XNYS:DGI DigitalGlobe Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended: March 31, 2012

OR

 

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

For the transition period from             to             

Commission file number 001-34299

 

 

DIGITALGLOBE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   31-1420852
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

1601 Dry Creek Drive, Suite 260

Longmont, Colorado

  80503
(Address of principal executive office)   (Zip Code)

(303) 684-4000

(Registrant’s telephone number, including area code)

 

Common Stock, par value $0.001 per share   New York Stock Exchange
(Title of each class)   (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: Not Applicable

 

 

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

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

As of April 27, 2012, there were 46,606,812 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

DigitalGlobe, Inc.

INDEX

 

     Page
PART I. Financial Information    2
Item 1: Financial Statements    2
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income    2
Unaudited Condensed Consolidated Balance Sheets    3
Unaudited Condensed Consolidated Statements of Cash Flows    4
Notes to Unaudited Condensed Consolidated Financial Statements    5
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations    15
Item 3: Quantitative and Qualitative Disclosures about Market Risk    27
Item 4: Controls and Procedures    27
PART II. Other Information    29
Item 1: Legal Proceedings    29
Item 1A: Risk Factors    29
Item 2: Changes in Securities and Use of Proceeds    29
Item 3: Defaults Upon Senior Securities    29
Item 4: Mine Safety Disclosures    30
Item 5: Other Information    30
Item 6: Exhibit Index    30

 

Page 1 of 30


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

DigitalGlobe, Inc.

Unaudited Condensed Consolidated Statements of Operations

and Comprehensive Income

 

     For the three months  ended
March 31,
 

(in millions, except share and per share data)

       2012         2011
Revised
 

Revenue

   $ 87.0      $ 77.4   

Costs and expenses:

    

Cost of revenue, excluding depreciation and amortization

     18.0        13.1   

Selling, general and administrative

     29.8        30.2   

Depreciation and amortization

     29.1        29.2   
  

 

 

   

 

 

 

Income from operations

     10.1        4.9   

Other income (expense), net

     —          0.2   

Interest income (expense), net

     (3.2     (7.9
  

 

 

   

 

 

 

Income (loss) before income taxes

     6.9        (2.8

Income tax (expense) benefit

     (3.1     1.5   
  

 

 

   

 

 

 

Net income (loss)

   $ 3.8      $ (1.3
  

 

 

   

 

 

 

Comprehensive Income:

    

Net income (loss)

   $ 3.8      $ (1.3
  

 

 

   

 

 

 

Earnings (loss) per share:

    

Basic earnings (loss) per share

   $ 0.08      $ (0.03
  

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 0.08      $ (0.03
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     46.0        46.1   
  

 

 

   

 

 

 

Diluted

     46.7        46.1   
  

 

 

   

 

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

 

Page 2 of 30


Table of Contents

DigitalGlobe, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

(in millions, except share data)

   March 31,
2012
    December 31,
2011
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 209.8      $ 198.5   

Restricted cash

     7.7        7.7   

Accounts receivable, net of allowance for doubtful accounts of $2.5 and $3.6, respectively

     40.6        50.7   

Prepaid and current assets

     20.0        19.6   

Deferred taxes

     64.2        65.1   
  

 

 

   

 

 

 

Total current assets

     342.3        341.6   

Property and equipment, net of accumulated depreciation of $592.9 and $563.9, respectively

     1,035.4        1,019.8   

Goodwill

     8.7        8.7   

Aerial image library, net of accumulated amortization of $27.1 and $25.1, respectively

     17.7        13.0   

Long-term restricted cash

     8.8        9.8   

Long-term deferred contract costs

     44.3        44.7   

Other assets

     13.3        14.0   
  

 

 

   

 

 

 

Total assets

   $ 1,470.5      $ 1,451.6   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 7.4      $ 19.7   

Accrued interest

     0.2        0.2   

Current note payable

     5.0        5.0   

Other accrued liabilities

     30.1        37.5   

Current portion of deferred revenue

     43.3        36.6   
  

 

 

   

 

 

 

Total current liabilities

     86.0        99.0   

Long-term accrued liability

     1.4        1.4   

Deferred revenue

     344.1        319.3   

Deferred lease incentive

     3.0        3.3   

Long-term debt, net of discount

     480.9        481.6   

Long-term deferred tax liability, net

     61.5        59.6   
  

 

 

   

 

 

 

Total liabilities

   $ 976.9      $ 964.2   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 13)

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock, $0.001 par value; 24,000,000 shares authorized; no shares issued and outstanding at March 31, 2012 and December 31, 2011

     —          —     

Common stock; $0.001 par value; 250,000,000 shares authorized; 46,608,702 shares issued and outstanding at March 31, 2012 and 46,320,471 shares issued and outstanding at December 31, 2011

     0.2        0.2   

Treasury stock, at cost; 79,066 shares at March 31, 2012 and 66,175 shares at December 31, 2011

     (1.4     (1.2

Additional paid-in capital

     532.6        530.0   

Accumulated deficit

     (37.8     (41.6
  

 

 

   

 

 

 

Total stockholders’ equity

     493.6        487.4   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,470.5      $ 1,451.6   
  

 

 

   

 

 

 

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

 

Page 3 of 30


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DigitalGlobe, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

     For the three months  ended
March 31,
 

(in millions)

       2012         2011
Revised
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 3.8      $ (1.3

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization expense

     29.1        29.2   

EnhancedView deferred revenue

     20.1        24.8   

Recognition of pre-FOC payments

     (6.4     (6.4

Amortization of aerial image library, deferred contract costs and lease incentive

     3.8        4.3   

Non-cash stock compensation expense

     2.5        2.1   

Amortization of debt issuance costs and accretion debt discount

     0.9        1.0   

Deferred income taxes

     2.8        (1.6

Changes in working capital, net of investing activities:

    

Accounts receivable, net

     10.1        8.5   

Prepaids and other assets

     (7.3     2.2   

Accounts payable

     (1.1     (0.8

Accrued liabilities

     (6.2     1.1   

Deferred contract costs

     (1.3     (2.3

Deferred revenue

     17.7        (0.7
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     68.5        60.1   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Construction in progress additions

     (55.0     (78.7

Other property and equipment additions

     (2.0     (0.7

Decrease in restricted cash

     1.0        3.0   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (56.0     (76.4
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of long-term debt

     (1.2     —     

Proceeds from exercise of stock options

     —          0.6   
  

 

 

   

 

 

 

Net cash flows (used in) provided by financing activities

     (1.2     0.6   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     11.3        (15.7

Cash and cash equivalents, beginning of period

     198.5        179.3   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 209.8      $ 163.6   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Interest capitalized

   $ 5.2      $ 2.9   

NON-CASH INVESTING AND FINANCING ACTIVITIES:

    

Changes to non-cash construction in progress accruals, including interest

     12.3        9.6   

See accompanying notes to the Unaudited Condensed Consolidated Financial Statements.

 

Page 4 of 30


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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

(Dollars in millions except for share and per share data, unless otherwise noted)

 

NOTE 1. General Information

DigitalGlobe, Inc. (“DigitalGlobe,” the “Company” or “we”) is a leading global provider of commercial high-resolution earth imagery products and services that support a wide variety of uses, including defense, intelligence and homeland security applications, mapping and analysis, environmental monitoring, oil and gas exploration and infrastructure management. We own and operate three imagery satellites – QuickBird, WorldView-1 and WorldView-2 – which collect panchromatic (black and white) and color imagery using visible and near-infrared wavelengths. We also offer a range of on-line and off-line distribution options designed to enable customers to easily access and integrate our imagery into their business operations and applications.

 

NOTE 2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

Our accompanying unaudited condensed consolidated financial statements for the three month periods ended March 31, 2012 and 2011, included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC. All amounts included in the condensed consolidated financial statements for the three month periods ended March 31, 2012 and 2011, are unaudited. 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any future period. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required in the annual financial statements by GAAP.

Use of Estimates

The preparation of financial statements in conformity with 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 differ from those estimates.

Included in the results of operations for the three months ended March 31, 2012 we have recorded out of period adjustments primarily to increase bad debt expense of $0.6 million ($0.4 million after tax) as we determined the effects to be immaterial to the current and prior periods.

Revenue Recognition

Our 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. Our 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 our system. In some customer arrangements, we must satisfy certain acceptance provisions. 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 our revenue sharing arrangements, we report royalty revenue on a net basis.

Subscriptions. We sell online subscriptions to our 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, we have other arrangements in which customers pay for their subscription to one of our web-

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

based products by paying for a predetermined amount of access (for example, each time users click on an image of their home). In the case of prepayment, each time a product is accessed, a portion of the customer’s 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 contractually agreed discounts.

Service Level Agreements (SLA). We recognize service level agreement revenue net of any allowances resulting from failure to meet certain stated monthly performance metrics. Net 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. We enter into revenue arrangements that may consist of multiple deliverables of our product and service offerings based on the needs of our 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 selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate selling price (“BESP”) if neither VSOE nor TPE is available.

We have generally been unable to establish VSOE for any of our products due to our infrequently selling each deliverable separately or only having a limited sales history, such as in the case of new or emerging products. We have been unable to establish TPE for any of our offerings due to the unique nature of our products and services and the limited number of competitors. As we are unable to establish price on the basis of VSOE or TPE, we use BESP to determine the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine BESP for a product or service by considering multiple factors, including but not limited to market conditions, competitive landscape, internal costs, gross margin objectives, product technology lifecycles, pricing practices, and our go-to-market strategy.

While multiple deliverable arrangements occur throughout our business, the EnhancedView contract (“EnhancedView”) with National Geospatial-Intelligence Agency (“NGA”) and the Direct Access Program (“DAP”) make up the majority of our multiple deliverable arrangement activity. EnhancedView and four of our DAP agreements were entered into prior to the January 1, 2011 adoption of ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” and ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements” and none have been materially modified. As we adopted the new guidance on a prospective basis, the agreements will continue to be accounted for under the pre-adoption guidance unless they are materially modified. Additionally, our fifth DAP agreement was entered into in 2011. The accounting for this DAP agreement is consistent with previous DAP agreements. The following is a description of the accounting for these arrangements.

EnhancedView. The EnhancedView contract contains multiple deliverables, including an SLA, infrastructure enhancements, and other services. We 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. We recognize revenue on a single unit of accounting using a proportional performance method based on the estimated capacity of our constellation made available to NGA compared to the total estimated capacity to be provided over the life of the contract.

Direct Access Program. The direct access program 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 the 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.

Deferred Contract Costs

The Company defers certain direct costs incurred in the construction of direct access facilities built for DAP customers. The direct access facility will allow the Company’s DAP customers to communicate with the Company’s satellites. The deferred contract costs are recognized as expense over the same period that the related revenue is recognized, which is the estimated customer relationship period, except when deferred contract costs are in excess of related revenues, in which case the excess costs are recognized over the initial contract period. The customer relationship period is based on the estimated useful life of the satellite being used. If more than one satellite is being used the satellite with the longest life is used as the basis for the amortization. The Company has deferred contract costs in excess of related contract deferred revenue for some of its customers.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

New Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”) 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 (“ASU”).

The following new accounting pronouncements were adopted effective January 1, 2012:

 

   

Authoritative guidance which allows entities to use a qualitative approach to test goodwill for impairment, as well as a modification to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This authoritative guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The implementation of this authoritative guidance did not have an impact on the Company’s financial position or results of operations.

 

   

Authoritative guidance on the presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We have opted for the single statement presentation for interim period condensed consolidated financial statements.

 

   

Authoritative guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This authoritative guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. See Note 9 for the expanded disclosures.

 

NOTE 3. Revision of Previously Issued Financial Statements

In connection with the preparation of the Company’s consolidated financial statements for the year ended December 31, 2011, errors were identified primarily relating to the year ended December 31, 2010 and the first three quarters of the year ended December 31, 2011. These errors were primarily related to the Company’s accounting for the DAP, as described below. The Company has assessed the impact of these errors on each period involved, in accordance with the SEC’s Staff Accounting Bulletin No. 99, “Materiality”, and has determined that the impact of the errors was not material, both individually and in the aggregate, to any previously issued financial statements. While the Company determined that the cumulative effect of correcting the errors in the fourth quarter of the year ended December 31, 2011 would not be material to the 2011 consolidated financial statements, the Company has elected to revise its previously issued financial statements to facilitate comparisons among periods. As part of its revision, the Company determined to reverse immaterial out-of-period adjustments that were previously recorded in the Company’s 2011 quarterly periods and to reflect those adjustments as corrections to the periods in which the errors originated.

The following is a description of the nature of the errors:

 

   

In three of the Company’s four current DAP customer contracts, the up-front payments contractually negotiated for each facility were less than the actual third-party costs to manufacture each facility. As each of the three facilities was brought into service, it was the Company’s accounting policy to amortize both the deferred revenue and deferred contracts costs over the estimated customer relationship periods, which periods are consistent with the estimated remaining useful life of the satellite being accessed. However, the Company has concluded that this accounting policy was in error and that it should have been recognizing the deferred contract costs in excess of the deferred revenues (for each individual customer) over the related initial contract period.

 

   

Certain costs for two DAP customers were previously netted against the related revenue. However, the Company concluded that this was an error as the Company acts as the principal in these arrangements. The cost and revenue should have been recorded on a gross basis.

 

   

The Company incorrectly capitalized interest related to the construction of its direct access facilities and other discrete projects.

 

   

The Company previously recognized maintenance revenue for one DAP customer over a one-year period. However, the Company concluded that this was an error and that the revenue should have been recognized over the customer relationship period.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

   

The Company has also corrected other immaterial errors including (i) over- or under-capitalization of certain internal and external costs, (ii) the accounting for stock compensation, including under capitalization of stock compensation for certain assets under construction, (iii) the effects of properly reconciling certain accrued liability accounts, and (iv) the classification of payments received for a sales type lease from operating to investing cash flows.

The following tables reflect the effect of correcting the errors on the Company’s consolidated financial statements as of and for the three months ended March 31, 2011.

Condensed Consolidated Statements of Operations

Revision

 

     For the three months ended March 31, 2011  

(in millions, except per share data)

   As previously
reported
    Adjustment     Revised  

Revenue

   $ 77.1      $ 0.3      $ 77.4   

Costs and expenses:

      

Cost of revenue, excluding depreciation and amortization

     11.8        1.3        13.1   

Selling, general and administrative

     30.1        0.1        30.2   

Depreciation and amortization

     29.2        —          29.2   
  

 

 

   

 

 

   

 

 

 

Income from operations

     6.0        (1.1     4.9   

Other income (expense), net

     0.1        0.1        0.2   

Interest income (expense), net

     (7.7     (0.2     (7.9
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (1.6     (1.2     (2.8

Income tax (expense), benefit

     0.9        0.6        1.5   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (0.7   $ (0.6   $ (1.3
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

      

Basic earnings (loss) per share

   $ (0.02   $ (0.1   $ (0.03
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ (0.02   $ (0.1   $ (0.03
  

 

 

   

 

 

   

 

 

 

Condensed Consolidated Statement of Cash Flows

Revision

 

(in millions)

   For the three months ended March 31, 2011  
   As previously
reported
    Adjustment     Revised  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income (loss)

   $ (0.7   $ (0.6   $ (1.3

Adjustments to reconcile net income to net cash provided by operating activities:

      

Amortization of aerial image library, deferred contract costs and lease incentive

     1.7        2.6        4.3   

Non-cash stock compensation expense

     1.7        0.4        2.1   

Deferred income taxes

     (1.0     (0.6     (1.6

Changes in working capital, net of investing activities:

      

Prepaids and other assets

     1.9        0.3        2.2   

Accrued liabilities

     3.4        (2.3     1.1   

Deferred contract costs

     (2.4     0.1        (2.3

Deferred revenue

     (0.6     (0.1     (0.7

Net cash flows provided by operating activities

     60.5        (0.4     60.1   

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Construction in progress additions

     (78.3     (0.4     (78.7

Net cash flows used in investing activities

     (76.5     0.1        (76.4

 

NOTE 4. NextView / EnhancedView Programs

We recognize revenue for the $2.8 billion in services to be provided under the EnhancedView SLA using a proportional performance method based upon the percentage of capacity of our constellation made available to NGA compared to the total capacity to be provided over the life of the contract. The contract requires the Company to increase capacity of the constellation through the installation of additional remote ground terminals, which communicate directly with our satellites, as well as the addition of an entirely new satellite, WorldView-3. During the first quarter of 2012, the Company and NGA agreed to a modification of the EnhancedView SLA that included increasing the amount of capacity made available to NGA. The modification did not result in a material change to the SLA accounting. We will continue to use the proportional performance method of revenue recognition. As capacity is added to our constellation, we recognize revenue in direct proportion to the amount of incremental capacity that is made available to NGA. The increased capacity resulted in $2.1 million additional revenue recognized for the three months ended March 31, 2012. For the three months ended March 31, 2012, we recognized approximately $44.5 million of revenue and recorded $20.1 million

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

of deferred revenue related to the EnhancedView SLA contract. For the three months ended March 31, 2011, we recognized approximately $37.6 million of revenue and we recorded $24.8 million of deferred revenue related to the EnhancedView SLA contract. Given the significant amount of constellation capacity expected to be generated by WorldView-3 and the increasing percentage of capacity that will be made available to NGA once WorldView-3 becomes operational, we anticipate a material increase in revenue once WorldView-3 reaches full operational capability (“FOC”).

Under the EnhancedView SLA, and assuming all option years under the agreement are exercised and funded, we will receive a monthly non-refundable cash payment of approximately $20.8 million from NGA during the first four years of the EnhancedView contract, with an increase to $25.0 million per month in years five through ten. Each month is subject to a holdback, up to 10%, depending upon the Company’s performance against pre-defined criteria. If NGA certifies that we have performed all requirements in the agreement each month, no holdback will be applied to that month. If funds are held back, the Company retains the cash; however, those funds can be applied to future products and services or will fund a pro-rated extension beyond the current contract period. Accordingly, all amounts held back will cause the Company to defer recognition of a corresponding revenue amount until such additional products or services have been provided. We had no holdback during the three months ended March 31, 2012. For the three months ended March 31, 2011, we had a holdback of $0.2 million, of which $0.1 million was utilized by NGA during each of the first and second quarters of 2011.

 

NOTE 5. Information on Segments and Major Customers

We conduct our business through two segments: (i) defense and intelligence and (ii) commercial. Our imagery products and services consist of imagery that we process to varying levels according to the customer’s specifications. Customers can purchase satellite or aerial images that are archived in our ImageLibrary. Customers can also order imagery content by placing custom orders, which require tasking of our satellites, for a specific area of interest, or as a bundle of imagery and data for a region or type of location, such as cities, ports and harbors or airports.

We have organized our business around the defense and intelligence and commercial segments because we believe that customers in these two groups are identifiably similar in terms of their areas of focus, imaging needs and purchasing habits. We deliver our products and services using the distribution method that best suits our customers’ needs.

The vast majority of the dollar value of our fixed assets are the satellites and the ground based production and support facilities that are common to all segments. There are no significant identifiable assets specifically dedicated to either segment.

Only those costs directly associated with the two segments are shown in cost of revenue and selling, general and administrative expenses in those segments. All expenses which are common to both segments and/or represent corporate operating costs are included in the unallocated cost section. Substantially all of the Company’s assets are located in the United States.

 

     Three months ended March 31,  

(in millions)

   2012     2011
Revised
 

Defense and Intelligence:

    

Revenue

   $ 68.4      $ 62.1   

Cost of revenue excluding depreciation and amortization

     5.3        4.0   

Selling, general and administrative

     2.1        2.8   
  

 

 

   

 

 

 

Segment results of operations

     61.0        55.3   
  

 

 

   

 

 

 

Commercial:

    

Revenue

     18.6        15.3   

Cost of revenue excluding depreciation and amortization

     1.7        1.2   

Selling, general and administrative

     4.5        5.0   
  

 

 

   

 

 

 

Segment results of operations

     12.4        9.1   
  

 

 

   

 

 

 

Unallocated Common Costs:

    

Cost of revenue excluding depreciation and amortization

     11.0        7.9   

Selling, general and administrative

     23.2        22.4   

Depreciation and amortization

     29.1        29.2   
  

 

 

   

 

 

 

Unallocated costs

     63.3        59.5   
  

 

 

   

 

 

 

Income from operations

     10.1        4.9   

Other income (expense), net

     —          0.2   

Interest income (expense), net

     (3.2     (7.9
  

 

 

   

 

 

 

Income before income taxes

   $ 6.9      $ (2.8
  

 

 

   

 

 

 

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

NOTE 6. Property and Equipment

Property and equipment consisted of the following:

 

(in millions)

   March 31, 2012     December 31, 2011  

Construction in progress

   $ 346.8      $ 305.9   

Computer equipment and software

     130.8        127.1   

Machinery and equipment

     24.5        24.5   

Furniture and fixtures

     15.1        15.1   

Land and land improvements

     0.3        0.3   

WorldView-2 satellite

     463.2        463.2   

WorldView-1 satellite

     473.2        473.2   

QuickBird satellite

     174.4        174.4   
  

 

 

   

 

 

 

Total property and equipment

     1,628.3        1,583.7   

Accumulated depreciation and amortization

     (592.9     (563.9
  

 

 

   

 

 

 

Property and equipment, net

   $ 1,035.4      $ 1,019.8   
  

 

 

   

 

 

 

Construction in progress includes our WorldView-3 satellite, ground station construction, infrastructure projects, certain internally developed software costs and capitalized interest. Depreciation expense for property and equipment was $29.1 million and $29.2 million for the three months ended March 31, 2012 and 2011, respectively.

The capitalized costs of our 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 our satellites, and related ground systems. The cost of our 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.

Following each satellite launch, and at least annually thereafter, we review the expected operational life of our satellites. We determine a satellite’s expected operational life by considering certain factors including: (i) the probabilities of failure of the satellite’s components from design or manufacturing defects, (ii) environmental stresses or other causes, (iii) the quality of construction, (iv) the supply of fuel, (v) the expected gradual environmental degradation of solar panels and other components, (vi) projected levels of solar radiation, (vii) the durability of various satellite components, and (viii) the orbits in which the satellites are placed.

We have generally aligned the annual assessment of the useful life of the operating satellites with the timing of our insurance renewals in the second half of the calendar year, and we perform the annual assessment of the useful life of the QuickBird, WorldView-1 and WorldView-2 satellites in the second half of the calendar year or when events or circumstances dictate that a reevaluation of the useful life should be done at an earlier date. An adjustment will be made to the estimated depreciable life of the satellite if deemed necessary by the assessment performed. Changes to the estimated useful life of our satellites and related impact on the depreciation expense will be accounted for on a prospective basis as of the date of the change.

 

NOTE 7. Other Accrued Liabilities and Other Long-Term Liabilities

 

(in millions)

   March 31, 2012      December 31, 2011  

Compensation and other employee benefits

   $ 5.9       $ 10.3   

Accrued taxes

     0.5         0.8   

Accrued expense

     4.7         8.2   

Construction in progress accruals

     10.9         10.7   

Other

     8.1         7.5   
  

 

 

    

 

 

 

Total other accrued liabilities

   $ 30.1       $ 37.5   
  

 

 

    

 

 

 

Compensation and other employee benefits include accrued bonus expense and vacation accrual. Accrued expense primarily represents the current portion of payments to third parties for work performed on our direct access facilities. Construction in progress accruals include amounts due for milestone payments due on the procurement and construction of our WorldView-3 satellite. Other accruals consist of third party commission expense, professional fees 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.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

NOTE 8. Debt

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, the terms of which are set forth in a Credit and Guaranty Agreement dated as of October 12, 2011 among the Company, the guarantors party thereto, the lenders named therein and J.P. Morgan Chase Bank, N.A., as administrative agent and as collateral agent (the “Credit Agreement”). As of the date of this filing, the revolving credit facility remains undrawn.

The obligations of the Company under the credit facility are guaranteed by certain of the Company’s domestic subsidiaries and are secured by substantially all of the assets of the Company and the guarantors, subject to certain exceptions. Assets collateralizing the senior secured notes had a net book value of $1,454.0 million as of March 31, 2012. The 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 the Company’s affiliates. The Credit Agreement also requires the Company to comply with a maximum leverage ratio and minimum interest coverage ratio. As of March 31, 2012, the Company is in compliance with our debt covenants.

Borrowings under the Credit Agreement will bear interest, at the Company’s option, at a rate equal to either an adjusted LIBOR rate or a base rate, in each case plus the applicable margin. The applicable margin for borrowings under the term loan facility is 4.50% for adjusted LIBOR loans or 3.50% for base rate loans. The applicable margin for borrowings under the revolving credit facility may change depending on the Company’s leverage ratio, up to a maximum of 4.50%. The term loan facility current 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 Company’s leverage ratio.

Interest expense, accretion of debt discount and amortization of the deferred financing fees for the three months ended March 31, 2012 were $7.3 million, $0.6 million and $0.4 million, respectively, of which $5.2 million was capitalized to assets under construction. Interest expense, accretion of debt discount and amortization of the deferred financing fees for the three months ended March 31, 2011 were $9.3 million, $0.6 million and $0.5 million, respectively, of which $2.9 million was capitalized to assets under construction.

Senior Secured Notes

We issued $355.0 million principal amount of our senior secured notes in April 2009, net of the issuance discount of $13.2 million and paid fees and expenses of $10.2 million, which were recorded in deferred financing costs. As of March 31, 2011, the senior secured notes had a carrying value of $346.1 million. The senior secured notes were guaranteed by certain of our subsidiaries and secured by nearly all of our assets, including the shares of capital stock of certain of our subsidiaries, and the QuickBird, WorldView-1 and WorldView-2 satellites. On October 12, 2011 the Company entered into a new senior secured facility and paid the full obligation under the senior secured notes.

Letters of Credit

At March 31, 2012 and December 31, 2011, we had $1.2 million of restricted cash under the lease agreement for our headquarters in Longmont, Colorado. At March 31, 2012 and December 31, 2011, we had $15.3 million and $16.3 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 our 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.

 

NOTE 9. Fair Values of Financial Instruments

When measuring our financial instruments we use a market-based measurement, not an entity-specific measurement, and determine the fair value based on the assumptions that market participants would use in pricing the asset or liability. Fair value losses or gains are reported when identified.

We use the valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.

Level 1 inputs utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Financial assets and liabilities utilizing Level 1 inputs include actively traded equity securities.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers (for example, some brokered markets), or in which little information is released publicly (for example, a principal-to-principal market), inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The following table provides information about the assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 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, 2012

   $  155.1       $  155.1       $  —         $  —     

Cash equivalents at December 31, 2011

     166.0         166.0         —           —     

Our 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 December 31, 2011 and March 31, 2012, our 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, 2012 and December 31, 2011.

The fair value of the senior secured facility was based upon trading activity among lenders.

 

(in millions)

   Total Carrying
Value
     Estimated
Fair Value
 

Senior Secured Facility at March 31, 2012

     485.9         465.2   

Senior Secured Facility at December 31, 2011

     486.6         490.0   

 

NOTE 10. Shareholders’ Equity

Treasury Stock

There were no open market repurchases of our common stock during the three months ended March 31, 2012 and 2011. During the first quarter of 2012 and 2011, certain participants elected to have the Company withhold 12,891 and 6,356, respectively, shares to pay for minimum taxes due, in accordance with the 2007 Employee Stock Option Plan, at the time their restricted stock vested. Such shares have been included in treasury shares.

Stock-Based Compensation Program

The Company has equity incentive plans that provide for the grant to employees of stock-based compensation. To date, issued equity awards have consisted of stock options, restricted stock and unrestricted shares. The date of grant of the awards is used as the measurement date. The awards are valued as of the measurement date and are amortized on a straight-line basis over the requisite vesting period.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

A summary of stock option activity for the three months ended March 31, 2012 is presented below:

 

     Options Outstanding  
     Number of Shares     Weighted-Average
Exercise Price
 

Outstanding – December 31, 2011

     3,496,200      $ 23.49   

Granted

     998,318        11.83   

Exercised

     —          —     

Forfeited/Expired

     (49,877     23.60   
  

 

 

   

Outstanding – March 31, 2012

     4,444,641        20.86   
  

 

 

   

Exercisable – March 31, 2012

     2,342,802        22.63   
  

 

 

   

During the three months ended March 31, 2012 the Company awarded 271,616 shares of restricted stock to certain employees, which will vest over four years and 13,349 unrestricted shares to independent members of our board of directors pursuant to applicable compensation plans which vest immediately on the date of grant. A summary of restricted stock activity for the three months ended March 31, 2012 is shown below:

 

Restricted Stock Awards

   No. of Shares     Weighted
Average Grant

Date  Fair Value
 

Non-vested at December 31, 2011

     371,777      $ 27.55   

Granted

     284,965        11.80   

Forfeited

     (2,422     26.32   

Vested

     (53,750     24.17   
  

 

 

   

Non-vested at March 31, 2012

     600,570        20.50   
  

 

 

   

 

NOTE 11. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) 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 income (loss) 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.

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)

   2012      2011
Revised
 

Earnings (loss) per share:

     

Net income (loss)

   $ 3.8       $ (1.3
  

 

 

    

 

 

 

Basic weighted average number of common shares outstanding

     46.0         46.1   

Assuming exercise of stock options and restricted shares

     0.7         —     
  

 

 

    

 

 

 

Diluted weighted average number of common shares outstanding

     46.7         46.1   
  

 

 

    

 

 

 

Earnings (loss) per share:

     

Basic

   $ 0.08       $ (0.03
  

 

 

    

 

 

 

Diluted

   $ 0.08       $ (0.03
  

 

 

    

 

 

 

The number of options and non-vested restricted stock awards that were excluded from the computation of diluted EPS, because the effects thereof were anti-dilutive were 4.2 million and 3.6 million for the three months ended March 31, 2012 and 2011, respectively.

 

NOTE 12. Related Party Transactions

Morgan Stanley/Morgan Stanley & Co. Incorporated

At March 31, 2012 and December 31, 2011, Morgan Stanley and its affiliates held approximately 7.5 million shares, or 16.0% and 16.1%, respectively, of the Company’s common stock. Pursuant to the Investor Agreement between the Company and Morgan Stanley, four of our current board of directors, Mr. Albert, Mr. Jenson, Mr. Whitehurst and Mr. Cyprus, are Morgan Stanley’s designees. Mr. Albert, Mr. Jenson, Mr. Whitehurst, Mr. Cyprus and Mr. Zervigon are independent directors, as defined under the applicable rules of the New York Stock Exchange. Morgan Stanley currently has the right to propose three directors for nomination to the Board of Directors, all of whom must be independent.

 

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DigitalGlobe, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

NOTE 13. Commitments and Contingencies

The Company is obligated under certain non-cancelable operating leases for office space and equipment. We currently lease 233,903 square feet of office and operations space in two locations in Longmont, Colorado. This space includes our principal executive offices. The rent varies in amounts per year through its expiration date in August 2015. Lease expense for the Longmont location has been recorded on the straight line basis over the term of the lease. The Company received approximately $9.1 million of certain rent incentives that we have deferred and are amortizing over the life of the lease. We have $2.2 million and $2.4 million of net leasehold improvements at March 31, 2012 and December 31, 2011, respectively, which we are amortizing ratably over the shorter of the remaining lease term or the useful life of the leasehold improvement.

Rent expense net of sublease income, approximated $0.8 million and $0.6 million for each of the three months ended March 31, 2012 and 2011, respectively.

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

 

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DigitalGlobe, Inc.

 

 

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Any forward-looking statements are based upon our historical performance and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions. A number of important factors could cause our actual results or performance to differ materially from those indicated by such forward looking statements, including: the loss, reduction or change in terms of any of our primary contracts; the availability of government funding for our products and services both domestically and internationally; changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of congress and the administration, or budgetary cuts resulting from congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011); the loss or impairment of our satellites; delays in the construction and launch of WorldView-3; delays in implementation of planned ground system and infrastructure enhancements; loss or damage to the content contained in our ImageLibrary; interruption or failure of our ground system and other infrastructure, decrease in demand for our imagery products and services; increased competition that may reduce our market share or cause us to lower our prices; our failure to obtain or maintain required regulatory approvals and licenses; changes in U.S. foreign law or regulation that may limit our ability to distribute our imagery products and services; the costs associated with being a public company; and other important factors, all as described more fully in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K.

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

Overview

We are a leading global provider of commercial high-resolution earth imagery products and services. Our products and services support a wide variety of uses, including defense, intelligence and homeland security applications, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. Our principal customers are governments, including U.S. and foreign defense and intelligence, and civil agencies and providers of location-based services (“LBS”). Additionally we serve a wide variety of companies in other vertical markets, such as energy, telecommunications, utility, forestry, mining, environmental and agricultural industries. The imagery that forms the foundation of our products and services is collected daily via our three high-resolution imaging satellites and managed in our content archive, which we refer to as our ImageLibrary. We believe our ImageLibrary is the largest, most up-to-date and comprehensive archive of high-resolution earth imagery commercially available, containing more than 2.2 billion square kilometers of imagery, with new imagery added every day. As of March 31, 2012, our collection capacity was approximately 916 million square kilometers of imagery per year or roughly six times the earth’s land surface area and offers intraday revisit around the globe.

Revision of Previously Issued Financial Statements

In connection with the preparation of the Company’s consolidated financial statements for the year ended December 31, 2011, errors were identified primarily relating to the year ended December 31, 2010 and the first three quarters of the year ended December 31, 2011. These errors were primarily related to the Company’s accounting for the Direct Access Program (“DAP”), as described below. The Company has assessed the impact of these errors on each period involved, in accordance with the SEC’s Staff Accounting Bulletin No. 99, and has determined that the impact of the errors was not material, both individually and in the aggregate, to all previously issued financial statements. While the Company determined that the cumulative effect of correcting the errors in the fourth quarter of the year ended December 31, 2011 would not be material to the 2011 consolidated financial statements, the Company has elected to revise its previously issued financial statements to facilitate comparisons among periods. As part of its revision, the Company determined to reverse immaterial out-of-period adjustments that were previously recorded in the Company’s 2011 quarterly periods and to reflect those adjustments as corrections to the periods in which the errors originated.

 

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DigitalGlobe, Inc.

 

 

The following is a description of the nature of the errors relating to the three months ended March 31, 2011 (see Note 3 of the Notes to the condensed consolidated financial statements for the impact on the 2011 quarterly financial information):

 

   

In three of the Company’s four current DAP customer contracts, the up-front payments contractually negotiated for the facility were less than the actual third-party costs to manufacture the facility. As each of the three facilities was brought into service, it was the Company’s accounting policy to amortize both the deferred revenue and deferred contracts costs over the estimated customer relationship periods, which periods are consistent with the estimated remaining useful life of the satellite being accessed. However, the Company has concluded that this accounting policy was in error and that it should have been recognizing the deferred contract costs in excess of the deferred revenues (for each individual customer) over the related initial contract period.

 

   

Certain costs for two DAP customers were previously netted against the related revenue. However, the Company concluded that this was an error as the Company acts as the principal in these arrangements. The cost and revenue should have been recorded on a gross basis.

 

   

The Company incorrectly capitalized interest related to the construction of its direct access facilities and other discrete projects.

 

   

The Company previously recognized maintenance revenue for one DAP customer over a one-year period. However, the Company concluded that this was an error and that the revenue should have been recognized over the customer relationship period.

 

   

The Company has also corrected other immaterial errors including (i) over- or under-capitalization of certain internal and external costs, (ii) the accounting for stock compensation, including under capitalization of stock compensation for certain assets under construction, (iii) the effects of properly reconciling certain accrued liability accounts, and (iv) the classification of payments received for a sales type lease from operating to investing cash flows.

Products and Services

We offer earth imagery products and services that are comprised of imagery from our three high-resolution satellite constellation as well as aerial and satellite imagery that we acquire from third party suppliers. We process our imagery to varying levels according to our customers’ specifications and deliver our products using the distribution methods that best suit our customers’ needs. Customers can purchase satellite or aerial images that are archived in our ImageLibrary, or by placing custom orders, which require tasking of our satellites, for a specific area of interest, or as a bundle of imagery and data for a region or type of location, such as cities, ports and harbors or airports. For example, our Global Basemap product features comprehensive color imagery of the Earth’s surface that is refreshed on a routine basis and is delivered to customers according to geographic need.

Our ImageLibrary currently houses what we believe to be the most comprehensive, up-to-date, high-resolution archive of commercial earth imagery in the world. It is a collection of substantially all imagery acquired by our QuickBird, WorldView-1 and WorldView-2 satellites, whether tasked for a specific customer or collected on a speculative basis, as well as aerial imagery and other satellite imagery we have purchased to supplement our satellite imagery. We collect and store hundreds of thousands of high-resolution imagery scenes covering over 2.2 billion square kilometers in the ImageLibrary. For the first quarter of 2012, approximately 45% of our revenue, excluding the NGA SLA, is generated from purchases from our ImageLibrary.

Customers specify how they want the imagery content that they are purchasing from us to be produced. We deliver our satellite imagery content at three processing levels: (i) basic imagery with the least amount of processing; (ii) standard imagery with radiometric and geometric correction; and (iii) ortho-rectified imagery with radiometric, geometric, and topographic correction. Radiometric correction enables images to appear uniformly illuminated with the right level of brightness. Geometric correction allows a user to identify the latitudinal, longitudinal and altitudinal location of any point in an image. Topographic correction accounts for terrain and projects images onto the earth as they would be seen by the human eye. All of our aerial imagery is delivered as ortho-rectified imagery.

We also use enhanced processing to produce mosaic and stereo imagery products. The mosaic process takes multiple imagery scenes, collected at different times and dates, and merges them into a single seamless imagery product. We use specialized collection and enhanced processing to produce stereo imagery products. Stereo imagery products consist of two images collected from two different viewpoints along the satellite orbit track that are produced as basic products, but can be viewed in stereo (“3D”) using specialized software. Stereo imagery products are used for the creation of digital elevation maps, for the more accurate and life like creation of 3D maps that can be used in flight simulations, environmental analysis and other consumer and products.

 

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We offer a range of on- and off-line distribution options designed to enable customers to easily access and integrate our imagery into their business operations and applications. Delivery options include desktop software applications, web services that provide for direct on-line access to our ImageLibrary, File Transfer Protocol (“FTP”), and physical media such as hard drives.

We offer an additional distribution option through our DAP that allows certain customers, approved by the U.S. government, to task and download data directly from our WorldView-1 and WorldView-2 satellites within their regional area of interest. DAP is designed to meet the enhanced information and operational security needs of a select and limited number of defense and intelligence customers and certain commercial customers. To date, we have signed five customer contracts for our DAP, four of whom have been operational since the second half of 2010. We began providing services to our fifth DAP Customers during the first quarter of 2012.

We sell our products and services through a combination of direct and indirect channels, a global network of resellers, strategic partners, direct enterprise sales and web services. We generated 46.6% of our revenue through direct sales and 53.4% of our revenue from our reseller and partner network during the three months ended March 31, 2012.

Backlog

The following table represents our backlog as of March 31, 2012:

 

     Backlog to be recognized  

(in millions)

   Next 12 Months      Life of Contracts  

EnhancedView SLA

   $ 216.0       $ 2,603.4   

DAP

     43.9         134.3   

Amortization of pre-FOC payments related to NextView

     25.5         156.3   

Other(1)

     52.3         133.7   
  

 

 

    

 

 

 

Total Backlog

   $ 337.7       $ 3,027.7   
  

 

 

    

 

 

 
(1) 

Other consists of firm orders, minimum commitments under signed customer contracts, remaining amounts under pre-paid subscriptions, firm fixed price reimbursement and funded and unfunded task orders from U.S. and International defense and intelligence and commercial customers.

Backlog consists of all contractual commitments, including those under the anticipated ten year term of the EnhancedView contract, amounts committed under DAP agreements, firm orders, remaining pre-paid subscriptions and task orders from our government customers. Our backlog also includes amounts of obligated funding on indefinite delivery/indefinite quantity (“IDIQ”) contracts on which we participate for products and services that we believe we are qualified to provide, which funding contains an inherent level of uncertainty in the current budget environment.

The EnhancedView contract is structured as a ten-year term, inclusive of nine annual renewal options that may be exercised by NGA. Although NGA may terminate the contract at any time and is not obligated to exercise any of the remaining eight option years, we include the full remaining term in backlog, because we believe it is NGA’s intention to exercise the remaining options, subject only to annual appropriation of funding and the federal budget process.

The pre-FOC balance will be recognized over the 10.5 years from the launch of WorldView-1. We recognize it ratably over the estimated satellite life, but the recognition of this revenue has no effect on our ability to generate additional revenue from the usage of our satellite and therefore should not be considered a reduction in our capacity to generate additional sales.

Although backlog reflects business that is considered to be firm, terminations, amendments or cancellations may occur which could result in a reduction in our total backlog. In addition, failure to receive task orders under IDIQ contracts could also result in a reduction in our total backlog. Any such terminations, amendments or cancellations of contractual commitments, or failure to receive task orders under IDIQ contracts may also negatively impact the timing of our realization of backlog.

Significant Customer

On August 6, 2010, we entered into the EnhancedView contract with the National Geospatial-Intelligence Agency (“NGA”). The service level agreement (“SLA”) portion of the EnhancedView contract, (“EnhancedView SLA”) has an effective date of September 1, 2010. 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 federal budget process, and the right of NGA to terminate or suspend the contract at any time. The Company has been notified by NGA that its EnhancedView contract remains unchanged for government fiscal year 2012. Accordingly, the Company expects to receive $250.0 million in payments for contract year two under the EnhancedView SLA contract.

The EnhancedView SLA portion of the award is sized at $2.8 billion over the term of the contract assuming NGA exercises all of its options and we perform as specified; $250.0 million annually, or $20.8 million per month, for the first four contract years, commencing September 1, 2010, with an increase to $300.0 million annually, or $25.0 million per month, for the remaining six years of the contract term. The award also provides for up to $750.0 million for value added products, infrastructure enhancements and other services, including the option for NGA to require us to lower the altitude of WorldView-2 to an altitude of 496 km at any time after

 

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September 1, 2013. We will be required to meet certain service level requirements related to the operational performance of the satellites comprising the WorldView constellation and related ground systems. To support requirements under this agreement, we have begun the procurement and construction of our next satellite, WorldView-3, as well as certain other infrastructure improvements.

We recognize revenue for the $2.8 billion in services to be provided under the EnhancedView SLA using a proportional performance method based upon the estimated capacity of our constellation made available to NGA compared to the total capacity to be provided over the life of the contract. The contract requires us to increase capacity of the constellation through the installation of additional remote ground terminals, which communicate directly with our satellites, as well as the addition of an entirely new satellite, WorldView-3. During the first quarter of 2012, the company and NGA agreed to a modification of the EnhancedView SLA that included increasing the amount of capacity made available to NGA. The modification did not result in a material change to the SLA accounting. We will continue to use the proportional performance method of revenue recognition. Our WorldView-3 satellite is currently expected to be ready for launch in mid-2014. As capacity is added to our constellation, we recognize revenue in direct proportion to the amount of incremental capacity that is made available to NGA. As of September 1, 2011, we increased the capacity of the constellation made available to NGA and are now recognizing approximately $14.1 million per month under the EnhancedView SLA. For the three months ended March 31, 2012, we recognized approximately $44.5 million of revenue, including $2.1 million related to the first quarter of 2012 modification to the agreement, and recorded $20.1 million of deferred revenue related to the EnhancedView SLA contract. As of March 31, 2012, there was $139.4 million in total deferred revenue from the inception of the EnhancedView SLA. Given the significant amount of constellation capacity expected to be generated by WorldView-3 satellite and the increasing percentage of capacity that NGA will acquire from us once WorldView-3 satellite becomes operational, we anticipate a material increase in revenue once WorldView-3 satellite reaches FOC.

Under the EnhancedView SLA, and assuming all option years under the agreement are exercised and funded, we will receive a consistent, monthly non-refundable cash payment of approximately $20.8 million from NGA during the first four years of the EnhancedView contract, with an increase to $25.0 million per month in years five through ten. Each month is subject to a holdback, up to 10% of the monthly payment scheduled, depending upon our performance against pre-defined criteria. If we have been certified as having performed all requirements in the agreement each month, no holdback will be applied to that month. If funds are held back, we retain the cash, however, those funds can be applied to future products and services or will fund a pro-rated extension beyond the current contract period. Accordingly, all amounts held back will cause us to defer recognition of a corresponding revenue amount until such additional products or services have been provided. We had no holdback during the three months ended March 31, 2012. For the three months ended March 31, 2011, we had a holdback of $0.2 million, of which $0.1 million was utilized by NGA during each of the first and second quarters of 2011.

Revenue

Our principal source of revenue is the licensing of our earth imagery products and services to end users and resellers and partners.

We conduct our business through two segments: (i) defense and intelligence; and (ii) commercial. We have organized our business into these two segments because we believe that customers in these two groups are functionally similar in terms of their areas of focus and purchasing habits. Our imagery products and services are comprised of imagery that we process to varying levels according to the customer’s specifications. We deliver our products and services using the distribution method that best suits our customers’ needs. Customers can purchase satellite or aerial images that are archived in our ImageLibrary. Customers can also order imagery content by placing custom orders, which require tasking of our satellites, for a specific area of interest, or as a bundle of imagery and data for a region or type of location, such as cities, ports and harbors or airports.

 

(in millions)

   Three months ended March 31,  
   2012     2011
Revised
 

Revenue:

    

Defense and intelligence

   $ 68.4      $ 62.1   

Commercial

     18.6        15.3   
  

 

 

   

 

 

 

Total Revenue

   $ 87.0      $ 77.4   
  

 

 

   

 

 

 

Revenue as a Percent of Total:

    

Defense and intelligence

     78.6     80.2

Commercial

     21.4        19.8   
  

 

 

   

 

 

 

Total Revenue

     100.0     100.0
  

 

 

   

 

 

 

 

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Total U.S. and foreign sales were as follows:

 

     Three months ended March 31,  

(in millions)

   2012      2011
Revised
 

Revenue

     

U.S.

   $ 61.4       $ 54.3   

Foreign

     25.6         23.1   
  

 

 

    

 

 

 

Total Revenue

   $ 87.0       $ 77.4   
  

 

 

    

 

 

 

Defense and Intelligence Revenue

Our defense and intelligence segment consists of customers who are principally defense and intelligence agencies of U.S. or foreign governments. The U.S. government, through NGA, purchases our imagery products and services on behalf of various entities within the U.S. government, including the military commands and other government agencies. We also sell to other U.S. defense and intelligence customers including defense and intelligence contractors who provide an additional outlet for our imagery by providing value-added services with our imagery to deliver a final end product to a customer.

Our defense and intelligence customers focus on image quality, including resolution, frequency of area revisit and coverage, as well as ensuring availability of a certain amount of our capacity as they integrate our products and services into their operational planning. Our customers in this segment typically operate under contracts with purchase commitments, through which we receive monthly or quarterly payments in exchange for delivering specific orders to the customer. Our revenue from our defense and intelligence customers has historically been largely from tasking orders, with a smaller portion from sales of imagery from our ImageLibrary. We believe this trend will continue. We sell to our defense and intelligence customers both directly and through resellers.

Only one DAP customer had been commissioned in 2009. By the second half of 2010, we had commissioned four of our current DAP customers’ ground terminals and began generating revenue from providing satellite access time to these customers. These four DAP customers generated revenue for the entire year of 2011. The contract with the fifth customer became effective in the first quarter of 2012.

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

 

(in millions)

   Three months ended March 31,  
   2012     2011
Revised
 

Defense and Intelligence Revenue:

    

U.S. and Canada revenue:

    

NGA SLA

   $ 44.5      $ 37.6   

Other revenue and value added services

     2.8        6.2   

Amortization of pre-FOC payments related to NextView

     6.4        6.4   
  

 

 

   

 

 

 

Total U.S. and Canada revenue

     53.7        50.2   
  

 

 

   

 

 

 

International revenue, excluding Canada

     1.9        2.1   

DAP revenue

     12.8        9.8   
  

 

 

   

 

 

 

Total international revenue, excluding Canada

     14.7        11.9   
  

 

 

   

 

 

 

Total defense and intelligence revenue

   $ 68.4      $ 62.1   
  

 

 

   

 

 

 

Revenue as a Percent of Total:

    

U.S. and Canada

     78.5     80.8

International, excluding Canada

     21.5        19.2   
  

 

 

   

 

 

 
     100.0     100.0
  

 

 

   

 

 

 

Reseller and Direct Sales:

    

Direct Sales

     98.0     98.3

Resellers

     2.0        1.7   
  

 

 

   

 

 

 
     100.0     100.0
  

 

 

   

 

 

 

 

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Commercial Revenue

Our commercial segment consists of both traditional and location based services customers. Our traditional customers are primarily civil government agencies, and energy, telecommunications, utility and agricultural companies who, like our defense and intelligence customers, use our content for mapping, monitoring, analysis and planning activities. Providers of LBS, include internet portals, connected devices, and digital mapmakers, who use our imagery products and services to expand their products and services. Customers in other industry verticals are represented by financial services, oil and gas, telecommunications, utilities, environmental services and other industry verticals who use our imagery in a wide range of applications.

Our commercial customers are located throughout the world. They purchase our products and services on an as-needed basis, or through multi-year contracts, depending on the solution that best suits their application. We sell to these customers directly and through resellers.

For the three months ended March 31, 2012 and 2011, we generated approximately 24.8% and 17.5% of our commercial revenue from paid tasking and 75.2% and 82.5% from our ImageLibrary, respectively.

For the three months ended March 31, 2012 and 2011, our top five commercial customers accounted for 50.1% and 46.0% of our commercial revenue. We believe that we will have additional growth opportunities internationally especially in countries with rapidly developing economies, such as Brazil, China and Russia, and, as a result, we expect that long-term sales growth in our commercial segment will be higher outside of the United States.

 

(in millions)

   Three months ended March 31,  
   2012     2011
Revised
 

Commercial Revenue:

    

Americas

   $ 10.6      $ 5.7   

International

     8.0        9.6   
  

 

 

   

 

 

 

Total commercial revenue

   $ 18.6      $ 15.3   
  

 

 

   

 

 

 

Revenue as a Percent of Total:

    

Americas revenue

     57.0     37.3

International revenue

     43.0        62.7   
  

 

 

   

 

 

 
     100.0     100.0
  

 

 

   

 

 

 

Reseller and Direct Sales:

    

Direct sales

     46.6     39.0

Resellers

     53.4        61.0   
  

 

 

   

 

 

 
     100.0     100.0
  

 

 

   

 

 

 

Expenses

Most of our revenue is generated by the sale of products and services comprised of imagery from our QuickBird, WorldView-1 and WorldView-2 satellites. Given that most of the costs of a satellite are related to the pre-operation capital expenditures required to build and launch a satellite, there is no significant direct relationship between our cost of revenue and changes in our revenue. Our cost of revenue consists primarily of the cost of personnel, as well as the cost of operations directly associated with operating our satellites, retrieving information from the satellites, and processing the data retrieved. Costs of acquiring aerial imagery from third-parties are capitalized and amortized on an accelerated basis as a cost of revenue.

Our selling, general and administrative expenses consist primarily of labor, benefits, travel, rent, insurance, utilities, telecommunications and related overhead costs, third-party consultant payments, sales commissions and marketing expenses.

 

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Depreciation and amortization consist primarily of depreciation of our satellites and other operating assets.

Our interest charges consist primarily of interest payments on borrowings used to finance satellite construction and are capitalized as a cost of our satellite construction. During 2012, with the expected increase in accumulated costs related to capital projects, including WorldView-3, we expect our capitalized interest expense will increased, decreasing our interest expense.

Based on our capitalization policies, we expect our future interest expense to decrease due to capitalization of these costs to the construction of our WorldView-3 satellite and other infrastructure, until the anticipated commissioning of WorldView-3 in 2014. The costs of our satellites include capitalized interest costs incurred during the construction and development period of the satellite. In addition, capitalized costs of our satellites and related ground systems include internal direct labor costs incurred in their construction.

Results of Operations

For the Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

The following tables summarize our historical results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, and our expenses as a percentage of revenue for the periods indicated:

 

     Three months ended March 31,     Change  

(in millions)

   2012     2011
Revised(1)
    $     Percent  

Historical results of operations:

        

Defense and intelligence revenue

   $ 68.4      $ 62.1      $ 6.3        10.1

Commercial revenue

     18.6        15.3        3.3        21.6   
  

 

 

   

 

 

   

 

 

   

Total revenue

     87.0        77.4        9.6        12.4   

Cost of revenue excluding depreciation and amortization

     18.0        13.1        4.9        37.4   

Selling, general and administrative

     29.8        30.2        (0.4     (1.3

Depreciation and amortization

     29.1        29.2        (0.1     (0.3
  

 

 

   

 

 

   

 

 

   

Income from operations

     10.1        4.9        5.2        106.1   

Other income, net

     —          0.2        (0.2     (100.0

Interest income (expense), net

     (3.2     (7.9     4.7        (59.5
  

 

 

   

 

 

   

 

 

   

Income (loss) before income taxes

     6.9        (2.8     9.7        (346.4

Income tax (expense) benefit

     (3.1     1.5        (4.6     (306.7
  

 

 

   

 

 

   

 

 

   

Net income (loss)

   $ 3.8      $ (1.3   $ 5.1        (392.3
  

 

 

   

 

 

   

 

 

   

 

(in millions)

   Three months ended March 31,  
   2012     2011
Revised(1)
 

Expenses as a percentage of revenue:

    

Total revenue

     100.0     100.0

Cost of revenue excluding depreciation and amortization

     20.7        16.9   

Selling, general and administrative

     34.3        39.0   

Depreciation and amortization

     33.4        37.8   
  

 

 

   

 

 

 

Income from operations

     11.6        6.3   

Other income, net

     —          0.3   

Interest income (expense), net

     (3.7     (10.2
  

 

 

   

 

 

 

Income (loss) before income taxes

     7.9        (3.6

Income tax (expense) benefit

     (3.5     1.9   
  

 

 

   

 

 

 

Net income (loss)

     4.4     (1.7 )% 
  

 

 

   

 

 

 

 

(1) 

The Company revised its financial information for the first three quarters of 2011. See Note 3 to the Consolidated Financial Statements for more detail.

Revenue increased $9.6 million or 12.4% to $87.0 million for the three months ended March 31, 2012 from $77.4 million for the three months ended March 31, 2011.

There was an increase of $6.3 million or 10.1%, in defense and intelligence revenue during the three months ended March 31, 2012, to $68.4 million from $62.1 million for the three months ended March 31, 2011. This increase was the result of $6.9 million of additional revenue recognized under the NGA SLA due to increased capacity made available to NGA per the EnhancedView contract, including $2.1 million related to the modification of the EnhancedView contract executed during the quarter ended March 31, 2012 and a $3.0 million increase in direct access program revenue, offset by a $3.4 million decrease in U.S. Government value added services.

 

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due to a decrease in funding available for such services. The increase of $3.3 million, or 21.6%, in commercial revenue to $18.6 million for the three months ended March 31, 2012 from $15.3 million for the three months ended March 31, 2011, was due to a $2.2 million increase in revenue from location-based services customers and $1.3 million among customers in other verticals, offset by a $0.2 million decrease internationally among civil government customers.

Cost of revenue increased $4.9 million or 37.4%, during the three months ended March 31, 2012 to $18.0 million from $13.1 million for the three months ended March 31, 2011. This increase is attributed to (i) a $2.6 million increase in costs related to the addition of four remote ground terminals brought into service during the second half of 2011 to satisfy obligations under the EnhancedView contract to make more imagery capacity available to NGA, (ii) a $1.0 million increase in labor related costs due to headcount growth and (iii) a $1.3 million increase in aerial imagery cost amortization.

Selling, general and administrative costs decreased $0.4 million or 1.3%, for the three months ended March 31, 2012, to $29.8 million from $30.2 million for the three months ended March 31, 2011. This decrease was primarily due to a $0.6 million decrease in bad debt expense. In the prior year, the Company reserved for two delinquent customer accounts and has subsequently written those accounts off.

Depreciation and amortization decreased by $0.1 million or 0.3% for the three months ended March 31, 2012, to $29.1 million from $29.2 million for the three months ended March 31, 2011. Future changes in depreciation and amortization could be affected by commissioning of a new satellite, change in useful life of an existing satellite, or introduction of significant new capital assets.

Interest expense, net of capitalized interest, decreased by $4.7 million or 59.5% for the three months ended March 31, 2012 to $3.2 million from $7.9 million during the three months ended March 31, 2011. This decrease is attributed to approximately 61.2% of our interest being capitalized to capital projects during the three months ended March 31, 2012 as compared to 26.9% during the three months ended March 31, 2011, as well as lower interest costs as a result of refinancing our debt in October 2011. The increased amount in capitalized interest expense is due to the construction in progress of our WorldView-3 satellite, which is currently expected to continue until anticipated launch and commissioning in 2014. We anticipate that an increasing percentage of our interest will be capitalized until the WorldView-3 satellite is launched, and that we will capitalize substantially all of our interest by the first quarter of 2013.

Income tax expense increased by $4.6 million for the three months ended March 31, 2012, to $3.1 million from a tax benefit of $1.5 million during the three months ended March 31, 2011. The increase in tax expense is due to the Company having taxable income in the current year. For the first quarter ended March 31, 2012, we had an effective overall tax rate of 44.9%. 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.

Balance Sheet Measures

Total assets increased $18.9 million, or 1.3%, to $1,470.5 million at March 31, 2012 from $1,451.6 million at December 31, 2011. Total assets increased primarily as a result of an increase in property and equipment of $15.6 million at March 31, 2012 from $1,019.8 million at December 31, 2011 to $1,035.4 million at March 31, 2012. The increase in property and equipment results from an increase in WorldView-3 satellite construction and other infrastructure projects, offset by depreciation. The increase of $4.7 million in aerial image library costs to $17.7 million at March 31, 2012 from $13.0 million at December 31, 2011, is due to receipt of imagery acquired from a third party provider. Cash and cash equivalents increased $11.3 million primarily due to the decrease in the accounts receivable balance of $11.2 million related to collections from customers during the quarter.

Total liabilities increased $12.7 million, to $976.9 million at March 31, 2012 from $964.2 million at December 31, 2011. This increase was due to a net $24.8 million increase in long-term deferred revenue to $344.1 million at March 31, 2012 from $319.3 at December 31, 2011 primarily due to payments received from NGA under the EnhancedView SLA, offset by the recognition of the pre-FOC payments received under the NextView agreement. Total accounts payable, other accrued liabilities and long-term accrued liabilities decreased by $19.7 million to $38.9 million at March 31, 2012 from $58.6 million at December 31, 2011. The decrease is primarily related to the timing of accruals and milestone payments on capital projects.

Liquidity and Capital Resources

We believe that the combination of funds currently available to us and funds expected to be generated from operations will be adequate to finance our operations and development activities for the next twelve months. Our NextView agreement with NGA was replaced by the EnhancedView agreement which was signed during August 2010. We cannot assure you that the U.S. government will continue to purchase earth imagery or other services from us at similar levels or similar terms. The Company has been notified by NGA that its EnhancedView contract remains unchanged for government fiscal year 2012. Accordingly, the Company expects to receive $250.0 million in payments for contract year two under the EnhancedView SLA contract. All of our contracts with the U.S.

 

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government agencies are subject to risks of termination or reduction in scope due to changes in U.S. government policies and priorities, or reduced Congressional funding level commitments. Pursuant to the contract terms, U.S. government agencies can terminate, modify or suspend our contracts at any time with or without cause. The U.S. government accounted for approximately 61.0% of our consolidated revenue for the three months ended March 31, 2012. If the U.S. government were not to renew or extend our contract at similar levels or similar terms, we believe we would be able to maintain operations at a reduced level with existing cash and cash equivalents for the next twelve months.

In summary, our cash flows were:

 

     Three months ended March 31,  

(in millions)

   2012     2011
Revised
 

Net cash provided by operating activities

   $ 68.5      $ 60.1   

Net cash used in investing activities

     (56.0     (76.4

Net cash (used in) provided by financing activities

     (1.2     0.6   

Cash provided by operating activities increased to $68.5 million in the three months ended March 31, 2012 from $60.1 million in the three months ended March 31, 2011. The $8.4 million increase in operating activities is primarily due to an increase in net income and an increase in deferred revenue related to the EnhancedView contract and our fifth DAP customer, offset by a decrease in cash flows from prepaids related to third party purchases of aerial imagery as well as decreases in cash flows from accounts payable and accrued liabilities due to timing of capital expenditure payments.

Cash used in investing activities decreased to $56.0 million in the three months ended March 31, 2012 from $76.4 million in the three months ended March 31, 2011. The $20.4 million decrease was primarily due to lower capital expenditures related to the construction of the WorldView-3 satellite and related infrastructure. We anticipate capital expenditures for the satellite to continue throughout the remainder of 2012 and, until the completion of WorldView-3, which we currently anticipate to be in 2014.

Cash used in financing activities was $1.2 million in the three months ended March 31, 2012 from $0.6 million provided by financing activities in the three months ended March 31, 2011. The $1.8 million decrease was due to a quarterly principle repayment on our senior credit facility and lower cash proceeds to the Company from a decrease in the exercise of stock options.

Senior Secured Credit Facility

On October 12, 2011, we entered into a $500 million, seven-year senior secured term loan facility and a $100 million, five-year senior secured revolving credit facility, the terms of which are set forth in a Credit and Guaranty Agreement dated as of October 12, 2011 among the Company, the guarantors party thereto, the lenders named therein and J.P. Morgan Chase Bank, N.A., as administrative agent and as collateral agent (the “Credit Agreement”). As of the date of this filing, the revolving credit facility remains undrawn.

The obligations of the Company under the credit facility are guaranteed by certain of the Company’s domestic subsidiaries and are secured by substantially all of the assets of the Company and the guarantors, subject to certain exceptions. Assets collateralizing the senior secured notes had a net book value of $1,454.0 as of March 31, 2012. The Credit Agreement contains affirmative and negative covenants that we believe 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 our affiliates. The Credit Agreement also requires us to comply with a maximum leverage ratio and minimum interest coverage ratio. As of March 31, 2012 the Company is in compliance with our debt covenants.

Borrowings under the Credit Agreement will bear interest, at our option, at a rate equal to either an adjusted LIBOR rate or a base rate, in each case plus the applicable margin. The applicable margin for borrowings under the term loan facility is 4.50% for adjusted LIBOR loans or 3.50% for base rate loans. The applicable margin for borrowings under the revolving credit facility may change depending on our leverage ratio, up to a maximum of 4.50%. The term loan facility currently bears interest based upon the LIBOR-based rate. We 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 our leverage ratio.

Off-Balance Sheet Arrangements, Guaranty and Indemnification Obligations

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2012.

 

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Guaranty and Indemnification Obligations

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

Non-GAAP Disclosures

 

     Three months ended March 31,  

(in millions)

   2012     2011
Revised(1)
 

Net income (loss)

   $ 3.8      $ (1.3

Depreciation and amortization

     29.1        29.2   

Interest (income) expense, net

     3.2        7.9   

Income tax expense (benefit)

     3.1        (1.5
  

 

 

   

 

 

 

EBITDA

   $ 39.2      $ 34.3   

Non-cash stock compensation expense

     2.5        2.1   

EnhancedView deferred revenue

     13.4        16.5   

EnhancedView outstanding invoices not yet paid by NGA

     4.6        8.3   

Amortization of pre-FOC payment related to NextView

     (6.4     (6.4
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 53.3      $ 54.8   
  

 

 

   

 

 

 

 

(1) 

The Company revised its financial information for the first three quarters of 2011. See Note 3 to the Unaudited Condensed Consolidated Financial Statements for more detail.

Non-GAAP Financial Measures

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

EBITDA and Adjusted EBITDA are key measures used in internal operating reports by management and the board of directors to evaluate the performance of our operations and are also used by analysts, investment banks and lenders for the same purpose. In 2012, EBITDA is being used as a key element of the company-wide bonus incentive plan. Prior to 2012, adjusted EBITDA had been a key element of the company-wide bonus incentive plan.

EBITDA is a measure of our current period operating performance, excluding charges for depreciation related to prior period capital expenditures and items which are generally non-core in nature. Adjusted EBITDA is a measure of our current period operating performance, excluding charges for capital, depreciation related to prior period capital expenditures and items which are generally non-core in nature, and including EnhancedView deferred revenue and EnhancedView outstanding invoices not yet paid by NGA and excluding the amortization of pre-FOC payments related to our NextView contract. EnhancedView outstanding invoices not yet paid by NGA represent an irrevocable right to be paid in cash by NGA.

EBITDA

We believe that the elimination of material non-cash, non-operating items enables a more consistent measurement of period to period performance of our operations. In addition, we believe that elimination of these facilitate comparison of our operating performance to companies in our industry. We believe this EBITDA measure is particularly important in a capital intensive industry such as ours, in which our current period depreciation is not a good indication of our current or future period capital expenditures. The cost to construct and launch a satellite and build the related ground infrastructure may vary greatly from one satellite to another, depending on the satellite’s size, type and capabilities. For example, our QuickBird satellite, which we are currently depreciating, cost significantly less than our WorldView-1 and WorldView-2 satellites. Current depreciation expense is not indicative of the revenue generating potential of the satellite.

EBITDA excludes interest income, interest expense, income taxes and loss on early extinguishment of debt because these items are associated with our capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which are not indicative of future capital expenditure requirements. EBITDA excludes loss on derivative instrument and disposal of assets because these are not related to our primary operations.

 

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We use EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance and we do not place undue reliance on this measure as our only measure of operating performance. EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.

Adjusted EBITDA

We believe that the elimination of material non-cash, non-operating items enables a more consistent measurement of period to period performance of our operations. In addition, we believe that elimination of these items in combination with the addition of the nonrefundable EnhancedView deferred revenue and EnhancedView outstanding invoices not yet paid by NGA as well as the elimination of amortization of pre-FOC payments related to NextView, facilitate comparison of our operating performance to companies in our industry. We believe this Adjusted EBITDA measure is particularly important in a capital intensive industry such as ours, in which our current period depreciation is not a good indication of our current or future period capital expenditures. The cost to construct and launch a satellite and build the related ground infrastructure may vary greatly from one satellite to another, depending on the satellite’s size, type and capabilities. For example, our QuickBird satellite, which we are currently depreciating, cost significantly less than our WorldView-1 and WorldView-2 satellites. Current depreciation expense is not indicative of the revenue generating potential of the satellite.

Adjusted EBITDA excludes interest income, interest expense, income taxes and loss on early extinguishment of debt because these items are associated with our capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which are not indicative of future capital expenditure requirements. Adjusted EBITDA excludes non-cash stock compensation expense, because these items are non-cash expenses and loss on derivative instrument and disposal of assets because these are not related to our primary operations.

We use Adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance and we do not place undue reliance on this measure as our only measure of operating performance. Adjusted EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2011 Annual Report on Form 10-K.

Revenue Recognition

Our 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. Our 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 our system. In certain customer arrangements, we must satisfy certain acceptance provisions. 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 our revenue sharing arrangements, we report royalty revenue on a net basis.

Subscriptions. We sell online subscriptions to our 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, we have other arrangements in which customers pay for their subscription to one of our web-based products by paying for a predetermined amount of access (for example, each time users click on an image of their home). In the case of prepayment, each time a product is accessed, a portion of the customer’s 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 contractually agreed discounts.

 

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Service Level Agreements (SLA). We recognize service level agreement revenue net of any allowances resulting from failure to meet certain stated monthly performance metrics. Net 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. We enter into revenue arrangements that may consist of multiple deliverables of our product and service offerings based on the needs of our 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 selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate selling price (“BESP”) if neither VSOE nor TPE is available.

We have generally been unable to establish VSOE for any of our products due to our infrequently selling each deliverable separately or only having a limited sales history, such as in the case of new or emerging products. As of December 31, 2011, we have been unable to establish TPE for any of our offerings due to the unique nature of our products and services and the limited number of competitors. As we are unable to establish price on the basis of VSOE or TPE, we use BESP to determine the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine BESP for a product or service by considering multiple factors, including but not limited to market conditions, competitive landscape, internal costs, gross margin objectives, product technology lifecycles, pricing practices and our go-to-market strategy.

While multiple deliverable arrangements occur throughout our business, the EnhancedView contract (“EnhancedView”) with National Geospatial-Intelligence Agency (“NGA”) and the Direct Access Program (“DAP”) make up the majority of our multiple deliverable arrangement activity. EnhancedView and four of our DAP agreements were entered into prior to the January 1, 2011 adoption of ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” and ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements” and none have been materially modified. As we adopted the new guidance on a prospective basis, the agreements will continue to be accounted for under the pre-adoption guidance unless they are materially modified. Additionally, our fifth DAP agreement was entered into in 2011. The accounting for this DAP agreement is consistent with previous DAP agreements. The following is a description of the accounting for these arrangements.

EnhancedView. The EnhancedView contract contains multiple deliverables, including an SLA, infrastructure enhancements, and other services. We 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. We recognize revenue on a single unit of accounting using a proportional performance method based on the estimated capacity of our constellation made available to NGA compared to the total estimated capacity to be provided over the life of the contract.

Direct Access Program. The direct access program 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 the 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

Deferred Contract Costs

The Company defers certain direct costs incurred in the construction of direct access facilities built for DAP customers. The direct access facility will allow the Company’s DAP customers to communicate with the Company’s satellites. The deferred contract costs are recognized as expense over the same period that the related revenue is recognized, which is the estimated customer relationship period, except when deferred contract costs are in excess of related revenues, in which case the excess costs are recognized over the initial contract period. The customer relationship period is based on the estimated useful life of the satellite being used. If more than one satellite is being used the satellite with the longest life is used as the basis for the amortization. The Company has deferred contract costs in excess of related contract deferred revenue for some of its customers.

New Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”) 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 (“ASU”).

 

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The following new accounting pronouncements were adopted effective January 1, 2012:

 

   

Authoritative guidance which allows entities to use a qualitative approach to test goodwill for impairment, as well as a modification to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This authoritative guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The implementation of this authoritative guidance did not have an impact on the Company’s financial position or results of operations.

 

   

The presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We have opted for the single statement presentation for interim period condensed consolidated financial statements.

 

   

Provision of a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This authoritative guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. See Note 9 for the expanded disclosures.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates under our senior secured facility. The facility provides for a $500 million term loan facility and a $100 million revolving credit facility. At the closing of the facility, we borrowed the full amount of the term loan facility. As of March 31, 2012, we had not drawn any amounts under the revolving credit facility.

Borrowings under the senior credit facility bear interest, at our option, at a rate equal to either an adjusted LIBOR rate or a base rate, in each case, plus the applicable margin. The applicable margin for borrowings under the term loan facility is 4.5% for adjusted LIBOR loans or 3.5% for base rate loans. The applicable margin for borrowings under the revolving credit facility may change depending upon our leverage ratio, up to a maximum of 4.5%. Our term loan facility currently bears interest based upon the LIBOR-based rate.

Based upon the amounts outstanding under the term loan facility as of March 31, 2012 and assuming that the facility is outstanding for a full calendar year, a 100 basis point increase in interest rates would result in an increase in our annual interest expense under the facility of approximately $5.0 million. We may decide in the future to engage in various hedging transactions in order to hedge the interest rate risk under our senior secured credit facility but have not done so at this time.

We are exposed to various market risks that arise from transactions entered into in the normal course of business. Certain contractual relationships with customers and vendors mitigate risks from currency exchange rate changes that arise from normal purchasing and normal sales activities.

We do not currently have any material foreign currency exposure. Our revenue contracts are primarily denominated in U.S. dollars and the majority of our purchase contracts are denominated in U.S. dollars.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2012.

 

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As disclosed in our Form 10-K for the fiscal year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 29, 2012, we concluded that, as of December 31, 2011 material weaknesses in our internal control over financial reporting existed as we did not maintain effective controls over the accuracy, completeness and presentation of the accounting for DAP contracts in accordance with U.S. GAAP and management did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of U.S. GAAP, which resulted in audit adjustments related to the DAP (as discussed above), stock-based compensation, and certain accrued liability accounts.

Based on the foregoing, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2012 to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Management is actively engaged in the planning for and implementation of remediation efforts to address the material weaknesses. These remediation efforts, outlined below, are intended both to address the identified material weaknesses and to enhance the Company’s overall financial control environment. Management believes that these material weaknesses arose due to the Company’s rapid growth and the challenges of being a publicly held company, including increased SEC reporting requirements, which have outpaced the development of the Company’s accounting infrastructure and processes.

During the current quarter, actions continued to be taken to improve internal control over financial reporting by focusing on the initiatives listed below:

 

   

initiated the evaluation of the roles and responsibilities for the processes used in the Company’s internal control over financial reporting, including a new DAP process;

 

   

initiated the evaluation of the technical competencies of the accounting staff;

 

   

reevaluated the Company’s critical accounting policies and continued the process of documenting these policies;

 

   

reviewed and updated key internal controls for each significant process and began the process of implementing additional procedures, including DAP controls;

 

   

enhanced the monthly process to review balance sheet fluctuations and/or unusual transactions;

 

   

added a temporary technical resource to assist in the preparation and review of the quarterly report on Form 10-Q for the period ended March 31, 2012; and

 

   

assistance from third party consultants on other technical matters including revenue recognition.

Management’s planned actions to further address these issues in 2012 include:

 

   

the addition of more experienced accounting staff with appropriate expertise to address technical accounting issues;

 

   

continued evaluation of the Company’s critical accounting policies to ensure they are documented, reviewed and circulated to appropriate company personnel, as well as reviewed and updated on a periodic basis;

 

   

Continued evaluation of the Company’s key roles and responsibilities surrounding the processes used in the Company’s internal control over financial reporting;

 

   

Continued evaluation of the technical competencies of the Company’s accounting staff;

 

   

a formal training program for all technical accounting personnel to enable them to remain current with accounting rules, regulations and trends; and

 

   

continued documentation of a process for the identification, documentation, review and approval of all complex technical contracts (eg. DAP) and other technical issues.

 

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The audit committee is monitoring the detailed plan and timetable for the implementation of the foregoing remedial measures. In addition, under the direction of the audit committee, management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and other procedures that will be implemented will remediate the material weaknesses the Company has identified and strengthen its internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may determine to take additional measures to address material weaknesses or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

In light of the material weaknesses described above, the Company performed additional analysis and other post-closing procedures including but not limited to, a detailed review of balance sheet accounts as of and for the three months ended March 31, 2012, a review of the Company’s compliance with its critical accounting policies and discussions with independent technical advisors for certain of our complex accounting transactions to ensure the consolidated financial statements were prepared in accordance with GAAP. Accordingly, management concluded that the consolidated financial statements in this quarterly report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with GAAP.

Changes in Internal Control over Financial Reporting

Other than described above, there have been no other changes in internal control over financial reporting during the period covered by this report which have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that the disclosure controls and procedures of internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process, therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which, we believe, would have a material adverse effect on our business, operating results, financial condition or cash flows.

 

ITEM 1A. RISK FACTORS

Investment in our securities involves risk. In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors described under the caption “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on February 29, 2012. There have been no material changes to our Risk Factors since the filing of our Annual Report.

 

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBIT INDEX

EXHIBIT INDEX

 

Exhibit

Number

  

Description

  10.36*    Executive Compensation and Equity Awards (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.37*    Executive Success Sharing Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.38*    Form of Incentive Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.39*    Form of Incentive Stock Option Award Agreement with double trigger acceleration (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.40*    Form of Nonqualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.41*    Form of Nonqualified Stock Option Award Agreement with double trigger acceleration (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.42*    Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.43*    Form of Restricted Stock Award Agreement with double trigger acceleration (incorporated herein by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.44*    Form of Performance Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.45†#    Amendment No. 6 to WorldView-3 Satellite Purchase Agreement #60150, by and between DigitalGlobe, Inc. and Ball Aerospace & Technologies Corp.
  10.46†#    Amendment to EnhancedView Imagery Acquisition Contract #HM021010C0002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency, dated February 12, 2012.
  31.1†    Certification of Chief Executive Officer of DigitalGlobe, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2†    Certification of Chief Financial Officer of DigitalGlobe, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1†    Certification of Chief Executive Officer of DigitalGlobe, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2†    Certification of Chief Financial Officer of DigitalGlobe, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101†+    The following materials for the DigitalGlobe, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 1, 2012 formatted in eXtensible Business Reporting Language (XBRL):
  

  (i.) Unaudited Condensed Consolidated Statements of Operations

 

 (ii.) Unaudited Condensed Consolidated Balance Sheets

 

(iii.) Unaudited Condensed Consolidated Statements of Cash Flows

 

(iv.) Related notes, tagged or blocks of text

 

Filed herewith.
* Constitutes a management contract or compensatory plan or arrangement.
# Certain portions of this exhibit have been omitted by redacting a portion of the text. This exhibit has been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
+ XBRL (eXtensible Business Reporting Language) Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURE

DIGITALGLOBE, INC.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 1, 2012  

/s/ Yancey L. Spruill

  Yancey L. Spruill
 

Executive Vice President, Chief Financial Officer & Treasurer

(Principal Financial Officer and Duly Authorized Officer)


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EXHIBIT INDEX

 

Exhibit

Number

  

Description

  10.36*    Executive Compensation and Equity Awards (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.37*    Executive Success Sharing Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.38*    Form of Incentive Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.39*    Form of Incentive Stock Option Award Agreement with double trigger acceleration (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.40*    Form of Nonqualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.41*    Form of Nonqualified Stock Option Award Agreement with double trigger acceleration (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.42*    Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.43*    Form of Restricted Stock Award Agreement with double trigger acceleration (incorporated herein by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.44*    Form of Performance Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on March 12, 2012, Commission File No. 001-34299 ).
  10.45†#    Amendment No. 6 to WorldView-3 Satellite Purchase Agreement #60150, by and between DigitalGlobe, Inc. and Ball Aerospace & Technologies Corp.
  10.46†#    Amendment to EnhancedView Imagery Acquisition Contract #HM021010C0002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency, dated February 12, 2012.
  31.1†    Certification of Chief Executive Officer of DigitalGlobe, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2†    Certification of Chief Financial Officer of DigitalGlobe, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1†    Certification of Chief Executive Officer of DigitalGlobe, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2†    Certification of Chief Financial Officer of DigitalGlobe, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101†+    The following materials for the DigitalGlobe, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 1, 2012 formatted in eXtensible Business Reporting Language (XBRL):
  

  (i.) Unaudited Condensed Consolidated Statements of Operations

 

 (ii.) Unaudited Condensed Consolidated Balance Sheets

 

(iii.) Unaudited Condensed Consolidated Statements of Cash Flows

 

(iv.) Related notes, tagged or blocks of text

 

Filed herewith.
* Constitutes a management contract or compensatory plan or arrangement.
# Certain portions of this exhibit have been omitted by redacting a portion of the text. This exhibit has been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
+ XBRL (eXtensible Business Reporting Language) Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

XNYS:DGI DigitalGlobe Inc Quarterly Report 10-Q Filling

DigitalGlobe Inc XNYS:DGI Stock - Get Quarterly Report SEC Filing of DigitalGlobe Inc XNYS:DGI stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:DGI DigitalGlobe Inc Quarterly Report 10-Q Filing - 3/31/2012
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