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DIGITALGLOBE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein and other of our reports, filings, and public announcements may contain or incorporate forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words, although not all forward-looking statements contain these words. Any forward-looking statements are based upon our historical performance and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions. A number of important factors could cause our actual results or performance to differ materially from those indicated by such forward looking statements, including: the loss, reduction or change in terms of any of our primary contracts or decisions by customers not to exercise renewal options; the availability of government funding for our products and services both domestically and internationally; changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of Congress and the administration, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011); the risk that U.S. government sanctions against specified companies and individuals in Russia may limit our ability to conduct business with potential or existing customers; the risk that anticipated benefits and synergies from the strategic combination of the Company and GeoEye, Inc. cannot be fully realized or may take longer to realize than expected; the outcome of pending or threatened litigation; the loss or impairment of any of our satellites; delays in the construction and launch of any of our satellites or our ability to achieve and maintain full operational capacity of all our satellites; delays in implementation of planned ground system and infrastructure enhancements; loss or damage to the content contained in our imagery archives; interruption or failure of our ground system and other infrastructure, decrease in demand for our imagery products and services; increased competition, including possibly from companies with substantial financial and other resources and services, that may reduce our market share or cause us to lower our prices; our inability to fully integrate acquisitions or to achieve planned synergies; changes in satellite imaging technology; our failure to obtain or maintain required regulatory approvals and licenses; changes in U.S. or foreign law or regulation that may limit our ability to distribute our imagery products and services; the costs associated with being a public Company; and other important factors, all as described more fully in our filings with the U.S. Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2013. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on any of these forward looking statements. References in this filing to "DigitalGlobe," "Company," "we," "us," and "our" refer to DigitalGlobe, Inc. and its consolidated subsidiaries. Overview We are a leading global provider of geospatial information products and services. Sourced from our own advanced satellite constellation, our products and services support a wide variety of uses, including defense, intelligence and homeland security applications, mapping and analysis, environmental monitoring, oil and gas exploration, and infrastructure management. Each day users depend on our data, information, technology and expertise to better understand our changing planet in order to save lives, resources and time. Our principal customers are U.S. and foreign governments, civil agencies and providers of location-based services ("LBS"). Additionally, we serve a wide variety of companies in industry verticals, such as the financial services, energy, telecommunications, utility, forestry, mining, environmental and agricultural industries. The imagery that forms the foundation of our products and services is collected daily from our five high-resolution imaging satellites and maintained in our imagery archive, which we refer to as 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 4.9 billion square kilometers of imagery, an area the equivalent of 33 times the landmass of the earth, accumulated since 1999. As of June 30, 2014, our collection capacity was approximately 1.2 billion square kilometers of imagery per year, or the equivalent of roughly eight times the earth's land surface area. Increasing the capacity of our constellation and adding a new satellite, WorldView-3, which is expected to be launched in August 2014, will enable us to provide customers with superior performance and service. We anticipate a material increase in revenue once WorldView-3 reaches full operational capability ("FOC") as a result of the significant increase in satellite capacity across the 21 -------------------------------------------------------------------------------- Table of Contents constellation that will be made available to NGA at that time. Accordingly, when WorldView-3 reaches FOC, which we anticipate achieving approximately 90 days following the launch, we will begin to earn and recognize previously received EnhancedView cash payments that are classified as deferred revenue. In June 2014, the U.S. Department of Commerce granted us permission to sell the highest resolution imagery possible from our satellite constellation as follows: Satellite Best Ground Resolution WorldView-3(1) 31-centimeters WorldView-2 46-centimeters WorldView-1 50-centimeters GeoEye-1 41-centimeters QuickBird 58-centimeters IKONOS 82-centimeters -------------------------------------------------------------------------------- (1) Subject to the successful launch and commissioning into operation of WorldView-3, six months after the satellite becomes operational we will be permitted to provide customers with the satellite's best ground resolution. We have begun referring to GeoEye-2 as WorldView-4 internally and in marketing materials. We are completing enhancements to our WorldView-4 satellite and anticipate that those will be completed in the second half of 2014, at which time the satellite will be placed into storage. We intend to launch and place into service our WorldView-4 satellite in the second half of 2016 for forecasted incremental growth opportunities. Capitalization of all costs associated with this satellite will cease during the period in which the satellite is in storage and during which no additional enhancements are made. Storage costs and all other incremental costs that result from placing the satellite into storage will be expensed as incurred. Costs associated with enhancements to satellite capability will be capitalized. When we place the WorldView-4 satellite into service, all costs associated with removing the satellite from storage and other incremental costs that result from the storage process will be expensed as incurred. However, costs incurred to launch the satellite and perform in-orbit testing prior to the satellite reaching its FOC will be capitalized as these costs are necessary to place the satellite into service. After the satellite has been successfully placed into service, it will be removed from construction-in-process and recorded as a fixed asset. While satellite technology is highly sophisticated, satellite imaging technology has not changed significantly over time. As a result, we do not anticipate that the imaging technology and capabilities of the WorldView-4 satellite will experience any significant obsolescence during the satellite storage period and, therefore, we do not anticipate commencing depreciation of the satellite until it is placed into service. Our WorldView-3 and WorldView-4 satellites are expected to have useful lives similar to or longer than those of our most recently launched satellites. We include the WorldView-3 and WorldView-4 satellites in our assessment of impairment of our satellite constellation long-lived assets group. All of our assets, including our satellites and ground terminals, comprise a single asset group as separately identifiable cash flows attributable to any given satellite cannot be derived. Accordingly, our impairment testing is performed at the DigitalGlobe entity level. Our impairment analysis includes anticipated future cash flows from our satellite constellation as well as costs necessary to complete the construction of our satellites. We test this long-lived asset group for impairment annually or whenever events or changes in circumstances indicate that the asset group's carrying amount may not be recoverable. On January 31, 2013, we completed the acquisition of 100% of the outstanding stock of GeoEye, Inc. ("GeoEye"), a leading provider of geospatial intelligence solutions in a stock and cash transaction valued at approximately $1.4 billion. The acquisition of GeoEye increased the scale of our existing operations, diversified our customer base and product mix, broadened our service offerings, enabled us to optimize our satellite orbits and collection of imagery, and strengthened our production and analytics capabilities. The combined company has five operational satellites in orbit, a satellite expected to be launched in August 2014, and a satellite nearing end of construction. Refer to Note 4 "Business Acquisitions" to the Unaudited Condensed Consolidated Financial Statements for further discussion. We incurred the following combination-related costs in conjunction with the acquisition of GeoEye during the three month and six month periods ended June 30, 2014 and 2013: Three months ended June 30, 2014 Three months ended June 30, 2013 (in millions) Expensed Capitalized Total Expensed Capitalized Total Restructuring costs $ - $ - $ - $ 13.6 $ - $ 13.6 Integration costs 5.6 15.5 21.1 7.2 5.1 12.3 Acquisition costs - - - (0.2 ) - (0.2 ) Total combination related costs $ 5.6 $ 15.5 $ 21.1 $ 20.6 $ 5.1 $ 25.7 22 -------------------------------------------------------------------------------- Table of Contents Six months ended June 30, 2014 Six months ended June 30, 2013 (in millions) Expensed Capitalized Total Expensed Capitalized Total Restructuring costs $ 1.1 $ - $ 1.1 $ 33.9 $ - $ 33.9 Integration costs 9.4 25.5 34.9 15.1 6.3 21.4 Acquisition costs - - - 20.6 - 20.6 Debt related costs - - - 17.8 36.6 54.4 Total combination related costs $ 10.5 $ 25.5 $ 36.0 $ 87.4 $ 42.9 $ 130.3 During the first quarter of 2013, we initiated a series of restructuring activities intended to improve our operational efficiency as a result of 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, including contract termination charges to effect the restructuring activities. These restructuring activities were completed in March 2014 and we do not currently expect additional restructuring charges in 2014. Integration costs that are expensed consist primarily of professional fees incurred to assist us with system and process improvements associated with integrating operations. Capitalized costs relating to integration primarily consist of property, equipment and leasehold improvements necessary to consolidate operations. We expect integration related expenses will end in the third quarter of 2014; however, we will continue to capitalize certain costs until our integration related projects are completed in the fourth quarter of 2014. Acquisition costs were costs incurred to effect the acquisition, such as advisory, legal, accounting, consulting and other professional fees. Debt-related costs were related to entering into a seven-year $550.0 million Senior Secured Term Loan Facility and a five-year $150.0 million Senior Secured Revolving Credit Facility (collectively, the "2013 Credit Facility") and issuing $600.0 million of 5.25% Senior Notes due 2021, the proceeds of which were used to refinance our $500.0 million senior secured term loan and our $100.0 million senior secured revolving credit facility, and fund the discharge and redemption of GeoEye's $400.0 million 9.625% Senior Secured Notes due 2015 and $125.0 million 8.625% Senior Secured Notes due 2016 we assumed in the acquisition. Synergies from our acquisition of GeoEye are principally from labor cost reductions and operational infrastructure savings resulting from our restructuring and integration efforts as compared with the pre-acquisition combined operating expenses of GeoEye and DigitalGlobe, and including adjustments for planned expenditures related to project commitments, infrastructure investments, and compensation increases. These synergies, however, are partially offset by higher operating costs associated with growth in our business. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions. Refer to the accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013, where we discuss our more significant judgments and estimates used in the preparation of the Unaudited Condensed Consolidated Financial Statements. We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2013. New Accounting Pronouncements See Note 2 "Summary of Significant Accounting Policies" of our Unaudited Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements and our expectation of their impact on our Unaudited Condensed Consolidated Financial Statements. 23 -------------------------------------------------------------------------------- Table of Contents Backlog The following table represents our backlog as of June 30, 2014. "Next 12 Months" backlog refers to the backlog expected to be recognized as revenue during the period between July 1, 2014 and June 30, 2015. Backlog to be recognized Life of (in millions) Next 12 Months Contracts U.S. Government: EnhancedView SLA $ 301.5 $ 2,051.1 Amortization of pre-FOC payments related to NextView 25.5 98.9 Other revenue and value added services 34.2 99.9 Total U.S. Government 361.2 2,249.9 Diversified Commercial: DAP 66.7 124.4 Other Diversified Commercial(1) 89.5 152.1 Total Diversified Commercial 156.2 276.5 Total Backlog $ 517.4 $ 2,526.4 -------------------------------------------------------------------------------- (1) Other Diversified Commercial backlog consists of firm orders, minimum commitments under signed customer contracts, remaining amounts under pre-paid subscriptions, firm fixed price reimbursement and funded and unfunded task orders from Diversified Commercial customers. Backlog consists of all contractual commitments, including those under the anticipated ten-year term of the EnhancedView contract ("EnhancedView Contract") with the NGA, amounts committed under Direct Access Program ("DAP") agreements, firm orders, remaining pre-paid subscriptions and task orders from our government customers. Our backlog also includes amounts of obligated funding on indefinite delivery/indefinite quantity ("IDIQ") contracts on which we participate for products and services that we believe we are qualified to provide. The EnhancedView Contract is structured as a ten-year term, inclusive of nine annual renewal options that may be exercised by the NGA. The EnhancedView Contract contains multiple deliverables, including a service level agreement ("EnhancedView SLA") described below, infrastructure enhancements and other services. Although the NGA may terminate the contract at any time and is not obligated to exercise any of the remaining five renewal options, we include the full remaining term in backlog, because we believe it is NGA's intention to exercise the remaining options, subject only to annual Congressional appropriation of funding and the federal budget process, which funding contains an inherent level of uncertainty in the current budget environment. The amortization of pre-FOC payments related to our NextView agreement with the NGA will be recognized over the expected useful life of WorldView-1. The recognition of this revenue has no effect on our ability to generate additional revenue from the usage of the satellite and we do not consider it a reduction in our capacity to generate additional sales. Additionally, if the life of WorldView-1 were to be modified, the amortization of deferred revenue would be modified and either reduced in the event that the life of WorldView-1 is extended, or increased in the event the life of WorldView-1 is reduced. Although backlog reflects business that is considered to be firm, terminations, amendments or cancellations may occur, which could result in a reduction in our total backlog. In addition, failure to receive task orders under IDIQ contracts could also result in a reduction in our total backlog. Any such terminations, amendments or cancellations of contractual commitments, or failure to receive task orders under IDIQ contracts may also negatively impact the timing of our realization of backlog. Significant Customer EnhancedView Service Level Agreement Our largest customer is the U.S. Government, which includes our EnhancedView SLA with the NGA. The EnhancedView SLA totals $2.8 billion over the term of the contract, payable as $250.0 million per year ($20.8 million monthly) for the first four contract years commencing September 1, 2010, and $300.0 million per year ($25.0 million monthly) for the remaining six years of the contract beginning September 1, 2014. We are required to meet certain service level requirements related to the operational performance of the WorldView constellation and related ground systems. The NGA has exercised the first three options under the EnhancedView SLA, collectively extending the SLA through August 31, 2014. On July 23, 2014, the NGA exercised the fourth option under the EnhancedView SLA, extending the SLA for the period of September 1, 2014 through August 31, 2015. We recognize revenue for the EnhancedView SLA using a proportional performance method. Under this method, revenue is recognized based on the estimated amount of imaging capacity made available to NGA in any given period compared to the total 24 -------------------------------------------------------------------------------- Table of Contents estimated imaging capacity to be provided over the life of the contract. As increasing levels of imaging capacity are made available to NGA, EnhancedView SLA revenue increases proportionally. The contract requires us to increase the imaging capacity made available to NGA through the addition of our WorldView-3 satellite (scheduled to launch in August 2014). Given the significant amount of imaging capacity that will be made available to NGA after WorldView-3 becomes operational, we anticipate a material increase in revenue after WorldView-3 reaches FOC. Accordingly, when WorldView-3 reaches FOC, we will begin to earn and recognize previously deferred revenue. During the first quarter of 2014, DigitalGlobe and NGA agreed to certain modifications of the EnhancedView Contract that included, among other changes, flexibility in the timing of the capacity step-up to accommodate a potential delay of no greater than four months in the launch of WorldView-3. Step-up in the monthly cash payments from NGA remain unchanged, and will increase from $20.8 million per month to $25.0 million per month beginning on September 1, 2014. The modifications did not result in a material change to the SLA accounting methodology and we continue to use the proportional performance method of revenue recognition. Results of Operations The following tables summarize our results of operations for the three months ended June 30, 2014 compared to the three months ended June 30, 2013: Three months ended June 30, Change (dollars in millions) 2014 2013 $ Percent Results of operations: U.S. Government revenue $ 95.5 $ 82.7 $ 12.8 15.5 % Diversified Commercial revenue 62.3 67.9 (5.6 ) (8.2 ) Total revenue 157.8 150.6 7.2 4.8 Cost of revenue excluding depreciation and amortization 41.1 47.3 (6.2 ) (13.1 ) Selling, general and administrative 58.4 64.5 (6.1 ) (9.5 ) Depreciation and amortization 57.6 59.0 (1.4 ) (2.4 ) Restructuring charges - 13.6 (13.6 ) * Income (loss) from operations 0.7 (33.8 ) 34.5 * Other income, net - 0.1 (0.1 ) * Interest expense, net - (1.4 ) 1.4 * Income (loss) before income taxes 0.7 (35.1 ) 35.8 * Income tax benefit 4.3 14.1 (9.8 ) (69.5 ) Net income (loss) $ 5.0 $ (21.0 ) $ 26.0 * -------------------------------------------------------------------------------- * Not meaningful The following tables summarize our results of operations for the six months ended June 30, 2014 compared to the six months ended June 30, 2013: Six months ended June 30, Change (dollars in millions) 2014 2013 $ Percent Results of operations: U.S. Government revenue $ 193.1 $ 160.2 $ 32.9 20.5 % Diversified Commercial revenue 121.2 118.0 3.2 2.7 Total revenue 314.3 278.2 36.1 13.0 Cost of revenue excluding depreciation and amortization 80.6 88.2 (7.6 ) (8.6 ) Selling, general and administrative 111.4 144.3 (32.9 ) (22.8 ) Depreciation and amortization 115.2 106.3 8.9 8.4 Restructuring charges 1.1 33.9 (32.8 ) (96.8 ) Loss on abandonment of asset 1.2 - 1.2 * Income (loss) from operations 4.8 (94.5 ) 99.3 * Loss from early extinguishment of debt - (17.8 ) 17.8 * Other income, net 0.1 0.4 (0.3 ) (75.0 ) Interest expense, net - (2.8 ) 2.8 * Income (loss) before income taxes 4.9 (114.7 ) 119.6 * Income tax benefit 0.5 33.1 (32.6 ) (98.5 ) Net income (loss) $ 5.4 $ (81.6 ) $ 87.0 * -------------------------------------------------------------------------------- * Not meaningful 25 -------------------------------------------------------------------------------- Table of Contents Revenue The following table summarizes revenue as a percentage of totals for U.S. Government and Diversified Commercial customers: For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Net Revenue as a Percent of Total: U.S. Government 60.5 % 54.9 % 61.4 % 57.6 % Diversified Commercial 39.5 45.1 38.6 42.4 Total net revenue 100.0 % 100.0 % 100.0 % 100.0 % Total U.S. and international revenues were as follows: For the three months ended For the six months ended June 30, June 30, (in millions) 2014 2013 2014 2013 Net Revenue: U.S. $ 108.3 $ 99.5 $ 219.9 $ 190.3 International 49.5 51.1 94.4 87.9 Total net revenue $ 157.8 $ 150.6 $ 314.3 $ 278.2 The following table summarizes our percentage of direct and reseller and partner sales on a consolidated basis: For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Reseller and Direct Sales: Direct 91.5 % 87.6 % 92.0 % 86.8 % Resellers 8.5 12.4 8.0 13.2 100.0 % 100.0 % 100.0 % 100.0 % Our principal source of revenue is the licensing of our earth imagery products and other services to end users and resellers and partners. We operate in a single segment, in which we provide imagery, imagery information products and services to customers around the world. The vast majority of our revenue is derived from imagery and imagery information products and services. In order to serve our customers, we use a common infrastructure and technology to collect, process and distribute those imagery products and services to all customers. We have organized our sales leadership and marketing efforts around two customer groups (i) U.S. Government and (ii) Diversified Commercial. Revenue recognized for services provided to U.S. Government customers consist primarily of the EnhancedView SLA, amortization of pre-FOC payments related to the NextView agreement and other value added services. Diversified Commercial revenue consists of DAP revenue, other international defense and intelligence revenue, and revenue from civil governments, providers of LBS and industry verticals. Our imagery products and services are comprised of imagery that we process to varying levels according to our customer's specifications. We deliver our products and services using the distribution method suited to our customers' needs. Customers can purchase satellite or aerial images that are archived in our ImageLibrary. Customers can also order imagery content by placing custom orders, which requires tasking of our satellites, for a specific area of interest or as a bundle of imagery and data for a region or type of location, such as cities, ports, harbors or airports. 26 -------------------------------------------------------------------------------- Table of Contents U.S. Government For the three months ended For the six months ended June 30, June 30, (in millions) 2014 2013 2014 2013 U.S. Government Net Revenue: EnhancedView SLA $ 56.8 $ 56.8 $ 113.6 $ 113.6 Other revenue and value added services 32.3 19.5 66.7 33.8 Amortization of pre-FOC payments related to NextView 6.4 6.4 12.8 12.8 Total U.S. Government net revenue $ 95.5 $ 82.7 $ 193.1 $ 160.2 Reseller and Direct Sales: Direct 99.9 % 99.9 % 99.9 % 99.3 % Resellers 0.1 0.1 0.1 0.7 100.0 % 100.0 % 100.0 % 100.0 % U.S. Government primarily consists of customers who are defense and intelligence agencies of the U.S. Government. The U.S. Government, through NGA, purchases our imagery products and services on behalf of various entities within the U.S. Government, including the military and other government agencies. EnhancedView SLA revenue comprised 36.0% and 37.7% of our revenue for the three months ended June 30, 2014 and 2013, respectively, and 36.1% and 40.8% of our revenue for the six months ended June 30, 2014 and 2013, respectively. We also sell to other U.S. defense and intelligence customers including defense and intelligence contractors who provide an additional outlet for our imagery by providing value-added services with our imagery to deliver a final end product to a customer. Other revenue and value added services comprised 20.5% and 12.9% of our revenue for the three months ended June 30, 2014 and 2013, respectively, and 21.2% and 12.1% of our revenue for the six months ended June 30, 2014 and 2013, respectively. Our U.S. Government customers focus on image quality, including resolution, accuracy, spectral diversity, frequency of area revisit and coverage, as well as ensuring availability of a certain amount of our capacity as they integrate our products and services into their operational planning. Our customers typically operate under contracts with purchase commitments, through which we receive monthly or quarterly payments in exchange for delivering specific orders to the customer. Our revenue from customers in the U.S. Government has historically been largely from service level agreements and tasking orders, with a smaller portion from sales of imagery from our ImageLibrary. We sell to the U.S. Government primarily through direct sales, with sales arising from sub-contract relationships to a lesser extent, and expect this trend to continue. Diversified Commercial Revenue For the three months ended For the six months ended June 30, June 30, (in millions) 2014 2013 2014 2013 Diversified Commercial Net Revenue: DAP $ 30.6 $ 28.7 $ 57.1 $ 46.7 Other diversified commercial 31.7 39.2 64.1 71.3 Total Diversified Commercial net revenue $ 62.3 $ 67.9 $ 121.2 $ 118.0 For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Reseller and Direct Sales: Direct 78.8 % 72.6 % 79.5 % 70.0 % Resellers 21.2 27.4 20.5 30.0 100.0 % 100.0 % 100.0 % 100.0 % Our Diversified Commercial customers are located throughout the world. They purchase our products and services on an as-needed basis, or through contracts that span one or more years, depending on the solution that best suits their application. We sell to these customers through a combination of direct sales and through resellers. We earn revenue from sales of the DAP facility hardware and software, as well as from service fees to access our satellite constellation. The revenue to access our satellite constellation is recognized over time based on minutes of actual usage. The revenue and costs associated with the sales of a DAP facility are deferred until we commission into operation the ground terminal and can provide contractually specified access to our satellites. The facilities related revenue and costs are then recognized ratably over the customer relationship period, which is based on the estimated useful life of the satellite being accessed, except when deferred contract 27 -------------------------------------------------------------------------------- Table of Contents costs are in excess of deferred revenue, in which case the excess costs are recognized over the initial contract period. If more than one satellite is used, the satellite with the longest remaining useful life is used as the basis for the amortization of revenue. We have DAP agreements in 10 countries. Other Diversified Commercial revenue also includes revenue from international civil governments, providers of LBS, industry verticals and international defense and intelligence customers. Our customers are primarily government agencies, energy, telecommunications, utility and agricultural companies who, like our U.S. Government customers, use our content for mapping, monitoring, analysis and planning activities. Providers of LBS include internet portals, connected devices, and digital mapmakers, who use our imagery products and services to create or expand their products and services. Customers in our industry verticals include financial services, energy, telecommunications, utility, forestry, mining, environmental and agricultural industries. For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Revenue increased $7.2 million, or 4.8%, to $157.8 million for the three months ended June 30, 2014 from $150.6 million for the three months ended June 30, 2013. There was an increase of $12.8 million, or 15.5%, in U.S. Government revenue to $95.5 million during the three months ended June 30, 2014 from $82.7 million for the three months ended June 30, 2013. This increase was the result of a $12.8 million increase in other revenue and value added services primarily attributable to expanded services being delivered, including daily global imagery collections ("Global EGD") delivered via a web-based platform. There was a decrease of $5.6 million, or 8.2%, in Diversified Commercial revenue to $62.3 million for the three months ended June 30, 2014 from $67.9 million for the three months ended June 30, 2013. During the three months ended June 30, 2014 compared to the three months ended June 30, 2013, DAP revenue increased $1.9 million primarily due to one direct access customer that was activated in the first quarter of 2014. Other diversified commercial revenue decreased $7.5 million during the three months ended June 30, 2014 compared to the same period in 2013 due to decreased revenue from customers in Russia totaling approximately $4.8 and data deliveries to two customers totaling $6.3 million during the three months ended June 30, 2013 that did not recur during the three months ended June 30, 2014. These decreases were partially offset by growth in revenue from our acquisition of Spatial Energy, and from other new and existing customers. For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Revenue increased $36.1 million, or 13.0%, to $314.3 million for the six months ended June 30, 2014 from $278.2 million for the six months ended June 30, 2013. There was an increase of $32.9 million, or 20.5%, in U.S. Government revenue to $193.1 million during the six months ended June 30, 2014 from $160.2 million for the six months ended June 30, 2013. This increase was the result of a $32.9 million increase in other revenue and value added services primarily attributable to expanded services being delivered, including Global EGD and an additional month of revenue from services provided to customers from the GeoEye acquisition in 2014 as compared to 2013. There was an increase of $3.2 million, or 2.7%, in Diversified Commercial revenue to $121.2 million for the six months ended June 30, 2014 from $118.0 million for the six months ended June 30, 2013. During the six months ended June 30, 2014 compared to the six months ended June 30, 2013, DAP revenue increased $10.4 million primarily due to the year over year impact of activating two direct access customers totaling $8.1 million and an additional month of revenue from GeoEye totaling $2.2 million. Other diversified commercial revenue decreased $7.2 million during the six months ended June 30, 2014 compared to the same period in 2013 due to decreased revenue from customers in Russia totaling approximately $8.1 million and data deliveries to two customers totaling $6.3 million during the six months ended June 30, 2013 that did not recur during the six months ended June 30, 2014. These decreases were partially offset by growth in revenue from our acquisition of Spatial Energy, an additional month of revenue from GeoEye in 2014, and from other new and existing customers. 28 -------------------------------------------------------------------------------- Table of Contents Expenses The following table summarizes our results of operations for the three and six months ended June 30, 2014 and 2013 as a percentage of total revenue: For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Expenses as a percentage of net revenue: Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue excluding depreciation and amortization 26.0 31.4 25.6 31.7 Selling, general and administrative 37.0 42.8 35.5 51.9 Depreciation and amortization 36.5 39.2 36.7 38.2 Restructuring charges - 9.0 0.3 12.2 Loss on abandonment of asset - - 0.4 - Income (loss) from operations 0.5 (22.4 ) 1.5 (34.0 ) Loss on early extinguishment of debt - - - (6.4 ) Other income, net - - - 0.2 Interest expense, net - (0.9 ) - (1.0 ) Income (loss) before income taxes 0.5 (23.3 ) 1.5 (41.2 ) Income tax benefit 2.7 9.4 0.2 11.9 Net income (loss) 3.2 % (13.9 )% 1.7 % (29.3 )% Cost of Revenue The following table summarizes our cost of revenue, excluding depreciation and amortization: For the three months ended For the six months ended June 30, June 30, (in millions) 2014 2013(1) 2014 2013(1) Labor and labor related costs $ 17.8 $ 19.8 $ 34.6 $ 36.7 Facilities, subcontracting and equipment costs 18.2 20.9 36.4 39.9 Consulting and professional fees 1.9 2.6 2.8 4.2 Aerial imagery 1.3 2.0 2.9 4.0 Other direct costs 1.9 2.0 3.9 3.4 Total cost of revenue, excluding depreciation and amortization $ 41.1 $ 47.3 $ 80.6 $ 88.2 -------------------------------------------------------------------------------- (1) Certain immaterial 2013 amounts have been reclassified to conform to the current year presentation. Most of the costs of a satellite are related to the pre-operation capital expenditures required to build and launch a satellite. There is not a significant direct relationship between our cost of revenue and changes in our revenue. Our cost of revenue consists primarily of the cost of personnel, as well as the costs of operating our satellites, retrieving information from the satellites and processing the data retrieved. Costs of acquiring aerial imagery from third parties have been capitalized and are amortized on an accelerated basis as a cost of revenue. For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Cost of revenue decreased $6.2 million, or 13.1%, to $41.1 million during the three months ended June 30, 2014 from $47.3 million for the three months ended June 30, 2013. Labor and labor related costs decreased $2.0 million primarily resulting from our restructuring efforts. Facilities, subcontracting and equipment costs decreased $2.7 million primarily due to a reduction in costs of approximately $2.5 million resulting from the consolidation of ground terminals and related telecommunication contracts acquired in connection with our acquisition of GeoEye. The decrease in consulting and professional fees of $0.7 million is primarily due to reduced third-party services needed to support the integration of GeoEye. For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Cost of revenue decreased $7.6 million, or 8.6%, to $80.6 million during the six months ended June 30, 2014 from $88.2 million for the six months ended June 30, 2013. Labor and labor related costs decreased $2.1 million primarily due to a reduction in expenses of approximately $5.3 million resulting from our restructuring efforts, partially offset by an additional month of expense for employees assumed in connection with our acquisition of GeoEye totaling $3.2 million. Facilities, subcontracting and equipment costs decreased $3.5 million primarily due to a reduction in costs of approximately $6.6 million due to the consolidation of ground terminals and related telecommunications contracts acquired in connection with our acquisition of GeoEye. This reduction was partially offset by an 29 -------------------------------------------------------------------------------- Table of Contents additional month of expense associated with the remaining ground terminal facilities acquired from GeoEye totaling $2.0 million and a net increase in direct access facility costs of $0.8 million resulting from additional facilities that came online during the current year, partially offset by a decrease in expenses from existing facilities. The decrease in consulting and professional fees of $1.4 million is primarily due to reduced services needed to support the integration of GeoEye. Selling, General and Administrative The following table summarizes our selling, general and administrative expenses: For the three months ended For the six months ended June 30, June 30, (in millions) 2014 2013(1) 2014 2013(1) Acquisition costs $ - $ (0.2 ) $ - $ 20.6 Labor and labor related costs 33.2 32.2 63.4 64.6 Consulting and professional fees 12.8 18.4 24.2 34.1 Rent and facilities 2.7 4.7 5.7 7.4 Satellite insurance 2.3 3.4 4.7 6.3 Other 7.4 6.0 13.4 11.3 Total selling, general and administrative $ 58.4 $ 64.5 $ 111.4 $ 144.3 -------------------------------------------------------------------------------- (1) Certain immaterial 2013 amounts have been reclassified to conform to the current year presentation. For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Selling, general and administrative expenses decreased $6.1 million, or 9.5%, to $58.4 million during the three months ended June 30, 2014 from $64.5 million for the three months ended June 30, 2013. Labor and labor related costs increased $1.0 million primarily due to severance expenses of approximately $1.4 million. The decrease in consulting and professional fees of $5.6 million is primarily due to reduced combination related costs associated with the integration of GeoEye. Rent and facilities expenses decreased $2.0 million primarily due to consolidation of facilities and telecommunication contracts. Satellite insurance decreased $1.1 million due to a reduction in current year rates to insure our in-orbit satellites. Other expenses increased $1.4 million due to higher costs related to software licenses and support, hardware support and maintenance fees. For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Selling, general and administrative expenses decreased $32.9 million, or 22.8%, to $111.4 million during the six months ended June 30, 2014 from $144.3 million for the six months ended June 30, 2013. The reduction in acquisition costs of $20.6 million was for the acquisition of GeoEye in 2013. Labor and labor related costs decreased $1.2 million primarily due to a reduction in expenses of approximately $5.1 million resulting from our restructuring efforts, partially offset by an additional month of expense for employees assumed in connection with our acquisition of GeoEye of approximately $2.5 million and $1.4 million of severance expenses. Consulting and professional fees decreased $9.9 million primarily due to reduced combination related costs associated with the integration of GeoEye. Rent and facilities expenses decreased $1.7 million primarily due to consolidation of facilities and telecommunication contracts. Satellite insurance decreased $1.6 million due to a reduction in current year rates to insure our on-orbit satellites. Other expenses increased $2.1 million due to higher costs related to software licenses and support, hardware support and maintenance fees. Depreciation and Amortization Depreciation and amortization consists primarily of depreciation of our satellites and other operating assets. For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Depreciation and amortization expense decreased $1.4 million, or 2.4%, to $57.6 million for the three months ended June 30, 2014 from $59.0 million for the three months ended June 30, 2013 due to a $2.4 million decrease in expense primarily from fully depreciated assets, partially offset by a $1.0 million increase in expense related to assets placed into service in the current year, including intangible assets assumed as part of our acquisition of Spatial Energy. For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Depreciation and amortization expense increased $8.9 million, or 8.4%, to $115.2 million for the six months ended June 30, 2014 from $106.3 million for the six months ended June 30, 2013 primarily from an additional month of expense for property, equipment 30 -------------------------------------------------------------------------------- Table of Contents and intangible assets assumed in connection with our acquisition of GeoEye totaling $7.1 million, a $6.1 million increase in expense primarily resulting from assets placed into service during the current year, including intangible assets assumed as part of our acquisition of Spatial Energy, partially offset by a $4.6 million decrease in expense from fully depreciated assets. Restructuring Charges For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 There were no restructuring charges for the three months ended June 30, 2014 compared with $13.6 million for the three months ended June 30, 2013 as our restructuring activities related to the acquisition of GeoEye were completed in March 2014. For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Restructuring charges decreased $32.8 million, or 96.8%, to $1.1 million for the six months ended June 30, 2014 from $33.9 million for the six months ended June 30, 2013. The restructuring charges we incurred following our acquisition of GeoEye were designed to realign our infrastructure with demand by our customers so as to optimize our operational efficiency. These restructuring activities primarily consisted of reducing redundant workforce, consolidating office and production facilities, consolidating certain ground terminals and systems and other exit costs. We completed our restructuring activities related to the acquisition of GeoEye in March 2014. We currently do not expect additional restructuring charges in 2014. Loss from Early Extinguishment of Debt In connection with the acquisition of GeoEye, we entered into the 2013 Credit Facility, issued $600.0 million of Senior Notes ("Senior Notes"), which bear interest at 5.25%, and retired our previous credit facility. We recorded a loss of $17.8 million during the six months ended June 30, 2013 due to the write-off of $12.8 million of unamortized deferred financing fees and debt discount associated with the previous credit facility and $5.0 million of fees paid in connection with the 2013 Credit Facility and Senior Notes. Interest Expense, net For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Interest expense, net of capitalized interest and interest income, decreased $1.4 million to $0 for the three months ended June 30, 2014. This decrease is attributable to 100.0% of our interest capitalized to capital projects during the three months ended June 30, 2014 compared to 90.7% during the three months ended June 30, 2013. For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Interest expense, net of capitalized interest and interest income, decreased $2.8 million to $0 for the six months ended June 30, 2014. This decrease is attributable to 99.7% of our interest capitalized to capital projects during the six months ended June 30, 2014 compared to 89.5% during the six months ended June 30, 2013, with the remainder of interest expense offset by interest income. The majority of our capitalized interest is related to our WorldView-3 and WorldView-4 satellites. Capitalization of interest related to WorldView-3 will cease once the satellite reaches FOC, which we anticipate achieving approximately 90 days following the expected August 2014 launch. Capitalization of interest related to WorldView-4 will cease once the satellite is placed in storage, which we anticipate occurring in the second half of 2014. Income Tax Expense (Benefit) For the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Income tax benefit decreased $9.8 million, or 69.5%, to $4.3 million for the three months ended June 30, 2014 from an income tax benefit of $14.1 million for the three months ended June 30, 2013. For interim income tax reporting we estimate our annual effective tax rate and apply it to our year to date pre-tax income (loss). For the three months ended June 30, 2014, we recognized a tax benefit due to a change in our estimated annual effective tax rate and a release of tax reserves of $2.5 million upon completion of an Internal Revenue Service audit. 31 -------------------------------------------------------------------------------- Table of Contents For the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Income tax benefit decreased $32.6 million, or 98.5%, to $0.5 million for the six months ended June 30, 2014 from an income tax benefit of $33.1 million for the six months ended June 30, 2013. For interim income tax reporting we estimate our annual effective tax rate and apply it to our year to date pre-tax income (loss). For the six months ended June 30, 2014, we recognized a tax benefit due to a change in our estimated annual effective tax rate and a release of tax reserves of $2.5 million upon completion of an Internal Revenue Service audit. Balance Sheet Measures Total assets decreased $25.3 million, or 0.8%, to $3,140.5 million at June 30, 2014 from $3,165.8 million at December 31, 2013 primarily as a result of a decrease in cash and cash equivalents partially offset by increases in goodwill and intangible assets as a result of an acquisition completed during the first quarter of 2014. Property and equipment, net of accumulated depreciation was largely unchanged from December 31, 2013 to June 30, 2014, as costs to build our WorldView-3 and WorldView-4 satellites and other infrastructure projects were offset by depreciation. Total liabilities decreased $39.5 million, or 2.2%, to $1,743.0 million at June 30, 2014 from $1,782.5 million at December 31, 2013 primarily due to reductions in accounts payable and accrued liabilities resulting from reduced operating costs in 2014. Liquidity and Capital Resources As of June 30, 2014, we had $177.8 million in cash and cash equivalents. We believe that the combination of funds currently available to us and funds expected to be generated from operations will be adequate to finance our operations and development activities for the next twelve months. The U.S. Government accounted for 60.5% of our consolidated revenue for the quarter ended June 30, 2014, of which the EnhancedView SLA comprised 36.0% of our consolidated revenue. If the U.S. Government were not to renew or extend the EnhancedView SLA at similar levels or similar terms, we believe we would be able to maintain operations at a reduced level with existing cash, cash equivalents and proceeds from operations for at least the next twelve months. The Company's Board of Directors, on July 23, 2014, authorized a program to repurchase up to $75.0 million of the Company's outstanding common stock through December 31, 2015. The Company may repurchase shares through open market purchases, privately negotiated transactions, structured or derivative transactions such as puts, calls, options, forwards, collars, accelerated share repurchase transactions (with or without collars), other equity contracts or other methods of acquiring shares, in each case on such terms and at such times as shall be permitted by applicable securities laws and determined by management. The stock repurchase program does not obligate the Company to acquire any stock, and it may be limited or terminated at any time without notice. In summary, our cash flows were: Six months ended June 30, (in millions) 2014 2013 Net cash provided by operating activities $ 101.2 $ 1.6 Net cash used in investing activities (150.0 ) (665.3 ) Net cash (used in) provided by financing activities (2.5 ) 658.9 Cash provided by operating activities was $101.2 million for the six months ended June 30, 2014 compared to cash provided by operating activities of $1.6 million for the six months ended June 30, 2013. The $99.6 million increase in cash provided by operating activities was primarily due to net income in 2014 compared with a loss in 2013, which was largely the result of merger related expenditures incurred in connection with our acquisition of GeoEye. Cash used in investing activities was $150.0 million for the six months ended June 30, 2014 compared to $665.3 million for the six months ended June 30, 2013. The $515.3 million decrease in cash used in investing activities was primarily due to cash expenditures for the acquisition of GeoEye incurred in 2013, partially offset by an acquisition completed in 2014. We will continue to make capital expenditures on our WorldView-3 satellite until its launch, which we anticipate will be in August 2014. We are making additional capital expenditures on WorldView-4 to enhance its capabilities. We expect to complete the enhancements being made to WorldView-4 in the second half of 2014 and intend to place the satellite in storage until the second half of 2016 when we intend to launch and place WorldView-4 into service. Cash used in financing activities was $2.5 million for the six months ended June 30, 2014 compared to cash provided by financing activities of $658.9 million for the six months ended June 30, 2013. The $661.4 million decrease in cash provided by financing activities was primarily due to $632.6 million in net proceeds received during the six months ended June 30, 2013 from refinancing our debt in connection with the acquisition of GeoEye. In addition, cash proceeds from the exercise of stock options decreased $25.6 32 -------------------------------------------------------------------------------- Table of Contents million to $3.1 million for the six months ended June 30, 2014 from $28.7 million for the six months ended June 30, 2013 primarily as a result of former GeoEye executives exercising their options following the acquisition. 2013 Credit Facility In connection with the acquisition of GeoEye on January 31, 2013, we entered into the 2013 Credit Facility, which includes a seven-year $550.0 million Senior Secured Term Loan Facility and a five-year $150.0 million Senior Secured Revolving Credit Facility. At the closing of the 2013 Credit Facility, we borrowed the full amount of the Senior Secured Term Loan Facility. As of June 30, 2014, we have not drawn any amounts under the Senior Secured Revolving Credit Facility. The 2013 Credit Facility requires quarterly principal payments of $1.375 million, which began on June 30, 2013 and will continue through February 1, 2020. As of February 1, 2014, there is no penalty for the early repayment of the Senior Secured Term Loan Facility. Borrowings under the 2013 Credit Facility bear interest at an adjusted LIBOR rate, plus a 2.75% margin subject to a 1.0% LIBOR floor. The LIBOR margin becomes 2.5% when our ratio of total debt to Adjusted EBITDA is 2.5:1.0 or lower. The Senior Secured Term Loan Facility currently bears interest based upon the LIBOR-based rate. The Company is also required to pay a commitment fee of between 37.5 to 50.0 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility based on our leverage ratio. Our obligations under the 2013 Credit Facility are guaranteed by certain of our existing and future direct and indirect wholly-owned domestic subsidiaries. Our obligations and the obligations of our guarantor subsidiaries under the 2013 Credit Facility are collateralized by substantially all of our assets and the assets of the guarantor subsidiaries. The 2013 Credit Facility contains affirmative and negative covenants that we believe are usual and customary for a senior secured credit agreement. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with its affiliates. The 2013 Credit Facility also requires that the Company comply with a maximum leverage ratio and minimum interest coverage ratio. As of June 30, 2014, we were in compliance with our debt covenants. Senior Notes In connection with the acquisition of GeoEye, we issued the Senior Notes, which bear interest at 5.25% per year. Interest on the Senior Notes is payable on February 1 and August 1 of each year, beginning on August 1, 2013. The Senior Notes were issued at par and mature on February 1, 2021. We may redeem some or all of the Senior Notes at any time on or after February 1, 2017, at the redemption prices set forth in the indenture governing the Senior Notes. The initial redemption price for the Senior Notes is 102.625% of their principal amount plus accrued and unpaid interest to the date of redemption. We may redeem some or all of the Senior Notes at any time prior to February 1, 2017, at a redemption price equal to 100% of their principal amount, plus a "make whole" premium, together with accrued and unpaid interest to the date of redemption. In addition, on or prior to February 1, 2016, we may redeem up to 35% of the principal amount of the Senior Notes using the net cash proceeds from sales of certain types of capital stock at a redemption price equal to 105.250% of the principal amount of the Senior Notes, plus accrued and unpaid interest to the date of redemption, subject to certain other provisions as set forth in the offering memorandum. If a change of control occurs, we must give holders of the Senior Notes an opportunity to sell us their Senior Notes at a purchase price of 101% of the principal amount of such Senior Notes, plus accrued and unpaid interest to the date of purchase. The Senior Notes are senior unsecured obligations, ranking equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness and senior to our existing and future subordinated indebtedness. The Senior Notes are unconditionally guaranteed, jointly and severally, by all of our existing and certain of our future domestic subsidiaries, including GeoEye and its domestic subsidiaries, which also guarantee our 2013 Credit Facility. Each guarantor's guarantee ranks parri passu in right of payment with all future senior indebtedness of the guarantor. The Senior Notes have not been registered under the Securities Act of 1933, as amended ("Securities Act"). We agreed to file an exchange offer registration statement or, under certain circumstances, a shelf registration statement, pursuant to a registration rights agreement if the Senior Notes were not freely transferable on February 1, 2014 under Rule 144 of the Securities Act, by persons that are not our "affiliates" (as defined under Rule 144). As of February 1, 2014, the Senior Notes were freely transferable and eligible for resale pursuant to Rule 144 under the Securities Act. The net proceeds of the 2013 Credit Facility and Senior Notes were used, along with cash on hand, to refinance our $500.0 million senior secured term loan and $100.0 million senior secured revolving credit facility entered into on October 12, 2011, to fund the discharge and redemption of GeoEye's $400.0 million 9.625% Senior Secured Notes due 2015 and $125.0 million 8.625% Senior Secured Notes due 2016 assumed in connection with the acquisition, to pay the cash consideration under the merger agreement and to pay fees and expenses related to the transactions. 33 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations As of June 30, 2014, there were no significant changes to the contractual obligations table presented in our Annual Report on Form 10-K for the year ended December 31, 2013. Off-Balance Sheet Arrangements, Guaranty and Indemnification Obligations Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of June 30, 2014. Guaranty and Indemnification Obligations We enter into agreements in the ordinary course of business with resellers and others. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require us to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by us, our employees, agents or representatives. In addition, from time to time we have made guarantees regarding the performance of our systems to our customers. Non-U.S. GAAP Financial Measures Reconciliation of Net Cash Flows Provided by Operating Activities to Free Cash Flow For the six months ended June 30, (in millions) 2014 2013Net cash flows provided by operating activities $ 101.2 $ 1.6 Net cash flows used in investing activities (150.0 ) (665.3 ) Acquisition of businesses, net of cash acquired 35.7 524.0 Free cash flow $ (13.1 ) $ (139.7 ) Free cash flow is defined as net cash provided by operating activities less net cash flows used in investing activities (excluding acquisition of businesses, net of cash acquired). Free cash flow is not a recognized term under U.S. GAAP and may not be defined similarly by other companies. Free cash flow should not be considered an alternative to "operating income (loss)," "net income (loss)," "net cash flows provided by (used in) operating activities" or any other measure determined in accordance with U.S. GAAP. Since free cash flow includes investments in operating assets, we believe this non-GAAP liquidity measure is useful in addition to the most comparable U.S. GAAP measure - "net cash flows provided by (used in) operating activities" because it provides information about the amount of cash generated after acquisitions of businesses that is then available to repay debt obligations, make investments, fund acquisitions, and for certain other activities. There are limitations to using non-U.S. GAAP financial measures, including the difficulty associated with comparing companies in different industries that use similar performance measures whose calculations may differ from ours. Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA For the three months ended For the six months ended June 30, June 30, (in millions) 2014 2013 2014 2013 Net income (loss) $ 5.0 $ (21.0 ) $ 5.4 $ (81.6 ) Depreciation and amortization 57.6 59.0 115.2 106.3 Interest expense, net - 1.4 - 2.8 Income tax benefit (4.3 ) (14.1 ) (0.5 ) (33.1 ) EBITDA 58.3 25.3 120.1 (5.6 ) Loss from early extinguishment of debt - - - 17.8 Loss on abandonment of asset - - 1.2 - Restructuring charges (1) - 13.6 1.1 33.9 Acquisition costs (1) - (0.2 ) - 20.6 Integration costs (1) 5.6 7.2 9.4 15.1 Adjusted EBITDA $ 63.9 $ 45.9 $ 131.8 $ 81.8 -------------------------------------------------------------------------------- (1) Restructuring, acquisition and integration costs consist of non-recurring charges related to the combination with GeoEye. 34 -------------------------------------------------------------------------------- Table of Contents EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and may not be defined similarly by other companies. EBITDA and Adjusted EBITDA should not be considered alternatives to net income as indications of financial performance or as alternatives to cash flow from operations as measures of liquidity. There are limitations to using non-U.S. GAAP financial measures, including the difficulty associated with comparing companies in different industries that use similar performance measures whose calculations may differ from ours. EBITDA and Adjusted EBITDA are key measures used in our internal operating reports by management and our Board of Directors to evaluate the performance of our operations and are also used by analysts, investment banks and lenders for the same purpose. EBITDA, excluding certain acquisition costs, is a measure being used as a key element of the company-wide bonus incentive plan. We believe that the presentation of EBITDA and Adjusted EBITDA enables a more consistent measurement of period to period performance of our operations and facilitates comparison of our operating performance to companies in our industry. We believe that EBITDA and Adjusted EBITDA measures are particularly important in a capital intensive industry such as ours, in which our current period depreciation is not a good indication of our current or future period capital expenditures. The cost to construct and launch a satellite and to build the related ground infrastructure may vary greatly from one satellite to another, depending on the satellite's size, type and capabilities. For example, our QuickBird satellite cost significantly less than our WorldView-1 and WorldView-2 satellites. Current depreciation expense is not indicative of the revenue generating potential of the satellites. EBITDA excludes interest income, interest expense and income taxes because these items are associated with our capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the impact of prior capital expenditure decisions which are not indicative of future capital expenditure requirements. Adjusted EBITDA further adjusts EBITDA to exclude the loss on the early extinguishment of debt and the loss on abandonment of asset because these are not related to our primary operations. Additionally, it excludes restructuring costs, acquisition costs and integration costs as these are non-core items. Restructuring costs are costs incurred to realize efficiencies from the acquisition with GeoEye, such as reducing excess workforce, consolidating facilities and systems, and relocating ground terminals. Acquisition costs are costs incurred to effect the acquisition, such as advisory, legal, accounting, consulting and other professional fees. Integration costs consist primarily of professional fees incurred to assist us with system and process improvements associated with integrating operations. Loss on early extinguishment of debt is related to entering into the 2013 Credit Facility and Senior Notes, the proceeds of which were used to refinance our $500.0 million senior secured term loan and $100.0 million senior secured revolving credit facility, and to fund the discharge and redemption of GeoEye's $525.0 million senior secured notes that we assumed in the acquisition. We use EBITDA and Adjusted EBITDA in conjunction with traditional U.S. GAAP operating performance measures as part of our overall assessment of our performance and we do not place undue reliance on these Non-GAAP measures as our only measures of operating performance. EBITDA and Adjusted EBITDA should not be considered as substitutes for other measures of financial performance reported in accordance with U.S. GAAP. |