 2013, there have been no new pronouncements issued that would have a material impact on the Companys financial position or results of operations.
NOTE 3. EnhancedView/NextView Programs
EnhancedView
On August 6, 2010, DigitalGlobe entered into the EnhancedView Contract with NGA. The EnhancedView Contract has a ten-year term, inclusive of nine
one-year options exercisable by NGA, and is subject to Congressional appropriations and the right of NGA to terminate or suspend the contract at any time.
On July 25, 2011, NGA exercised the first option under the EnhancedView SLA, extending the SLA for the period of September 1, 2011 through August 31, 2012. On July 24, 2012, NGA exercised the second
option period under the EnhancedView SLA, extending the SLA for the period of September 1, 2012 through August 31, 2013. On July 30, 2013 NGA exercised the third option period under the EnhancedView SLA, extending the SLA for the period of September
1, 2013 through August 31, 2014.
EnhancedView Service Level Agreement
The EnhancedView SLA totals $2.8 billion over the term of the contract, payable as $250.0 million per year ($20.8 million monthly) for the first four contract years commencing on September 1, 2010,
and $300.0 million per year ($25.0 million monthly) for the remaining six years of the contract beginning on September 1, 2014. The Company is required to meet certain service level requirements related to the operational performance of the
satellites comprising the WorldView constellation and related ground systems.
The Company recognizes net revenue for the EnhancedView SLA
using a proportional performance method. Under this method, net revenue is recognized based on the estimated amount of capacity made available to NGA in any given period compared to the total estimated capacity to be provided over the life of the
contract. As increasing levels of capacity are made available to NGA, the Company recognizes SLA revenue in direct proportion to the increased level of capacity made available. The contract requires DigitalGlobe to increase the capacity made
available to NGA through the addition of its WorldView-3 satellite (scheduled to launch in the second half of 2014) as well as the installation of seven additional remote ground terminals. As of July 31, 2012, the Company has installed all
remote ground terminals required by the EnhancedView SLA. Given the significant amount of constellation capacity that will be made available to NGA once WorldView-3 becomes operational, the Company anticipates a material increase in net revenue once
WorldView-3 reaches full operational capability (FOC). Accordingly, when WorldView-3 reaches FOC, the Company will begin to earn and recognize previously received EnhancedView cash payments that are classified as deferred revenue.
During the first and second quarters of 2012, DigitalGlobe and NGA agreed to modifications of EnhancedView that included increasing the
amount of capacity made available to NGA and adjustments to the performance penalty (formerly holdback). The modifications did not result in a material change to the SLA accounting and the Company continues to use the proportional
performance method of net revenue recognition. The capacity made available to NGA resulted in EnhancedView SLA net revenue as follows:
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Page 8 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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Thee months ended June 30,
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Six months ended June 30,
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(in millions)
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2013
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2012
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2013
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2012
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Cash received
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$
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62.5
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$
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62.5
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$
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125.0
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$
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125.0
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EnhancedView SLA net revenue recognized
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56.8
|
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48.6
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113.6
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93.1
|
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Deferred revenue arising from timing of revenue recognition
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5.7
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13.8
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11.4
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31.7
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Deferred revenue arising from timing of payments
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2.1
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Deferred revenue represents cash received in advance of revenue recognition. Accordingly, the Companys period-end
deferred revenue balance varies based on the timing of revenue recognition and the timing of payments within each period presented. Each monthly SLA payment is subject to a performance penalty ranging from 3% to 10% through February 28, 2013
and 6% thereafter, depending upon the Companys performance against pre-defined SLA performance criteria. If NGA determines that not all of the SLA performance criteria were met in a given month, a performance penalty is assessed for that
month. The Company retains the full monthly cash payment; however, the penalty amount will be applied to mutually agreeable future products and services or to a pro-rated extension beyond the current contract period. Accordingly, all penalty amounts
will cause the Company to defer recognition of a corresponding net revenue amount until the performance penalty funds are consumed as described above. During the three and six months ended June 30, 2013, there were no holdbacks for penalties.
For the six months ended June 30, 2012, the Company incurred a penalty of $0.2 million.
EnhancedView Value Added and Other
Services
Over the ten-year life of the EnhancedView Contract, approximately $750.0 million is provided for value added products and
services, infrastructure enhancements and other services including the option for NGA to require the Company to lower the altitude of WorldView-2 to 496 kilometers. Value added products and services enable the Company to meet NGAs more
advanced imagery requirements using its production and dissemination capabilities.
NextView
In connection with the Companys NextView agreement with NGA (which was entered into September 2003 and was the predecessor to the current
EnhancedView Contract), the Company received $266.0 million from NGA to offset the construction costs of WorldView-1, which was recorded as deferred revenue when received. When WorldView-1 reached FOC in November 2007, the Company began recognizing
the deferred revenue on a straight-line basis over the estimated customer relationship period, for which the estimated useful life of WorldView-1 is used as the proxy. Additionally, if the life of WorldView-1 were to be modified, the amortization of
deferred revenue would be modified accordingly. Based on the current estimated useful life of WorldView-1, the Company recognized $6.4 million of net revenue related to the pre-FOC payments for each of the three month periods ended
June 30, 2013 and 2012 and $12.8 million for each of the six month periods ended June 30, 2013 and 2012.
NOTE 4. Business Acquisitions
GeoEye
On
January 31, 2013, DigitalGlobe completed its acquisition of 100% of the outstanding stock of GeoEye. DigitalGlobe is considered the acquirer and has accounted for the transaction under the acquisition method in accordance with U.S. GAAP. The
acquisition of GeoEye broadened the Companys service offerings, enabled the Company to optimize its satellite orbits and collection of imagery, strengthened its production and analytics capabilities, increased the scale of its existing
operations and diversified its customer and product mix.
GeoEye common stockholders received, in the aggregate, approximately
25.9 million shares of DigitalGlobes common stock and $92.8 million in cash in exchange for their shares of GeoEye common stock. In addition, each share of GeoEyes Series A Convertible Preferred Stock was converted into one
newly-designated share of Series A Convertible Preferred Stock of DigitalGlobe and $4.10 in cash for each share of GeoEye common stock into which such share of GeoEye Series A Convertible Preferred Stock was convertible. As a result, DigitalGlobe
issued 80,000 shares of Series A Convertible Preferred Stock and paid approximately $11.0 million in cash to GeoEyes Series A Convertible Preferred stockholder. The Company also assumed the awards outstanding under GeoEyes equity stock
incentive plans. Immediately following the acquisition, the former GeoEye stockholders owned approximately 35% of DigitalGlobes common stock. The Company incurred total acquisition costs of $33.5 million related to the acquisition of GeoEye of
which $20.6 million was incurred during the six months ended June 30, 2013.
In accordance with the terms of the GeoEye Senior Secured Notes
agreements, the Company redeemed the outstanding balances of GeoEyes $400.0 million 9.625% Senior Secured Notes due 2015 and $125.0 million 8.625% Senior Secured Notes due 2016 and paid fees and expenses associated with the redemption totaling
approximately $55.3 million and accrued interest of $16.4 million.
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Page 9 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The total purchase price for the acquisition of GeoEye was as follows:
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(in millions)
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Amount
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Net cash received
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$
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(76.2
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)
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Cash due to equity holders
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0.8
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DigitalGlobe common stock
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723.8
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DigitalGlobe Series A convertible preferred stock
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112.7
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DigitalGlobe equity awards issued to replace GeoEye equity awards
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21.6
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Long-term debt issued to redeem GeoEyes long-term debt including early termination penalties and accrued
interest
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596.7
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Aggregate purchase price
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$
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1,379.4
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Pursuant to the acquisition method of accounting, the fair value of each DigitalGlobe common share issued was $27.97,
which was the Companys closing share price on January 31, 2013.
The following represents the classifications of the cash flows
received, which are included within the Unaudited Condensed Consolidated Statements of Cash Flows:
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(in millions)
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Amount
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Investing activities:
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Acquisition of business
(1)
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$
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76.2
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Redemption of GeoEye debt
(2)
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(596.7
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)
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Total cash used in acquisition of business
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$
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(520.5
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)
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(1)
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Includes $103.8 million of cash paid to GeoEye common and convertible preferred stockholders, offset by cash acquired of $180.0 million.
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(2)
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Includes cash paid to settle GeoEyes outstanding long-term debt at the acquisition date, including principal of $525.0 million and accrued interest of $16.4
million that was replaced by new debt (See Note 8). As a result of the discharge and redemption of GeoEyes debt, DigitalGlobe incurred early termination penalties of approximately $55.3 million.
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The Company has recognized the assets and liabilities of GeoEye based on its preliminary estimates of their acquisition date fair values. The preliminary
fair value of GeoEyes property and equipment was estimated using a market approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The preliminary fair
value of GeoEyes satellites was estimated using a replacement cost approach and was based on the amount that would be required to replace the service capacity of the assets. Under the replacement cost approach, the Company estimated the cost
of a similar satellite having the nearest equivalent utility to the satellite being valued. The Company then adjusted this value, as necessary, for physical depreciation, functional obsolescence or economic obsolescence. As of the acquisition date,
identifiable intangible assets, excluding technology, were measured at fair value primarily using various income approaches, which required a forecast of expected future cash flows, either for the use of a relief-from royalty method or a
multi-period excess earnings method. Technology was valued using a cost approach.
The determination of the fair values of the acquired assets
and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. DigitalGlobe expects to complete its final determinations no later than
January 31, 2014. The final determinations may be significantly different than those reflected in its Unaudited Condensed Consolidated Financial Statements as of June 30, 2013. Based on the Companys preliminary estimates, the
aggregate purchase price exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $438.8 million, which amount has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible
for income tax purposes.
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Page 10 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following is DigitalGlobes preliminary assignment of the aggregate consideration based on
currently available information.
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(in millions)
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June 30, 2013
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Current assets, net of cash acquired
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$
|
90.3
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Property, plant and equipment, including satellite constellation
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990.1
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Identifiable intangible assets:
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Technology
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26.0
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Customer relationships
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10.0
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Trademarks
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5.0
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FCC licenses and other
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|
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2.5
|
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Other noncurrent assets
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|
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4.0
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Current liabilities
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|
|
(50.1
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)
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Deferred revenue
|
|
|
(12.1
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)
|
Long-term deferred tax liability, net
|
|
|
(125.1
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)
|
|
|
|
|
|
Fair value of acquired assets and assumed liabilities
|
|
|
940.6
|
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Goodwill
|
|
|
438.8
|
|
|
|
|
|
|
Aggregate purchase price
|
|
$
|
1,379.4
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|
|
|
|
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During the three-month period ended June 30, 2013, the Company increased goodwill related to the acquisition of
GeoEye by $1.2 million primarily relating to a reduction in the value of an acquired investment and buildings and partially offset by an increase in the value assigned to the acquired customer relationship intangible asset.
The results of GeoEyes operations have been included in the Companys Unaudited Condensed Consolidated Results of Operations beginning as of
the acquisition date of January 31, 2013. During the period February 1, 2013 to June 30, 2013, the Company recognized an incremental $52.7 million of revenue and $88.5 million of net loss from continuing operations attributable to
GeoEyes operations since the date of the acquisition, which includes restructuring and integration costs. The following unaudited pro forma financial information presents the combined results of DigitalGlobe and GeoEye for the six months ended
June 30, 2013 and 2012 as though the acquisition had been consummated as of January 1, 2012.
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|
|
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Six months ended June 30,
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(in millions, except per share data)
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|
2013
|
|
|
2012
|
|
Operating revenue
|
|
$
|
288.0
|
|
|
$
|
366.5
|
|
Net loss
|
|
|
(76.9
|
)
|
|
|
(11.0
|
)
|
Net loss available to common stockholders
|
|
|
(78.9
|
)
|
|
|
(13.0
|
)
|
Basic loss per common share
|
|
$
|
(1.08
|
)
|
|
$
|
(0.18
|
)
|
Diluted loss per common share
|
|
$
|
(1.08
|
)
|
|
$
|
(0.18
|
)
|
This pro forma information reflects certain adjustments to DigitalGlobes previously reported operating results,
primarily:
|
|
|
transaction costs are reflected as if they occurred on January 1, 2012;
|
|
|
|
increased amortization of stock-based compensation;
|
|
|
|
increased amortization expense related to identifiable intangible assets recorded as part of the acquisition;
|
|
|
|
changes to depreciation expense as a result of the fair value adjustment to property and equipment;
|
|
|
|
decreased interest expense due to lower interest rates on long-term debt; and
|
|
|
|
related income tax effects.
|
The pro forma information for the six months ended June 30, 2012 includes approximately $87.4 million of revenue from GeoEyes major contracts
with the NGA, which were cancelled in the fourth quarter of 2012. The pro forma information does not reflect the actual results of operations had the acquisition been consummated at January 1, 2012, nor is it necessarily indicative of present
or future operating results. The pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition (other than those realized subsequent to the
January 31, 2013 acquisition date).
Other Acquisition
During the six-month period ended June 30, 2013, the Company completed one other acquisition for $4.0 million, consisting of $3.5 million of cash and $0.5 million of accrued liabilities. The Company
has recognized the assets and liabilities of the acquired company based on its preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related
determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. DigitalGlobe expects to complete its final determinations no later than the first quarter of 2014. The final determinations
may be significantly different than those reflected in its Unaudited Condensed Consolidated Financial Statements as of June 30, 2013.
|
|
|
|
|
|
|
Page 11 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Based on the Companys preliminary estimates, the aggregate purchase price exceeds the aggregate
estimated fair value of the acquired assets and assumed liabilities by $3.3 million, which amount has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible for income tax purposes. In addition, the Company
recorded $1.1 million of technology and other intangible assets and $0.4 million of deferred tax liability as part of its purchase price allocation.
NOTE 5. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Depreciable Life
(in
years)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
Satellites
|
|
1 12
|
|
$
|
1,323.6
|
|
|
$
|
1,110.8
|
|
Construction in progress
|
|
|
|
|
1,186.7
|
|
|
|
486.8
|
|
Computer equipment and software
|
|
3
|
|
|
281.1
|
|
|
|
140.6
|
|
Machinery and equipment, including ground stations
|
|
5
|
|
|
96.2
|
|
|
|
32.7
|
|
Furniture, fixtures and other
|
|
3 7
|
|
|
40.2
|
|
|
|
20.2
|
|
Land and buildings
|
|
34
|
|
|
6.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
2,934.2
|
|
|
|
1,791.4
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(774.1
|
)
|
|
|
(676.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
2,160.1
|
|
|
$
|
1,115.2
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company operates a constellation of five in-orbit satellites, as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Depreciable Life
(in
years)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
Quickbird
|
|
12.2
|
|
$
|
174.4
|
|
|
$
|
174.4
|
|
Worldview-1
|
|
10.5
|
|
|
473.2
|
|
|
|
473.2
|
|
WorldView-2
|
|
11
|
|
|
463.2
|
|
|
|
463.2
|
|
IKONOS
|
|
0.5
|
|
|
1.0
|
|
|
|
|
|
GeoEye-1
|
|
5
|
|
|
211.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total satellites
|
|
|
|
|
1,323.6
|
|
|
|
1,110.8
|
|
Accumulated depreciation
|
|
|
|
|
(592.7
|
)
|
|
|
(530.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Satellites, net
|
|
|
|
$
|
730.9
|
|
|
$
|
580.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress includes the WorldView-3 and GeoEye-2 satellites, ground station construction, infrastructure
projects, certain internally developed software costs and capitalized interest. The IKONOS, GeoEye-1, and GeoEye-2 satellites were added from our acquisition of GeoEye. The Company currently expects to launch WorldView-3 in the second half of 2014.
Upon the completion of construction and testing of the GeoEye-2 satellite, the Company intends to place it in storage until such time as incremental imaging capacity or a replacement for an existing satellite is required.
Depreciation expense for property and equipment was $56.6 million and $28.5 million for the three months ended June 30, 2013 and 2012,
respectively, and $102.5 million and $57.6 million for the six months ended June 30, 2013 and 2012, respectively.
The capitalized
costs of the Companys satellites and related ground systems include internal and external direct labor costs, internally developed software and direct material costs which support the construction and development of the satellites and related
ground systems. The cost of DigitalGlobes satellites also includes capitalized interest incurred during the construction, development and initial in-orbit testing period. The portion of the launch insurance premium allocable to the period from
launch through in-orbit calibration and commissioning has been capitalized as part of the cost of the satellites and is amortized over the useful life of the satellites.
The expected operational life of a satellite is determined once the satellite has been placed into orbit. A satellites expected operational life is determined by considering certain factors
including: i) the orbit in which the satellite is placed; ii) the supply of fuel; iii) environmental stress; iv) the anticipated environmental degradation of solar panels and other components; v) the anticipated levels of solar radiation; vi) the
probability of design failure of the satellites components from design or manufacturing defect; and vii) the quality of the satellites construction. The Company depreciates the cost of a satellite, after the satellite has been
successfully placed into service, over its expected useful life using the straight-line method of depreciation as the Company anticipates that the satellite will provide consistent levels of imagery over its useful life. The Quickbird and IKONOS
satellites are nearing the end of their expected useful lives.
|
|
|
|
|
|
|
Page 12 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
If a satellite were to fail to launch or while in orbit, the resulting loss would be charged to expense
in the period in which such loss was to occur. The amount of any such loss would be reduced to the extent of insurance proceeds received as a result of the launch or in-orbit failure
NOTE 6. Goodwill and Other Intangibles
The following table summarizes the activity in the Companys goodwill account during the six-month period ended June 30,
2013:
|
|
|
|
|
(in millions)
|
|
June 30, 2013
|
|
Balance, December 31, 2012
|
|
$
|
8.7
|
|
Acquisitions
|
|
|
442.1
|
|
|
|
|
|
|
Balance, June 30, 2013
|
|
$
|
450.8
|
|
|
|
|
|
|
The following table summarizes the Companys intangible assets for the six months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
(in millions)
|
|
Useful Life
(in years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
3 5
|
|
$
|
26.9
|
|
|
$
|
(2.3
|
)
|
|
$
|
24.6
|
|
Customer relationships
|
|
12
|
|
|
10.0
|
|
|
|
(0.3
|
)
|
|
|
9.7
|
|
Trademarks
|
|
3
|
|
|
5.0
|
|
|
|
(0.7
|
)
|
|
|
4.3
|
|
FCC licenses and other
|
|
1 - 20
|
|
|
2.7
|
|
|
|
(0.5
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
44.6
|
|
|
$
|
(3.8
|
)
|
|
$
|
40.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amounts of intangible assets are removed when the recorded amounts have been fully amortized. During
the six month period ended June 30, 2013, the Company added approximately $43.5 million of intangible assets that were related to its acquisition of GeoEye and $1.1 million of intangible assets related to its other acquisition. During the three
month period ended June 30, 2013, the Company identified an intangible asset for customer relationships acquired from GeoEye. The Company is in the process of finalizing the fair value of goodwill and intangible assets acquired. Such valuations
will be completed by January 31, 2014. Accordingly, these amounts represent preliminary estimates, which are subject to change upon finalization of purchase accounting, and any such change may have a material effect on the Companys
results of operations.
Total intangible amortization expense recognized was $2.4 million and $3.8 million during the three and six month
periods ended June 30, 2013 (none during the three and six months ended June 30, 2012), respectively. The estimated future annual amortization expense for acquired intangible assets is as follows:
|
|
|
|
|
(in millions)
|
|
|
|
Fiscal Years Ending December 31,
|
|
Amount
|
|
2013
(1)
|
|
$
|
4.6
|
|
2014
|
|
|
9.1
|
|
2015
|
|
|
8.2
|
|
2016
|
|
|
6.2
|
|
2017
|
|
|
6.1
|
|
Thereafter
|
|
|
6.6
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
40.8
|
|
|
|
|
|
|
(1)
|
Represents estimated amortization for the remaining six-month period ended December 31, 2013.
|
NOTE 7. Other Accrued Liabilities and Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
(in millions)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
Compensation and other employee benefits
|
|
$
|
21.2
|
|
|
$
|
16.4
|
|
Construction in progress accruals
|
|
|
18.7
|
|
|
|
7.1
|
|
Accrued interest payable
|
|
|
13.4
|
|
|
|
0.1
|
|
Restructuring costs
|
|
|
9.1
|
|
|
|
|
|
Accrued taxes
|
|
|
1.4
|
|
|
|
9.2
|
|
Acquisition related accruals
|
|
|
|
|
|
|
5.8
|
|
Other accrued expense
|
|
|
29.6
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
93.4
|
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Compensation and other employee benefits include payroll, accrued bonus expense and vacation accrual.
Construction in progress accruals include amounts for milestone payments due on the procurement and construction of the
WorldView-3
and
GeoEye-2
satellites. Acquisition
related accruals primarily consist of advisory and legal costs. Other accruals consist of third party commission expense, professional fees, remote ground terminal maintenance, deferred contract costs and the current portion of deferred lease
incentives.
NOTE 8. Debt
2013 Credit Facility
In connection with the acquisition of GeoEye on January 31, 2013, the Company entered into a seven-year $550.0 million Senior Secured Term Loan Facility and a five-year $150.0 million Senior Secured
Revolving Credit Facility (collectively the 2013 Credit Facility). The 2013 Credit Facility requires quarterly principal payments of $1.375 million starting June 30, 2013 with the remaining balance due February 1, 2020.
Borrowings under the 2013 Credit Facility bear interest at an adjusted LIBOR rate, plus a 2.75% margin subject to a 1.0% LIBOR floor. The LIBOR margin becomes 2.5% when the ratio of total debt to Adjusted EBITDA is 2.5 or lower. The Company will
also pay a commitment fee of between 37.5 to 50.0 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility based on the Companys leverage ratio.
The Companys obligations under the 2013 Credit Facility are guaranteed by certain of its existing and future direct and indirect wholly-owned
domestic subsidiaries. The Companys obligations and the obligations of the guarantor subsidiaries under the 2013 Credit Facility are collateralized by substantially all of the Companys assets and the assets of the guarantor subsidiaries.
The 2013 Credit Agreement contains affirmative and negative covenants that the Company believes are usual and customary for a senior secured
credit agreement. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with its affiliates. The 2013 Credit Agreement also requires
that the Company comply with a maximum leverage ratio and minimum interest coverage ratio. The Company was in compliance with its debt covenants as of June 30, 2013.
Senior Notes
Also in connection with the acquisition of GeoEye on January 31,
2013, the Company issued $600.0 million of Senior Notes (Senior Notes), which bear interest at 5.25% per year. Interest on the Senior Notes is payable on February 1 and August 1 of each year, beginning on August 1,
2013. The Senior Notes were issued at par and mature on February 1, 2021. The Company may redeem some or all of the Senior Notes at any time and from time to time on or after February 1, 2017, at the redemption prices set forth in the
offering memorandum. The initial redemption price for the Senior Notes is 102.625% of their principal amount plus accrued and unpaid interest to the date of redemption. The Company may redeem some or all of the Senior Notes at any time prior to
February 1, 2017, at a redemption price equal to 100% of their principal amount, plus a make whole premium, together with accrued and unpaid interest to the date of redemption. In addition, on or prior to February 1, 2016, the
Company may redeem up to 35% of the principal amount of the Senior Notes using the net cash proceeds from sales of certain types of capital stock at a redemption price equal to 105.250% of the principal amount of the Senior Notes, plus accrued and
unpaid interest to the date of redemption, subject to certain other provisions as set forth in the offering memorandum. If a change of control occurs, the Company must give holders of the Senior Notes an opportunity to sell the Company their Senior
Notes at a purchase price of 101% of the principal amount of such Senior Notes, plus accrued and unpaid interest to the date of purchase.
The
Senior Notes are senior unsecured obligations, ranking equally in right of payment with all of the Companys existing and future unsecured and unsubordinated indebtedness and are senior to its existing and future subordinated indebtedness. The
Senior Notes are unconditionally guaranteed, jointly and severally, by all of the Companys existing and certain of its future direct and indirect wholly-owned domestic subsidiaries. Each guarantors guarantee ranks pari passu in right of
payment with all future senior indebtedness of the guarantor.
The Senior Notes have not been registered under the Securities Act of 1933, as
amended. The Company has agreed to file an exchange offer registration statement or, under certain circumstances, a shelf registration statement, pursuant to a registration rights agreement if the Senior Notes are not freely transferable on February
1, 2014 under Rule 144 of the Securities Exchange Act of 1934, as amended (the Exchange Act), by persons that are not affiliates (as defined under Rule 144) of the Company. The Company does not currently expect to be required
to file an exchange offer or shelf registration statement with respect to the Senior Notes. If, however, circumstances change and the Company is required to do so but does not comply with the registration obligations, the Company will pay additional
interest on the Senior Notes.
The Company paid $41.2 million of underwriting and other fees and expenses in connection with the 2013 Credit
Facility and the Senior Notes, of which $5.0 million was included in Loss on early extinguishment of debt because a portion of the refinancing was accounted for as a modification and $36.2 million was capitalized as debt
issuance costs and included in other assets.
|
|
|
|
|
|
|
Page 14 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table represents the Companys future debt payments as of June 30, 2013:
|
|
|
|
|
(in millions)
|
|
Long-term debt
(excluding interest
payments)
|
|
2013
(1)
|
|
$
|
2.7
|
|
2014
|
|
|
5.5
|
|
2015
|
|
|
5.5
|
|
2016
|
|
|
5.5
|
|
2017
|
|
|
5.5
|
|
Thereafter
|
|
|
1,123.9
|
|
|
|
|
|
|
Total
|
|
$
|
1,148.6
|
|
|
|
|
|
|
(1)
|
Represents long-term debt principal payments for the six month period ended December 31, 2013.
|
The net proceeds of the 2013 Credit Facility and Senior Notes were used, along with cash on hand, to refinance the Companys 2011 $500.0 million
senior secured term loan and $100.0 million senior secured revolving credit facility, to fund the discharge and redemption of GeoEyes $400.0 million 9.625% Senior Secured Notes due 2015 and $125.0 million 8.625% Senior Secured Notes due 2016
assumed in connection with the acquisition of GeoEye, to pay the cash consideration under the merger agreement with GeoEye and to pay fees and expenses related to the foregoing transactions.
Retired 2011 Senior Secured Credit Facility
On October 12, 2011, the Company
entered into a $500.0 million, seven-year senior secured term loan facility and a $100.0 million, five-year senior secured revolving credit facility (collectively, the 2011 Credit Facility). As of January 31, 2013, the Company had a
net unamortized debt discount of $12.5 million and deferred financing costs of approximately $7.8 million relating to the 2011 Credit Agreement. On January 31, 2013, in connection with the acquisition of GeoEye, the Company entered into 2013
Credit Facility and Senior Notes and repaid and retired the 2011 Credit Facility. DigitalGlobes entrance into the 2013 Credit Facility, issuance of the Senior Notes and payoff of DigitalGlobes pre-combination outstanding debt were
assessed in accordance with ASC 470-50, Debt Modifications and Extinguishments. As a result of the repayment and retirement of the 2011 Credit Facility, the Company performed an analysis of the holders of the Companys debt before and
after the transaction. The Company determined that 33% of the Companys outstanding debt before the transaction was held by common debt holders after the transaction and that the terms of the new debt were not substantially different from the
terms of the old debt. Accordingly, this portion of the debt was accounted for as a modification of debt and as a result, the Company allocated $7.5 million of the net unamortized debt discount and deferred financing costs to the 2013 Credit
Facility and Senior Notes, which will be amortized as interest expense over the respective terms of the debt. The Company recorded a loss of $17.8 million during the three months ended March 31, 2013 primarily due to the write-off of the
remaining $12.8 million of unamortized deferred financing fees and debt discount and approximately $5.0 million of fees paid in connection with the 2013 Credit Facility and Senior Notes.
Letters of Credit
At June 30, 2013 and December 31, 2012, DigitalGlobe
had $1.2 million of restricted cash under the lease agreement for its headquarters in Longmont, Colorado. At June 30, 2013 and December 31, 2012, the Company had $24.1 million and $10.9 million, respectively, in letters of credit and
performance guarantees used in the ordinary course of business to support advanced payments from customers under certain of the DAP contracts. These letters of credit are secured by restricted cash. The letters of credit and related restricted cash
amounts are released when the respective contractual obligations have been fulfilled by the Company.
The following table summarizes the
Companys interest expense, accretion of debt discount, amortization of the deferred financing fees and interest capitalized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
(in millions)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Interest
|
|
$
|
13.3
|
|
|
$
|
7.2
|
|
|
$
|
$24.2
|
|
|
$
|
14.5
|
|
Capitalized interest
|
|
|
(13.7
|
)
|
|
|
(5.7
|
)
|
|
|
(24.6
|
)
|
|
|
(10.9
|
)
|
Accretion of debt discount, deferred financing amortization and line of credit fees
|
|
|
1.8
|
|
|
|
1.0
|
|
|
|
3.3
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
1.4
|
|
|
$
|
2.5
|
|
|
$
|
$2.9
|
|
|
$
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 15 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9. Fair Values of Financial Instruments
The fair value guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of inputs are defined as follows:
|
|
|
Level 1 quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
Level 2 quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
|
Level 3 unobservable inputs when little or no market data is available.
|
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
The following table provides information about the assets and liabilities measured at fair value on a recurring basis as of
June 30, 2013 and December 31, 2012 and indicates the valuation technique utilized by the Company to determine the fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Total
Carrying
Value
|
|
|
Quoted Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents at June 30, 2013
|
|
$
|
75.1
|
|
|
$
|
75.1
|
|
|
$
|
|
|
|
$
|
|
|
Cash equivalents at December 31, 2012
|
|
|
174.1
|
|
|
|
174.1
|
|
|
|
|
|
|
|
|
|
The Companys cash equivalents consist of investments acquired with maturity dates of less than 90 days, are quoted
from market rates and are classified within Level 1 of the valuation hierarchy. At June 30, 2013 and December 31, 2012, the Companys cash equivalents consisted of funds held in U.S. Treasury money markets. The Company does not have
any Level 2 or Level 3 financial instruments as of June 30, 2013 and December 31, 2012.
The fair value of the Senior Secured Term
Loan Facility and the Senior Notes were based upon trading activity among lenders.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Total
Carrying
Value
|
|
|
Principal
|
|
|
Estimated
Fair
Value
|
|
2013 Senior Secured Facility at June 30, 2013
|
|
$
|
546.4
|
|
|
$
|
548.6
|
|
|
$
|
546.5
|
|
2013 Senior Notes at June 30, 2013
|
|
|
598.7
|
|
|
|
600.0
|
|
|
|
576.0
|
|
2011 Senior Secured Facility at December 31, 2012
|
|
|
483.6
|
|
|
|
495.0
|
|
|
|
496.2
|
|
NOTE 10. Stock-Based Compensation
To date, the Company has issued equity awards that consist of stock options, restricted stock, non-vested restricted stock awards and
non-vested restricted stock units. Non-cash compensation expense for the equity awards is calculated based on the fair value of the award on the date of grant and amortized on a straight-line basis over the vesting period. For non-vested restricted
stock awards where vesting is contingent upon meeting both a service condition and a performance condition, the Company recognizes expense on the estimated number of shares that is anticipated to vest over the requisite service period. Changes to
the number of shares that are anticipated to vest will result in a cumulative catch-up or a reduction of expense in the period in which the change in estimate is made.
In connection with the acquisition of GeoEye, the Company issued stock compensation awards to replace the outstanding GeoEye awards with options and awards to acquire the Companys common stock.
Stock Options
The
Company did not award stock options during the six months ended June 30, 2013 other than in connection with the GeoEye acquisition. The stock options granted vest over a four year period from date of grant and have an exercise price equal to
the closing price of the Companys stock on the date of grant.
|
|
|
|
|
|
|
Page 16 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
A summary of stock option activity for the six months ended June 30, 2013 is presented below:
|
|
|
|
|
|
|
|
|
(in millions, except for weighted average exercise prices)
|
|
Number of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding December 31, 2012
|
|
|
3.7
|
|
|
$
|
21.06
|
|
Granted
|
|
|
|
|
|
|
|
|
Granted in GeoEye acquisition (Note 4)
|
|
|
1.4
|
|
|
|
17.69
|
|
Exercised
|
|
|
(1.7
|
)
|
|
|
18.62
|
|
Forfeited/Expired
|
|
|
(0.2
|
)
|
|
|
24.79
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2013
|
|
|
3.2
|
|
|
|
20.50
|
|
|
|
|
|
|
|
|
|
|
Exercisable June 30, 2013
|
|
|
2.0
|
|
|
$
|
22.41
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
During the six months ended June 30, 2013, the Company did not grant any restricted stock awards other than in connection with the GeoEye acquisition. A summary of restricted stock activity for the
six months ended June 30, 2013 is shown below:
|
|
|
|
|
|
|
|
|
(in millions, except for weighted average grant date fair values)
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Non-vested at December 31, 2012
|
|
|
0.6
|
|
|
$
|
17.52
|
|
Granted
|
|
|
|
|
|
|
|
|
Granted in GeoEye acquisition (Note 4)
|
|
|
0.5
|
|
|
|
27.97
|
|
Forfeited/Canceled
|
|
|
(0.1
|
)
|
|
|
25.08
|
|
Vested
|
|
|
(0.4
|
)
|
|
|
24.78
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2013
|
|
|
0.6
|
|
|
$
|
19.52
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
During the six months ended June 30, 2013, the Company awarded 0.5 million restricted stock units, which generally vest over four years. A summary of restricted stock unit activity for the six
months ended June 30, 2013 is shown below:
|
|
|
|
|
|
|
|
|
(in millions, except for weighted average grant date fair values)
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Non-vested at December 31, 2012
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
0.5
|
|
|
|
28.41
|
|
Forfeited/Canceled
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2013
|
|
|
0.5
|
|
|
$
|
28.46
|
|
|
|
|
|
|
|
|
|
|
Performance Share Units
During the six months ended June 30, 2013, the Company did not award performance share units other than in connection with the GeoEye acquisition. A summary of performance share activity for the six
months ended June 30, 2013 is shown below:
|
|
|
|
|
|
|
|
|
(in millions, except for weighted average grant date fair values)
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Non-vested at December 31, 2012
|
|
|
0.1
|
|
|
$
|
15.82
|
|
Granted
|
|
|
|
|
|
|
|
|
Granted in GeoEye acquisition (Note 4)
|
|
|
0.3
|
|
|
|
27.97
|
|
Forfeited/Canceled
|
|
|
(0.1
|
)
|
|
|
28.29
|
|
Vested
|
|
|
(0.2
|
)
|
|
|
27.68
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2013
|
|
|
0.1
|
|
|
$
|
16.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 17 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Performance share units are based on both a service requirement and a performance condition. The number
of shares that ultimately will vest are based on a measurement of the Companys average annual return on invested capital as determined over the three year vesting period of the awards. The actual 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. During the second quarter of 2013, as a result of the acquisition of GeoEye, management projected that the Companys average return on
invested capital would decrease below the minimum threshold necessary for vesting in the performance based awards, which did not contemplate the acquisition of GeoEye when the award was granted. As a result, in the second quarter of 2013,
approximately $0.4 million of cumulative compensation expense previously recognized for these awards through March 31, 2013 was reversed. In July 2013, under the terms of the performance based awards, the Companys compensation committee
modified the targets for the vesting of these awards to align the awards in a manner consistent with the financial objectives of the acquisition. The target number of awards expected to vest under the modified performance condition would result in
non-cash compensation expense of approximately $3.3 million. This expense will be recognized beginning in the third quarter of 2013 and continue over the remaining term of the awards until the second quarter of 2015. Changes to the number of shares
expected to vest will result in a cumulative catch up or reduction of expense in the period in which the change in estimate is made.
Deferred Stock Units
In
connection with the GeoEye acquisition, the Company assumed 0.1 million deferred stock units, which were issued in shares of the Companys stock on July 31, 2013.
Treasury Stock
During the three and six month periods ended June 30, 2013 and
2012, certain participants elected to have the Company withhold shares to pay for minimum taxes due at the time their restricted stock vested. The quantity and value of the shares withheld were immaterial and have been included in treasury shares.
The Company made no open market repurchases of its common stock during the three or six months ended June 30, 2013 or 2012.
NOTE 11. (Loss) Earnings Per Share
Basic (loss) earnings per share (EPS) is computed by dividing net (loss) income available to common stockholders by the
weighted average number of common shares outstanding for the period excluding issued, but unvested, restricted shares. Diluted EPS is computed by dividing net (loss) income available to common shareholders by the weighted average number of common
shares outstanding and dilutive potential common shares for the period. The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options and restricted shares using the treasury stock method.
Securities that contain non-forfeitable rights to dividend equivalents (whether paid or unpaid) are participating securities and are required to be included in the computation of basic EPS and dilutive EPS pursuant to the two-class method. Net
losses are not allocated to the Companys participating securities. The Companys Series A Convertible Preferred Stock are participating securities.
The following table sets forth the number of weighted average shares used to compute basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
June 30,
|
|
|
Six months
ended
June 30,
|
|
(in millions, except per share data)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(21.0
|
)
|
|
$
|
9.6
|
|
|
$
|
(81.6
|
)
|
|
$
|
13.4
|
|
Preferred stock dividends
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income less preferred stock dividends
|
|
|
(22.0
|
)
|
|
|
9.6
|
|
|
|
(83.2
|
)
|
|
|
13.4
|
|
Income allocated to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(22.0
|
)
|
|
$
|
9.6
|
|
|
$
|
(83.2
|
)
|
|
$
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
74.0
|
|
|
|
46.0
|
|
|
|
69.0
|
|
|
|
46.0
|
|
Assuming exercise of stock options and restricted shares
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding
|
|
|
74.0
|
|
|
|
46.2
|
|
|
|
69.0
|
|
|
|
46.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.30
|
)
|
|
$
|
0.21
|
|
|
$
|
(1.21
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.30
|
)
|
|
$
|
0.21
|
|
|
$
|
(1.21
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of options, non-vested restricted stock awards and potential common shares from the conversion of Series A
Convertible Preferred Stock that were excluded from the computation of diluted EPS, because the effects thereof were anti-dilutive were 7.5 million and 4.9 million for the three months ended June 30, 2013 and 2012, respectively, and
8.0 million and 4.8 million for the six months ended June 30, 2013 and 2012, respectively.
|
|
|
|
|
|
|
Page 18 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12. Income Taxes
In connection with DigitalGlobes acquisition of GeoEye on January 31, 2013, the Company recognized a net current deferred
tax asset of $26.8 million and a net noncurrent deferred tax liability of $125.1 million, which reflects the expected future tax effects of certain differences between the financial reporting carrying amounts and tax bases of GeoEyes assets
and liabilities. The primary differences involve GeoEyes intangible assets, and property and equipment, including the effects of acquisition date valuation adjustments. The net deferred tax liability is partially offset by a deferred tax asset
for expected future tax deductions relating to GeoEyes net operating loss carryforwards. Based on preliminary information, DigitalGlobe recorded a valuation allowance of $2.0 million on the acquisition date for a portion of the acquired net
deferred tax assets that it believes will not be realized.
The Company has recognized the assets and liabilities of GeoEye based on its
preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible
assets) requires significant judgment. DigitalGlobe expects to complete its final determinations no later than the first quarter of 2014. The Companys preliminary acquisition date estimates of deferred income taxes and the related valuation
allowance are subject to adjustment as discussed in Note 4.
The Companys effective income tax rate was 40.2% and 42.9% for the three
months ended June 30, 2013 and 2012, respectively, and 28.9% and 43.5% for the six months ended June 30, 2013 and 2012, respectively. The effective tax rate differed from the statutory federal rate of 35.0% primarily due to state taxes and
the effects of non-deductible stock based compensation and discrete items related to the vesting of equity based compensation, 2012 research and development tax credits resulting from tax law changes enacted in January 2013 and significant
non-deductible costs related to GeoEye. We expect our annualized effective tax rate before discrete items to be approximately 37% for the remainder of 2013.
NOTE 13. Restructuring Charges
The Company has initiated a series of restructuring activities intended to improve its operational efficiency as a result of its
acquisition of GeoEye. The restructuring enhances the Companys ability to provide cost-effective offerings to customers. The restructuring enables the Company to retain and expand its existing relationships with customers and attract new
business. These restructuring activities primarily consist of reducing redundant workforce, consolidating office and production facilities, consolidating certain ground terminals and systems and other exit costs, including contract termination
charges to effect the restructuring activities.
The restructuring costs totaled $13.6 million and $33.9 million for the three and six month
periods ended June 30, 2013, respectively. The restructuring liability is included in current other accrued liabilities.
The components
of the restructuring liability were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Severance
|
|
|
Facilities
|
|
|
Other costs
|
|
|
Total
|
|
Balance, December 31, 2012
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Provision for restructuring charges
(1) (2)
|
|
|
13.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
14.1
|
|
Cash payments
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
|
4.1
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
4.8
|
|
Provision for restructuring charges
(1) (2)
|
|
|
7.3
|
|
|
|
|
|
|
|
3.9
|
|
|
|
11.2
|
|
Cash payments
|
|
|
(6.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2013
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
3.9
|
|
|
$
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restructuring charges for the three month and six month periods ended June 30, 2013 excludes $1.2 million and $7.4 million, respectively, of
share-based compensation associated with the accelerated vesting of stock awards.
|
(2)
|
Restructuring charges for the three month and six month periods ended June 30, 2013 excludes $1.2 million of non-cash asset impairment charges.
|
NOTE 14. Related Party Transactions
Morgan Stanley/Morgan Stanley & Co., Incorporated
During the three months ended March 31, 2013, the Company paid Morgan Stanley approximately $26.5 million in fees and expenses associated with the acquisition of GeoEye and associated financing.
Additionally, during the three months ended March 31, 2013, Morgan Stanley sold its interest in DigitalGlobes common stock. As of March 31, 2013, the Company no longer considered Morgan Stanley to be a related party.
|
|
|
|
|
|
|
Page 19 of 38
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Cerberus Agreement
On July 22, 2012, DigitalGlobe entered into an agreement (the Cerberus Agreement) with Cerberus Capital Management, L.P., Cerberus Partners II, L.P., Cerberus Series Four Holdings, LLC,
and Cerberus Satellite LLC (collectively, the Cerberus Parties). The Cerberus Agreement provides, among other things, that for a period of time the Cerberus Parties and their respective affiliates (i) will not hold beneficial
ownership in excess of 19.9% of the outstanding DigitalGlobe common stock, including the DigitalGlobe Series A Convertible Preferred Stock on an as-converted basis, and (ii) will vote their shares in accordance with the recommendations of the
DigitalGlobe Board of Directors. As a result of the acquisition of GeoEye, the Company issued 80,000 shares of Series A Convertible Preferred Stock to Cerberus Satellite, LLC.
Pursuant to the Cerberus Agreement, the Cerberus Parties also held the right to appoint one director to the DigitalGlobe Board of Directors, with a term to expire at the 2014 DigitalGlobe annual meeting
of stockholders. General Michael P.C. Carns, the Cerberus Parties designee, was appointed to the DigitalGlobe Board of Directors effective January 31, 2013 in connection with the closing of the acquisition of GeoEye.
In addition, on January 31, 2013, DigitalGlobe entered into a registration rights agreement with the Cerberus Parties pursuant to which the Company
agreed to file with the SEC on or before January 26, 2014 a shelf registration statement registering the resale of shares of common stock into which the Series A Preferred Stock is convertible and shares of the Companys common stock received
by any of Cerberus Parties in the acquisition of GeoEye. Under the registration rights agreement, once filed, the Company is required to keep the registration statement effective for a period of three years.
Investment in Joint Venture
In
June 2012, the Company made an investment of approximately $0.3 million for an 18% ownership interest in a joint venture in China. During the six months ended June 30, 2013, the joint venture purchased $4.8 million in products and services from
the Company. Amounts owed to the Company by the joint venture at June 30, 2013 and December 31, 2012 were $6.5 million and $7.6 million, respectively.
NOTE 15. Commitments and Contingencies
The Company enters into agreements in the ordinary course of business with customers, vendors and others. Most of these agreements
require the Company to indemnify the other party against third-party claims alleging that one of its products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements
require the Company to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by the Company, its employees, agents or representatives. In addition, from time to time the Company has made
guarantees regarding the performance of its systems to its customers. The majority of these agreements do not limit the maximum potential future payments the Company could be obligated to make. The Company evaluates and estimates potential losses
from such indemnification based on the likelihood that the future event will occur. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such indemnification
and guarantees in the Companys 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 ultimate costs to resolve these matters will have a
material adverse effect on its consolidated financial position, results of operations or cash flows.
Litigation Related To the
Acquisition
In July 2012, GeoEye and the GeoEye board of directors, DigitalGlobe, 20/20 Acquisition Sub, Inc.
and WorldView, LLC were named as defendants in three purported class action lawsuits filed in the United States District Court for the Eastern District of Virginia. The lawsuits were brought on behalf of proposed classes consisting of all
public holders of GeoEye common stock, excluding the defendants and, among others, their affiliates. On September 7, 2012, the Court ordered the consolidation of the three actions as In re GeoEye, Inc., Shareholder
Litigation, Consol. No. 1:12-cv-00826-CMH-TCB.
On September 24, 2012, plaintiffs filed an amended consolidated complaint
alleging the GeoEye board of directors breached its fiduciary duties by allegedly, among other things, failing to maximize stockholder value, agreeing to preclusive deal protection measures and failing to disclose certain information
necessary to make an informed vote on whether to approve the proposed acquisition. DigitalGlobe is alleged to have aided and abetted these breaches of fiduciary duty. In addition, the amended complaint contains allegations that
the GeoEye board of directors and DigitalGlobe violated Section 20(a) and Section 14(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder, by the filing of a Registration Statement allegedly omitting material
facts and setting forth materially misleading information.
On October 9, 2012, following arms-length negotiations, the parties to
the consolidated action entered into a memorandum of understanding (MOU) to settle all claims asserted therein on a class-wide basis. GeoEye and the GeoEye board of directors, DigitalGlobe, 20/20 Acquisition Sub, Inc.
and WorldView, LLC entered into the MOU solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing. In connection with the MOU, DigitalGlobe
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Page 20 of 38
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
agreed to make additional disclosures in Amendment No. 1 to the Registration Statement. The settlement set forth in the MOU includes a release of all claims against defendants alleged in the
corrected amended complaint, and is subject to, among other items, the completion of confirmatory discovery, execution of a stipulation of settlement and court approval, as well as the Acquisition becoming effective under applicable
law. Any payments made in connection with the settlement, which are subject to court approval, are not expected to be material to the combined company. In January 2013, the parties completed confirmatory discovery. On April 24, 2013, the
parties submitted the final settlement to the Court for approval. Notices have been sent to the affected class of GeoEye shareholders, and the Court has set a settlement hearing date of September 2013.
NOTE 16. Significant Customers and Geographic Information
With the acquisition of GeoEye on January 31, 2013, the Companys Chief Operating Decision Maker (CODM) has
re-evaluated the information used to manage the business and has concluded that 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 recognized net revenue related to contracts with the U.S. Government, its largest customer, of $82.7 million and
$64.5 million for the three months ended June 30, 2013 and 2012 and $160.2 million and $118.2 million for the six months ended June 30, 2013 and 2012, respectively. This represented 54.9% and 63.4% of the Companys total net
revenue for the three months ended June 30, 2013 and 2012, respectively, and 57.6% and 62.6% of the Companys total net revenue for the six months ended June 30, 2013 and 2012, respectively.
DigitalGlobe has organized its sales organization and go-to market efforts around two customer groups (i) U.S. Government and (ii) Diversified
Commercial. Revenue recognized for services provided to U.S. Government customers consist primarily of the EnhancedView SLA, amortization of pre-FOC payments related to the NextView agreement and other value added services. Diversified Commercial
revenue consists of the Companys DAP revenue, international defense and intelligence revenue and commercial revenue, including civil governments. The following table summarizes net revenue for these two groups:
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For the three months ended
June 30,
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For the six months
ended
June 30,
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(dollars in millions)
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2013
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2012
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2013
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2012
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U.S. Government
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$
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82.7
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$
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64.5
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$
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160.2
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$
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118.2
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Diversified Commercial
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67.9
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37.3
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118.0
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70.6
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Net revenue
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$
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150.6
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$
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101.8
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$
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278.2
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$
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188.8
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Total U.S. and international net revenue was as follows:
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For the three months ended
June 30,
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For the six months
ended
June 30,
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(dollars in millions)
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2013
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2012
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2013
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2012
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U.S.
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$
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99.5
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$
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71.2
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$
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190.3
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$
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132.6
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International
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51.1
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30.6
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87.9
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56.2
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Net revenue
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$
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150.6
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$
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101.8
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$
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278.2
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$
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188.8
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Page 21 of 38
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DigitalGlobe, Inc.