Notes to Unaudited Condensed Consolidated Financial Statements
NOTE
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1. General Information
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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 broadens the Companys service
offerings, enables it to optimize satellite orbits and collection of imagery, strengthens its production and analytics capabilities, increases the scale of its existing operations and diversifies its customer and product mix. All balances and
transactions reflect the effect of this acquisition as of January 31, 2013.
NOTE
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2. Summary of Significant Accounting Policies
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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 month periods ended March 31, 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 condensed consolidated financial statements have been included. Operating results for the three months ended March 31, 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.
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.
The Company has
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 end of the purchase
price allocation period of January 31, 2014 with respect to the acquisition of GeoEye. Any changes in these estimates may have a material impact on our Unaudited Condensed Consolidated Results of Operations or Unaudited Condensed Consolidated
Balance Sheets.
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Page 5 of 35
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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. 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 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 months ended March 31, 2013 or 2012.
Intangible assets (identified as technology, trademarks and other) are recorded at
fair value as determined at the time of acquisition. The Company evaluates its definite-lived intangible assets for impairment when evidence exists that certain events or changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. Significant judgments and assumptions are required in such impairment evaluations. Definite-lived intangibles are stated at cost less accumulated amortization. Amortization is recorded using the straight-line method over the
estimated lives of the assets. The Company continuously monitors the performance of definite-lived intangible assets for potential triggering events suggesting an impairment review should be performed. There were no impairments of definite-lived
intangible assets during the three months ended March 31, 2013 or 2012.
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors that would require an impairment assessment includes, 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 our 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. An impairment loss is recognized when the carrying amount of these long-lived assets exceeds their fair value. Recoverability of property and equipment 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 recognized, if any, is the amount by which the carrying amount of the property and
equipment and acquired amortizable intangible assets exceeds fair value. There were no impairments of long-lived assets during the three months ended March 31, 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.
Royalties.
Revenue from royalties is based on agreements or licenses with third parties that allow the third party to incorporate our 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 our 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 the 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 revenues for the majority of the
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Page 6 of 35
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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:
EnhancedView.
EnhancedView 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.
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.
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) 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 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 dividend payable of $1.0 million was included in accrued liabilities at
March 31, 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 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 nonvested 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 Financial Accounting Standards
Board or other standard setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (ASC) are communicated through issuance of an Accounting Standards Update. During the three-months ended
March 31, 2013, the Company does not believe that there have been any new pronouncements issued that would have a material impact on its financial position or results of operations.
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Page 7 of 35
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE
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3. EnhancedView/NextView Programs
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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.
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 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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For the three months ended March 31,
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(in millions)
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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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$
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62.5
|
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EnhancedView SLA net revenue recognized
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56.8
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44.5
|
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Deferred revenue arising from timing of revenue recognition
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5.7
|
|
|
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18.0
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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-
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Page 8 of 35
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 months ended March 31, 2013 and 2012, respectively, there were no holdbacks for penalties.
EnhancedView Value Added and Other Services
Over the 10-year life of the
EnhancedView agreement, 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 us 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 agreement), 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, either reduced in the event that the life of WorldView-1 is extended, or increased in the event that the life of
WorldView-1 is reduced. Based on the current estimated useful life of WorldView-1, we recognized $6.4 million of net revenue related to the pre-FOC payments for each of the three months ended March 31, 2013 and 2012.
NOTE
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4. Business Acquisitions
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GeoEye
On
January 31, 2013, DigitalGlobe completed its acquisition of 100% of the outstanding stock of GeoEye, Inc. DigitalGlobe is considered the acquirer and has accounted for the transaction under the acquisition method in accordance with U.S. GAAP.
The Company believes that the acquisition of GeoEye will broaden its service offerings, enable the Company to optimize its satellite orbits and collection of imagery, strengthen its production and analytics capabilities, increase the scale of its
existing operations and diversify 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 $33.7 million related to the acquisition of GeoEye of
which $20.8 million was incurred during the three months ended March 31, 2013.
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.
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 $16.4 million.
The total purchase price for the acquisition of GeoEye was as follows:
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(in millions)
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Amount
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Net cash received
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$
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(76.2
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)
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Cash due to equity holders
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|
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0.8
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DigitalGlobe common stock
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|
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723.8
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DigitalGlobe Series A convertible preferred stock
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|
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112.7
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DigitalGlobe equity awards issued to replace GeoEye equity awards, net of income taxes of $8.2 million
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13.4
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Long-term debt issued to redeem GeoEyes long-term debt including early termination penalties and accrued
interest
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596.7
|
|
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Aggregate purchase price
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$
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1,371.2
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Page 9 of 35
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following represents the classifications of the cash flows received, which are included within our
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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|
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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. 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 Condensed Consolidated Financial Statements as of March 31, 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 $437.6 million, which has been recognized as goodwill. None of the goodwill associated with this acquisition is deductible for income tax purposes.
The following is DigitalGlobes preliminary assignment of the aggregate consideration based on currently available information.
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(in millions)
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March 31, 2013
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|
Current assets, net of cash acquired
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$
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90.0
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Property, plant and equipment, including satellite constellation
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1,000.7
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Identifiable intangible assets:
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Technology
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26.0
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Trademarks
|
|
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5.0
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Other
|
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2.5
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Other noncurrent assets
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|
|
5.5
|
|
Current liabilities
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|
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(48.6
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)
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Deferred revenue
|
|
|
(13.5
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)
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Long-term deferred tax liability, net
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|
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(134.0
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)
|
|
|
|
|
|
Fair value of acquired assets and assumed liabilities
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|
|
933.6
|
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Goodwill
|
|
|
437.6
|
|
|
|
|
|
|
Aggregate purchase price
|
|
$
|
1,371.2
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|
|
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The results of GeoEyes operations have been included in the Companys consolidated results of operations
beginning as of the acquisition date of January 31, 2013. During the period February 1, 2013 to March 31, 2013, the Company recognized an incremental $17.0 million of revenue and $48.0 million of net loss from continuing operations
resulting from the acquisition. The following unaudited pro forma financial information presents the combined results of DigitalGlobe and GeoEye for the three months ended March 31, 2013 and 2012, as though the acquisition had been consummated
as of January 1, 2012.
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Three months ended March 31,
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(in millions, except per share data)
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|
2013
|
|
|
2012
|
|
Operating revenue
|
|
$
|
137.4
|
|
|
$
|
176.3
|
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Net loss
|
|
|
(55.9
|
)
|
|
|
(35.8
|
)
|
Net loss available to common stockholders
|
|
|
(56.9
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)
|
|
|
(36.8
|
)
|
Basic loss per common share
|
|
$
|
(0.77
|
)
|
|
$
|
(0.51
|
)
|
Diluted loss per common share
|
|
$
|
(0.77
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)
|
|
$
|
(0.50
|
)
|
This pro forma information reflects certain adjustments to DigitalGlobes previously reported operating results,
primarily:
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|
|
transaction costs are reflected as if they occurred on January 1, 2012;
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increased amortization of stock-based compensation;
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|
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increased amortization expense related to identifiable intangible assets recorded as part of the acquisition;
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changes to depreciation expense as a result of the fair value adjustment to property and equipment;
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|
decreased interest expense due to lower interest rates on long-term debt; and
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related income tax effects.
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Page 10 of 35
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DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The pro forma information for the three months ended March 31, 2012 includes approximately $43.6 million
of revenue from its 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 three-month period ended March 31, 2013, the Company completed one other acquisition for $4.0 million, including $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 Condensed Consolidated Financial Statements as of March 31, 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 $3.3 million, which 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 intangible assets and $0.4 million of deferred tax liability as part of
its acquisition price allocation.
NOTE
|
5. Property and Equipment
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Depreciable Life
(in
years)
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Satellites
|
|
|
1 12
|
|
|
$
|
1,323.6
|
|
|
$
|
1,110.8
|
|
Construction in progress
|
|
|
|
|
|
|
1,108.1
|
|
|
|
486.8
|
|
Computer equipment and software
|
|
|
3
|
|
|
|
271.0
|
|
|
|
140.6
|
|
Machinery and equipment
|
|
|
5
|
|
|
|
92.0
|
|
|
|
32.7
|
|
Furniture, fixtures and other
|
|
|
3 7
|
|
|
|
68.7
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
|
2,863.4
|
|
|
|
1,791.4
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(718.1
|
)
|
|
|
(676.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
2,145.3
|
|
|
$
|
1,115.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to the Companys satellites consist of the IKONOS and GeoEye-1 satellites acquired in connection with our
acquisition of GeoEye. 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 Company currently plans
to optimize the size of its satellite constellation and, following the completion of construction and testing, place GeoEye-2 in storage until such time as incremental capacity or a replacement for an existing satellite is required. Depreciation
expense for property and equipment was $45.9 million and $29.1 million for the three months ended March 31, 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.
NOTE
|
6. Goodwill and Other Intangibles
|
The following table summarizes the activity in the Companys goodwill account during the three-month period ended March 31,
2013:
|
|
|
|
|
(in millions)
|
|
March 31, 2013
|
|
Balance, December 31, 2012
|
|
$
|
8.7
|
|
Acquisitions
|
|
|
440.9
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
449.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the Companys intangible assets for the three months ended
March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
(in millions)
|
|
Useful Life
(in
years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
3 5
|
|
|
$
|
26.9
|
|
|
$
|
(0.9
|
)
|
|
$
|
26.0
|
|
Trademarks
|
|
|
3
|
|
|
|
5.0
|
|
|
|
(0.3
|
)
|
|
|
4.7
|
|
Other
|
|
|
1 20
|
|
|
|
2.7
|
|
|
|
(0.2
|
)
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
34.6
|
|
|
$
|
(1.4
|
)
|
|
$
|
33.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amounts of intangible assets are removed when the recorded amounts have been fully amortized. During
the three-month period ended March 31, 2013 the Company added approximately $33.5 million of intangible assets that were related to its acquisition of GeoEye and $1.1 million of intangible assets related to its other acquisition. The Company is
in the process of finalizing the fair value of goodwill and intangible assets acquired. Such valuations will be completed within one year of purchase. 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 $1.4 million during the three-month ended March 31, 2013 (none during the three-months ended March 31, 2012). The estimated future annual amortization expense for acquired intangible assets is
as follows:
|
|
|
|
|
(in millions)
Fiscal Years Ending December 31,
|
|
Amount
|
|
2013
(1)
|
|
$
|
6.2
|
|
2014
|
|
|
8.3
|
|
2015
|
|
|
7.3
|
|
2016
|
|
|
5.4
|
|
2017
|
|
|
5.2
|
|
Thereafter
|
|
|
0.8
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
33.2
|
|
|
|
|
|
|
(1)
|
Represents estimated amortization for the nine month period ended December 31, 2013.
|
NOTE
|
7. Other Accrued Liabilities and Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Compensation and other employee benefits
|
|
$
|
20.0
|
|
|
$
|
16.4
|
|
Construction in progress accruals
|
|
|
17.4
|
|
|
|
7.1
|
|
Restructuring costs
|
|
|
4.8
|
|
|
|
|
|
Accrued taxes
|
|
|
1.9
|
|
|
|
9.2
|
|
Acquisition related accruals
|
|
|
|
|
|
|
5.8
|
|
Other accrued expense
|
|
|
38.0
|
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
82.1
|
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
|
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 and the current portion of deferred lease incentives.
Long-term accrued liabilities consist of future payments related to the construction of a direct access facility.
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%
|
|
|
|
|
|
|
Page 12 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 Senior Secured Term Loan Facility currently bears interest
based upon the LIBOR-based rate. 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.
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 Company fails to comply with certain of its obligations under the registration rights agreement, 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.
The following table represents the Companys future debt payments as of March 31, 2013:
|
|
|
|
|
(in millions)
|
|
Long-term debt
(excluding interest
payments)
|
|
2013
(1)
|
|
$
|
4.1
|
|
2014
|
|
|
5.5
|
|
2015
|
|
|
5.5
|
|
2016
|
|
|
5.5
|
|
2017
|
|
|
5.5
|
|
Thereafter
|
|
|
1,123.9
|
|
|
|
|
|
|
Total
|
|
$
|
1,150.0
|
|
|
|
|
|
|
(1)
|
Represents long-term debt principal payments for the nine month period ended December 31, 2013.
|
|
|
|
|
|
|
|
Page 13 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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, to pay the cash consideration under the merger agreement and to pay fees and expenses related to the 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 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. As a result of the repayment and retirement of the 2011 Credit Facility, the Company
allocated $7.5 million of the net unamortized debt discount and deferred financing costs to the 2013 Credit Facility and Senior Notes. 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
March 31, 2013 and December 31, 2012, DigitalGlobe had $1.2 million of restricted cash under the lease agreement for its headquarters in Longmont, Colorado. At March 31, 2013 and December 31, 2012, the Company had $27.3 million
and $15.3 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 March 31,
|
|
(in millions)
|
|
2013
|
|
|
2012
|
|
Interest
|
|
$
|
10.9
|
|
|
$
|
7.3
|
|
Capitalized interest
|
|
|
(10.9
|
)
|
|
|
(5.2
|
)
|
Accretion of debt discount, deferred financing amortization and line of credit fees
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
1.5
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
Page 14 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table provides information about the assets and liabilities measured at fair value on a
recurring basis as of March 31, 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 March 31, 2013
|
|
$
|
73.1
|
|
|
$
|
73.1
|
|
|
$
|
|
|
|
$
|
|
|
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 March 31, 2013 and December 31, 2012, the Companys cash equivalents consisted of funds held in U.S. Treasury money markets. The Company has not
identified any Level 2 or Level 3 financial instruments as of March 31, 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 March 31, 2013
|
|
$
|
547.7
|
|
|
$
|
550.0
|
|
|
$
|
557.2
|
|
2013 Senior Notes at March 31, 2013
|
|
|
598.7
|
|
|
|
600.0
|
|
|
|
596.6
|
|
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 three months ended March 31, 2013 other than in connection with the GeoEye acquisition.
A
summary of stock option activity for the three months ended March 31, 2013 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
(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
|
|
|
(1.2
|
)
|
|
|
17.88
|
|
Forfeited/Expired
|
|
|
(0.1
|
)
|
|
|
21.81
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2013
|
|
|
3.8
|
|
|
|
20.86
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2013
|
|
|
2.5
|
|
|
$
|
22.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 15 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Restricted Stock Awards
During the three months ended March 31, 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
three months ended March 31, 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
|
|
|
|
27.27
|
|
Forfeited/Canceled
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(0.3
|
)
|
|
|
24.02
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2013
|
|
|
0.8
|
|
|
$
|
21.01
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
During the three months ended March 31, 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
three months ended March 31, 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
|
|
|
|
28.44
|
|
Forfeited/Canceled
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2013
|
|
|
0.5
|
|
|
$
|
28.44
|
|
|
|
|
|
|
|
|
|
|
Performance Share Units
During the three months ended March 31, 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
three months ended March 31, 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
|
|
|
|
27.27
|
|
Forfeited/Canceled
|
|
|
(0.1
|
)
|
|
|
27.27
|
|
Vested
|
|
|
(0.2
|
)
|
|
|
27.27
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2013
|
|
|
0.1
|
|
|
$
|
18.63
|
|
|
|
|
|
|
|
|
|
|
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. The actual number of shares that may ultimately vest can range from zero to 200% of the target amount. 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 granted 0.1 million deferred stock units, which will vest on July 31, 2013 and be settled in shares of the Companys stock.
Treasury Stock
During the three months ended March 31, 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 months ended March 31, 2013 or 2012.
|
|
|
|
|
|
|
Page 16 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 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 March 31,
|
|
(in millions, except per share data)
|
|
2013
|
|
|
2012
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(60.6
|
)
|
|
$
|
3.8
|
|
Preferred stock dividends
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income less preferred stock dividends
|
|
|
(61.2
|
)
|
|
|
3.8
|
|
Income allocated to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(61.2
|
)
|
|
$
|
3.8
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
64.0
|
|
|
|
46.0
|
|
Assuming exercise of stock options and restricted shares
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding
|
|
|
64.0
|
|
|
|
46.7
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.96
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.96
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
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 8.5 million and 4.2 million for the three months ended March 31, 2013 and 2012, respectively.
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 $134.0 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 is more likely than not to 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 23.9% and 44.9% for
the three months ended March 31, 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 by tax law changes enacted in January 2013 and significant non-deductible costs related to the acquisition of GeoEye.
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, relocating certain ground terminals and systems and other exit costs.
|
|
|
|
|
|
|
Page 17 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The restructuring costs totaled $20.3 million during the three months ended March 31, 2013. The
restructuring liability is included in current accrued liabilities.
The accrued restructuring liability as of March 31, 2013 includes
$3.8 million of severance and retention payments for employees required to provide service for a period of time. The components of the restructuring charge were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Severance
|
|
|
Facilities
|
|
|
Other costs
|
|
|
Total
|
|
Balance, December 31, 2012
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Provision for restructuring charges
(1)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restructuring charges for the three months ended March 31, 2013 excludes $6.2 million of share-based compensation associated with the
accelerated vesting of stock awards.
|
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 does not consider Morgan Stanley to be a related party.
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 Convertible Preferred Stock on an as-converted basis, and (ii) will vote their shares in accordance with the recommendations of the DigitalGlobe Board. 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.
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 three months ended March 31, 2013, the joint venture purchased $3.9 million in products and services from the Company. Amounts owed to the Company
by the joint venture at March 31, 2013 and December 31, 2012 were $7.8 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.
|
|
|
|
|
|
|
Page 18 of 35
|
|
|
DigitalGlobe, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 their 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 Securities Exchange Act of 1934, 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 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. A hearing date has not yet been set.
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 $77.5 million and
$53.7 million for the three months ended March 31, 2013 and 2012, respectively. This represented 60.7% and 61.7% of the Companys total net revenue for the three months ended March 31, 2013 and 2012, respectively.
DigitalGlobe has organized its sales leadership and go-to market efforts around two customer bases (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:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2013
|
|
|
2012
|
|
U.S. Government
|
|
$
|
77.5
|
|
|
$
|
53.7
|
|
Diversified Commercial
|
|
|
50.1
|
|
|
|
33.3
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
127.6
|
|
|
$
|
87.0
|
|
|
|
|
|
|
|
|
|
|
Total U.S. and international net revenue were as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2013
|
|
|
2012
|
|
U.S.
|
|
$
|
90.8
|
|
|
$
|
61.4
|
|
International
|
|
|
36.8
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
127.6
|
|
|
$
|
87.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 19 of 35
|
|
|
DigitalGlobe, Inc.