10-K 1 dgi-20161231x10k.htm 10-K dgi_Current folio_10K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark one)

 

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

 

For the fiscal year ended December 31, 2016

 

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 No. 001-34299

 

DIGITALGLOBE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

31-1420852

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1300 West 120th Avenue
Westminster, Colorado

 

80234

(Address of principal executive office)

 

(Zip Code)

 

(303) 684-4000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☒   No  ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  ☐   No  ☒

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an 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  ☒

 

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  ☒

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: The aggregate market value of the registrant’s common stock held by non-affiliates, computed by reference to the closing sale price of $21.39 as reported by the New York Stock Exchange on June 30, 2016 was $1.3 billion.

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of February 21, 2017 (latest practicable date) was 61,752,832 shares.

 

Documents Incorporated by Reference: Portions of the registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

PAGE

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 

 

 

PART I 

 

 

ITEM 1. 

BUSINESS

ITEM 1A. 

RISK FACTORS

13 

ITEM 1B. 

UNRESOLVED STAFF COMMENTS

25 

ITEM 2. 

PROPERTIES

25 

ITEM 3. 

LEGAL PROCEEDINGS

26 

ITEM 4. 

MINE SAFETY DISCLOSURES

26 

PART II 

 

ITEM 5. 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

26 

ITEM 6. 

SELECTED FINANCIAL DATA

29 

ITEM 7. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

30 

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46 

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

47 

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

78 

ITEM 9A. 

CONTROLS AND PROCEDURES

78 

ITEM 9B. 

OTHER INFORMATION

79 

PART III 

 

ITEM 10. 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

80 

ITEM 11. 

EXECUTIVE COMPENSATION

80 

ITEM 12. 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

80 

ITEM 13. 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

80 

ITEM 14. 

PRINCIPAL ACCOUNTING FEES AND SERVICES

80 

PART IV 

 

ITEM 15. 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

81 

ITEM 16. 

FORM 10-K SUMMARY

81 

 

 

1


 

NOTE  REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may appear throughout this Form 10-K, including without limitation, in Item 1 “Business,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements can generally be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will,” “would,” “could,” “can,” “may,” or the negative of these terms or other similar words, although not all forward-looking statements contain these words. These forward-looking statements are based on current expectations and assumptions of future events and are subject to risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. You are urged to carefully review the disclosures we make concerning the factors that may cause such differences which include, but are not limited to, those discussed in Part 1, Item 1A of this Form 10-K under the heading “Risk Factors,” and those discussed in other documents we file with the U.S. Securities and Exchange Commission (“SEC”). We undertake no obligation to revise or update any forward-looking statements, except as required by law. Readers are cautioned not to place undue reliance on any of these forward-looking statements. References herein to “DigitalGlobe,” “Company,” “we,” “us,” and “our” refer to DigitalGlobe, Inc. and its consolidated subsidiaries.

 

2


 

PART I

 

ITEM 1.       BUSINESS

 

Overview

 

DigitalGlobe is a leading global provider of high-resolution Earth imagery, data and analysis. Sourced from our own advanced satellite constellation and third-party providers, our imagery solutions and other services provide customers with accurate and mission-critical information about our changing planet, and support a wide variety of uses, including mission-planning, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. Additionally, hundreds of developers are building new applications and machine learning algorithms on our Geospatial Big Data platform and in our recently expanded Services business. Each day users depend on us to better understand our changing planet in order to save lives, resources and time. 

 

We were originally incorporated as EarthWatch on September 30, 1993 under the laws of the State of Colorado and reincorporated in the State of Delaware on August 21, 1995. On August 22, 2002, we changed our name to DigitalGlobe, Inc. Our common stock has been listed on the New York Stock Exchange (“NYSE”) and traded under the symbol “DGI” since our initial public offering in May 2009. On January 31, 2013, we completed our acquisition of 100% of the outstanding stock of GeoEye, Inc. (“GeoEye”), a leading provider of geospatial intelligence solutions.

 

Pending Transaction with MDA

 

On February 24, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MacDonald, Dettwiler and Associates Ltd., a corporation organized under the laws of British Columbia (“MDA”), SSL MDA Holdings, Inc., a Delaware corporation and wholly owned subsidiary of MDA (“SSL MDA Holdings”), and Merlin Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of SSL MDA Holdings (“Merger Sub”), pursuant to which, among other things, Merger Sub will merge with and into DigitalGlobe (the “Merger”), with DigitalGlobe surviving as an indirect wholly owned subsidiary of MDA. Under the terms of the Merger Agreement, at the closing of the Merger, each outstanding share of our common stock will be converted into the right to receive US$17.50 in cash and 0.3132 of a common share of MDA (the “Merger Consideration”), without interest and subject to any required withholding for taxes, and each outstanding share of our Series A convertible preferred stock will be converted into the right to receive the same Merger Consideration as if the holder thereof had converted such shares of Series A convertible preferred stock into our common stock immediately prior to the closing of the Merger. 

 

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

 

The Merger is expected to close in the second half of 2017. Following completion of the Merger, our common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended, and as such, we will no longer file periodic reports with the SEC.

 

3


 

Business Strategy

 

Our long-term business strategy is to grow our core satellite imagery products and services, while investing for growth in our multi-source analytics Platform business, which enables a wide array of customers to extract insight from our imagery. Additionally, our Services business helps our government customers harness the power of our imagery and platform services to address critical missions at scale. The key factors we believe will enable us to achieve our long-term business strategy include:

 

Imagery leadership. We plan to deliver the highest-quality products and experience to our customers and efficiently maintain and replenish our satellite constellation and technology architecture in a manner that reduces capital intensity. We expect to extend our lead as the industry-best source of imagery. As a result, we expect to protect and grow our key customer segments including the U.S. Government and Diversified Commercial through a focus on quality and ease of use, driving free cash flow growth and returns by solving our customers’ problems.

 

Platform leadership. We are investing to build the leading multi-source analytics platform to enable a wide array of customers, developers and partners to easily unlock the power of our content and thereby sustain long-term growth. Our Platform business is built on the largest historical archive of the highest quality Earth imagery commercially available. We are enhancing our platform’s large-scale data analytics applications to derive new analytic products and services to reach new customers and use cases.

 

Services leadership. We plan to grow our Services business by helping the U.S. Government and other strategic customers with innovative solutions that enable our customers to leverage geospatial intelligence to support critical national security missions at scale. In November 2016, we completed the acquisition of The Radiant Group, Inc. (“Radiant”), a privately held leading technical and analytical solutions provider for U.S. government customers. Our acquisition of Radiant is expected to broaden our cloud-enabled capabilities across the geospatial intelligence value chain and expand our customer base across the U.S. Intelligence and Special Operations communities.    

 

Reducing capital intensity. We are actively reducing our capital intensity while extending our industry lead. In February 2016, we reached an agreement with two Saudi Arabian entities to develop a constellation of six sub-meter resolution satellites. The Saudi Arabian entities will be responsible for the construction, integration and launch of the satellites. Additionally, our future replenishment of WorldView-1 and WorldView-2 is expected to cost no more than $600 million, a considerable savings over the combined cost of the original satellites.

 

Business Organization

 

We have one reportable segment, in which we use common infrastructure and technology to collect, process and distribute products and provide services to customers around the world. We measure performance based on consolidated operating results and achievement of individual performance goals. We sell our products and services through a combination of direct and indirect channels consisting of a global network of resellers, strategic partners and direct-enterprise sales to our U.S. Government and Diversified Commercial customer groups.

 

Products and Services

 

We offer products comprised of imagery from our constellation of high-resolution satellites and we provide geospatial products and services in which we combine our imagery, analytic expertise and innovative technology to deliver integrated solutions. Customers can purchase specific images that are archived in our imagery archives (“ImageLibrary”) or place custom orders to task our satellites for a specific area of interest. We process our imagery to varying levels according to our customers’ specifications and deliver our products using the distribution method that best suits our customers’ needs. We use our satellite imagery, along with other sources of data, to deliver integrated intelligence solutions to our customers. Our Services team’s unique geospatial and intelligence expertise allows our customers to unlock insights from large sets of data.

4


 

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, including desktop software applications and web services that provide for direct on-line access to our ImageLibrary.

 

Imagery

 

We provide many customer-ready imagery products that are designed to enable customers to understand and analyze specific geographies of interest. Imagery can be collected as follows:

 

·

Panchromatic – black and white imagery that provides the highest resolution band from our constellation.

 

·

Multispectral (4-band) – includes the Red, Green, Blue and Near Infrared bands. These bands approximate the colors the human eye can see, and just beyond the visible into the near infrared.

 

·

Multispectral (8-band) – includes the four bands above plus Coastal, Yellow, Red-Edge, and Near Infrared 2. The near infrared bands support applications such as monitoring crop health and moisture content.

 

·

Short Wave Infrared (“SWIR”) – this unique WorldView-3 imaging capability enables applications such as mineral and material detection and visibility through obstructions such as smoke and haze.

 

We offer a number of imagery products, including:

 

·

Basic imagery – includes the least amount of processing. Basic imagery provides the customer flexibility to perform their own processing to produce orthorectified imagery and basemaps.

 

·

Standard imagery – includes radiometric and geometric correction. Radiometric correction enables images to appear uniformly illuminated with the appropriate level of brightness. Geometric correction allows a user to identify the latitudinal, longitudinal and altitudinal location of any point in an image.

 

·

Orthorectified imagery – includes radiometric, geometric and topographic correction. Topographic correction accounts for terrain and projects images onto the Earth as they would be seen by the human eye.

 

·

Basemap product suite – our Basemap product delivers geo-located context that enables users to better understand and analyze specific areas of interest. Our Basemap product can be supplemented with +Daily, +Vivid, and/or +Metro. The +Daily service includes the most relevant current collections from our satellite constellation and is updated continuously, allowing customers to extract new points of interest as they appear throughout time. Powered by our proprietary image processing techniques, +Vivid delivers high quality imagery that maximizes contrast, sharpness, and clarity while maintaining uniformity. Finally, Basemap +Metro provides access to high-resolution imagery of more than 2,600 world capitals and major metropolitan areas. Imagery is mosaicked together to provide a consistent view of the urban landscape.

 

·

Elevation products – Elevation and terrain information is foundational to mapping and understanding the surface of our planet. We offer stereo imagery (images collected from different viewpoints along the satellite’s orbit track) to customers with advanced image processing capabilities and tools, allowing them to create 3D visualization and digital elevation models. We also offer customers semi-customized terrain products, 3D surface models and digital elevation models.  

 

In addition to offering many customer-ready products and services, certain of our customers through our Direct Access Program (“DAP”) are able to directly task and receive imagery from our satellites within local and regional geographic boundaries of interest. We sell these customers facilities, enabling them to download and process imagery directly from our satellites. The DAP is designed to meet the enhanced information and operational security needs of a select number of defense and intelligence customers and certain commercial customers.

5


 

Services

 

Customers are increasingly looking for analytic solutions to derive insights from imagery. With our Services products, we use our geospatial and military intelligence expertise to deliver insight to our customers through the creation of analytic applications, such as geospatial risk intelligence reports. These products and services combine imagery with other sources of geospatial data (e.g., geotagged social media data) to deliver integrated intelligence solutions. We provide analytic solutions that accurately document change and enable geospatial modeling and analysis that predict where events will occur to help our customers protect lives, make resource allocation decisions and save time. Our acquisition of Radiant furthers our capabilities through its expertise in efficient and optimized satellite tasking, imagery processing, data analytics, and machine learning. We primarily support U.S. government customers, but many of our capabilities also support intelligence requirements from international governments, global development organizations and commercial customers.

 

Platform Products

 

In the current environment, the geospatial industry suffers from an imbalance between the proliferation of data from an expanding variety of sources and users’ capacity to distill this data down to actionable information. Our Platform products are closing this gap by assembling content and large-scale analytical tools in a single environment. This unlocks new-use cases outside of traditional geospatial applications, allowing imagery analytics to be a standard part of planning for new business and intelligence applications. These products include our Geospatial Big Data platform, which creates new applications and insights from our industry-leading archive of very high resolution imagery combined with our best-in-class accuracy. It also includes our Spatial on Demand platform that serves as a source-agnostic imagery provider for our energy customers, organizing large amounts of imagery and other geospatial datasets in a single environment for customer use. 

 

Customers

 

U.S. Government Customers

 

U.S. Government revenue is generated from multiple U.S. Government agencies, primarily focused on defense and intelligence, with the United States National Geospatial Intelligence Agency (“NGA”) as our largest customer. The NGA serves as the primary U.S. Government procurement agency for geospatial information and purchases imagery products and services on behalf of various agencies within the U.S. Government, including defense, intelligence and law enforcement agencies. The U.S. Government, inclusive of the NGA, provided 63.7%, 63.7%, and 60.4% of our revenue for the years ended December 31, 2016, 2015, and 2014, respectively. Revenue from the NGA arises from the EnhancedView SLA (as defined below), EnhancedView value-added services, and the NextView Agreement.

 

EnhancedView Service Level Agreement

 

On August 6, 2010, we entered into the EnhancedView contract with the NGA (the “EnhancedView Contract”). The EnhancedView Contract has a ten-year term, inclusive of nine one-year renewal options exercisable by the NGA, and is subject to congressional appropriations and the right of the NGA to terminate or suspend the contract at any time. The EnhancedView Contract contains multiple deliverables, including a Service Level Agreement, (the “EnhancedView SLA”) that totals $2.8 billion over the term of the contract. The EnhancedView SLA provides the U.S. Government with a level of capacity, assured access and pre-emptive tasking rights to certain satellites within our satellite constellation.

 

For the first four contract years commencing on September 1, 2010, $250.0 million was paid per year (or $20.8 million a month). For the last six contract years, $300.0 million is payable per year (or $25.0 million a month). The NGA exercised its renewal option for year seven under the EnhancedView SLA through August 31, 2017. We believe it is the NGA’s intention to exercise the remaining options, subject to annual appropriation of funding and the federal budget process, which contain an inherent level of uncertainty in the current budget environment. The EnhancedView SLA represented 46.5%, 48.0%, and 38.9% of our revenue for the years ended December 31, 2016, 2015, and 2014, respectively.

 

6


 

Each monthly EnhancedView SLA payment is subject to a performance penalty of up to 4% depending upon our performance against pre-defined performance criteria. A performance penalty is assessed in any month the NGA determines that not all of the performance criteria were met. If that occurs, we retain the full monthly cash payment, but apply any penalty amount as a credit towards either NGA purchases of additional mutually-agreed upon products or services, or an extension of the EnhancedView SLA beyond the current contract period. We have not incurred a penalty since the year ended December 31, 2012. Cumulative penalties over the life of the EnhancedView SLA total $0.4 million, or 0.02%, of our total cash receipts under the contract, all of which were applied to the purchase of other products.

 

EnhancedView Value-Added Services

 

The EnhancedView Contract also provides up to $750.0 million for value-added products and services, infrastructure enhancements and other services, including the option for the NGA to require us to lower the altitude of WorldView-2 from its current altitude of 770 kilometers to an altitude of 496 kilometers. Value-added products and services enable us to meet the NGA’s more advanced-imagery requirements using our production and dissemination capabilities, including Global Enhanced GEOINT Delivery (“Global EGD”) which provides for the delivery of certain orthorectified imagery and imagery-related products and services. In September 2016, the NGA and DigitalGlobe executed a contract for an additional year of the Global EGD program. In 2016, we recognized $60.5 million in revenue for value-added products and services and have recognized $320.0 million cumulatively since the inception of the EnhancedView Contract.

 

NextView

 

In September 2003, we entered into our first agreement with the NGA, the NextView Agreement. The NextView Agreement provided us with $266.0 million to offset the construction costs of WorldView-1, which was recorded as deferred revenue when received. When WorldView-1 was placed into service in November 2007, we began recognizing the deferred revenue on a straight-line basis over the estimated useful life of WorldView-1 (“NextView amortization”).

 

Based on the estimated useful life of WorldView-1, we recognized $15.1 million, $15.1 million, and $22.9 million of revenue related to the NextView amortization for the years ended December 31, 2016, 2015, and 2014, respectively. Cumulatively, since WorldView-1 was placed into service, we have recognized $207.4 million of NextView amortization revenue, and at December 31, 2016 had deferred revenue remaining of $58.6 million, expected to be amortized through the fourth quarter of 2020.

 

Diversified Commercial Customers

 

Diversified Commercial includes customers in the DAP, location-based services (“LBS”), international civil government, other international defense and intelligence, energy and other industry verticals.

 

Direct Access Program

 

We earn revenue from sales of DAP facilities, service fees to access our satellite constellation, as well as other imagery-related product sales. As of December 31, 2016, we had DAP agreements in ten countries. For the years ended December 31, 2016, 2015, and 2014, DAP revenue represented 16.8%, 17.2%, and 17.0% of our total revenue for each respective year.

 

7


 

Other Diversified Commercial

 

Other diversified commercial revenue is generated from customers in LBS, international civil government, other international defense and intelligence, energy and other industry verticals through sales of imagery, Platform products and other services. Our LBS customers rely on us to create and enhance the maps and geospatial services that over a billion people use every day. We sell imagery and provide services to international civil governments for use in applications such as infrastructure planning, taxation, rescue and recovery services, forestry and agriculture. Our other international defense and intelligence customers include friendly foreign governments, many in volatile parts of the world, that rely on us to keep their nations safe. We sell imagery and Platform products to energy customers to enable efficient discovery, security, production and development of energy resources. Customers in other industry verticals use our content for mapping, monitoring, analysis and planning activities.

 

Satellite Constellation and Ground System Operations

 

As of December 31, 2016, we operated a constellation of four in-orbit and fully-commissioned satellites: GeoEye-1, WorldView-1, WorldView-2, and WorldView-3. The following tables summarize the primary characteristics of the in-orbit and fully-commissioned satellites in our constellation as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Annual Collection

    

 

 

 

 

 

 

 

 

Capacity (million

 

Orbital Altitude

 

Satellite

 

Launch Date

 

Best Ground Resolution

 

square kilometers)

 

 (kilometers)

 

WorldView-3

 

August 2014

 

31-centimeters black and white, or color 1.24-meter multi-spectral

 

248

 

617

 

WorldView-2

 

October 2009

 

46-centimeters black and white, or color 1.84-meter multi-spectral

 

427

 

770

 

WorldView-1

 

September 2007

 

50-centimeters black and white

 

569

 

496

 

GeoEye-1

 

September 2008

 

41-centimeters black and white, or color 1.64-meter multi-spectral

 

128

 

681

 

 

 

 

 

 

 

 

 

 

 

 

    

Expected End

    

Original Cost

    

Net Book Value

Satellite

 

of Depreciable Life

 

(millions)

 

(millions)

WorldView-3

 

Q1 2026

 

 

649.5

 

 

522.4

WorldView-2

 

Q4 2022

 

 

463.2

 

 

191.5

WorldView-1

 

Q4 2020

 

 

473.2

 

 

103.1

GeoEye-1

 

Q1 2018

 

 

211.8

 

 

45.9

 

On November 11, 2016, we successfully launched WorldView-4. On February 1, 2017, WorldView-4 was placed into service and commercial operations began. Our preliminary assessment indicates an initial estimated useful life of approximately ten years.

 

8


 

Satellite Insurance

 

We procure insurance to protect us from the risks associated with our satellite operations, including the partial or total impairment of the functional capacity of the satellite. We insure satellites in our constellation to the extent that insurance is available at acceptable premiums. As of December 31, 2016, we maintained the following insurance coverage on our in-orbit satellite constellation:

 

 

 

 

 

 

 

    

 

    

Coverage

Satellite

 

Policy Period

 

 (in millions)

WorldView-4 (1)

 

11/2016-11/2026

 

$

431.0

WorldView-3 (1)

 

10/2016-08/2019

 

 

340.0

WorldView-2

 

10/2016-10/2017

 

 

220.0

WorldView-1

 

10/2016-10/2017

 

 

220.0

GeoEye-1

 

10/2016-10/2017

 

 

75.0

 

(1) Coverage at December 31, 2016 is comprised of multiple insurance policies ranging from one year to ten years in duration.

 

Ground Terminals and Image Processing Facilities

 

As of December 31, 2016, we owned or had service agreements for remote ground terminals in eight locations throughout the world. Each ground terminal is strategically placed to optimize contact with our satellites as they orbit. Each of our satellites orbits the Earth approximately 15 times per day, communicating with one or more of our ground terminals. Our image processing facility houses the hardware and software systems and personnel required to operate and control our satellites as well as process, store and distribute our imagery.

 

Competition

 

There are significant barriers to entry in the geospatial industry, primarily related to the substantial costs involved with satellite construction and launch, along with the amount of time required to build and develop ground systems and obtain necessary licenses. Our major existing and potential competitors for our Imagery business include commercial satellite imagery companies, state-owned imagery providers, aerial imagery companies, free sources of imagery, and unmanned aerial vehicles. 

 

We compete on the basis of the technical capabilities of our satellites, such as size of collection area, collection speed, revisit time, resolution, accuracy and spectral diversity; satellite availability for tasked orders; the size, comprehensiveness and relevance of our ImageLibrary; distribution platform and tools that enable customers to easily access and integrate imagery; value-added services, including advanced imagery production and analysis; timeliness and ready availability of imagery products and services that can be deployed quickly and cost-effectively; and price.

 

The data intensive nature of high-resolution imagery, complexity of analysis and desire to analyze multiple data sources have driven growth in multi-source analytics platforms. We are uniquely positioned to provide a platform solution because of the size and quality of our industry-leading ImageLibrary and our years of experience and resulting intellectual property in creating image analysis algorithms and tools. We also provide our customers with insights from our imagery with our Platform and Services products. Our Platform products face competition from aggregators of imagery and imagery-related products and services. Our Services products face competition from companies that provide geospatial analytic information and services to the U.S. Government, including defense prime contractors.

 

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Regulation

 

Operations

 

The satellite operations portion of our business is highly regulated. The Department of Commerce (“DoC”), pursuant to the National and Commercial Space Programs Act of 2010 (successor legislation to the 1992 Land Remote Sensing Policy Act, as amended), has the primary regulatory authority over our industry. The DoC delegated responsibility for satellite remote sensing operations to the National Oceanic and Atmospheric Administration (“NOAA”). Each of our satellites is required to be licensed for operation by NOAA. We currently have licenses for all in-orbit satellites (“NOAA licenses”). Our NOAA licenses require us to obtain prior approval from NOAA for any significant and substantial foreign agreements, and generally require us to operate our satellite system in a manner that is consistent with U.S. national security and foreign policy objectives. In addition, the NOAA licenses allow the U.S. Government to suspend our imaging activities in certain cases, if deemed necessary, for national security reasons. The NOAA licenses are valid for the operational life of the satellites, provided that we comply with the licensing terms. Failure to comply with these licensing terms can result in sanctions or fines imposed by NOAA.

 

The launch of our satellites and the communication links, both uplink and downlink, are regulated by the U.S. Federal Communications Commission (“FCC”). FCC licenses must be obtained for each individual satellite. The FCC is the governmental agency with primary authority in the United States over the commercial use of the satellite frequency spectrum. We currently have the requisite licensing authority from the FCC to operate all in-orbit satellites. The FCC has also granted licenses to operate ground terminals for our satellites. The FCC’s rules and regulations and terms of our licenses require that we comply with various operating conditions and requirements. Failure to comply with these or other conditions or requirements could lead to sanctions, up to and including revocation, cancellation or non-renewal of our licenses. In addition to the FCC’s requirements, our satellites must undergo the frequency coordination and registration process of the International Telecommunications Union (“ITU”), as well as a variety of other federal and international regulations.

 

Sales

 

Satellite imagery does not require an export license in order to be sold internationally, but our ability to sell certain imagery products and services may be subject to sanctions or embargoes imposed by the U.S. Government against particular entities, individuals, or other countries or by foreign government regulation.

Direct access to the satellites under a DAP constitutes a significant and substantial foreign agreement under our NOAA licenses and requires approval from NOAA under the terms of such licenses. In addition, we or our suppliers must obtain export licenses from the Department of State (“DoS”) for the export of certain equipment and related technology necessary to enable the DAP access. The ground terminal equipment and related technology necessary to allow access to the satellites are controlled under the International Traffic in Arms Regulations (“ITAR”). The approval process for these sales usually takes three months or longer and there is no obligation on the part of either NOAA or the DoS to approve any transaction. In addition to the required U.S. Government approvals, the export of equipment from Canada by a certain DAP equipment supplier is subject to Canadian export license requirements. Our DAP customers may need to obtain additional approvals from the government of the country in which the ground terminal is to be operated.

 

Ownership

 

We are obligated under our NOAA licenses to monitor and report increases in foreign ownership of our common stock and any agreement for ownership of 20% or greater of our common stock is subject to NOAA approval. We are also required to report certain common stock foreign-ownership levels to the Defense Security Service and to comply with certain rules and regulations to mitigate foreign influence as part of maintaining our facility security clearances. Our facility security clearance allows us to perform work on U.S. Government classified contracts. A transfer to foreign ownership also could trigger other requirements including filings with, and review by, the Committee on Foreign Investment in the United States pursuant to the Exon-Florio provision. Other restrictions and requirements may also arise depending on the country of origin and identity of foreign owners.

 

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Environmental

 

Our operations are regulated under various federal, state, local and international laws governing the environment, including laws governing the discharge of pollutants into the soil, air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We have infrastructure in place to ensure that our operations are in compliance with all applicable environmental regulations. We do not believe that the costs of compliance with these laws and regulations will have a material adverse effect on our capital expenditures, operating results or competitive position. The imposition of more stringent standards or requirements under environmental laws or regulations or a determination that we are responsible for the release of hazardous substances at our sites could result in expenditures in excess of amounts currently estimated to be required for such matters. While no material exposures have been identified to date that we are aware of, there can be no assurance that additional environmental matters will not arise in the future, or that costs will not be incurred with respect to sites as to which no problem is currently known.

 

Intellectual Property

 

“DigitalGlobe” and other trademarks of ours appearing in this annual report are our property. Trade names and trademarks of other companies used in this annual report are for informational purposes only. We rely on licenses of certain intellectual property to conduct our business operations, including certain proprietary rights from third parties to enable us to operate our satellites, ground terminals, collection systems and other various components of our systems. In addition, we actively pursue internal development of intellectual property. We have registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names and copyrights. Additionally, we have been issued and have filed for U.S. and international patent applications covering certain of our proprietary technology and processes.

 

Business Seasonality

 

We have historically experienced higher revenues in the fourth quarter of the year due in part to the procurement cycles of U.S. and international governments as well as increased demand from commercial customers. However, historical seasonal patterns should not be considered a reliable indicator of our future revenues or financial performance.

 

Foreign and Domestic Operations

 

During 2016, our domestic and international revenue accounted for 71.9% and 28.1%, respectively, of total revenue. A summary of our domestic and international revenue is set forth in Note 17, “Significant Customers and Geographic Information” to the Consolidated Financial Statements in Item 8 of this Form 10-K.

 

Backlog

 

A summary of our backlog is set forth under the subheading “Backlog” within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K.

 

Employees

 

As of December 31, 2016, we had 1,733 full-time employees.

 

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Additional Information

 

Our website can be accessed at http://www.digitalglobe.com.  The website contains information about us and our operations. Through a link on the Investor Relations section of our website, copies of our filings with the SEC on Forms 8-K, 10-Q and 10-K and amendments to those reports can be viewed and downloaded free of charge as soon as reasonably practicable after the reports have been filed or furnished with the SEC. The information on our website is not incorporated by reference and is not a part of this Form 10-K. Additionally, our reports, proxy and information statements, and other information filed with the SEC are available on the SEC’s web site http://www.sec.gov or at the SEC Public Reference Room in Washington, D.C. Information regarding the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

 

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ITEM 1A.   RISK FACTORS

 

Risks

 

Our business is subject to many risks. The occurrence of any of the following risks could materially and adversely affect our business, financial condition, prospects, results of operations and cash flows. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition, results of operations and cash flows.

 

Risks Related to Pending Merger with MDA

 

The announcement and pendency of the Merger with MDA may have an adverse effect on our business, operating results and stock price.

 

On February 24, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MacDonald, Dettwiler and Associates Ltd., a corporation organized under the laws of British Columbia (“MDA”), SSL MDA Holdings, Inc., a Delaware corporation and wholly owned subsidiary of MDA (“SSL MDA Holdings”), and Merlin Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of SSL MDA Holdings (“Merger Sub”), pursuant to which, among other things, Merger Sub will merge with and into DigitalGlobe (the “Merger”), with DigitalGlobe surviving as an indirect wholly owned subsidiary of MDA.  We have operated and, until completion of the Merger, will continue to operate independently of MDA. Uncertainty about the Merger may adversely affect our revenue, operating results and stock price, whether or not the Merger is completed. For example, our customers or other partners may:

 

·

delay, defer or cease purchasing products or services from us or providing goods or services to us;

·

delay or defer other decisions concerning us;

·

cease further joint development activities; or

·

otherwise seek to change the terms on which they do business with us.

 

The uncertainties around the Merger could adversely impact our relationships or contract negotiations with third parties, including our customers and other business partners, or those with which we are seeking to establish business relationships. We are subject to additional risks in connection with the announcement and pendency of the Merger which could adversely impact our operating results, including:

 

·

the pendency and outcome of any legal proceedings that may be instituted against us, our directors and others relating to the transactions contemplated by the Merger;

·

the restrictions imposed on our business and operations pursuant to certain covenants set forth in the Merger Agreement, which may prevent us from pursuing certain strategic opportunities without MDA’s approval;

·

except as permitted by certain limited exceptions in the Merger Agreement or required by their fiduciary duties and subject to the other requirements of the Merger Agreement, our Board of Directors may not withdraw or adversely modify its recommendation of adoption of the Merger Agreement by DigitalGlobe stockholders, which may have the effect of delaying other strategic transactions and may, in some cases, make it impossible to pursue other strategic transactions that are available only for a limited time; 

·

that we may forego opportunities we might otherwise pursue absent the pending Merger with MDA;

·

potential adverse effects on our ability to retain and motivate current employees, and attract and recruit prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Merger; and

·

the diversion of our employees’ and management’s attention due to activities related to the proposed Merger, which could otherwise have been devoted to other opportunities that may have been beneficial to us.

 

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Since a portion of the Merger Consideration that our stockholders will receive in the proposed Merger will be in common shares of MDA, which are traded on the Toronto Stock Exchange, our stock price will be adversely impacted by a decline in MDA’s stock price and any adverse developments in MDA’s business or its business outlook. MDA stock price changes may result from a variety of factors, including changes in its business operations and outlook, changes in general market and economic conditions, and regulatory considerations. These factors are beyond our control.

 

In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services, other transaction costs and employee retention costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated.

 

Our pending Merger with MDA may not be completed, may be delayed or may be approved subject to materially burdensome conditions, any of which may adversely affect our business, operating results and stock price.

 

The closing of the Merger is subject to the adoption of the Merger Agreement by the holders of a majority in voting power of the outstanding shares of Company Common Stock and Series A Preferred Stock, voting together as a single class, and the approval of the issuance of MDA Common Shares in connection with the Merger by a majority of the votes cast on such matter at a meeting of the shareholders of MDA. The closing of the Merger is also subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the Competition Act (Canada), as applicable; receipt of clearance from the Committee on Foreign Investment in the United States (“CFIUS”); receipt of other specified regulatory approvals; the absence of any temporary restraining order, preliminary or permanent injunction or other judgment issued by any court of competent jurisdiction enjoining or otherwise prohibiting the consummation of the Merger; the U.S. Securities and Exchange Commission having declared effective a registration statement on Form F-4 under the Securities Act of 1933, as amended, with respect to, and the authorization for listing on the Toronto Stock Exchange and New York Stock Exchange (or the NASDAQ Stock Market LLC) of, the shares of MDA Common Shares issuable in connection with the Merger; receipt by each party of a customary tax opinion; the accuracy of the representations and warranties contained in the Merger Agreement (generally subject to a material adverse effect qualification); compliance with the covenants and agreements in the Merger Agreement in all material respects; and no material adverse effect on either the Company or MDA.

 

We cannot assure you that the conditions to the completion of the Merger will be satisfied in a timely manner, or at all. Although we and MDA have agreed, subject to certain exceptions, to use reasonable best efforts to obtain the requisite governmental approvals, there can be no assurance that these approvals will be obtained, and the governmental entities from which these approvals are required may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Any such conditions or changes could have the effect of jeopardizing or delaying completion of the Merger. Any delay in completing the Merger may significantly reduce the synergies projected to result from the Merger and other benefits that the parties expect to achieve if they successfully complete the Merger. The parties are not obligated to consummate the Merger under certain circumstances, including if CFIUS notifies MDA and the Company in writing that CFIUS intends to send a report to the President of the United States recommending that the President act to suspend or to prohibit the Merger, or if the required approvals by our stockholders and MDA’s shareholders are not obtained. In addition, other factors, such as MDA’s ability to obtain the debt financing it needs on acceptable terms and other sources of cash to consummate the Merger, and any litigation challenging the Merger, may affect when and whether the Merger will occur. If the Merger is not completed by December 7, 2017, either MDA or the Company may choose to terminate the Merger Agreement. If the EnhancedView Contract is terminated, cancelled or the option to renew the EnhancedView Contract for the next contract year after the date of the Merger Agreement is not exercised by the NGA, or if certain other adverse actions occur with respect to the EnhancedView Contract, MDA may choose to terminate the Merger Agreement, at which time it would be required to pay a termination fee to us of $150 million. MDA or the Company may also elect to terminate the Merger Agreement in certain other circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the closing, before or after the required stockholder approvals, as applicable.

 

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If the Merger is not completed, our stock price could fall to the extent that our current price reflects an assumption that the acquisition will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business, results of operations and stock price, including the following:

 

·

we could be required to pay a termination fee of approximately $85 million to MDA under certain circumstances as described in the Merger Agreement;

·

we would have incurred significant costs in connection with the Merger that we likely will be unable to recover in full, including transaction, professional services, employee-related and other costs;

·

we may be subject to legal proceedings related to the Merger;

·

the failure of the Merger to be consummated may result in negative publicity and a negative impression of us in the investment community;

·

disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, business partners and employees, may continue or intensify in the event the Merger is not consummated;

·

we may not be able to take advantage of alternative business opportunities or effectively respond to competitive

pressures; and

·

we may experience an increase in employee departures.

 

Potential litigation filed against MDA or the Company could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.

 

We and members of our Board of Directors or executive officers may in the future be parties, among others, to various claims and litigation related to the pending Merger, including putative stockholder class actions. Among other remedies, the plaintiffs in such matters may seek to enjoin the Merger. The results of complex legal proceedings are difficult to predict, and could delay or prevent the Merger from becoming effective in a timely manner. The existence of litigation relating to the Merger could impact the likelihood of obtaining the stockholder approvals from either MDA or DigitalGlobe. Moreover, any future litigation could be time consuming and expensive, could divert our attention away from regular business, and, if any one of these potential lawsuits is adversely resolved, could have a material adverse effect on our results of operations and financial condition.

 

One of the conditions to the closing of the Merger is that no applicable governmental entity shall have issued an order, decree or ruling or taken any other material action enjoining or otherwise prohibiting the consummation of the Merger, and that no law shall have been enacted or promulgated by any applicable governmental entity that makes the consummation of the Merger illegal that remains in effect. Consequently, if a settlement or other resolution is not reached in the potential lawsuits and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting MDA’s and/or our ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective in a timely manner, or at all.

 

DigitalGlobe’s stockholders will have a minority ownership and voting interest in MDA after completion of the pending Merger, and will be subject to risks related to MDA’s stock price after becoming stockholders of MDA.

 

Our stockholders presently have the right to vote for the election of directors to our Board of Directors and on other matters affecting us. Immediately following the Merger, our stockholders will own approximately 37% of MDA’s outstanding common shares, based on the number of shares of DigitalGlobe common stock and MDA common shares outstanding as of February 24, 2017. As a result, our stockholders will have less influence on the management and policies of MDA and its subsidiaries than they now have on the management and policies of DigitalGlobe.

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Upon closing of the Merger, our stockholders will become stockholders of MDA upon their receipt of common shares of MDA in the Merger. MDA’s common shares will be listed for trading on the Toronto Stock Exchange and the New York Stock Exchange or NASDAQ Stock Market LLC following the Merger. Our stockholders will be subject to risks related to the market price of MDA’s common shares after becoming stockholders of MDA in connection with the Merger. The market prices of MDA’s common shares after the Merger might be affected by factors different from, or in addition to, those currently affecting the market prices of our common stock. In addition, MDA may fail to realize the benefits expected from the Merger, which could adversely affect MDA’s stock price following the Merger. The use of cash and incurrence of substantial indebtedness in connection with the financing of the Merger may have an adverse impact on MDA’s liquidity, limit MDA’s flexibility in responding to other business opportunities and increase MDA’s vulnerability to adverse economic and industry conditions, each of which could adversely affect MDA’s stock price.

 

Risks Related to Our Business

 

The loss or reduction in scope of any one of our primary contracts will materially reduce our revenue. The majority of our revenue is currently derived from a single contract with a U.S. Government agency that can be terminated at any time.

 

We generated 63.7% of our revenue from the U.S. Government and 46.5% from the EnhancedView SLA in 2016. Our contracts with U.S. Government agencies are subject to risks of termination or reduction in scope due to changes in U.S. Government policies, priorities or funding level commitments to various agencies. Under the EnhancedView SLA, we are obligated to make a portion of the image tasking capacity of WorldView-1, WorldView-2 and WorldView-3 available to the NGA, including specified priority access rights. The NGA does not have contracted access to WorldView-4. The NGA has the option to require us to lower the altitude of WorldView-2 from its current altitude of 770 kilometers to an altitude of 496 kilometers, subject to receipt of all required regulatory approvals. The lowering of the orbital altitude could result in a decrease in the amount of square kilometers collected by WorldView-2. While we believe the decrease in collection capability would be offset by improved data capture capabilities on the ground, there can be no assurance that our current collection capability will be maintained. Our ability to service other customers could be negatively impacted if we are unable to maintain our current collection capacity. In addition, any inability on our part to meet the performance requirements of the EnhancedView Contract could result in a performance penalty or breach of our contract with the NGA. A breach of our contract with the NGA or reduction in service to our other customers could have a material adverse effect on our business, financial condition and results of operations.

 

The NGA may also terminate or suspend our contracts, including the EnhancedView Contract, at any time with or without cause. If the EnhancedView Contract was terminated early, recognition of revenue currently classified as deferred would be accelerated. If the contract was extended, the time period over which certain deferred revenue balances are currently expected to be recognized could be extended, resulting in lower revenue recognition than currently anticipated. Additionally, any changes in the size, scope or term of the EnhancedView Contract could impact our satellite replenishment strategy and our ability to repay or refinance our long-term debt. Although our NGA contracts generally involve fixed annual minimum commitments, such commitments are subject to annual Congressional appropriations and the federal budget process, and as a result, the NGA may not continue to fund these contracts at current or anticipated levels. In addition, the sequestration process under the Budget Control Act of 2011 (PL 112-25) could have an adverse impact on the timing and amount of appropriations available for defense programs, including EnhancedView. Under the terms of the Budget Control Act, discretionary spending is capped, and any breach of the caps would result in automatic, across-the-board spending cuts, known as sequestration. The Budget Control Act assumed that spending cap recommendations would be recommended to Congress by the Joint Select Committee on Deficit Reduction. This Committee failed to come to agreement, and accordingly sequestration was implemented during 2014. Sequestration did not have a material effect on our financial position or results of operations during 2014. However, future reductions in the current EnhancedView program or other current or future business with the Department of Defense resulting from sequestration could have a material adverse effect on our business, financial condition and results of operations.

 

 

 

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Interruption or failure of our infrastructure could hurt our ability to effectively perform our daily operations and provide our products and services, which could damage our reputation and harm our operating results.

 

The availability of our products and services depends on the continuing operation of our satellite operations infrastructure, information technology and communications systems. Any downtime, damage to or failure of our systems could result in interruptions in our service, which could reduce our revenue and profits. Our systems are vulnerable to damage or interruption from floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. We do not currently maintain a back-up production facility from which we can continue to collect, process and deliver imagery in the event of the loss of our primary facility. In the event we are unable to collect, process and deliver imagery from our facility, our daily operations and operating results would be materially and adversely affected. In addition, our ground terminal centers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of any of the foregoing could result in lengthy interruptions in our services and/or damage our reputation, which could have a material adverse effect on our financial condition and results of operations.

 

We face competition that may cause us to have to reduce our prices or to lose market share.

 

Our products and services compete with satellite and aerial imagery and related products and services offered by a range of private and government providers. Our current or future competitors may have superior technologies or greater financial, personnel and other resources than we have. The value of our imagery may also be diluted by Earth imagery that is available free of charge.

 

The U.S. Government and foreign governments may develop, construct, launch and operate their own imagery satellites, which could reduce their need to rely on commercial suppliers. In addition, such governments could sell or provide free of charge Earth imagery from their satellites and thereby compete with our imagery products and services. Also, governments may at times make our imagery freely available for humanitarian purposes, which could impair our revenue growth with non-governmental organizations. These governments could also subsidize the development, launch and operation of imagery satellites by our current or future competitors.

 

Our competitors or potential competitors could, in the future, offer satellite-based imagery or other products and services with more attractive features than our products and services. The emergence of new remote imaging technologies or the continued growth of low-cost imaging satellites, could negatively affect our marketing efforts. More importantly, if competitors develop and launch satellites or other imagery-content sources with more advanced capabilities and technologies than ours, or offer products and services at lower prices than ours, our business and results of operations could be harmed. Due to competitive pricing pressures, such as new product introductions by us or our competitors or other factors, the selling price of our products and services may further decrease. If we are unable to offset decreases in our average selling prices by increasing our sales volumes or by adjusting our product mix, our revenue and operating margins may decline and our financial position may be harmed.

 

We are dependent on resellers of our imagery for a portion of our revenue. If these resellers fail to market or sell our products and services successfully, our business would be harmed.

 

In 2016, we generated $65.3 million, or 9.0%, of our total revenue from foreign and domestic resellers. We rely on foreign resellers and partners to market and sell the majority of our products and services in the international market. Our foreign resellers and partners may not have the skill or experience to develop regional commercial markets for our imagery products and services, or may have competing interests that negatively affect their sales of our products and services. If we fail to enter into reseller agreements on a timely basis or if our resellers and partners fail to market and sell our imagery products and services successfully, these failures could negatively impact our business, financial condition and results of operations.

 

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We rely on a single vendor or a limited number of vendors to provide certain key products or services to us and the inability of these key vendors to meet our needs could have a material adverse effect on our business.

 

Historically, we have contracted with a single vendor or a limited number of vendors to provide certain key products or services to us such as construction of our satellites and launch vehicles, and management of certain remote ground terminals and DAP facilities. If these vendors are unable to meet our needs because they fail to perform adequately, are unable to match new technological requirements or problems, or are unable to dedicate engineering and other resources necessary to provide the services contracted for, our business, financial position and results of operations may be adversely affected. While alternative sources for these products and services exist, we may not be able to develop these alternative sources quickly and cost-effectively, which could materially impair our ability to operate our business. Furthermore, our vendors may request changes in pricing, payment terms or other contractual obligations, which could cause us to make substantial additional investments.

 

Breach of our system security measures or loss of our secure facility clearance and accreditation could result in interruption, delay or suspension of our ability to provide our products and services, and could result in loss of current and future business, including our U.S. Government contracts.

 

Our business and our reputation could be negatively impacted by cyber attacks, other security breaches and other disruptions. Our business involves the transmission and storage of large quantities of electronic data, including the imagery comprising our ImageLibrary. In addition, our business is becoming increasingly web-based, allowing our customers to access and take delivery of imagery from our ImageLibrary over the Internet. From time to time, we have experienced computer viruses and other forms of third-party attacks on our systems that, to date, have not had a material adverse effect on our business. We cannot assure you, however, that future attacks will not materially adversely affect our business. Despite the implementation and continued upgrading of security measures, our network infrastructure may be vulnerable to computer viruses, unauthorized third-party access or other problems caused by third parties. Because the techniques used to obtain unauthorized access or to otherwise infect or sabotage systems change frequently, and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

 

We may also need to expend significant resources to protect against security breaches. If unauthorized parties gain access to our information or our systems, they may be able to misappropriate assets or sensitive information (e.g., customer information), cause interruption in our operations, cause the loss of imagery from our ImageLibrary, corrupt data or computers, or otherwise damage our reputation and business. In addition, a security breach that involves classified or other sensitive government information or certain controlled technical information, could subject us to civil or criminal penalties and could result in loss of our secure facility clearance and other accreditations, loss of our government contracts, loss of access to classified information, loss of export privileges or debarment as a government contractor. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of web-based products and services we offer as well as increase the number of countries within which we do business.

 

Changes in U.S. Government policy regarding use of commercial-data providers, or material delay or cancellation of planned U.S. Government EnhancedView programs, may have a material adverse effect on our revenue and our ability to achieve our growth objectives.

 

Current U.S. Government policy encourages the U.S. Government’s use of commercial-data providers to support U.S. national security objectives. We are considered by the U.S. Government to be a commercial data provider. U.S. Government policy is subject to change and any change in policy away from supporting the use of commercial-data providers to meet U.S. Government imagery needs could materially affect our revenue and our ability to achieve our growth objectives.

 

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If our satellites fail to operate as intended, it could have a material adverse effect on our business, financial condition and results of operations.

 

The manufacturing, testing, launching and operation of satellites involves complex processes and technology. Our satellites employ advanced technologies and sensors that are exposed to severe environmental stresses in space that could affect our satellites’ performance. Hardware component problems in space could lead to deterioration in performance or loss of functionality of a satellite. In addition, human operators may execute improper implementation commands that may negatively impact a satellite’s performance. Exposure of our satellites to an unanticipated catastrophic event, such as a meteor shower or a collision with space debris, could reduce the performance of, or completely destroy, the affected satellite. We cannot assure you that our satellites will continue to operate successfully in space throughout their expected operational lives. Even if a satellite is operated properly, technical flaws in that satellite’s sensors or other technical deficiencies or anomalies could significantly hinder its performance, which could materially affect our ability to collect imagery and market our products and services successfully. While some anomalies are covered by insurance policies, others are not or may not be covered, or may be subject to large deductibles.

 

If we suffer a partial or total loss of a deployed satellite, we would need a significant amount of time and would incur substantial expense to replace that satellite. We may experience other problems with our satellites that may reduce their performance. During any period of time in which a satellite is not fully operational, we may lose most or all of the revenue that otherwise would have been derived from that satellite. Our inability to repair or replace a defective satellite or correct any other technical problem in a timely manner could result in a significant loss of revenue. If a satellite experiences a significant anomaly such that it becomes impaired or is no longer functional, it would significantly impact our business, prospects and profitability. Additionally, our review of satellite lives could extend or shorten the depreciable lives of our satellites, which would have an impact on the depreciation we recognize, as well as certain deferred revenue, which is tied to the life of the satellites. 

 

Loss of, or damage to, a satellite before the end of its expected operational life may require us to seek additional financing from outside sources, which we may be unable to obtain on favorable terms, if at all.

 

The expected operational lives of our satellites are affected by a number of factors, including the quality of design and construction, the supply of fuel, the expected gradual environmental degradation of solar panels, the durability of various satellite components and the orbits and space environments in which the satellites are placed and operated. The failure of satellite components could cause damage to or loss of the use of a satellite before the end of its expected operational life. Electrostatic storms or collisions with other objects could also damage our satellites. We cannot assure you that each satellite will remain in operation until the end of its expected operational life. Furthermore, we expect the performance of each satellite to decline gradually near the end of its expected operational life. We can offer no assurance that our satellites will maintain their prescribed orbits or remain operational.

 

We anticipate using funds generated from operations to fund the construction and launch of any future satellites, including the replenishment constellation for the combined capacity of WorldView-1 and WorldView-2. If we do not generate sufficient funds from operations, we may need to obtain additional financing from outside sources to deploy any future satellites. If we do not generate sufficient funds from operations and cannot obtain financing, we will not be able to deploy any future satellites or be able to replace any of our operating satellites. We cannot assure that we will be able to generate sufficient funds from operations or raise additional capital on favorable terms or on a timely basis, if at all, to develop or deploy additional high-resolution satellites.

 

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New satellites are subject to construction and launch delays, launch failures,  damage or destruction during launch, the occurrence of which can materially and adversely affect our operations.

 

Delays in the construction of future satellites and the procurement of requisite components and launch vehicles, limited availability of appropriate launch windows, possible delays in obtaining regulatory approvals, satellite damage or destruction during launch, launch failures, or incorrect orbital placement could have a material adverse effect on our business, financial condition and results of operations. The loss of, or damage to, a satellite due to a launch failure could result in significant delays in anticipated revenue to be generated by that satellite. Any significant delay in the commencement of service of a satellite would delay or potentially permanently reduce the revenue anticipated to be generated by that satellite. In addition, if the loss of a satellite were to occur, we may not be able to accommodate affected customers with our other satellites until a replacement satellite is available, and we may not have on hand, or be able to obtain in a timely manner, the necessary funds to cover the cost of any necessary satellite replacement. Any launch delay, launch failure, underperformance, delay or perceived delay could have a material adverse effect on our results of operations, business prospects and financial condition.

 

Limited insurance coverage, pricing and availability may prevent us from obtaining insurance to cover all risks of loss.

 

We intend to insure satellites in our constellation to the extent that insurance remains available at acceptable premiums. The insurance proceeds received in connection with a partial or total impairment of the functional capacity of any of our satellites would not be sufficient to cover the replacement cost, if we choose to do so, of an equivalent high-resolution satellite. In addition, this insurance will not protect us against all losses to our satellites due to specified exclusions, deductibles and material change limitations and it may be difficult to insure against certain risks, including a partial deterioration in satellite performance and satellite re-entry.

 

The price and availability of insurance have fluctuated significantly since we began offering commercial services in 2001. Although we have historically been able to obtain insurance coverage for our in-orbit satellites, we cannot guarantee that we will be able to do so in the future. We intend to maintain insurance for our operating satellites, but any determination we make as to whether to obtain insurance coverage will depend on a variety of factors, including the availability of insurance in the market, the cost of available insurance and the redundancy of our operating satellites. Insurance market conditions or factors outside our control at the time we are in the market for the required insurance, such as failure of a satellite using similar components, could cause premiums to be significantly higher than current estimates and could reduce amounts of available coverage. Higher premiums on insurance policies will increase our costs and consequently reduce our operating income by the amount of such increased premiums. If the terms of in-orbit insurance policies become less favorable than those currently available, there may be limits on the amount of coverage that we can obtain or we may not be able to obtain insurance at all. Even if obtained, our in-orbit operations insurance will not cover any loss in revenue incurred as a result of a partial or total satellite loss.

 

We are highly dependent upon our ImageLibrary and our failure or inability to protect and maintain the Earth- imagery content stored in our ImageLibrary could have a material adverse effect on our business, financial condition and results of operations.

 

Our operations depend upon our ability to maintain and protect our Earth-imagery content and our ImageLibrary against damage that may be caused by fire and other natural disasters, power failures, telecommunications failures, terrorist attacks, unauthorized intrusion, computer viruses, equipment malfunction or inadequacy, firewall breach or other events. The satellite imagery content we collect is downloaded directly to our facilities and then stored in our ImageLibrary for sale to customers. We back up our imagery and permanently store it with a third party data storage provider. Notwithstanding precautions we have taken to protect our ImageLibrary, there can be no assurance that a natural disaster or other event would not result in a prolonged interruption in our ability to provide access to or deliver imagery from our ImageLibrary to our customers. The temporary or permanent loss or disruption of access to our ImageLibrary could impair our ability to supply current and future customers with imagery content, have a negative impact on our revenue and cause harm to our reputation. Any impairment in our ability to supply our customers with imagery content could affect our ability to retain or attract customers, which would have a material adverse effect on our business, financial condition and results of operations.

20


 

The market may not accept our imagery products and services. You should not rely upon our historic growth rates as an indicator of future growth.

 

We cannot accurately predict whether our products and services will achieve significant market acceptance or whether there will be a market for our products and services on terms we find acceptable. Market acceptance of our commercial high-resolution Earth-imagery and related products and services depends on a number of factors, including the quality, scope, timeliness, sophistication, price and the availability of substitute products and services. Lack of significant market acceptance of our offerings, or other products and services that utilize our imagery, delays in acceptance, failure of certain markets to develop or our need to make significant investments to achieve acceptance by the market would negatively affect our business, financial condition and results of operations. We may not continue to grow in line with historical rates or at all. If we are unable to achieve sustained growth, we may be unable to execute our business strategy, expand our business or fund other liquidity needs and our prospects, financial condition and results of operations could be materially and adversely affected.

 

Uncertain global macro-economic and political conditions could materially adversely affect our results of operations and financial condition.

 

Our results of operations are materially affected by conditions in the global capital markets and the economy, both in the U.S. and internationally. Our business may be materially and adversely impacted by changes in United States or global economic conditions including inflation, deflation, interest rates, availability of capital, energy and commodity prices, trade laws, and the effects of governmental initiatives to manage economic conditions. Current or potential customers may delay or decrease spending on our products and services as their business and/or budgets are impacted by economic conditions. The inability of current and potential customers to pay us for our products and services may adversely affect our earnings and cash flows.

 

Our international business exposes us to risks relating to increased regulation, currency fluctuations, and political or economic instability in foreign markets, which could adversely affect our revenue.

 

In 2016, approximately 28.1% of our revenue was derived from international sales, and we intend to continue to pursue international contracts. International operations are subject to certain risks, such as: changes in domestic and foreign governmental regulations and licensing requirements; deterioration of relations between the United States and a particular foreign country; increases in tariffs and taxes and other trade barriers; changes in political and economic stability, including fluctuations in the value of foreign currencies, which may make payment in U.S. dollars, as provided for under our existing contracts, more expensive for foreign customers and affect their budgets; effects of austerity programs or similar significant budget reduction programs; potential preferences by prospective customers to purchase from local (non-U.S.) sources; and difficulties in obtaining or enforcing judgments in foreign jurisdictions. In addition, our international contracts may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other financial obligations, known as offset obligations, and provide for penalties if we fail to meet such requirements. The impact of these factors is difficult to predict, but one or more of them could adversely affect our financial position, results of operations, or cash flows. 

 

We depend upon our ability to attract, train and retain employees. Our inability to do so, or the loss of key personnel, would seriously harm our business.

 

Because of the specialized nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical, sales, marketing and managerial personnel. The loss of one or more of our senior management personnel could result in the loss of knowledge, experience and technical expertise within the satellite imagery sector, which would be detrimental to us if we cannot recruit suitable replacements in a timely manner. The competition for qualified personnel in the commercial high-resolution Earth imagery industry is intense. Due to this intense competition, we may be unable to continue to attract and retain the qualified personnel necessary for the development of our business or to recruit suitable replacement personnel. The loss of the services of any member of our senior management or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results. Additionally, our ability to effectively manage change of people and/or processes within the organization could negatively impact our ability to deliver on our objectives and plans.

21


 

In addition, the pending Merger could adversely affect our ability to retain and motivate current employees or attract and recruit prospective employees, each of whom may be uncertain about their future roles and relationships with us following the completion of the acquisition. Any loss of key personnel could adversely affect our business.

Our restructuring activities and cost saving initiatives may not achieve the results we anticipate.

We have undertaken cost reduction initiatives and organizational restructurings to improve operating efficiencies, optimize our asset base and generate cost savings. For example, we have recently undertaken restructuring plans intended to reduce global headcount, rationalize our real estate footprint, realize efficiencies from re-engineering processes and enhancing system workflows, and implement other efficiency initiatives. We cannot be certain that the estimated operating efficiencies or cost savings from such activities will be fully realized or maintained over time.

 

Risks Related to Acquisitions

 

Acquisitions could result in adverse impacts on our operations and in unanticipated liabilities and we may be unable to successfully integrate acquired companies.

 

To integrate acquired businesses we must implement our management information systems, operating systems and internal controls and assimilate and manage the personnel of the acquired operations. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. Also, the integration of acquired businesses may require that we incur significant restructuring charges. Acquisitions involve numerous risks and challenges, including: diversion of management’s attention from the normal operation of our business; potential loss of key employees and customers of the acquired companies; disruption of business relationships with current customers; uncertainties that may impair our ability to attract, retain and motivate key personnel; difficulties managing and integrating operations; the potential for deficiencies in internal controls at acquired companies; increases in our expenses and working capital requirements; and exposure to unanticipated liabilities of acquired companies.

 

Any future acquisitions may require additional equity financing, which could be dilutive to our existing stockholders, or additional debt financing, which could increase our leverage and potentially affect our credit ratings. Any downgrades in our credit ratings associated with an acquisition could adversely affect our ability to borrow by resulting in more restrictive borrowing terms. As a result of the foregoing, we also may not be able to complete acquisitions in the future. These and other factors may harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business and operating results.

 

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.    

 

We have acquired other companies and may not realize all the economic benefit from those acquisitions, which could cause an impairment of our goodwill or intangible assets. We review goodwill and our amortizable intangible assets for impairment annually or if events or changes in circumstances indicate the carrying value may not be recoverable. We may be required to record a significant non-cash charge in our consolidated financial statements in the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations.

 

Risks Related to Legal and Regulatory Matters

 

Changes in U.S. or foreign laws and regulations could have a material adverse effect on our operations and financial condition.

 

Our industry is highly regulated due to the sensitive nature of satellite technology. We cannot assure you that the laws and regulations governing our business and operations, including the distribution of satellite imagery, will not change in the future. Our business and operating results may be materially and adversely affected if we are required to alter our business operations to comply with such changes or if our ability to sell our products and services on a global basis is reduced or restricted due to increased U.S. or foreign government regulation.

22


 

Our international operations are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or representatives. If we or our agents fail to comply with the requirements of the FCPA, or similar anti-bribery laws in other jurisdictions, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, financial condition and results of operations.

 

Failure to obtain or maintain regulatory approvals could result in service interruptions or could impede us from executing our business plan.

 

NOAA Approvals. Our business requires licenses from NOAA. Under our NOAA licenses, the U.S. Government reserves the right to interrupt service or limit our ability to distribute satellite images when foreign policy or U.S. national security interests are affected. In addition, NOAA has the right to review and approve the terms of certain of our agreements with international customers, including our DAP customers. We currently have the necessary approvals for our existing international customers. However, such reviews in the future could delay or prohibit us from executing new international agreements. The inability to get approvals for DAP customers could materially affect our ability to establish and grow our DAP business. In addition, should we not get approvals in a timely manner, our products and services may not be competitive, and we may be subject to fines or sanctions imposed by NOAA.

 

Export Approvals. The ground station equipment and related technology that is purchased by certain of our DAP customers is controlled under the ITAR. We, or our suppliers, must obtain export licenses from the DoS, and in some cases from foreign government agencies, in order to export ground station equipment and related technology to our DAP customers. Export licenses can take up to three months or longer to be processed and neither the DoS nor any corresponding foreign government agency are obligated to approve any license application. Our inability or the inability of our suppliers to get required export approvals for equipment and technology supporting the DAP could materially affect our ability to establish and grow our DAP business.

 

FCC Approvals. Our operation of satellites and ground terminals also requires licenses from the FCC. The FCC regulates the construction, launch and operation of our satellites, the use of satellite frequency spectrum and the licensing of our ground terminals located within the United States. We are also subject to the FCC’s rules and regulations and the terms of our licenses, which require us to comply with various operating conditions and requirements. The current licenses of our satellites expire between 2023 and 2024 and those of our ground terminals expire between 2019 and 2024.  While the FCC generally renews licenses routinely, there can be no assurance that our licenses will be renewed at their expiration dates on favorable terms or without adverse conditions. Failure to renew these licenses could have a material and adverse effect on our ability to generate revenue and conduct our business as currently expected.

 

International Registration and Approvals. The use of the satellite frequency spectrum internationally is subject to the rules and requirements of the ITU. Additionally, satellite operators must abide by the specific laws of the countries in which downlink services are provided from the satellite to ground terminals within such countries. The FCC has coordinated the operations for each of our satellites pursuant to the ITU requirements. Coordination of our satellites with other satellite systems is required by the ITU to help prevent harmful frequency interference from or into existing or planned satellite operations. We do not expect significant issues relating to the coordination of our satellites due to the nature of satellite imaging operations.

 

Our foreign DAP customers are responsible for securing necessary licenses and operational authority to use the required spectrum in each country into which we will downlink high resolution commercial Earth imagery. If such customers are not successful in obtaining the necessary approvals, we will not be able to distribute real-time imagery to those customers. Our inability to offer real-time access service in a significant number of foreign countries could negatively affect our business. In addition, regulatory provisions in countries where we wish to operate may impose unduly burdensome restrictions on our operations. Our business may also be adversely affected if the national authorities where we plan to operate adopt treaties, regulations or legislation unfavorable to foreign companies.

23


 

Government audits of our contracts could result in a decrease in our earnings and/or have a negative effect on our cash position following an audit adjustment.

 

Our government contracts are subject to cost audits, which may occur several years after the period to which the audit relates. If an audit identifies significant unallowable costs, we could incur a material charge to our earnings or reduction in our cash position.

 

Risks Related to Our Indebtedness and Investment in Our Common Stock

 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, including our ability to incur additional indebtedness.

 

Our debt obligations consist of a $1.275 billion Senior Secured Term Loan due January 15, 2024 (“Term Loan”) and a $200.0 million Senior Secured Revolving Credit Facility due January 15, 2022 (“Revolving Credit Facility” and, together with the Term Loan, the “2016 Credit Facility”), in addition to $34.4 million of 5.25% Senior Notes due February 1, 2021 (“Senior Notes”). Our indebtedness could have several consequences, including: increasing our vulnerability to adverse economic, industry or competitive developments; requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, return of capital to shareholders through our share repurchase program, and future business opportunities; restricting us from making strategic acquisitions; limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are not as highly leveraged as us and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

 

Our 2016 Credit Facility contains a number of restrictions and covenants that, among other things, limit our ability to incur additional indebtedness, make investments, pay dividends or make distributions to our stockholders, grant liens on our assets, sell assets, enter into a new or different line of business, enter into transactions with our affiliates, and merge or consolidate with other entities or transfer all or substantially all of our assets. The 2016 Credit Facility also requires us to comply with a maximum leverage ratio covenant.

 

Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants under our 2016 Credit Facility could cause all of our existing indebtedness to be immediately due and payable. If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it. If our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected. As of December 31, 2016, our total indebtedness was $1,309.4 million. Our total borrowings as of December 31, 2016 were $1,289.3 million which was net of discounts and issuance costs of $20.1 million and represented 52.4% of our total capitalization. Our indebtedness increases the possibility that we may be unable to generate sufficient cash to pay, when due, the principal, interest or other amounts due with respect to our indebtedness.

 

24


 

We expect that the price of our common stock will fluctuate substantially.

 

The market price of our common stock has been, and is likely to continue to be, volatile. Factors that could contribute to the volatility of our stock include, but are not limited to: events or circumstances affecting completion of the Merger in a timely manner, or at all, or the imposition of conditions on completion of the Merger or requiring changes to the terms of the Merger; fluctuations in the market price of MDA’s common shares; termination or expiration of one or more of our key contracts, or a change in scope or purchasing levels under one or more of our contracts, including the EnhancedView Contract, our DAP contracts or other large contracts; unfounded rumors and leaks of information, or formal announcements regarding federal budget cuts, including, but not limited to, reduction in budgets affecting the Department of Defense; failure of our satellites to operate as designed; loss or damage to any of our satellites; changes in U.S. or foreign governmental regulations or in the status of our regulatory approvals, clearances or future applications; our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments; changes in the availability of insurance; changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock; and analysts expectations regarding the pending Merger with MDA; changes in our published forecast of future results of operations; fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; success of competitive products and services; changes in our capital structure, such as future issuances or repurchases of securities, sales of large blocks of common stock by our stockholders or the incurrence of additional debt; investors’ general perception of us, including any perception of misuse of sensitive information; changes in general global economic and market conditions; changes in industry conditions; business disruptions, costs and future events related to shareholder activism, and changes in regulatory and other dynamics.

 

In addition, in recent years, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many companies in the technology sector, which have often been unrelated to their operating performance or prospects for future operations. These broad fluctuations may adversely impact the market price of our common stock. Future market movements may materially and adversely affect the market price of our common stock.

 

Provisions in our amended and restated certificate of incorporation and amended and restated by-laws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our amended and restated certificate of incorporation and amended and restated by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include: the existence of a classified board of directors; limitations on the removal of directors; advance notice requirements for stockholder proposals and director nominations; the inability of stockholders to act by written consent or to call special meetings; the ability of our board of directors to make, alter or repeal our by-laws; and provisions that permit the redemption of stock from foreign stockholders where necessary, in the judgment of our board of directors, to protect our licenses and registrations.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.      PROPERTIES

 

The properties used in our operations consist principally of production facilities, administrative and executive offices, and remote ground terminals. As of December 31, 2016, we leased or owned approximately 830,000 square feet of office and operations space. This space includes our production facilities, administrative and executive offices in Westminster, Colorado; Longmont, Colorado; and Herndon, Virginia. We also lease a data center and have smaller administrative offices and sales offices located in the United States and internationally.

 

25


 

ITEM 3.       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 4.       MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.       MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on the NYSE and traded under the symbol “DGI.” The following table sets forth, for the periods indicated, the high and low sales prices in dollars on the NYSE for our common stock based on daily trading prices.

 

 

 

 

 

 

 

 

    

High

    

Low

2016

 

 

 

 

 

 

Fourth Quarter

 

$

33.05

 

$

23.95

Third Quarter

 

 

28.33

 

 

20.85

Second Quarter

 

 

23.20

 

 

16.58

First Quarter

 

 

18.21

 

 

11.80

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

Fourth Quarter

 

$

22.22

 

$

12.41

Third Quarter

 

 

28.32

 

 

17.78

Second Quarter

 

 

35.70

 

 

27.59

First Quarter

 

 

35.91

 

 

26.85

 

At February 21, 2017, there were approximately 230 stockholders of record of our common stock. Because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

26


 

Performance Measurement Comparison of Stockholder Return

 

The graph below compares the yearly percentage change in our cumulative total stockholder return on our common stock with the cumulative total return of the S&P Composite 500 Stock Index, the Russell 2000 and our 2016 and 2015 peer groups for the period from December 31, 2011 through December 30, 2016. It assumes $100 was invested at market close on December 31, 2011 and that any dividends have been reinvested.

 

In 2016, we changed our peer group to better reflect companies of our size and complexity. Our new peer group consists of: Acxiom Corporation, Advisory Board Company, comScore, Inc., Corporate Executive Board Company, CoStar Group Inc., Cubic Corporation, Exponent, Inc., FactSet Research Systems, Inc., Fair Isaac Corporation, FLIR Systems, Inc., Forrester Research, Inc., Gartner, Inc., IHS, Inc., Iridium Communications, Inc., KEYW Holding Corporation, Kratos Defense & Security Solutions, NeuStar, Inc., Qlik Technologies, Inc., Trimble Navigation Limited and ViaSat, Inc.

 

Our peer group in 2015 consisted of Acxiom Corporation, Advisory Board Company, comScore, Inc., Corporate Executive Board Company, CoStar Group Inc., FactSet Research Systems, Inc., Fair Isaac Corporation, FLIR Systems, Inc., Forrester Research, Inc., Gartner, Inc., IHS, Inc., Iridium Communications, Inc., KEYW Holding Corporation, Kratos Defense & Security Solutions, NeuStar, Inc., Orbital Sciences Corporation (included through February 9, 2015 when it was acquired by Alliant Techsystems), Qlik Technologies, Inc., Trimble Navigation Limited, Verisk Analytics, Inc., and ViaSat, Inc.

 

 

Picture 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Return Analysis

 

12/31/2011

    

12/31/2012

    

12/31/2013

    

12/31/2014

    

12/31/2015

    

12/31/2016

 

DigitalGlobe, Inc.

 

$

100.00

 

$

142.84

 

$

240.50

 

$

181.01

 

$

91.53

 

$

167.45

 

Russell 2000

 

 

100.00

 

 

116.35

 

 

161.52

 

 

169.43

 

 

161.95

 

 

196.45

 

S&P 500

 

 

100.00

 

 

116.00

 

 

153.57

 

 

174.60

 

 

177.01

 

 

198.18

 

2016 Peer Group

 

 

100.00

 

 

113.02

 

 

156.36

 

 

152.94

 

 

153.66

 

 

168.77

 

2015 Peer Group

 

 

100.00

 

 

114.66

 

 

158.16

 

 

154.83

 

 

160.18

 

 

174.77

 

 

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (“Exchange Act”), or otherwise subject to the liabilities under that section and shall not be deemed to be incorporated by reference into any filing of DigitalGlobe, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.

 

27


 

Dividends

 

Since inception, we have not declared or paid any cash dividends on our common stock and do not currently anticipate paying cash dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be subject to restrictive covenants contained in our 2016 Credit Facility and dependent on then-existing conditions, including our financial condition and results of operations, contractual restrictions, capital requirements and other factors. For information concerning dividends declared or paid on our Series A convertible preferred stock, please see Note 13 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

Issuer Purchases of Equity Securities

 

In the second half of 2014, the Company’s Board of Directors authorized a program to repurchase up to $205.0 million of the Company’s outstanding common stock through December 31, 2015. In October 2015, the Company’s Board of Directors approved an additional $130.0 million of authorized share repurchases of the Company’s outstanding common stock through December 31, 2016. The approval increased the total authorized amount under the program to $335.0 million excluding broker transaction fees. As of December 31, 2016, we have exhausted our share repurchase program and have repurchased a total of 15,365,411 shares at an average purchase price of $21.82 per share, for a total of $335.3 million under the program. The amount purchased and the average share price for repurchases include broker transaction fees of $0.3 million. We repurchased shares through open market purchases, and pursuant to Rule 10b5-1, in each case on such terms and at such times as was permitted by applicable securities laws and determined by management.

 

Share repurchase activity during the quarter ended December 31, 2016, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number

    

Approximate

 

 

 

 

 

 

 

of Shares

 

Dollar Value

 

 

Total

 

Average

 

Purchased as Part

 

of Shares That

 

 

Number

 

Price

 

of Publicly

 

May Yet be

 

 

of Shares

 

Paid Per

 

Announced

 

Purchased

 

 

Purchased

 

Share

 

Program

 

Under Program

October 1, 2016 to October 31, 2016

 

314,698

 

 

26.70

 

 

 

 

 

November 1, 2016 to November 30, 2016

 

543,803

 

 

27.80

 

 

 

 

 

December 1, 2016 to December 31, 2016

 

180,819

 

 

32.12

 

 

 

 

 

Total

 

1,039,320

 

$

28.22

 

15,365,411

 

$

 —

 

 

 

 

28


 

ITEM 6.       SELECTED FINANCIAL DATA

 

The selected consolidated financial information set forth below for each of the years ended December 31, 2016, 2015, 2014, 2013 and 2012 has been derived from our audited Consolidated Financial Statements. The information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto in Items 7 and 8, respectively, of this Form 10-K.

 

Summary Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

(in millions, except per share data)

    

2016

    

2015

    

2014

    

2013(1)

    

2012

Revenue

 

$

725.4

 

$

702.4

 

$

654.6

 

$

612.7

 

$

421.4

Income (loss) from operations

 

 

102.1

 

 

60.8

 

 

31.9

 

 

(84.8)

 

 

76.0

Net income (loss)

 

 

26.5

 

 

23.3

 

 

18.5

 

 

(68.3)

 

 

39.0

Net income (loss) available to common shareholders

 

 

21.5

 

 

18.5

 

 

13.9

 

 

(71.9)

 

 

39.0

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

$

0.26

 

$

0.19

 

$

(1.00)

 

$

0.85

Diluted

 

$

0.34

 

$

0.26

 

$

0.18

 

$

(1.00)

 

$

0.84

Total assets (3) (4)

 

 

3,009.9

 

 

2,913.2

 

 

3,047.1

 

 

3,131.6

 

 

1,533.3

Long-term debt, including current portion (4)

 

 

1,289.3

 

 

1,109.9

 

 

1,113.6

 

 

1,114.3

 

 

483.3

Other long-term obligations (2) (3)

 

 

158.8

 

 

122.6

 

 

87.3

 

 

76.9

 

 

14.4

Stockholders’ equity

 

 

1,172.9

 

 

1,248.1

 

 

1,353.5

 

 

1,383.3

 

 

539.4

(1)

On January 31, 2013, we completed our acquisition of 100% of the outstanding common stock of GeoEye, a provider of geospatial intelligence solutions. The results of GeoEye’s operations were included in our Consolidated Financial Statements beginning on the acquisition date.

(2)

Other long-term obligations include Deferred income taxes, net and Other liabilities.

(3)

Amounts differ from prior year presentation due to our adoption of ASU 2015 – 17, Balance Sheet Classification of Deferred Taxes. Refer to Note 2, “Summary of Significant Accounting Policies and Recent Accounting Pronouncements,” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further detail.    

(4)

Amounts differ from prior year presentation due to our adoption in 2015 of ASU 2015 – 03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented as a direct deduction from the associated debt liability.

 

 

 

29


 

ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

DigitalGlobe is a leading global provider of high-resolution Earth imagery, data and analysis. Sourced from our own advanced satellite constellation and third-party providers, our imagery solutions and other services provide customers with accurate and mission-critical information about our changing planet, and support a wide variety of uses, including mission-planning, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. Additionally, hundreds of developers are building new applications and machine learning algorithms on our Geospatial Big Data platform and in our recently expanded Services business. Each day users depend on us to better understand our changing planet in order to save lives, resources and time. 

   

Our principal customers include U.S. and foreign governments, and commercial customers. The imagery that forms the foundation of our products, services and analysis is collected daily from our constellation of high-resolution imaging satellites and maintained in our ImageLibrary. We believe that our ImageLibrary is the largest, most up-to-date and comprehensive archive of high-resolution Earth imagery commercially available, containing more than 7.5 billion square kilometers of imagery, an area the equivalent of 50 times the landmass of the Earth. As of December 31, 2016, our collection capacity capability was approximately 1.37 billion square kilometers of imagery per year, or the equivalent of roughly 9 times the Earth’s land surface area, and offers intraday revisit around the globe.

 

Pending Transaction with MDA

 

On February 24, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MacDonald, Dettwiler and Associates Ltd., a corporation organized under the laws of British Columbia (“MDA”), SSL MDA Holdings, Inc., a Delaware corporation and wholly owned subsidiary of MDA (“SSL MDA Holdings”), and Merlin Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of SSL MDA Holdings (“Merger Sub”), pursuant to which, among other things, Merger Sub will merge with and into DigitalGlobe (the “Merger”), with DigitalGlobe surviving as an indirect wholly owned subsidiary of MDA.  Under the terms of the Merger Agreement, at the closing of the Merger, each outstanding share of our common stock will be converted into the right to receive US$17.50 in cash and 0.3132 of a common share of MDA (the “Merger Consideration”), without interest and subject to any required withholding for taxes, and each outstanding share of our Series A convertible preferred stock will be converted into the right to receive the same Merger Consideration as if the holder thereof had converted such shares of Series A convertible preferred stock into our common stock immediately prior to the closing of the Merger. 

 

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

 

The Merger is expected to close in the second half of 2017. Following completion of the Merger, our common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended, and as such, we will no longer file periodic reports with the SEC.

 

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

 

30


 

2016 Highlights

 

Share Repurchase Program

 

Our Board of Directors authorized a program to repurchase up to $335.0 million of the Company’s outstanding common stock through December 31, 2016, excluding broker transaction fees. As of December 31, 2016, we have exhausted our share repurchase program and have repurchased a total of 15,365,411 shares at an average purchase price of $21.82 per share, for a total of $335.3 million under the program. The amount purchased and the average share price for repurchases include broker transaction fees of $0.3 million. See “Issuer Purchases of Equity Securities” in Item 5 of this Form 10-K for further detail.

 

Re-engineering and Restructuring Plans

 

2016 Restructuring

 

In November 2016, we initiated a restructuring plan in conjunction with the acquisition of Radiant, under which we may incur up to $4.5 million in an effort to continue to consolidate our real estate footprint and rationalize the Services reporting structure. As of December 31, 2016, $0.8 million has been incurred under this plan, which we expect to complete by the end of the fourth quarter of 2017.

 

2015 Restructurings

 

In February 2015, we initiated a re-engineering and restructuring plan intended to improve our operational efficiency. We completed this plan in the first quarter of 2016. We incurred approximately $10.8 million of the originally anticipated $15.0 million as a result of these efforts, which included restructuring charges to reduce global headcount and rationalize our real estate footprint and other re-engineering charges to realize efficiencies from reducing headcount, such as re-engineering processes and enhancing system workflows, as well as costs related to the decision to proactively decommission the IKONOS satellite. Our less than expected spend resulted primarily from lower than anticipated lease-termination fees associated with the consolidation of our real estate footprint.

 

In October 2015, we initiated a re-engineering and restructuring plan to further reduce global headcount, rationalize our real estate footprint, realize efficiencies from re-engineering processes and enhancing system workflows, and undertake other efficiency initiatives. We completed this plan in the fourth quarter of 2016. We incurred approximately $14.8 million of the originally anticipated $18.0 million as a result of these efforts. The less than expected spend resulted primarily from lower than anticipated costs associated with the rationalization of our real estate footprint.

 

The benefits realized from these plans may be partially offset by higher operating costs associated with growth in our business.

 

Recent Satellite Developments

 

On November 11, 2016, we successfully launched WorldView-4. On February 1, 2017, WorldView-4 was placed into service and commercial operations began. Our preliminary assessment indicates an initial estimated useful life of approximately ten years. Prior to the launch of WorldView-4, we received early contractual agreements and letters of intent for direct access capacity from international defense and intelligence customers. We anticipate that these pre-launch commitments will begin generating incremental revenue in 2017.

 

In February 2016, we reached an agreement with two Saudi Arabian entities to develop a constellation of six sub-meter resolution satellites. The Saudi Arabian entities will be responsible for the construction, integration and launch of the satellites. The constellation will leverage our ground infrastructure and global distribution capabilities. The satellites are expected to launch in 2019.

 

31


 

Radiant Acquisition

 

In November 2016, we completed the acquisition of Radiant, a privately held leading technical and analytical solutions provider for U.S. government customers. The acquisition adds hundreds of innovative developers and analysts to DigitalGlobe, with expertise in data analytics, cloud computing, and machine learning to solve complex geospatial intelligence challenges. Our acquisition of Radiant is expected to broaden our cloud-enabled capabilities across the geospatial intelligence value chain and expand our customer base across the U.S. Intelligence and Special Operations communities. We incurred $1.0 million of acquisition and integration costs as of December 31, 2016, and expect to incur up to an additional $1.0 million of integration costs in 2017.

 

Debt Refinancing

 

On December 22, 2016, we refinanced our outstanding debt by entering into the 2016 Credit Facility. As a part of this refinancing, we repaid and retired our seven-year $550.0 million Senior Secured Term Loan Facility (“2013 Term Loan”) and the outstanding balance of $110.0 million on our five-year $150.0 million Senior Secured Revolving Credit Facility (together with the 2013 Term Loan, the “2013 Credit Facility”). We also extinguished the $600.0 million aggregate principal amount of our outstanding Senior Notes through a tender offer, completed on January 4, 2017, and a subsequent redemption, completed on January 23, 2017, for any Senior Notes not tendered and accepted for purchase in the tender offer. Refer to Note 6, “Debt” to the Consolidated Financial Statements in Item 8 of this Form 10-K for further detail on the refinancing and the related financial statement impact. This refinancing expanded our borrowing capacity, extended the maturity date of our long-term debt, and resulted in less restrictive debt covenants.

 

Results of Operations

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

(in millions)

    

2016

    

2015

    

2014

U.S. Government revenue

 

$

462.2

 

$

447.6

 

$

395.3

Diversified Commercial revenue

 

 

263.2

 

 

254.8

 

 

259.3

Total revenue

 

 

725.4

 

 

702.4

 

 

654.6

Cost of revenue, excluding depreciation and amortization

 

 

164.4

 

 

144.9

 

 

162.3

Selling, general and administrative

 

 

185.1

 

 

207.0

 

 

219.6

Depreciation and amortization

 

 

267.2

 

 

280.7

 

 

239.7

Restructuring charges

 

 

6.6

 

 

9.0

 

 

1.1

Income from operations

 

 

102.1

 

 

60.8

 

 

31.9

Loss from early extinguishment of debt

 

 

(35.7)

 

 

 —

 

 

 —

Interest expense, net

 

 

(17.8)

 

 

(29.0)

 

 

(7.1)

Other income, net

 

 

0.1

 

 

1.6

 

 

0.6

Income before income taxes

 

 

48.7

 

 

33.4

 

 

25.4

Income tax expense

 

 

(18.3)

 

 

(9.2)

 

 

(6.9)

Equity in earnings from joint ventures, net of tax

 

 

(3.9)

 

 

(0.9)

 

 

 —

Net income

 

$

26.5

 

$

23.3

 

$

18.5

 

32


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2016

    

 

2015

    

 

2014

 

U.S. Government revenue

 

63.7

%  

 

63.7

%  

 

60.4

%  

Diversified Commercial revenue

 

36.3

 

 

36.3

 

 

39.6

 

Total revenue

 

100.0

 

 

100.0

 

 

100.0

 

Cost of revenue, excluding depreciation and amortization

 

22.7

 

 

20.5

 

 

24.8

 

Selling, general and administrative

 

25.5

 

 

29.5

 

 

33.5

 

Depreciation and amortization

 

36.8

 

 

40.0

 

 

36.6

 

Restructuring charges

 

0.9

 

 

1.3

 

 

0.2

 

Income from operations

 

14.1

 

 

8.7

 

 

4.9

 

Loss from early extinguishment of debt

 

(4.9)

 

 

 —

 

 

 —

 

Interest expense, net

 

(2.5)

 

 

(4.1)

 

 

(1.1)

 

Other income, net

 

 —

 

 

0.2

 

 

0.1

 

Income before income taxes

 

6.7

 

 

4.8

 

 

3.9

 

Income tax expense

 

(2.5)

 

 

(1.3)

 

 

(1.1)

 

Equity in earnings from joint ventures, net of tax

 

(0.5)

 

 

(0.2)

 

 

 —

 

Net income

 

3.7

%

 

3.3

%  

 

2.8

%

 

Revenue

 

Our principal source of revenue is the licensing of Earth-imagery products and provision of other services to end users, resellers and partners. The Company has two primary customer groups: U.S. Government and Diversified Commercial.

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Percentage change

 

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

    

2015 vs.

 

($ in millions)

    

2016

    

2015

    

2014

 

2015

    

2014

 

U.S. Government Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EnhancedView SLA

 

$

337.1

 

$

337.1

 

$

254.7

 

 —

%  

32.4

%  

Other revenue and value-added services

 

 

110.0

 

 

95.4

 

 

117.7

 

15.3

 

(18.9)

 

NextView amortization

 

 

15.1

 

 

15.1

 

 

22.9

 

 —

 

(34.1)

 

Total

 

$

462.2

 

$

447.6

 

$

395.3

 

3.3

%  

13.2

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government revenue consists primarily of the EnhancedView SLA, other revenue and value-added services, and NextView amortization. The NGA purchases our imagery products and services on behalf of various U.S. government entities, including the military and other agencies. Other U.S. defense and intelligence customers, including contractors, purchase value-added services with our imagery. Our U.S. Government customers focus on image quality, including resolution, accuracy, spectral diversity, frequency of area revisit, coverage and availability of certain amounts of our capacity, as they integrate our products and services into their operational planning. Revenue is generated largely from service level agreements, tasking orders and sales of imagery from our ImageLibrary, in addition to sales of geospatial analytic products and expert services that derive insight from our imagery. We sell to the U.S. Government primarily through direct sales.

 

U.S. Government revenue increased $14.6 million, or 3.3%, from 2015 to 2016 due to an increase in other revenue and value-added services, primarily as a result of our acquisition of Radiant and increased demand for our analytic value-added products and services, partially offset by a decrease in non-cash amortization of Global EGD deferred revenue. 

 

33


 

U.S. Government revenue increased $52.3 million, or 13.2%, from 2014 to 2015. EnhancedView SLA revenue increased as a result of a full year of increased constellation capacity made available to the NGA due to WorldView-3 becoming fully operational on October 1, 2014. Other revenue and value-added services declined primarily due to a decrease in non-cash amortization of Global EGD deferred revenue. The decrease in non-cash NextView amortization resulted from the extension of the period over which this deferred revenue is amortized to reflect the 2014 fourth quarter extension of the useful life of WorldView-1. 

 

Diversified Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Percentage change

 

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

    

2015 vs.

 

($ in millions)

    

2016

    

2015

    

2014

 

2015

    

2014

 

Diversified Commercial Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DAP

 

$

121.6

 

$

120.6

 

$

111.3

 

0.8

%  

8.4

%  

Other diversified commercial

 

 

141.6

 

 

134.2

 

 

148.0

 

5.5

 

(9.3)

 

Total

 

$

263.2

 

$

254.8

 

$

259.3

 

3.3

%  

(1.7)

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S and International Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

59.7

 

$

51.8

 

$

61.5

 

15.3

%  

(15.8)

%  

International

 

 

203.5

 

 

203.0

 

 

197.8

 

0.2

 

2.6

 

Total

 

$

263.2

 

$

254.8

 

$

259.3

 

3.3

%  

(1.7)

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct and Reseller Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

198.2

 

$

186.5

 

$

196.3

 

6.3

%  

(5.0)

%  

Reseller and Partner

 

 

65.0

 

 

68.3

 

 

63.0

 

(4.8)

 

8.4

 

Total

 

$

263.2

 

$

254.8

 

$

259.3

 

3.3

%  

(1.7)

%  

 

Diversified Commercial consists of the following types of customers: DAP, LBS, international civil government, other international defense and intelligence, energy and other industry verticals. We sell products and services to these customers throughout the world both directly and through resellers. We have DAP agreements in ten countries, earning revenue from sales of DAP facilities and from service fees to access our satellite constellation. Other diversified commercial customers use our content for mapping, monitoring, analysis and planning activities.

 

Diversified Commercial revenue increased $8.4 million, or 3.3%, from 2015 to 2016. Other diversified commercial revenue increased primarily due to increased demand for our Global Basemap product suite and strength in imagery sales to other defense and intelligence customers, partially offset by a decrease in sales to energy customers driven by weakness in oil and gas commodity prices.

 

Diversified Commercial revenue decreased $4.5 million, or 1.7%, from 2014 to 2015. DAP revenue increased from additional image deliveries and access minutes to meet customer demands, primarily driven by events in the Middle East. Other diversified commercial decreased as a result of lower LBS revenue and the impact of the strong U.S. dollar on certain of our non-U.S. customers.

 

34


 

Expenses

 

Cost of Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Percentage change

 

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

    

2015 vs.

 

($ in millions)

    

2016

    

2015

    

2014

 

2015

    

2014

 

Labor and labor-related costs

    

$

86.5

    

$

62.8

    

$

68.7

    

37.7

%  

(8.6)

%  

Facilities, subcontracting and equipment costs

 

 

64.5

 

 

66.4

 

 

72.9

 

(2.9)

 

(8.9)

 

Consulting and professional fees

 

 

2.5

 

 

5.2

 

 

5.9

 

(51.9)

 

(11.9)

 

Other direct costs

 

 

10.9

 

 

10.5

 

 

14.8

 

3.8

 

(29.1)

 

Total

 

$

164.4

 

$

144.9

 

$

162.3

 

13.5

%  

(10.7)

%  

 

There is not a significant direct relationship between our cost of revenue and changes in our revenue. Our cost of revenue consists primarily of the cost of personnel, as well as the costs of operating our satellites, retrieving information from the satellites and processing the data retrieved.

Cost of revenue increased $19.5 million, or 13.5%, from 2015 to 2016. Labor and labor-related costs increased primarily due to increased headcount to support revenue-generating activities and the launch and operation of WorldView-4, expenses for employees assumed in connection with our acquisition of Radiant, and an increase in incentive compensation due to improved company performance.

 

Cost of revenue decreased $17.4 million, or 10.7%, from 2014 to 2015. Labor and labor-related costs decreased primarily from lower headcount in connection with our restructuring efforts and a reduction in incentive compensation due to lower-than-expected revenue growth. Facilities, subcontracting and equipment costs decreased primarily as a result of our re-engineering and restructuring efforts and procurement savings on various operating expenses, partially offset by an increase in fees following the launch and commission of WorldView-3. The decrease in other direct costs was impacted by aerial imagery, which is amortized on an accelerated basis and consists of costs associated with previously purchased aerial imagery.    

 

Selling, General and Administrative Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Percentage change

 

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

    

2015 vs.

 

($ in millions)

    

2016

    

2015

    

2014

 

2015

    

2014

 

Labor and labor-related costs

 

 

110.5

 

 

116.9

 

 

128.4

 

(5.5)

%

(9.0)

%

Consulting and professional fees

 

 

27.8

 

 

34.5

 

 

42.7

 

(19.4)

 

(19.2)

 

Rent and facilities

 

 

13.1

 

 

16.3

 

 

11.4

 

(19.6)

 

43.0

 

Computer hardware and software

 

 

11.4

 

 

14.8

 

 

14.4

 

(23.0)

 

2.8

 

Satellite insurance

 

 

8.9

 

 

11.2

 

 

9.8

 

(20.5)

 

14.3

 

Other costs

 

 

13.4

 

 

13.3

 

 

12.9

 

0.8

 

3.1

 

Total

 

$

185.1

 

$

207.0

 

$

219.6

 

(10.6)

%  

(5.7)

%

 

Selling, general and administrative expenses decreased $21.9 million, or 10.6%, from 2015 to 2016. Labor and labor-related costs decreased primarily due to lower headcount in connection with our restructuring efforts, partially offset by an increase in incentive compensation due to improved company performance. Consulting and professional fees decreased primarily from our re-engineering efforts.

 

35


 

Selling, general and administrative expenses decreased $12.6 million, or 5.7%, from 2014 to 2015. Labor and labor-related costs decreased primarily from lower headcount in connection with our restructuring efforts and a reduction in incentive compensation due to lower than expected revenue growth. Consulting and professional fees decreased primarily from our re-engineering and restructuring efforts. The increase in rent and facilities represents costs associated with our new headquarters.

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Percentage change

 

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

 

2015 vs.

 

($ in millions)

    

2016

    

2015

    

2014

 

2015

 

2014

 

Depreciation and amortization

 

$

267.2

 

$

280.7

 

$

239.7

 

(4.8)

%

17.1

%

 

Depreciation and amortization decreased $13.5 million, or 4.8%, from 2015 to 2016 primarily due to assets that were fully depreciated during the first three quarters of 2016, resulting in lower depreciation expense for the year.

 

Depreciation and amortization increased $41.0 million, or 17.1%, from 2014 to 2015 primarily due to higher depreciation expense of $42.4 million following the launch and commissioning of WorldView-3 in the fourth quarter of 2014 and a $17.6 million increase in expense primarily from hardware and software assets placed into service in 2015, partially offset by a $21.4 million decrease in depreciation expense as a result of the fourth quarter of 2014 extension of the useful lives of our WorldView-1 and WorldView-2 satellites.  

 

Restructuring Charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Percentage change

 

 

 

 

 

 

 

 

 

 

 

 

2016 vs.

 

2015 vs.

 

($ in millions)

    

2016

    

2015

    

2014

 

2015

 

2014

 

Restructuring charges

 

$

6.6

 

$

9.0

 

$

1.1

 

(26.7)

%

*

%


* Not meaningful

 

In November 2016, we initiated a restructuring plan in conjunction with the acquisition of Radiant to continue to consolidate our real estate footprint and rationalize our Services reporting structure (“Radiant Restructuring”). Expenses under the Radiant Restructuring were incurred during the fourth quarter of 2016.

 

In 2015, we initiated two restructuring plans intended to improve our operational efficiency by reducing our global headcount and rationalizing our real estate footprint (“2015 Restructurings”). We completed the first plan in the first quarter of 2016 and completed the second plan in the fourth quarter of 2016. Expenses under each of these plans were incurred during 2016 and 2015.

 

Restructuring charges in 2014 were incurred in conjunction with a restructuring plan related to our acquisition of GeoEye. These restructuring activities primarily consisted of reducing redundant workforce, consolidating office and production facilities, consolidating certain ground terminals and systems and other exit costs.

 

Refer to Note 9 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for further detail.

 

36


 

Interest Expense, net