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MAXR Maxar

Filed: 9 May 19, 4:31pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

 

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

For the Quarterly Period Ended March 31, 2019

or

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

For the transition period from              to            

Commission file number: 001-38228

 

Maxar Technologies Inc.

 

 

 

 

 

 

Delaware

 

 

 

83-2809420

(State or jurisdiction of incorporation)

 

 

 

(IRS Employer Identification Number)

 

 

 

 

 

1300 W. 120th Avenue, Westminster, Colorado

 

80234

(Address of principal executive offices)

 

(Zip Code)

 

 

 

303-684-2207

(Registrant’s telephone number, including area code)

 

 

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 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 every Interactive Data File required to be submitted 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 such files).  Yes   No 

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

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 

Smaller reporting company      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

 

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, at $0.0001 par value

MAXR

New York Stock Exchange

Toronto Stock Exchange

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of April 30, 2019, there were 59,594,485 shares of the registrant’s common stock, at $0.0001 par value, outstanding.

 

Explanatory Note

As a result of our domestication to the United States on January 1, 2019, Maxar Technologies Inc. is the successor issuer to Maxar Technologies Ltd. pursuant to Rule 12g-3(a) under the Exchange Act and will file periodic and other reports required by the Exchange Act.

 

 

 

 

 


 

2

 


 

PART I. FINANCIAL INFORMATION

 

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Statements of Operations

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Revenues:

 

 

 

 

 

 

Product

 

$

194

 

$

228

Service

 

 

310

 

 

329

Total revenues

 

 

504

 

 

557

Costs and expenses:

 

 

 

 

 

 

Product costs, excluding depreciation and amortization

 

 

197

 

 

187

Service costs, excluding depreciation and amortization

 

 

110

 

 

119

Selling, general and administrative

 

 

103

 

 

103

Depreciation and amortization

 

 

98

 

 

111

Operating (loss) income

 

 

(4)

 

 

37

Interest expense, net

 

 

49

 

 

53

Other expense, net

 

 

 6

 

 

 1

(Loss) before taxes

 

 

(59)

 

 

(17)

Income tax benefit

 

 

(1)

 

 

(32)

Equity in loss from joint ventures, net of tax

 

 

 1

 

 

 —

Net (loss) income

 

$

(59)

 

$

15

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

  

 

 

  

Basic

 

$

(0.99)

 

$

0.27

Diluted

 

$

(0.99)

 

$

0.26

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3

 


 

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

(In millions)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

 

2018

Net (loss) income

 

$

(59)

 

$

15

Other comprehensive (loss) income, net of tax:

 

 

  

 

 

  

Foreign currency translation adjustment

 

 

(9)

 

 

 3

Net (loss) on hedge of net investment in foreign operations

 

 

 5

 

 

(8)

Unrealized loss on derivatives

 

 

(4)

 

 

(3)

Change in pension and other postretirement benefit plans

 

 

 2

 

 

 —

Other comprehensive loss, net of tax

 

 

(6)

 

 

(8)

Comprehensive (loss) income, net of tax

 

$

(65)

 

$

 7

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4

 


 

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Balance Sheets

(In millions)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

Assets

 

  

 

 

  

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

45

 

$

35

Trade and other receivables, net

 

 

467

 

 

464

Inventory

 

 

26

 

 

31

Advances to suppliers

 

 

17

 

 

42

Income taxes receivable

 

 

16

 

 

14

Prepaid and other current assets

 

 

61

 

 

51

Total current assets

 

 

632

 

 

637

Non-current assets:

 

 

  

 

 

  

Orbital receivables

 

 

400

 

 

407

Deferred tax assets

 

 

108

 

 

103

Property, plant and equipment, net

 

 

768

 

 

747

Intangible assets, net

 

 

1,175

 

 

1,232

Non-current operating lease assets

 

 

129

 

 

 —

Goodwill

 

 

1,751

 

 

1,751

Other assets

 

 

115

 

 

124

Total assets

 

$

5,078

 

$

5,001

Liabilities and stockholders’ equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

190

 

$

209

Accrued liabilities

 

 

62

 

 

116

Accrued compensation and benefits

 

 

101

 

 

100

Contract liabilities

 

 

309

 

 

361

Current portion of long-term debt

 

 

19

 

 

17

Current operating lease liabilities

 

 

33

 

 

 —

Other current liabilities

 

 

52

 

 

46

Total current liabilities

 

 

766

 

 

849

Non-current liabilities:

 

 

  

 

 

  

Pension and other postretirement benefits

 

 

194

 

 

196

Contract liabilities

 

 

43

 

 

60

Operating lease liabilities

 

 

137

 

 

 —

Long-term debt

 

 

3,174

 

 

3,030

Other non-current liabilities

 

 

184

 

 

222

Total liabilities

 

 

4,498

 

 

4,357

Stockholders’ equity:

 

 

  

 

 

  

Common stock ($0.0001 par value, 240 million common shares authorized and 59.6 million outstanding at March 31, 2019; nil par value, unlimited authorized common shares and 59.4 million outstanding at December 31, 2018)

 

 

 —

 

 

1,713

Additional paid-in capital

 

 

1,774

 

 

59

Accumulated deficit

 

 

(1,271)

 

 

(1,211)

Accumulated other comprehensive income

 

 

76

 

 

82

Total Maxar stockholders' equity

 

 

579

 

 

643

Noncontrolling interest

 

 

 1

 

 

 1

Total stockholders' equity

 

 

580

 

 

644

Total liabilities and stockholders' equity

 

$

5,078

 

$

5,001

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

 


 

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In millions)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Cash flows provided by (used in):

 

 

 

 

 

 

Operating activities:

 

 

  

 

 

  

Net (loss) income

 

$

(59)

 

$

15

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation of property, plant and equipment

 

 

30

 

 

37

Amortization of intangible assets

 

 

68

 

 

74

Stock-based compensation expense (recovery)

 

 

 1

 

 

(1)

Amortization of debt issuance costs and other noncash interest expense

 

 

 2

 

 

 2

Inventory impairment

 

 

 3

 

 

 —

Foreign exchange losses

 

 

 6

 

 

 1

Deferred income tax (benefit)

 

 

 —

 

 

(24)

Other

 

 

 4

 

 

 2

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade and other receivables

 

 

 6

 

 

(35)

Accrued compensation and benefits

 

 

 1

 

 

(26)

Trade and other payables

 

 

(11)

 

 

(47)

Accrued liabilities

 

 

(56)

 

 

22

Contract liabilities

 

 

(71)

 

 

(26)

Advances to suppliers

 

 

25

 

 

15

Deferred tax assets

 

 

(5)

 

 

(18)

Deferred tax liabilities

 

 

 2

 

 

31

Other liabilities

 

 

 4

 

 

(28)

Other

 

 

(8)

 

 

(7)

Cash used in operating activities

 

 

(58)

 

 

(13)

 

 

 

 

 

 

 

Investing activities:

 

 

  

 

 

  

Purchase of property, plant and equipment

 

 

(59)

 

 

(43)

Purchase or development of intangible assets

 

 

(14)

 

 

(17)

Disposal of subsidiary and short-term investments

 

 

 —

 

 

 5

Cash used in investing activities

 

 

(73)

 

 

(55)

 

 

 

 

 

 

 

Financing activities:

 

 

  

 

 

  

Net proceeds from revolving credit facility

 

 

150

 

 

90

Repayments of long-term debt

 

 

(6)

 

 

(5)

Settlement of securitization liability

 

 

(4)

 

 

(4)

Payment of dividends

 

 

(1)

 

 

(16)

Change in overdraft balance

 

 

 —

 

 

 2

Cash provided by financing activities

 

 

139

 

 

67

Increase (decrease) in cash, cash equivalents, and restricted cash

 

 

 8

 

 

(1)

Effect of foreign exchange on cash, cash equivalents, and restricted cash

 

 

 1

 

 

 —

Cash, cash equivalents, and restricted cash, beginning of year

 

 

43

 

 

42

Cash, cash equivalents, and restricted cash, end of period

 

$

52

 

$

41

 

 

 

 

 

 

 

Reconciliation of cash flow information:

 

 

 

 

 

 

Cash and cash equivalents

 

 

45

 

 

25

Restricted cash included in prepaid and other current assets

 

 

 6

 

 

 7

Restricted cash included in other assets

 

 

 1

 

 

 9

Total cash, cash equivalents, and restricted cash

 

$

52

 

$

41

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

6

 


 

 

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Statements of Change in Stockholders’ Equity

(In millions)

 

Three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Retained earnings

 

Accumulated other

 

Noncontrolling

 

Total stockholders’

 

 

Shares

 

Amount

 

paid-in capital

 

(Accumulated deficit)

 

comprehensive income (loss)

 

interest

 

equity

Balance as of December 31, 2018

 

59.4

 

$

1,713

 

$

59

 

$

(1,211)

 

$

82

 

$

 1

 

$

644

Reclassification of APIC due to U.S. Domestication

 

 —

 

 

(1,713)

 

 

1,713

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Common stock issued under employee stock purchase plan

 

0.1

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Common stock issued upon vesting or exercise of stock-based compensation awards

 

0.1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity classified stock-based compensation expense

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Dividends ($0.01 per common share)

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

 —

 

 

(1)

Comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

(59)

 

 

(6)

 

 

 —

 

 

(65)

Balance as of March 31, 2019

 

59.6

 

$

 —

 

$

1,774

 

$

(1,271)

 

$

76

 

$

 1

 

$

580

 

Three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Retained earnings

 

Accumulated other

 

Noncontrolling

 

Total stockholders’

 

 

Shares

 

Amount

 

paid-in capital

 

(Accumulated deficit)

 

comprehensive income (loss)

 

interest

 

equity

Balance as of December 31, 2017

 

56.2

 

$

1,550

 

$

51

 

$

118

 

$

113

 

$

 1

 

$

1,833

Common stock issued under employee stock purchase plan

 

0.1

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Common stock issued upon vesting or exercise of stock-based compensation awards

 

0.1

 

 

 7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Reclassification of liability classified stock-based compensation awards to equity classified

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

Equity classified stock-based compensation expense

 

 —

 

 

 —

 

 

 8

 

 

 —

 

 

 —

 

 

 —

 

 

 8

Dividends ($0.29 per common share)

 

 —

 

 

 —

 

 

 —

 

 

(16)

 

 

 —

 

 

 —

 

 

(16)

Comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

15

 

 

(8)

 

 

 —

 

 

 7

Balance as of March 31, 2018

 

56.4

 

$

1,558

 

$

53

 

$

117

 

$

105

 

$

 1

 

$

1,834

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

7


 

Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of dollars, unless otherwise noted)

 

 

1.  GENERAL BUSINESS DESCRIPTION

Maxar Technologies Inc. (the “Company” or “Maxar”) is a global leader of advanced space technology solutions and is at the nexus of the new space economy, developing and sustaining the infrastructure and delivering the information, services, and systems that unlock the promise of space for commercial and government markets. As a trusted partner, the Company provides vertically integrated capabilities and expertise including satellites, Earth imagery, robotics, geospatial data and analytics to help customers anticipate and address their most complex mission-critical challenges with confidence. Maxar’s common stock trades on the New York Stock Exchange and Toronto Stock Exchange under the ticker MAXR.

Maxar’s businesses are organized and managed in three reportable segments: Space Systems, Imagery and Services.

 

On January 1, 2019, the Company completed a reorganization of its corporate structure pursuant to which the Company directly acquired all of the issued and outstanding shares of Maxar Technologies Ltd. (“Maxar Canada”), and the Company replaced Maxar Canada as the publicly-held parent company of the Maxar group (“U.S. Domestication”). Since its inception, Maxar Canada reported to securities regulators in both Canada and the U.S., financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Upon completion of the U.S. Domestication, and including the report herein, the Company has prepared its financial statements in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”).  

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The Unaudited Condensed Consolidated Financial Statements include the accounts of Maxar Technologies Inc., and all of its consolidated subsidiary entities. The Company’s Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  All intercompany balances and transactions are eliminated on consolidation.

The Company’s Unaudited Condensed Consolidated Financial Statements are presented in U.S. dollars and have been prepared on a historical cost basis, except for certain financial assets and liabilities including derivative financial instruments which are stated at fair value.

The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s annual audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K filed with the SEC. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. In management’s opinion, all adjustments of a normal recurring nature that are necessary for a fair statement of the accompanying Unaudited Condensed Consolidated Financial Statements have been included. 

Use of estimates, assumptions and judgments

The preparation of the Unaudited Condensed Consolidated Financial Statements in accordance with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the reporting date, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared using the most current and best available information; however, actual results could differ materially from those estimates.

8


 

Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) which together with subsequent amendments is included in ASC 842 – Leases. This new standard requires that all leases with an initial term greater than one year be recorded on the balance sheet as a right-of-use asset and lease liability. Additional qualitative and quantitative disclosures are also required. The Company adopted the lease standard on January 1, 2019 using the modified retrospective transition approach on the effective date. The Company has elected the package of practical expedients, which allows the Company not to reassess whether any expired or existing contracts as of the adoption date are or contain a lease, lease classification for any expired or existing leases as of the adoption date and initial direct costs for any existing leases as of the adoption date. The Company has not elected the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets.

Upon adoption, the Company recognized operating lease right-of-use assets and lease liabilities of $133 million and $176 million, respectively in its Unaudited Condensed Consolidated Balance Sheets. There were no material impacts to the Unaudited Condensed Consolidated Statements of Operations or Unaudited Condensed Consolidated Statements of Cash Flows. See Note 7 in this Quarterly Report on Form 10-Q for details.

Taxes

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted the update on January 1, 2019. There was no material impact on the Unaudited Condensed Consolidated Financial Statements.

Recent Accounting Guidance Not Yet Adopted

 

Financial Instruments

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which together with subsequent amendments is included in ASC 326 – Financial Instruments – Credit Losses. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. These updates are effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of this guidance may have on the Company’s financial statements.

 

 

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Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

3.  TRADE AND OTHER RECEIVABLES, NET

Trade and other receivables, net consisted of the following:

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

2019

    

2018

Billed

$

207

 

$

242

Unbilled

 

213

 

 

172

Total trade receivables

 

420

 

 

414

Orbital receivables, current portion

 

34

 

 

34

Other

 

14

 

 

17

Allowance for doubtful accounts

 

(1)

 

 

(1)

Total trade and other receivables, net

$

467

 

$

464

 

Orbital receivables relate to performance incentives due under certain satellite construction contracts that are paid over the in-orbit life of the satellite. As of March 31, 2019 and December 31, 2018, long-term orbital receivables were $400 million and $407 million, respectively, and are included in Non-current assets on the Unaudited Condensed Consolidated Balance Sheets.

 

4.  INVENTORY

 

Inventory consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

2019

    

2018

Raw materials

 

$

15

 

$

21

Work in process

 

 

11

 

 

10

Total inventory

 

$

26

 

$

31

 

 

5.  PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

2019

    

2018

Satellites

 

$

397

 

$

397

Equipment

 

 

229

 

 

229

Leasehold improvements

 

 

97

 

 

97

Computer hardware

 

 

92

 

 

92

Land and land improvements

 

 

88

 

 

88

Buildings

 

 

46

 

 

46

Furniture and fixtures

 

 

19

 

 

19

Construction in process

 

 

193

 

 

142

Property, plant and equipment, at cost

 

 

1,161

 

 

1,110

Accumulated depreciation

 

 

(393)

 

 

(363)

Property, plant and equipment, net

 

$

768

 

$

747

 

10

 


 

Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

Depreciation expense for property, plant and equipment was $30 million and $37 million for the three months ended March 31, 2019 and March 31, 2018, respectively.

 

6.  INTANGIBLE ASSETS

Intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

 

December 31, 2018

 

 

Gross carrying value

 

Accumulated amortization

 

Net carrying value

 

Gross carrying value

 

Accumulated amortization

 

Net carrying value

Customer relationships

 

$

619

 

$

(70)

 

$

549

 

$

619

 

$

(58)

 

$

561

Backlog

 

 

332

 

 

(145)

 

 

187

 

 

332

 

 

(120)

 

 

212

Technologies

 

 

329

 

 

(101)

 

 

228

 

 

330

 

 

(86)

 

 

244

Software

 

 

210

 

 

(80)

 

 

130

 

 

198

 

 

(71)

 

 

127

Image library

 

 

80

 

 

(36)

 

 

44

 

 

80

 

 

(32)

 

 

48

Trade names and other

 

 

41

 

 

(11)

 

 

30

 

 

41

 

 

(9)

 

 

32

Non-compete agreements

 

 

21

 

 

(14)

 

 

 7

 

 

21

 

 

(13)

 

 

 8

Total intangible assets

 

$

1,632

 

$

(457)

 

$

1,175

 

$

1,621

 

$

(389)

 

$

1,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense related to intangible assets was $68 million and $74 million for the three months ended March 31, 2019 and March 31, 2018, respectively.

 

 

7.  LEASES

 

The Company has both operating and finance leases. The majority of the Company’s leases are operating leases related to buildings. The majority of the Company’s finance leases are related to furniture and equipment.

 

The Company’s leases have remaining lease terms of one year to 16 years, some of which include options to extend the lease anywhere from one to ten years, and are included in the lease term when it is reasonably certain the Company will exercise the option. The Company has elected as an accounting policy not to recognize any leases with an initial term of 12 months or less on the balance sheet and will recognize the lease payments on a straight-line basis in the statement of operations.

 

The rate implicit in the lease is typically not readily determinable; in such instances the Company uses an incremental borrowing rate to determine the present value of the lease payments. The Company uses a borrowing rate with a similar term to the lease term and considers any options if they are reasonably certain to be exercised. For adoption, the Company elected to consider the remaining lease term and payments as of the adoption date.

 

The Company elected the practical expedient not to separate lease and non-lease components. The Company has also elected to include in minimum lease payments any executory costs that are part of the fixed lease payment.

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

Finance lease cost, variable lease cost, and short-term lease cost are not material. The components of operating lease expense are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

Classification

 

2019

Operating lease expense

 

 

Selling, general, and administrative expense, Product costs, and Service costs

 

$

 8

 

Supplemental lease balance sheet information consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

Classification

 

2019

Assets:

 

 

 

 

 

 

Operating

 

 

Non-current operating lease assets

 

$

129

Finance

 

 

Property, plant, and equipment, net

 

 

 9

Total lease assets

 

 

 

 

$

138

Liabilities:

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating

 

 

Current operating lease liabilities

 

$

33

Finance

 

 

Other current liabilities

 

 

 3

Non-current

 

 

 

 

 

 

Operating

 

 

Operating lease liabilities

 

 

137

Finance

 

 

Other non-current liabilities

 

 

 3

Total lease liabilities

 

 

 

 

$

176

 

Supplemental lease cash flow information is as follows:

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

$

 9

 

Other supplemental lease information consists of the following:

 

 

 

 

 

 

 

March 31, 

 

 

2019

Weighted average remaining lease term

 

 

 

Operating leases

 

 

9 years

Finance leases

 

 

3 years

Weighted average discount rate

 

 

 

Operating leases

 

 

7.1%

Finance leases

 

 

4.7%

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

Maturities of lease liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019 1

    

2020

 

2021

 

2022

 

2023

 

Thereafter

 

Less: imputed interest

 

Total minimum lease payments

Operating leases

 

$

26

 

$

31

 

$

29

 

$

24

 

$

22

 

$

100

 

$

(62)

 

$

170

Finance leases

 

 

 3

 

 

 3

 

 

 1

 

 

 —

 

 

 —

 

 

 9

 

 

(10)

 

 

 6

 

1Excludes the three months ended March 31, 2019.

 

8.  RESTRUCTURING LIABILITY

On February 27, 2019, the Company announced a restructuring plan to implement cost-saving measures, including a reduction in the Company’s workforce. The reduction in the Company’s workforce was substantially completed in the first quarter of 2019. Restructuring expense is included in Product costs, excluding depreciation and amortization, Service costs, excluding depreciation and amortization, and Selling, general and administrative expense in the Company’s Unaudited Condensed Consolidated Statements of Operations.

 

Changes to restructuring liabilities during the period consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Restructuring Liability

Balance as of December 31, 2018

 

$

 6

Obligations incurred

 

 

20

Payments

 

 

(5)

Balance as of March 31, 2019

 

$

21

 

 

9.  LONG-TERM DEBT AND INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Syndicated credit facility:

 

 

  

 

 

  

Revolving loan payable

 

$

734

 

$

595

Operating loan payable in Canadian dollars (March 31, 2019 - C$15 million; December 31, 2018 - C$0 million)

 

 

11

 

 

 —

Term Loan A

 

 

500

 

 

500

Term Loan B

 

 

1,975

 

 

1,980

Debt issuance costs

 

 

(39)

 

 

(41)

Obligations under finance leases and other

 

 

12

 

 

13

Total long-term debt

 

 

3,193

 

 

3,047

Current portion

 

 

(19)

 

 

(17)

Non-current portion

 

$

3,174

 

$

3,030

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

The Syndicated Credit Facility is composed of: (i) a four-year senior secured first lien revolving credit facility and a four-year senior secured first lien operating facility (collectively, the “Revolving Credit Facility”), (ii) a senior secured first lien term A facility (“Term Loan A”) and (iii) a seven-year senior secured first lien term B facility (“Term Loan B”) in an aggregate principal amount of $3.75 billion. The net proceeds of the Syndicated Credit Facility were used, along with cash on hand, to consummate the acquisition of DigitalGlobe, to refinance all amounts outstanding under the Company’s existing syndicated credit facility and senior term loans, to repay DigitalGlobe’s outstanding indebtedness, to pay transaction fees and expenses, to fund working capital and for general corporate purposes.

The Revolving Credit Facility includes an aggregate $200 million sub limit under which letters of credit can be issued. As of March 31, 2019 and December 31, 2018, the Company also had $15 million and $18 million, respectively, of issued and undrawn letters of credit outstanding under the Revolving Credit Facility.

Interest expense on long-term debt and other obligations are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

2019

    

2018

Interest on long-term debt

 

$

45

 

$

40

Interest expense on advance payments from customers

 

 

 5

 

 

 8

Interest on orbital securitization liability

 

 

 2

 

 

 2

Imputed interest and other

 

 

 —

 

 

 2

Capitalized interest

 

 

(3)

 

 

(1)

Interest expense on dissenting stockholder liability

 

 

 —

 

 

 2

Total interest expense

 

$

49

 

$

53

 

 

 

 

10.  FINANCIAL INSTRUMENTS AND FAIR VALUE DISCLOSURES

Fair value is determined based on the assumptions that market participants would use in pricing the asset or liability. The Company utilizes the following fair value hierarchy in determining fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)

Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs)

The following tables present assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. These fair values are included as components of Other current liabilities, Other non-current liabilities, Prepaid and other current assets, and Other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Fair Value Measurements of as of March 31, 2019

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

 

 

  

 

 

  

 

 

  

 

 

  

Short-term investments

 

$

 3

 

$

 —

 

$

 —

 

$

 3

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts & embedded derivatives

 

 

 —

 

 

 4

 

 

 —

 

 

 4

 

 

$

 3

 

$

 4

 

$

 —

 

$

 7

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts & embedded derivatives

 

$

 —

 

$

 3

 

$

 —

 

$

 3

Interest rate swaps

 

 

 —

 

 

 9

 

 

 —

 

 

 9

 

 

$

 —

 

$

12

 

$

 —

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Fair Value Measurements of as of December 31, 2018

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

 

 

  

 

 

  

 

 

  

 

 

  

Short-term investments

 

$

 3

 

$

 —

 

$

 —

 

$

 3

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts & embedded derivatives

 

 

 —

 

 

 5

 

 

 —

 

 

 5

 

 

$

 3

 

$

 5

 

$

 —

 

$

 8

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts & embedded derivatives

 

 

 —

 

 

 8

 

 

 —

 

 

 8

Interest rate swaps

 

 

 —

 

 

 4

 

 

 —

 

 

 4

 

 

$

 —

 

$

12

 

$

 —

 

$

12

 

The Company determines fair value of its derivative financial instruments based on internal valuation models, such as discounted cash flow analysis, using management estimates and observable market-based inputs, as applicable. Management estimates include assumptions concerning the amount and timing of estimated future cash flows and application of appropriate discount rates. Observable market-based inputs are sourced from third parties and include interest rates and yield curves, currency spot and forward rates, and credit spreads, as applicable.

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are all short-term in nature; therefore, the carrying value of these items approximates their fair value. The following tables provide additional fair value information related to the Company’s financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

Carrying value

 

Fair value

 

Fair value hierarchy

Long-term debt, excluding finance leases and other

 

$

3,181

 

$

3,083

 

Level 2

Orbital receivables

 

 

434

 

 

434

 

Level 2

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

Carrying value

 

Fair value

 

Fair value hierarchy

Long-term debt, excluding finance leases and other

 

$

3,034

 

$

2,925

 

Level 2

Orbital receivables

 

 

441

 

 

441

 

Level 2

 

There were no transfers into or out of each of the levels of the fair value hierarchy during the three months ended March 31, 2019 or year ended December 31, 2018.  

 

11.  STOCKHOLDERS’ EQUITY

Changes in the components of Accumulated other comprehensive income (loss) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

Net (Loss) Income

 

 

 

 

 

 

 

Total

 

 

Currency

 

on Hedge

 

Unrecognized

 

 

 

Accumulated Other

 

 

Translation

 

Investments in

 

(Loss) Gain on

 

Pension

 

Comprehensive

 

 

Adjustments

 

Foreign Operations

 

Derivatives1

 

Adjustments

 

Income (Loss)

Balance as of December 31, 2018

 

$

162

 

$

(51)

 

$

(4)

 

$

(25)

 

$

82

Other comprehensive (loss) income

 

 

(9)

 

 

 5

 

 

(4)

 

 

 3

 

 

(5)

Tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

(1)

Balance as of March 31, 2019

 

$

153

 

$

(46)

 

$

(8)

 

$

(23)

 

$

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1As of January 1, 2019, the Company has discontinued hedge accounting related to the Company’s foreign exchange contracts. The Company still applies hedge accounting to the interest rate swaps related to long-term debt. As of March 31, 2019 the balance consisted of unrecognized loss on the Company’s interest rate swaps.

 

As a result of the Company’s U.S. Domestication on January 1, 2019, a reclassification between Common Stock and Additional paid-in capital was necessary to reflect the Company’s new par value of $0.0001. The reclassification between Common Stock and Additional paid-in capital of $1.7 billion has been reflected within the Unaudited Condensed Consolidated Statements of Change in Stockholders’ Equity at March 31, 2019.

 

12.  REVENUE

On March 31, 2019, the Company had $1.9 billion of remaining performance obligations, which represents the transaction price of firm orders less inception to date sales recognized. Remaining performance obligations exclude unexercised contract options and indefinite delivery/indefinite quantity contracts. The Company expects to recognize sales relating to existing performance obligations of approximately $1.0 billion, $0.3 billion, and $0.6 billion in the years 2019, 2020 and thereafter, respectively.

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

Contract liabilities by segment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Space

 

 

 

 

 

    

As of March 31, 2019

    

Systems

    

Imagery1

    

Services

 

Total

Contract liabilities

 

$

128

 

$

222

 

$

 2

 

$

352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Space

 

 

 

 

 

 

    

As of December 31, 2018

    

Systems

    

 

Imagery1

 

Services

 

Total

Contract liabilities

 

$

172

 

$

247

 

$

 2

 

$

421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1  The contract liability balance associated with the Company’s EnhancedView Contract was $159 million and $184 million as of March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019, imputed interest on advanced payments increased the contract liability balance by $5 million, and $30 million in revenue was recognized, decreasing the contract liability balance. The contract liability balance associated with the Company’s EnhancedView Contract is expected to be recognized as revenue through August 31, 2020. There were no deferred contract costs on the Unaudited Condensed Consolidated Balance Sheets associated with this contract as of March 31, 2019 or December 31, 2018. 

The decrease in total contract liabilities was primarily due to revenues recognized.

The Company’s primary sources of revenues are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

    

Space Systems

    

Imagery

    

Services

    

Eliminations

    

Total

Product revenues

 

$

194

 

$

 —

 

$

 —

 

$

 —

 

$

194

Service revenues

 

 

45

 

 

199

 

 

66

 

 

 —

 

 

310

Intersegment

 

 

35

 

 

 1

 

 

 2

 

 

(38)

 

 

 —

 

 

$

274

 

$

200

 

$

68

 

$

(38)

 

$

504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

    

Space Systems

    

Imagery

    

Services

    

Eliminations

    

Total

Product revenues

 

$

228

 

$

 —

 

$

 —

 

$

 —

 

$

228

Service revenues

 

 

51

 

 

210

 

 

68

 

 

 —

 

 

329

Intersegment

 

 

14

 

 

 1

 

 

 2

 

 

(17)

 

 

 —

 

 

$

293

 

$

211

 

$

70

 

$

(17)

 

$

557

 

Certain of the Company’s contracts with customers in the Space Systems segment include a significant financing component since payments are received from the customer more than one year after delivery of the promised goods or services. The Company recognized orbital interest revenue of $7 million and $8 million for the three months ended March 31, 2019 and 2018, respectively related to these contracts, which is included in product revenues.

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

The approximate revenues based on geographic location of customers are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

 

2019

    

 

2018

United States

 

$

338

 

$

369

Asia

 

 

68

 

 

76

Canada

 

 

25

 

 

48

Europe

 

 

26

 

 

33

South America

 

 

39

 

 

22

Other

 

 

 8

 

 

 9

Total revenues

 

$

504

 

$

557

 

Revenues from significant customers are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

 

2018

U.S. Federal Government and agencies

 

$

231

 

$

232

Canadian Federal Government and agencies

 

 

20

 

 

28

  

13.  SEGMENT INFORMATION

The Company’s business is organized into three reportable segments based on the nature of the products and services offered: (i) Space Systems; (ii) Imagery; and (iii) Services. The Space Systems reportable segment supplies space-based and ground-based infrastructure and information solutions including communication and imaging satellites, satellite payloads and antenna subsystems, space-based and airborne surveillance solutions, robotic systems and associated ground infrastructure and support services. The Imagery segment is a supplier of high resolution Earth imagery and radar data sourced from the Company owned satellite constellations and third-party providers. The Services segment combines imagery, analytic expertise and innovative technology to deliver integrated intelligence solutions to customers.

Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts. The reconciling item “corporate and other unallocated expenses” includes items such as corporate office costs, regulatory costs, executive and director compensation, foreign exchange gains and losses, and fees for audit, legal and consulting services.

The Company’s Chief Operating Decision Maker (“CODM”) measures the performance of each segment based on revenue and Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA adjusted for certain items affecting comparability as specified in the calculation. Other unallocated expenses include SSL retention costs and foreign exchange gains and losses which are not included in segment Adjusted EBITDA. The following table summarizes the operating performance of the Company’s segments:

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

Revenues:

 

 

  

 

 

  

Space Systems

 

$

274

 

$

293

Imagery

 

 

200

 

 

211

Services

 

 

68

 

 

70

Intersegment eliminations

 

 

(38)

 

 

(17)

Total revenues

 

$

504

 

$

557

 

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

Space Systems

 

$

10

 

$

28

Imagery

 

 

121

 

 

134

Services

 

 

 7

 

 

 4

Intersegment eliminations

 

 

(3)

 

 

(2)

Depreciation and amortization

 

 

(98)

 

 

(111)

Corporate and other unallocated expenses

 

 

(18)

 

 

(13)

Restructuring

 

 

(20)

 

 

 —

Acquisition and integration related expense

 

 

(4)

 

 

(4)

Inventory impairment

 

 

(3)

 

 

 —

CEO severance

 

 

(3)

 

 

 —

Interest expense, net

 

 

(49)

 

 

(53)

Equity loss from joint ventures, net of tax

 

 

 1

 

 

 —

Net (loss) earnings before income taxes

 

$

(59)

 

$

(17)

 

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MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

The Company’s capital expenditures are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Space

 

 

 

 

 

 

 

Corporate and

 

 

 

Three months ended March 31, 2019

 

Systems

    

Imagery

    

Services

    

eliminations

 

Total

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

$

 6

 

$

50

 

$

 —

 

$

 3

 

$

59

Intangible assets

 

 

 1

 

 

13

 

 

 —

 

 

 —

 

 

14

 

 

$

 7

 

$

63

 

$

 —

 

$

 3

 

$

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Space

 

 

 

 

 

 

 

Corporate and

 

 

 

Three months ended March 31, 2018

 

Systems

    

Imagery

    

Services

    

eliminations

 

Total

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

$

 5

 

$

38

 

$

 —

 

$

 —

 

$

43

Intangible assets

 

 

 —

 

 

17

 

 

 —

 

 

 —

 

 

17

 

 

$

 5

 

$

55

 

$

 —

 

$

 —

 

$

60

 

Substantially all of the Company’s long-lived tangible assets were in the United States as of March 31, 2019 and December 31, 2018.

 

14.   EMPLOYEE BENEFIT PLANS

 

The following table summarizes the components of net periodic benefit (credits) costs for the Company’s pension plans:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

Pension

 

 

2019

 

2018

Service cost

 

$

 1

 

$

 2

Interest cost

 

 

 6

 

 

 —

Expected return on plan assets

 

 

(6)

 

 

 —

Expenses paid

 

 

 —

 

 

 —

Net periodic benefit (credit) cost

 

$

 1

 

$

 2

 

Contributions. The funding policy for the Company’s pension plans is to contribute at least the minimum required by applicable laws and regulations or to directly make benefit payments where appropriate. At March 31, 2019, all legal funding requirements had been met. The Company expects to contribute approximately $14 million to its pension plans for the year ending December 31, 2019. 

 

15.  INCOME TAXES 

On January 1, 2019, the Company completed the U.S. Domestication. The Company has estimated there are no material corporate tax consequences as a result of the U.S. Domestication; however, the Company’s effective tax rate is expected to increase in the future primarily due to related changes in corporate structure and the application of U.S. tax law to the Company. In prior years, the Company’s income taxes were described as Canadian and non-Canadian. Following the U.S. Domestication, the Company will describe its income tax in the context of U.S. and non-U.S.

Following the U.S. Domestication, the Company is subject to taxation on a material amount of Global Intangible Low-Tax Income (“GILTI”) earned by foreign subsidiaries. The Company has elected to treat the tax effect of GILTI as a

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Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

current period expense when incurred. The Company expects the net impact of the GILTI for the 2019 fiscal year to be immaterial due to a corresponding change in the valuation allowance.

 

In computing income tax expense for the quarter ended March 31, 2019, the Company applied the estimated annual effective tax rate to non-U.S. pre-tax income. No income tax expense was recognized on U.S. income as the Company does not expect to recognize the benefit of U.S. losses recorded in the year. This resulted in an effective income tax rate of 14.4% in the quarter ended March 31, 2019. In the quarter ended March 31, 2018, income tax expense was computed as (17.5%). The effective tax rate increased primarily due to transactions undertaken in the course of the U.S. Domestication and a change in the mix of income between jurisdictions.

 

16.  EARNINGS PER SHARE

The following table includes the calculation of basic and diluted Earnings per common share:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

 

 

 

 

 

 

 

Net (loss) income

 

$

(59)

 

$

15

Weighted average number of common shares outstanding-basic

 

 

59.5

 

 

56.4

Weighted dilutive effect of equity awards

 

 

 —

 

 

0.3

Weighted average number of common shares outstanding-diluted

 

 

59.5

 

 

56.7

Earnings per common share:

 

 

 

 

 

 

Basic

 

$

(0.99)

 

$

0.27

Dilutive

 

$

(0.99)

 

$

0.26

 

 

17.   CONTINGENCIES

Contingencies in the Normal Course of Business

As discussed in Note 3, satellite construction contracts may include performance incentives whereby payment for a portion of the purchase price of the satellite is contingent upon in-orbit performance of the satellite. The Company’s ultimate receipt of orbital performance incentives is subject to the continued performance of its satellites generally over the contractually stipulated life of the satellites. A complete or partial loss of a satellite’s functionality can result in loss of orbital receivable payments or repayment of amounts received by the Company under a warranty payback arrangement. The Company generally receives the present value of the orbital receivables if there is a launch failure or a failure caused by a customer error, but will forfeit some or all of the orbital receivables if the loss is caused by satellite failure or as a result of Company error. The Company recognizes orbital performance incentives in the financial statements based on the amounts that are expected to be received and believes that it will not incur a material loss relating to the incentives recognized.

The Company may incur liquidated damages on programs as a result of delays due to slippage, or for programs which fail to meet all milestone requirements as outlined within the contractual arrangements with customers. Losses on programs related to liquidated damages result in a reduction of revenue recognition.

 

The Company enters into agreements in the ordinary course of business with resellers and others. Most of these agreements require the Company to indemnify the other party against third-party claims alleging that one of its products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of

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Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

these agreements require the Company to indemnify the other party against claims relating to property damage, personal injury or acts or omissions by the Company, its employees, agents or representatives.

From time to time, the Company has made guarantees regarding the performance of its systems to its customers. Some of these agreements do not limit the maximum potential future payments the Company could be obligated to make. The Company evaluates and estimates potential losses from such indemnification based on the likelihood that the future event will occur. The Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such indemnification and guarantees in the Unaudited Condensed Consolidated Financial Statements.

The Company has entered into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to entering into contracts for its products and services from certain customers in foreign countries. These agreements are designed to return economic value to the foreign country and may be satisfied through activities that do not require a direct cash payment, including transferring technology, providing manufacturing, training and other consulting support to in-country projects. These agreements may provide for penalties in the event the Company fails to perform in accordance with offset requirements. The Company has historically not been required to pay any such penalties.

Legal Proceedings 

In 2010, we entered into an agreement with a Ukrainian customer to provide a communication satellite system. In 2014, following the annexation of Crimea by the Russian Federation, we declared force majeure with respect to the program. The Ukrainian customer accepted that an event of force majeure had occurred. Following various unsuccessful efforts to arrive at a new contractual framework to take account of the changed circumstances (including the force majeure and various financial issues), the contract with the Ukrainian customer was terminated by us. We completed work on the spacecraft, which is in storage. In July 2018, the Ukrainian customer issued a statement of claim in the arbitration it had commenced against us, challenging our right to terminate for force majeure, purporting to terminate the contract for default by us, and seeking recovery from us in the amount of approximately $227 million. Discovery has concluded, and the matter is scheduled to be heard by the arbitration panel in December 2019. We have sound defenses to the petitioner’s claims, and will vigorously defend the claims asserted against us. We have accrued an amount that we believe is within the range of probable outcomes for resolving this matter; the amount is not material to our consolidated financial statements. However, the outcome of any arbitration is difficult to predict, and in the event that the arbitration results in a finding against us in excess of the amount we have reserved, our business, results of operations and financial condition could be adversely affected.

In January 2019, a Maxar stockholder filed a class action lawsuit in the District Court of Colorado, naming Maxar and members of management as defendants alleging, among other things, that our public disclosures were deficient in violation of the federal securities laws and seeking monetary damages. Once the court appoints a lead plaintiff, that plaintiff will have sixty days to file a consolidated amended complaint and we will have sixty days to file a response.  Also in January 2019, a Maxar stockholder resident in Canada issued a proposed class action lawsuit in the Ontario Superior Court of Justice against Maxar and members of management claiming misrepresentations in Maxar’s public disclosures and seeking monetary damages. The Canadian case has not yet been served on us. We believe that these cases are without merit and we intend to vigorously defend against them.

We are a party to various other legal proceedings and claims that arise in the ordinary course of business as either a plaintiff or defendant. As a matter of course, we are prepared both to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities. We have established accrued liabilities for these matters where losses are deemed probable and reasonably estimable. The outcome of any of these other proceedings, either individually or in the aggregate, is not expected to have a material adverse effect on our financial position, results of operations or liquidity.

 

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Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

(Tabular amounts in millions of United States dollars, except per share amounts)

 

 

18.  SUPPLEMENTAL CASH FLOW

 

Selected cash payments and non-cash activities are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

    

2018

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest 1

 

$

(79)

 

$

(54)

Income tax payments

 

 

(1)

 

 

(1)

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

Accrued capital expenditures

 

 

13

 

 

 5

 

1The Company has the option to elect different interest periods on the Revolving Credit Facility. In the fourth quarter of 2017 and 2018, the Company elected a 3-month interest rate for a portion of its debt with payments due in the first quarter of the following year. In both 2019 and 2018 the Company made interest payments in the first quarter totaling $42 million and $21 million, respectively, which related to the fourth quarter of the previous year. 

 

 

 

19.  SUBSEQUENT EVENTS

Subsequent to March 31, 2019, the insurance carriers accepted the Company’s $183 million claim for loss arising from the on-orbit failure of the WorldView-4 satellite and the Company has collected $154 million in proceeds. The Company expects to receive the remaining insurance proceeds by the end of the second quarter of 2019.

 

 

 

23

 


 

 

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

 

This management’s discussion and analysis (“MD&A”) contains “forward-looking statements” as defined in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “may,” “estimate,” “outlook” and similar expressions, including the negative thereof. The absence of these words, however, does not mean that the statements are not forward-looking. These forward-looking statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.

 

All of our forward-looking statements involve risks and uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause actual results to differ materially from those contemplated in the forward-looking statements include those set forth in Part II, Item 1A, “Risk Factors” and elsewhere in this MD&A. We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except to the extent required by law.

*****

Unless stated otherwise or the context otherwise requires, references to the terms “Company,” “Maxar,” “we,” “us,” and “our” refer collectively to Maxar Technologies Inc. and its consolidated subsidiaries. Financial information and results of operations presented in this Quarterly Report on Form 10-Q relate to Maxar Technologies Ltd., our predecessor, and relate to Maxar Technologies Inc. for all periods beginning on or after January 1, 2019.

 

OVERVIEW

We are a global leader of advanced space technology solutions and are at the nexus of the new space economy, developing and sustaining the infrastructure and delivering the information, services and systems that unlock the promise of space for commercial and government markets. As a trusted partner, we provide vertically integrated capabilities and expertise including satellites, Earth imagery, robotics, geospatial data and analytics to help customers anticipate and address their most complex mission-critical challenges with confidence. Maxar’s common stock trades on the NYSE and TSX under the ticker “MAXR.”

Our businesses are organized and managed in three reportable segments: Space Systems, Imagery and Services, as described below under “Segment Results.” 

Unless otherwise indicated, our significant accounting policies and estimates, contractual obligations, commitments, contingencies, and business risks and uncertainties, as described in our MD&A and consolidated financial statements for the year ended December 31, 2018, are substantially unchanged.

RECENT DEVELOPMENTS

Security Control Agreement and Facility Clearance and the U.S. Domestication

On January 26, 2017, we, together with our U.S.-based subsidiary, Maxar Holdings, and the U.S. Department of Defense entered into a Security Control Agreement (SCA) and began operating under the agreement. The SCA allows our subsidiaries to hold facility clearances necessary to pursue and execute classified U.S. government space and defense contracts. In February 2017, we received facility security clearance for the offices of Maxar Holdings, and the proxy board at Radiant Geospatial Solutions LLC was dissolved. On February 2, 2018, the Defense Security Service granted

24


 

facility clearance for our satellite manufacturing facility in Palo Alto, California.

On January 1, 2019, we completed our previously announced U.S. Domestication. The U.S. Domestication marked a major milestone in our long-term U.S. access plan, enhanced our ability to provide and support classified applications for U.S. government agencies and fulfilled a commitment made in acquiring DigitalGlobe. We will continue to operate in compliance with the SCA until such time as the U.S. Department of Defense determines that the SCA is no longer necessary as a result of the U.S. Domestication.

Segment Results

Our Chief Operating Decision Maker (“CODM”) measures performance of our reportable segments based on revenue and Adjusted EBITDA. Our three reportable segments are Space Systems, Imagery and Services. In January 2019, with the appointment of Dan Jablonsky as our President and Chief Executive Officer, our CODM changed. Our CODM may decide to evaluate our business differently in the future, which could result in changes to our reportable segments.

Space Systems

 

In the Space Systems segment, we are a leading supplier of space-based and ground-based infrastructure and information solutions. The Space Systems segment includes the financial results of our Space Systems/Loral LLC (“SSL”) and MacDonald, Dettwiler and Associates (“MDA”) businesses. Our products include communication and imaging satellites, satellite payloads and antenna subsystems, space-based and airborne surveillance solutions, robotic systems and associated ground infrastructure and support services. Our offerings serve multiple markets, primarily for communications and surveillance and intelligence applications. In the communications market, our solutions provide cost-efficient global delivery of a broad range of services, including television and radio distribution, broadband internet, and mobile communications. In the surveillance and intelligence market, we offer end-to-end solutions to monitor changes and activities around the globe to support the operational needs of government agencies, both military and civilian, and commercial customers. We also supply spacecraft and subsystems to the U.S. government, Canadian government and other customers for scientific research and development missions, as well as robotic systems for the space and terrestrial markets. Our principal customers in the Space Systems segment are government agencies worldwide as well as satellite operators and satellite manufacturers.

Imagery

 

In the Imagery segment, we are a leading supplier of high-resolution Earth imagery and radar data sourced from our own advanced satellite constellation and third-party providers. Our imagery solutions 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, disaster management, crop management, oil and gas exploration and infrastructure management. Our principal customers in the Imagery segment are U.S., Canadian and other international government agencies (primarily defense and intelligence agencies), as well as a wide variety of commercial customers in multiple markets.

Services

 

In the Services segment, we provide geospatial services that combine imagery, analytic expertise and innovative technology to deliver integrated intelligence solutions to customers. We provide analytic solutions that accurately document change and enable geospatial modeling and analysis that predict where events will occur to help customers protect lives and make resource allocation decisions. Our primary customer in the Services segment is the U.S. government, but we also support intelligence requirements for other U.S. allied governments, global development organizations and commercial customers.

25

 


 

RESULTS OF OPERATIONS

The following table provides selected financial information for the three months ended March 31, 2019 and 2018, respectively. 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

 

    

2019

    

2018

    

Change

    

($ millions)

 

 

  

 

 

  

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product

 

$

194

 

$

228

 

(15)

%

Service

 

 

310

 

 

329

 

(6)

 

Total revenues

 

$

504

 

$

557

 

(10)

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

Product costs, excluding depreciation and amortization

 

$

197

 

$

187

 

 5

%

Service costs, excluding depreciation and amortization

 

 

110

 

 

119

 

(8)

 

Selling, general and administrative

 

 

103

 

 

103

 

 -

 

Depreciation and amortization

 

 

98

 

 

111

 

(12)

 

Operating (loss) income

 

$

(4)

 

$

37

 

*

%

Interest expense, net

 

 

49

 

 

53

 

(8)

 

Other expense, net

 

 

 6

 

 

 1

 

*

 

(Loss) before taxes

 

$

(59)

 

$

(17)

 

*

%

Income tax benefit

 

 

(1)

 

 

(32)

 

(97)

 

Equity in loss from joint ventures, net of tax

 

 

 1

 

 

 —

 

*

 

Net (loss) income

 

$

(59)

 

$

15

 

*

%

*Not meaningful.

Product and service revenues

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

    

    

2019

    

2018

    

Change

    

($ millions)

 

 

 

 

 

 

 

 

 

Product revenues

 

$

194

 

$

228

 

(15)

%

Service revenues

 

 

310

 

 

329

 

(6)

 

Total revenues

 

$

504

 

$

557

 

(10)

%

 

Total revenues decreased $53 million in the first quarter of 2019 compared to the same period of 2018. The decrease in revenues was primarily driven by a $19 million decrease in the Space Systems segment, an $11 million decrease in the Imagery segment and an increase in intersegment eliminations of $21 million. Further discussion of the drivers behind changes in revenue is included within the “Results by Segment” section below.

See Note 12, “Segment Information” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Information” for product and service revenue by segment.

Product and service costs

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

    

    

2019

    

2018

    

Change

    

($ millions)

 

 

 

 

 

 

 

 

 

Product costs, excluding depreciation and amortization

 

$

197

 

$

187

 

 5

%

Service costs, excluding depreciation and amortization

 

 

110

 

 

119

 

(8)

 

Total costs

 

$

307

 

$

306

 

 0

%

 

26

 


 

Total costs of product and services increased $1 million in the first quarter of 2019 compared to the same period of 2018. There was an increase of product costs of $10 million primarily in the Space Systems segment which was mostly offset by a decrease in service costs of $9 million primarily in the Space Systems and Imagery segments. Further discussion is included within the “Results by Segment” section below. 

Depreciation and amortization

The following table shows depreciation and amortization expense for the fiscal quarters indicated.

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

    

    

2019

    

2018

    

Change

    

($ millions)

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

$

30

 

$

37

 

(19)

%

Intangible assets

 

 

68

 

 

74

 

(8)

 

Depreciation and amortization expense

 

$

98

 

$

111

 

(12)

%

 

Depreciation and amortization expense decreased $13 million in the first quarter of 2019 compared to the same period of 2018. This is primarily driven by a decrease in depreciation and amortization following the Q3 and Q4 2018 impairments of property, plant and equipment and intangible assets.

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

 

    

2019

    

2018

    

Change

    

($ millions)

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

$

45

 

$

40

 

13

%

Interest expense on advance payments from customers1

 

 

 5

 

 

 8

 

(38)

 

Interest on orbital securitization liability

 

 

 2

 

 

 2

 

 —

 

Imputed interest and other

 

 

 —

 

 

 2

 

*

 

Capitalized interest

 

 

(3)

 

 

(1)

 

*

 

Interest expense on dissenting stockholder liability

 

 

 —

 

 

 2

 

*

 

Interest expense, net

 

$

49

 

$

53

 

(8)

%

*Not meaningful.

1 Under DigitalGlobe’s predecessor contract to the EnhancedView Contract, DigitalGlobe had received advanced payments from the U.S. government during the construction phase of the WorldView-1 satellite, which was more than one year before capacity was made available to them. The effect of imputing interest on these advanced payments is to increase contract liabilities with an offsetting charge to interest expense. As capacity is provided to the customer, revenue is recognized and the contract liabilities balance decreases.

Interest expense, net decreased $4 million in the first quarter of 2019 compared to the same period of 2018. The decrease is primarily due to an increase in the capitalization of interest costs as a result of an increase in capitalized expenditures, a decrease in interest expense on advance payments from customers, a decrease in imputed interest and the non-recurrence of interest expense on the dissenting stockholder liability. These decreases were partially offset by an increase in interest on long-term debt.

27

 


 

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

    

    

2019

    

2018

    

Change

    

($ millions)

 

 

 

 

 

 

 

 

 

Other expense, net

 

$

 6

 

$

 1

 

*

%

*Not meaningful.

Other expense, net increased $5 million in the first quarter of 2019 compared to the same period of 2018, primarily due to increased foreign exchange losses which were a result of no longer applying hedge accounting.

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

%

 

    

    

2019

    

2018

    

Change

    

($ millions)

 

 

 

 

 

 

 

 

 

Income tax benefit

 

$

(1)

 

$

(32)

 

(97)

%

 

Income tax benefit changed from a benefit of $32 million for the three months ended March 31, 2018 to a benefit of $1 million for the three months ended March 31, 2019, primarily due to transactions undertaken in the course of the U.S. Domestication, a change in the mix of income between jurisdictions and the recognition of previously unrecognized tax benefits in the first quarter of 2018.

In computing income tax expense for the quarter ended March 31, 2019, we applied the estimated annual effective tax rate to non-U.S. pre-tax income. No income tax expense was recognized on U.S. income as we do not expect to recognize the benefit of U.S. losses recorded in the year. This resulted in an effective income tax rate of 14.4% in the quarter ended March 31, 2019. In the quarter ended March 31, 2018, income tax expense was computed as (17.5%). The effective tax rate increased primarily due to transactions undertaken in the course of the U.S. Domestication and a change in the mix of income between jurisdictions.

RESULTS BY SEGMENT

We analyze financial performance by segments, which group related activities within our business. We report our financial performance based on three reportable segments: Space Systems, Imagery and Services. Intersegment transactions have been eliminated from the segmented financial information discussed below.

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2019

    

2018

($ millions)

 

 

 

 

 

 

Revenues:

 

 

  

 

 

  

Space Systems

 

$

274

 

$

293

Imagery

 

 

200

 

 

211

Services

 

 

68

 

 

70

Intersegment eliminations

 

 

(38)

 

 

(17)

Total revenue

 

$

504

 

$

557

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

Space Systems

 

$

10

 

$

28

Imagery

 

 

121

 

 

134

Services

 

 

 7

 

 

 4

Intersegment eliminations

 

 

(3)

 

 

(2)

Corporate expenses

 

 

(18)

 

 

(13)

Total Adjusted EBITDA

 

$

117

 

$

151

 

28

 


 

Total Adjusted EBITDA is a non-GAAP measure. See “Non-GAAP Financial Measures” below for further discussion of Adjusted EBITDA disclosures.

Space Systems

The following table provides selected financial information for the Space Systems segment.

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

    

2019

    

2018

 

($ millions)

 

 

  

 

 

  

 

Total revenue

 

$

274

 

$

293

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

10

 

$

28

 

Adjusted EBITDA margin percentage

 

 

3.6

%  

 

9.6

%  

 

Space Systems segment revenues decreased $19 million in the first quarter of 2019 compared to the same period of 2018. Revenues decreased primarily due to an increase in estimated costs to complete programs as well as impacts of lower volume in our Palo Alto factory and lower revenues on the RADARSAT Constellation Mission (“RCM”) program in Canada. These decreases were partially offset by increased intercompany revenue on the construction of the Company’s WorldView Legion constellation.

Adjusted EBITDA decreased $18 million in the Space Systems segment in the first quarter of 2019 compared to the same period of 2018. The decrease from 2018 to 2019 is primarily related to an increase in estimated costs to complete certain satellite build programs, as well as impacts of lower volume in our Palo Alto factory. Adjusted EBITDA was also lower due to a decrease in RCM revenue and the change in product mix. These increases were partially offset by a decrease in selling, general and administrative expense due to headcount reductions as a result of prior year restructuring initiatives.

Imagery

The following table provides selected financial information for the Imagery segment.

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

    

2019

    

2018

 

($ millions)

 

 

  

 

 

  

 

Total revenue

 

$

200

 

$

211

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

121

 

$

134

 

Adjusted EBITDA margin percentage

 

 

60.5

%  

 

63.5

%  

 

 

 

 

 

 

 

 

Revenues from the Imagery segment decreased $11 million in the first quarter of 2019 compared to the same period of 2018. The decrease was primarily driven by the loss of WorldView-4 revenue and higher than normal seasonal revenue from international defense and intelligence customers in first quarter of 2018, in part offset by growth from our commercial customers and the U.S. government.

Adjusted EBITDA decreased $13 million in the first quarter of 2019 compared to the same period of 2018. The decrease was primarily driven by the loss of WorldView-4 which had higher margins.

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Services

The following table provides selected financial information for the Services segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2019

    

2018

 

($ millions)

 

 

 

 

 

 

 

Total revenue

 

$

68

 

$

70

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

 7

 

$

 4

 

Adjusted EBITDA margin percentage

 

 

10.3

%  

 

5.7

%  

 

Services segment revenues remained relatively unchanged in the first quarter of 2019 compared to the same period in 2018. Adjusted EBITDA increased for the first quarter of 2019 compared to the same period of 2018 primarily as a result of the loss on the sale of a subsidiary recognized in the first quarter of 2018 which did not recur in 2019.

Corporate and other unallocated expenses

Corporate and other unallocated expenses include items such as corporate office costs, regulatory costs, executive and director compensation, foreign exchange gains and losses, SSL retention costs, and fees for audit, legal and consulting services. Corporate costs are not allocated to our segments.

Corporate and other unallocated expenses for the three months ended March 31, 2019 were $18 million compared to $13 million for the same period of 2018. The increase of $5 million or 38% is primarily attributable to an increase in foreign exchange losses as a result of no longer applying hedge accounting.

BACKLOG

Our backlog is as follows:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2019

 

2018

($ millions)

 

 

 

 

 

 

Total backlog

 

$

1,920

 

$

2,411

Unfunded contract options1

 

 

1,262

 

 

1,213

Total

 

$

3,182

 

$

3,624

1Unfunded contract options as of December 31, 2018 has been restated.

Order backlog, representing the estimated dollar value of firm contracts for which work has not yet been performed (also known as the remaining performance obligations on a contract), was $1.9 billion as of March 31, 2019 (December 31, 2018 - $2.4 billion). Backlog decreased primarily due to declines in backlog in our Space Systems and Imagery segments. Space Systems backlog decreased primarily as a result of revenue recognized on existing contracts and no new satellite awards during the quarter. Imagery backlog declined primarily due to the recognition of EnhancedView revenue during the quarter and the loss of our WorldView-4 satellite.

 

Order backlog generally does not include unexercised contract options and potential orders under indefinite delivery/indefinite quantity contracts. 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.

 

Unfunded contract options represent estimated amounts of revenue to be earned in the future from negotiated contracts with unexercised contract options and indefinite delivery/indefinite quantity contracts. Unfunded contract options as of March 31, 2019 were primarily composed of the option years in the EnhancedView Contract (September 1, 2020 through August 31, 2023). We believe it is the U.S. government’s intention to exercise all option years, subject only to

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annual congressional appropriation of funding and the federal budget process. As each option year is exercised, it will be added to backlog.

 

LIQUIDITY & CAPITAL RESOURCES

Our sources of liquidity include cash provided by operations, collection or securitization of orbital receivables, access to existing credit facilities and, when available and efficient, to the capital markets. We generally maintain limited cash on hand and use available cash to pay down borrowings on our Syndicated Credit Facility. Our primary short-term cash requirements are to fund working capital, including requirements on long-term construction contracts (including our geostationary satellite contracts), fixed overhead costs, and to fund increased capital expenditures, including the construction of our legion satellite constellation. Working capital requirements can vary significantly from period to period, particularly as a result of the timing of receipts and disbursements related to long-term construction contracts. Our medium-term to long-term cash requirements are to service and repay debt and to invest, including in facilities, equipment, technologies, and research and development for growth initiatives. These capital investments include investments to replace the capability or capacity of satellites which have or will go out of service in the future. Cash is also used to pay dividends and finance other long-term strategic business initiatives. Our first maturity of long-term debt is in the fourth quarter of 2020.

Our ability to fund these needs will depend, in part, on our ability to generate cash in the future, which depends on our future financial results. Our future results are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our control. Our future access to, and the availability of credit on acceptable terms and conditions is impacted by many factors, including capital market liquidity and overall economic conditions.

We believe that our cash from operating activities generated during the year, together with available borrowings under our Revolving Credit Facility, will be adequate for the next twelve months to meet our anticipated uses of cash flow, including working capital, capital expenditure, debt service costs, dividend, and other commitments. While we intend to reduce debt over time using cash provided by operations, we likely will also seek to meet long-term debt obligations by obtaining capital from a variety of additional sources or by refinancing existing obligations. These sources include public or private capital markets, bank financings and potential proceeds from dispositions or other third-party sources. The proceeds received from any disposition could be partially offset by cash tax liability if the company experiences a limitation in the ability to use its net operating loss carryforwards to offset any gain on such transaction pursuant to Section 382 of the Internal Revenue Code.

 

Summary of cash flows

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2019

    

2018

($ millions)

 

 

 

 

 

 

Cash used in operating activities

 

$

(58)

 

$

(13)

Cash used in investing activities

 

 

(73)

 

 

(55)

Cash provided by financing activities

 

 

139

 

 

67

Effect of foreign exchange on cash, cash equivalents and restricted cash

 

 

 1

 

 

 —

Cash, cash equivalents, and restricted cash, beginning of year

 

 

43

 

 

42

Cash, cash equivalents, and restricted cash, end of period

 

$

52

 

$

41

 

Operating activities

Cash used in operating activities increased $45 million from the three months ended March 31, 2018 to the corresponding period in 2019. The increase was primarily due to a $25 million increase in interest paid in the quarter and a decrease in contract liabilities. Both periods included interest paid for periods spanning the last quarter of the prior year and the first quarter due to the timing of payments under our Revolving Credit Facility.

Cash flows from operating activities can vary significantly from period to period as a result of our working capital requirements, given our portfolio of large construction programs and the timing of milestone receipts and payments with customers and suppliers in the ordinary course of business. Investment in working capital is also necessary to build our

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business and manage lead times in construction activities. We expect working capital account balances to continue to vary from period to period. We fund our working capital requirements with the Revolving Credit Facility (as defined below).

Investing activities

Investing activities increased $18 million for the three months ended March 31, 2019 compared to the corresponding period in 2018. The major investing activities included expenditures on property, plant and equipment of $59 million and $43 million, for the three months ended March 31, 2019 and 2018, respectively, and investments in software of $14 million and $17 million, for the three months ended March 31, 2019 and 2018, respectively. Property, plant and equipment expenditures for the three months ended March 31, 2019 were primarily related to the build of our Legion satellite constellation.

Financing activities

During the three months ended March 31, 2019, cash provided by financing activities was $139 million, mainly including net proceeds from the Syndicated Credit Facility (as described below) of $150 million which was partially offset by repayments of long-term debt and the settlement of the securitization liability. During the three months ended March 31, 2018, cash provided by financing activities was $67 million mainly including proceeds from the Syndicated Credit Facility of $90 million, partially offset by dividend payments of $16 million and repayments of long-term debt.

Credit facilities

The following table summarizes our long-term debt:

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

($ millions)

 

 

 

 

 

 

Syndicated Credit Facility:

 

 

 

 

 

 

Revolving Credit Facility

 

$

745

 

$

595

Term Loan A

 

 

500

 

 

500

Term Loan B

 

 

1,975

 

 

1,980

Financing fees

 

 

(39)

 

 

(41)

Obligations under finance leases and other

 

 

12

 

 

13

Long-term debt

 

$

3,193

 

$

3,047

 

The Syndicated Credit Facility is composed of: (i) a four-year senior secured first lien revolving credit facility in an aggregate principal amount of $1.15 billion and a four-year senior secured first lien operating facility in an aggregate principal amount of $100 million (collectively, the “Revolving Credit Facility”), (ii) a senior secured first lien term A facility (“Term Loan A”) in an aggregate principal amount of $500 million consisting of a $250 million tranche with a three-year maturity and a $250 million tranche with a four-year maturity, and (iii) a seven-year senior secured first lien term B facility (“Term Loan B”) in an aggregate principal amount of $2.0 billion.

Loans under the Revolving Credit Facility are available in U.S. dollars and, at our option, in Canadian dollars. Term Loan A and Term Loan B are repayable in U.S. dollars. Borrowings under the Revolving Credit Facility and Term Loan A bear interest at a rate equal to U.S. Dollar LIBOR (for U.S. dollar borrowings) and the Canadian Dollar Offered Rate (“CDOR”) or Canadian Bankers’ Acceptance Rate (for Canadian dollar borrowings), plus a margin of 120 – 350 basis points per annum, based on our total leverage ratio. Term Loan B bears interest at U.S. Dollar LIBOR plus 275 basis points per annum. On April 5, 2018, we entered into interest rate swaps at a notional value of $1.0 billion maturing in April 2021 or April 2022. As of March 31, 2019, we had hedged approximately 32% of our floating rate exposure on our outstanding debt at an average base rate of 2.56% (excluding the margin specified in the Syndicated Credit Facility).

The Revolving Credit Facility and Term Loan A are payable at maturity. Term Loan B will amortize in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount of the loan, with the final balance

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payable at maturity. The Revolving Credit Facility, Term Loan A, and Term Loan B may be repaid by us, in whole or in part, together with accrued interest, without premium or penalty.

The Syndicated Credit Facility is guaranteed by us and certain of our designated subsidiaries. The security for the Syndicated Credit Facility, subject to customary exceptions, includes substantially all our tangible and intangible assets and our subsidiary guarantors. We are required to make mandatory prepayments of the outstanding principal and accrued interest upon the occurrence of certain events and to the extent of a specified percentage of annual excess cash flow that is not reinvested or used for other specified purposes. The Syndicated Credit Facility is subject to customary affirmative and negative covenants, default provisions, representations and warranties and other terms and conditions. As of March 31, 2019, we were in compliance with our debt covenants.

The Revolving Credit Facility includes an aggregate $200 million sub limit under which letters of credit can be issued. As of March 31, 2019 and December 31, 2018, we had $15 million and $18 million, respectively, of issued and undrawn letters of credit outstanding under the Revolving Credit Facility.

Securitization liability

We have in place a revolving securitization facility agreement with an international financial institution. Under the terms of the Syndicated Credit Facility, we may offer to sell eligible orbital receivables from time to time with terms of seven years or less discounted to face value using prevailing market rates. There were no drawdowns executed in the quarter ended March 31, 2019 or March 31, 2018.

The orbital receivables that were securitized remain on our balance sheet because the accounting criteria for surrendering control of the orbital receivables were not met. The net proceeds received have been recognized as a securitization liability that has been subsequently measured at amortized cost using the effective interest rate method. The securitized orbital receivables and the securitization liability are being drawn down as payments are received from customers and passed on to the international financial institution. We continue to recognize orbital interest revenue on the orbital receivables that are subject to the securitization transactions and recognizes interest expense to accrete the securitization liability.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

As of March 31, 2019, there were no material changes outside the ordinary course of business to the contractual obligations table presented in our Annual Report on Form 10-K for the year ended December 31, 2018.

We are party to various legal proceedings and claims that arise in the ordinary course of business as either a plaintiff or defendant. We analyze all legal proceedings and the allegations therein. The outcome of any of these proceedings, either individually or in the aggregate, is not expected to have a material adverse effect on our financial position, results of operations or liquidity. Refer to Part II, Item 1, “Legal Proceedings” of this Quarterly Report on Form 10-Q for further discussion of legal proceedings.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2019, we had foreign exchange forward purchase contracts of $79 million, foreign exchange sales contracts of $226 million and financial guarantee contracts to export credit agencies in the form of indemnities or letters of credit. Such arrangements are not expected to have a material effect on our liquidity or capital resources, financial position or results of operations.

We use derivative financial instruments to manage existing foreign currency exposures. We consider the management of financial risks to be an important part of our overall corporate risk management policy. Foreign exchange forward contracts are used to hedge our exposure to currency risk on sales, purchases, cash, net investments and loans denominated in a currency other than the functional currency of our domestic and foreign operations.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There were no material changes to our critical accounting policies, estimates or judgements, that occurred in the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2, “Summary of Significant Accounting Policies” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, “Financial Information” in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

NON-GAAP FINANCIAL MEASURES

In addition to results reported in accordance with U.S. GAAP, we use certain non-GAAP financial measures as supplemental indicators of our financial and operating performance. These non-GAAP financial measures include EBITDA and Adjusted EBITDA. 

We define EBITDA as earnings before interest, taxes, depreciation and amortization, and Adjusted EBITDA as EBITDA adjusted for certain items affecting comparability as specified in the calculation. Management believes that exclusion of these items assists in providing a more complete understanding of our underlying results and trends, and management uses these measures along with the corresponding U.S. GAAP financial measures to manage our business, evaluate our performance compared to prior periods and the marketplace, and to establish operational goals. Adjusted EBITDA is a measure being used as a key element of our incentive compensation plan. The Syndicated Credit Facility also uses Adjusted EBITDA in the determination of our debt leverage covenant ratio. The definition of Adjusted EBITDA in the Syndicated Credit Facility includes a more comprehensive set of adjustments.

We believe that these non-GAAP measures, when read in conjunction with our U.S. GAAP results, provide useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business, and the comparison of our operating results against analyst financial models and operating results of other public companies.

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 (loss) as indications of financial performance or as alternate to cash flows from operations as measures of liquidity. EBITDA and Adjusted EBITDA have limitations as an analytical tool and should not be considered in isolation or as a substitute for our results reported under U.S. GAAP.

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The table below reconciles our net (loss) income to EBITDA and Adjusted EBITDA for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2019

    

2018

($ millions)

 

 

 

 

 

 

Net (loss) income

 

$

(59)

 

$

15

Income tax benefit

 

 

(1)

 

 

(32)

Interest expense, net

 

 

49

 

 

53

Depreciation and amortization

 

 

98

 

 

111

EBITDA

 

$

87

 

$

147

Acquisition and integration related expense

 

 

 4

 

 

 4

Restructuring

 

 

20

 

 

 —

Inventory impairment

 

 

 3

 

 

 —

CEO severance

 

 

 3

 

 

 —

Adjusted EBITDA

 

$

117

 

$

151

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

Space Systems

 

 

10

 

 

28

Imagery

 

 

121

 

 

134

Services

 

 

 7

 

 

 4

Intersegment eliminations

 

 

(3)

 

 

(2)

Corporate and other unallocated expenses

 

 

(18)

 

 

(13)

Adjusted EBITDA

 

$

117

 

$

151

 

 

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risks from those discussed in our 2018 Annual Report on Form 10-K and as updated in this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation and under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO have concluded that, as of March 31, 2019, due to the material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that have not yet been fully remediated as further discussed below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

 

Internal Control over Financial Reporting

 

As disclosed in Part II Item 9A “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we identified material weaknesses in internal control over financial reporting related to “Insufficient Complement of Personnel” and “Insufficient Identification and Assessment of Changes.” As a consequence of the

35

 


 

underlying root causes related to personnel and risk assessment, the Company did not have effective control activities related to the design, operation, and documentation of process-level controls over: (i) the cost-to-cost method used to determine the percentage-of-completion method affecting revenue and cost of sales (ii) the measurement and disclosures of current and deferred income taxes and related valuation allowance and (iii) commitment and contingency disclosures. No material errors were identified in the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 as a result of the material weaknesses.

 

Management believes that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles. Our CEO and CFO have certified that, based on such officer’s knowledge, the condensed consolidated financial statements, and other financial information included in this Quarterly Report on Form 10-Q, fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented in this Quarterly Report on Form 10-Q. In addition, we continue to implement the remediation program for these material weaknesses which is described below.

 

Remediation Actions

 

Management continues to implement the comprehensive remediation measures as disclosed in Part II Item 9A “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 to ensure that control deficiencies contributing to the material weaknesses are remediated such that these controls will be designed and operate effectively. Management is in the process of hiring additional resources and providing more comprehensive training to ensure process owners and control operators have robust understanding of the documentation requirements in advance of the control operations. Additionally, management is in the process of automating and reducing the complexity of the underlying processes and disaggregating the review of the key inputs utilized in developing the underlying estimates for revenue and cost of sales under the percentage-of-completion method, improving our evidentiary documentation over the review of key inputs, criteria for investigation, level of precision, and management’s expectations and judgments, and ensuring sufficient time is allowed for an effective documentation of the review to occur.

 

While management believes that progress has been made in enhancing internal controls as of March 31, 2019, and in the period since, the material weaknesses described in Part II, Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 have not been fully remediated due to insufficient time to assess the design, fully implement remediation and assess operating effectiveness of the related controls. Management will continue to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting throughout 2019 and will make any further changes management deems appropriate.

 

Changes in Internal Control over Financial Reporting

 

The remediation efforts related to the material weaknesses described in Part II Item 9A “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and above represent changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2019, that have materially affected our internal control over financial reporting. Furthermore, in conjunction with the adoption of ASC Topic 842, effective January 1, 2019, we implemented new processes and internal controls, which represent a material change to a component of our internal control over financial reporting. There were no other changes that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on the Effectiveness of Internal Controls

 

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

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PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

In 2010, we entered into an agreement with a Ukrainian customer to provide a communication satellite system. In 2014, following the annexation of Crimea by the Russian Federation, we declared force majeure with respect to the program. The Ukrainian customer accepted that an event of force majeure had occurred. Following various unsuccessful efforts to arrive at a new contractual framework to take account of the changed circumstances (including the force majeure and various financial issues), the contract with the Ukrainian customer was terminated by us. We completed work on the spacecraft, which is in storage. In July 2018, the Ukrainian customer issued a statement of claim in the arbitration it had commenced against us, challenging our right to terminate for force majeure, purporting to terminate the contract for default by us, and seeking recovery from us in the amount of approximately $227 million. Discovery has concluded, and the matter is scheduled to be heard by the arbitration panel in December 2019. We have sound defenses to the petitioner’s claims, and will vigorously defend the claims asserted against us. We have accrued an amount that we believe is within the range of probable outcomes for resolving this matter; the amount is not material to our consolidated financial statements. However, the outcome of any arbitration is difficult to predict, and in the event that the arbitration results in a finding against us in excess of the amount we have reserved, our business, results of operations and financial condition could be adversely affected.

In January 2019, a Maxar stockholder filed a class action lawsuit in the District Court of Colorado, naming Maxar and members of management as defendants alleging, among other things, that our public disclosures were deficient in violation of the federal securities laws and seeking monetary damages. Once the court appoints a lead plaintiff, that plaintiff will have sixty days to file a consolidated amended complaint and we will have sixty days to file a response.  Also in January 2019, a Maxar stockholder resident in Canada issued a proposed class action lawsuit in the Ontario Superior Court of Justice against Maxar and members of management claiming misrepresentations in Maxar’s public disclosures and seeking monetary damages. The Canadian case has not yet been served on us. We believe that these cases are without merit and we intend to vigorously defend against them.

We are a party to various other legal proceedings and claims that arise in the ordinary course of business as either a plaintiff or defendant. As a matter of course, we are prepared both to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities. We have established accrued liabilities for these matters where losses are deemed probable and reasonably estimable. The outcome of any of these other proceedings, either individually or in the aggregate, is not expected to have a material adverse effect on our financial position, results of operations or liquidity.

 

 

ITEM 1A.  RISK FACTORS

 

We operate in a changing global environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our business, financial condition and results of operations. 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 Our Business

The decline of our GeoComm business may adversely impact our financial results.

 

There has been a step down in total number and dollar value of geostationary communication satellite awards compared to historical averages prior to 2015. Revenues have decreased year-over-year as programs awarded prior to 2015 have been completed and have been replaced by a lower level of award value since 2015. Many satellite operators in the communications industry have continued to defer new satellite construction awards to evaluate geostationary and other competing satellite system architectures and other market factors. As a result, the outlook on our geostationary satellite manufacturing business (“GeoComm”) declined substantially during the year ended December 31, 2018 and negatively impacted our Space Systems segment.

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We have explored strategic alternatives regarding the future of our GeoComm business, including partnering with an existing satellite manufacturer to gain scale benefits; selling the GeoComm business; or exiting the GeoComm business following completion of existing contracts in backlog and the sale of its facilities. We continue to operate the GeoComm business and are completing projects in our backlog while pursuing new awards.

 

If we are unable to win new awards or execute existing contracts as expected, our business, results of operations and financial position could be further adversely affected.

 

We may be required to recognize impairment charges.

Long-lived assets, including goodwill and intangible assets, are tested annually for impairment in the fourth quarter or whenever there is an indication that an asset may be impaired. In the past, we have recognized impairment losses related to goodwill, intangible assets, property, plant and equipment, inventory and orbital receivables.

Disruptions to our business, unexpected significant declines in our operating results, adverse technological events or changes in the regulatory markets in which we operate, and significant declines in our stock price may result in further impairment charges to our tangible and intangible assets. Any future impairment charges could substantially affect our reported results.

The future revenue and operating results of the Space Systems segment are dependent on our ability to generate a sustainable order rate for the satellite manufacturing operations and develop new technologies to meet the needs of our customers or potential new customers.

The Space Systems segment’s financial performance is dependent on its ability to generate a sustainable order rate for its satellite manufacturing operations. This can be challenging and may fluctuate on an annual basis as the number of satellite construction contracts awarded varies. The cyclical nature of the commercial satellite market could negatively impact our ability to accurately forecast customer demand. The markets that we serve may not grow in the future and we may not be able to maintain adequate gross margins or profits in these markets. Our growth is dependent on the growth in the sales of services provided by our customers, our customers’ ability to anticipate market trends, and our ability to anticipate changes in the businesses of our customers and to successfully identify and enter new markets. If we fail to anticipate such changes in demand, our business, results of operations and financial position could be adversely affected.

The satellite manufacturing industry is characterized by development of technologies to meet changing customer demand for complex and reliable services. Our systems embody complex technology and may not always be compatible with current and evolving technical standards and systems developed by others. Failure or delays to meet or comply with the requisite and evolving industry or user standards could have a material adverse effect on our business, results of operations and financial condition.

Our business with various governmental entities is concentrated in a small number of primary contracts. The loss or reduction in scope of any one of our primary contracts would materially reduce our revenue.

Our business with various governmental entities is concentrated in a small number of primary contracts. We recognize significant revenue from U.S. government agencies and a significant amount of our U.S. government revenue is generated from a single contract, the EnhancedView Contract. The EnhancedView Contract is a service level agreement to provide image-tasking capacity on our satellites, and other imagery-derived products and services to the U.S. government. 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 that contract. A breach of our contract with government customers or reduction in service to our other customers could have a material adverse effect on our business, financial condition and results of operations. The U.S. government may also terminate or suspend our contracts, including the EnhancedView Contract, at any time with or without cause. 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 contracts generally involve fixed annual minimum commitments, such commitments, along with all other contracts with the U.S. government, are subject to annual Congressional appropriations and the federal

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budget process, and as a result, the U.S. government may not continue to fund these contracts at current or anticipated levels. Similarly, our contracts in Canada and other jurisdictions are also subject to government procurement policies and procedures.

Our business with various governmental entities is subject to the policies, priorities, regulations, mandates, and funding levels of such governmental entities and may be negatively or positively impacted by any change thereto.

Changes in government policies, priorities, regulations, use of commercial data providers to meet U.S. government imagery needs, government agency mandates, funding levels through agency budget reductions, the imposition of budgetary constraints or a decline in government support or deferment of funding for programs in which we or our customers participate could result in contract terminations, delays in contract awards, reduction in contract scope, performance penalties or breaches of our contracts, the failure to exercise contract options, the cancellation of planned procurements and fewer new business opportunities, all of which could negatively impact our business, financial condition, results of operations and cash flows.

We are subject to the procurement policies and procedures set forth in the Federal Acquisition Regulation (“FAR”). FAR governs all aspects of government contracting, including contractor qualifications and acquisition procedures. The FAR provisions in U.S. government contracts must be complied with in order for the contract to be awarded and provides for audits and reviews of contract procurement, performance and administration. Failure to comply with the provisions of FAR could result in contract termination.

 

In addition, contracts with any government, including the U.S. or Canadian government, may be terminated or suspended by the government at any time and could result in significant liability obligations for us. We seek to have in place as standard provisions, termination for convenience language which reimburses us for reasonable costs incurred, subcontractor and employee termination and wind-down costs plus a reasonable amount of profit thereon. However, reparations for termination may fall short of the financial benefit associated with full completion and operation of a contract. In addition, we may not be able to procure new contracts to offset the revenue or backlog lost as a result of any termination of government contracts. The loss of one or more large contracts could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Disruptions in U.S. government operations and funding could have a material adverse effect on our revenues, earnings and cash flows and otherwise adversely affect our financial condition.

Any disruptions in federal government operations could have a material adverse effect on our revenues, earnings and cash flows. A prolonged failure to maintain significant U.S. government operations, particularly those pertaining to our business, could have a material adverse effect on our revenues, earnings and cash flows. Continued uncertainty related to recent and future U.S. federal government shutdowns, the U.S. budget and/or failure of the U.S. government to enact annual appropriations could have a material adverse effect on our revenues, earnings and cash flows. Additionally, disruptions in federal government operations may negatively impact regulatory approvals and guidance that are important to our operations.

Changes in U.S. government policy regarding use of commercial data providers, or material delay or cancellation of certain U.S. government 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. Under the EnhancedView Contract, our contractual counterparty acquires imagery and imagery-derived products on behalf of our customers within the U.S. government. 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, or any material delay or cancellation of planned U.S. government programs, including the EnhancedView Contract, could materially adversely affect our revenue and our ability to achieve our growth objectives.

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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 economic and political conditions in the United States, Canada and internationally, 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.

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

The Imagery segment has historically generated a small portion of its revenue from foreign and domestic resellers. In the Imagery segment, 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 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 products and services successfully, these failures could negatively impact our business, financial condition and results of operations.

We often rely on a single vendor or a limited number of vendors to provide certain key products or services 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, such as construction of satellites and launch vehicles, and management of certain remote ground terminals and direct access facilities. In addition, our manufacturing operations depend on specific technologies and companies for which there may be a limited number of vendors. 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, services and technologies may 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, these vendors may request changes in pricing, payment terms or other contractual obligations, which could cause us to make substantial additional investments.

Our revenue, results of operations and reputation may be negatively impacted if our products contain defects or fail to operate in the expected manner.

We sell complex and technologically advanced systems, including satellites, products, hardware and software. Sophisticated software, including software developed by us, may contain defects that can unexpectedly interfere with the software’s intended operation. Defects may also occur in components and products that we manufacture or purchase from third parties. Most of the satellites and systems we have developed must function under demanding and unpredictable operating conditions and in harsh and potentially destructive environments. In addition, we may agree to the in-orbit delivery of a satellite, adding further risks to our ability to perform under a contract. Failure to achieve successful in-orbit delivery could result in significant penalties and other obligations on us. We employ sophisticated design and testing processes and practices, which include a range of stringent factory and on-site acceptance tests with criteria and requirements that are jointly developed with customers. Our systems may not be successfully implemented, pass required acceptance criteria, or operate or give the desired output, or we may not be able to detect and fix all defects in the satellites, products, hardware and software we sell or resolve any delays or availability issues in the launch services we procure. Failure to do so could result in lost revenue and damage to our reputation, and may adversely affect our ability to win new contract awards.

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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 or data from another source 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.

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 the performance of our satellite. 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. In December 2018, our WorldView-4 satellite experienced a failure in its control moment gyros, preventing the satellite from collecting imagery. See Part II, Item 7, “Management's Discussion and Analysis—Recent Developments—WorldView-4 Satellite” in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.

We cannot provide assurances 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.

Loss of, or damage to, a satellite and the failure to obtain data or alternate sources of data for our products may have an adverse impact on our results of operations and financial condition.

In the Imagery segment, we rely on data collected from a number of sources including data obtained from satellites. We may become unable or limited in our ability to collect such data. For example, satellites can temporarily go out of service and be recovered, or cease to function for reasons beyond our control, 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. Electrostatic storms or collisions with other objects could also damage the satellites. Additionally, in certain instances, governments may discontinue for periods of time the access to or operation of a satellite for any particular area on the Earth and for various reasons may not permit transmission of certain data, whether from a satellite owned by the government or not.  

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We cannot offer assurances that each of our satellites will remain in operation. Our satellites have certain redundant systems which can fail partially or in their entirety and accordingly satellites may operate for extended periods without all redundant systems in operation, but with single points of failure. 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. Certain of our satellites are nearing the end of their expected operational lives and 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 and we may not have replacement satellites that are immediately available.

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

We are vulnerable to natural disasters and significant disruptions including tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, and telecommunications failures. In the event of such a natural disaster or other disruption, we could experience: disruptions to our operations or the operations of suppliers, subcontractors, distributors or customers; destruction of facilities; and/ or loss of life.

The availability of many of our products and services depends on the continuing operation of our satellite operations infrastructure, satellite manufacturing operations, 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. Our satellite manufacturing operations are located in California in proximity to the San Andreas fault line, one of the longest and most heavily populated earthquake-prone rifts in the world. We do not maintain back-up manufacturing facilities or operations.

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.

Any significant disruption in or unauthorized access to our computer systems or those of third parties that we utilize in our operations, including those relating to cybersecurity or arising from cyber-attacks, could result in a loss or degradation of service, unauthorized disclosure of data, or theft of intellectual property, any of which could materially adversely impact our business.

Our customers and products depend upon the reliable performance and security of our computer systems and those of the third parties that we utilize in our operations. These systems may be subject to damage or interruption from earthquakes, adverse weather conditions, other natural disasters, terrorist attacks, power loss and telecommunications failures. Interruptions in these systems, or with the internet in general, could degrade or disrupt our ability to deliver our products and services to our customers.

In addition, we face the risk of a security breach or other significant disruption of our IT networks and related systems from a number of sources, including individual and state-sponsored actors, whether through cyber-attack or cyber intrusion via the internet, malware, computer viruses, email attachments to persons with access to our systems, denial of service attacks, physical or electronic break-ins and similar disruptions.

We also face the added risk of a security breach or other serious disruption of the systems that we develop and install for customers or that we develop and provide in our products. As a provider of communication satellites and complex systems, we face a heightened risk of security breach or disruption from threats to gain unauthorized access to our systems and our customers’ proprietary or classified information stored on our IT networks and related systems and to certain of the equipment used in our customers’ IT networks or related systems.

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While we have implemented certain systems and processes to help thwart hackers and protect our data and systems, the techniques used to gain unauthorized access to data and software are constantly evolving, and we may be unable to anticipate or prevent all unauthorized access. Because of our highly desired intellectual property and our support of the U.S. government and other governments, we (and/or third parties we use) may be a particularly attractive target for such attacks by hostile foreign governments. 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 offer assurances, however, that future attacks will not materially adversely affect our business.

A security breach or other significant disruption involving these types of information, IT networks and related systems could:

·

disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers;  

·

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, our or our customers’ proprietary, confidential, sensitive or otherwise valuable information, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;

·

compromise other sensitive government functions; and

·

damage our reputation with our customers (particularly agencies of various governments) and the public generally.

 

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.

Any attempt by hackers to obtain our data or intellectual property, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could harm our business, be expensive to remedy and damage our reputation.

Our business involves significant risks and uncertainties that may not be covered by insurance.

A significant portion of our business relates to designing, developing and manufacturing advanced space technology products and systems. New technologies may be untested or unproven. Failure of some of these products and services could result in extensive property damage. Accordingly, we may incur liabilities that are unique to our products and services.

 

We endeavor to obtain insurance coverage from established insurance carriers to cover these risks and liabilities. However, the amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities. Existing coverage may be canceled while we remain exposed to the risk and it is not possible to obtain insurance to protect against all operational risks, natural hazards and liabilities. 

We have historically insured satellites in our constellation to the extent that insurance was available on acceptable premiums and other terms. The insurance proceeds received in connection with a partial or total loss 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 fluctuate significantly. Although we have historically been able to obtain insurance coverage for 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

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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.

In addition, even though we carry business interruption insurance policies, any business interruption losses could exceed the coverage available or be excluded from our insurance policies. Any disruption of our ability to operate our business could result in a material decrease in our revenues or significant additional costs to replace, repair or insure our assets, which could have a material adverse impact on our financial condition and results of operations.

Disruptions in the supply of key raw materials or components and difficulties in the supplier qualification process, as well as increases in prices of raw materials, could adversely impact us.

Many raw materials, major components and product equipment items, particularly in our Space Systems segment, are procured or subcontracted on a single or sole-source basis. Although we maintain a qualification and performance surveillance process and we believe that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ inability to scale production and adjust delivery of long-lead time products during times of volatile demand. Our inability to fill our supply needs would jeopardize our ability to fulfill obligations under commercial and government contracts, which could, in turn, result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships and could have a material adverse effect on our operating results, financial condition, or cash flows.

Key raw materials used in our operations include metals such as aluminum and titanium, which are usually procured by our suppliers who manufacture parts in accordance with our drawings. We also purchase materials such as chemicals; composites; electronic, electro-mechanical and mechanical components; subassemblies; and subsystems that are integrated with the manufactured parts for final assembly into finished products and systems. We are impacted by increases in the prices of raw materials used in production on fixed-price business.

We monitor sources of supply to attempt to assure that adequate raw materials and other supplies needed in manufacturing processes are available.

Although we have not experienced significant difficulty in our ability to procure raw materials, components, sub-assemblies and other supplies required in our manufacturing processes, prolonged disruptions in the supply of any of our key raw materials or components, difficulty completing qualification of new sources of supply, implementing use of replacement materials, components or new sources of supply, or a continuing increase in the prices of raw materials, energy or components could have a material adverse effect on our operating results, financial condition, or cash flows.

We may not be successful in developing new technology and the technology we are successful in developing may not meet the needs of our customers or potential new customers.

The markets in which we operate are characterized by changing technology and evolving industry standards. Despite years of experience in meeting customer systems requirements with the latest in technological solutions, we may not be successful in identifying, developing and marketing products or systems that respond to rapid technological change, evolving technical standards and systems developed by others. Our competitors may develop technology that better meets the needs of our customers. If we do not continue to develop, manufacture and market innovative technologies or applications that meet customers’ requirements, sales may suffer and our business 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 business prospects, financial condition and results of operations could be materially and adversely affected.

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Our technology may violate the proprietary rights of third parties and our intellectual property may be misappropriated or infringed upon by third parties, each of which could have a negative impact on our operations.

If any of our technology violates proprietary rights, including copyrights and patents, third parties may assert infringement claims against us. Certain software modules and other intellectual property used by us or in our satellites, systems and products make use of or incorporate licensed software components and other licensed technology. These components are developed by third parties over whom we have no control. Any claims brought against us may result in limitations on our ability to use the intellectual property subject to these claims. We may be required to redesign our satellites, systems or products or to obtain licenses from third parties to continue offering our satellites, systems or products without substantially re-engineering such products or systems.

Our intellectual property rights may be invalidated, circumvented, challenged, infringed or required to be licensed to others. An infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights.

To protect our proprietary rights, we rely on a combination of patent protections, copyrights, trade secrets, trademark laws, confidentiality agreements with employees and third parties, and protective contractual provisions such as those contained in license agreements with consultants, subcontractors, vendors and customers. Although we apply rigorous standards, documents and processes to protect our intellectual property, there is no absolute assurance that the steps taken to protect our technology will prevent misappropriation or infringement. Litigation may be necessary to enforce or protect our intellectual property rights, our trade secrets or determine the validity and scope of the proprietary rights of others. Such litigation may be time-consuming and expensive to prosecute or defend and could result in the diversion of our time and resources. In addition, competitors may design around our technology or develop competing technologies.

We face competition that may cause us to have to either reduce our prices for imagery and related products and services 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 us and other 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 operate in highly competitive industries and in various jurisdictions across the world which may cause us to have to reduce our prices.

We operate in highly competitive industries and many of our competitors are larger and have substantially greater resources than we have. In addition, some of our foreign competitors currently benefit from, and others may benefit in the future from, protective measures by their home countries where governments are providing financial support,

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including significant investments in the development of new technologies. Government support of this nature greatly reduces the commercial risks associated with satellite development activities for these competitors. This market environment may result in increased pressures on our pricing and other competitive factors.

The market may not accept our imagery products and services. Our historic growth rates should not be relied upon 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 business prospects, financial condition and results of operations could be materially and adversely affected.

We are dependent on our ability to attract, train and retain employees. Our inability to do so, or the loss of key personnel, would cause serious harm to our business.

Our success is largely dependent on the abilities and experience of our executive officers and other key personnel to oversee all aspects of our operations and to deliver on our corporate strategies, including managing acquisitions and execution of our U.S. Access Plan. Competition for highly skilled management, technical, research and development and other personnel is intense in our industry. In order to maintain our ability to compete, we must continuously retain the services of a core group of specialists in a wide variety of disciplines. To the extent that the demand for qualified personnel exceeds supply, we could experience higher labor, recruiting or training costs in order to attract and retain such employees, or could experience difficulties in performing under contracts if our need for such employees is unmet. We may not be able to retain our current executive officers or key personnel or attract and retain additional executive officers or key personnel as needed to deliver on our corporate strategy. Furthermore, the recent volatility in our stock price may undermine the use of our equity as a retention tool and may make it more difficult to retain key personnel.

Some of our and our suppliers’ workforces are represented by labor unions, which may lead to work stoppages.

Some of the employees of our MDA business in Canada are represented by labor unions. We may experience work stoppages organized by labor unions, which could adversely affect our business. We cannot predict how stable our relationships with labor unions will be or whether we will be able to meet the labor unions’ requirements without impacting our financial condition. The labor unions may also limit our flexibility in dealing with our workforce. Labor union actions at suppliers can also affect us. Work stoppages and instability in our relationships with labor unions could delay the production and/or development of our products, which could strain relationships with customers and cause a loss of revenues which would adversely affect our operations.

Pension and other postretirement benefit obligations may materially impact our earnings, stockholders’ equity and cash flows from operations, and could have significant adverse impacts in future periods.

We maintain defined benefit pension and other postretirement benefits plans for some of our employees. Potential pension contributions include discretionary contributions to improve the plans’ funded status. The extent of future contributions depends heavily on market factors such as the discount rate and the actual return on plan assets. We estimate future contributions to these plans using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions, annual pension and other postretirement costs, the value of plan assets and our benefit obligations.

Significant changes in actual return on pension assets, discount rates, and other factors could adversely affect our results of operations and require cash pension contributions in future periods. Changes in discount rates and actual asset returns different than our expected asset returns can result in significant non-cash actuarial gains or losses which we record in

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the fourth quarter of each fiscal year and, if applicable, in any quarter in which an interim re-measurement is triggered. With regard to cash pension contributions, funding requirements for our pension plans are largely dependent upon interest rates, actual investment returns on pension assets and the impact of legislative or regulatory changes related to pension funding obligations.

We also provide other postretirement benefits to certain of our employees, consisting principally of health care, dental and life insurance for eligible retirees and qualifying dependents. Our estimates of future costs associated with these benefits are also subject to assumptions, including estimates of the level of medical cost increases and discount rates.

For a discussion regarding how our financial statements can be affected by pension and other postretirement plan accounting policies, see Part II, Item 7, “Management's Discussion and Analysis—Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” in our Annual Report on Form 10-K for the year ended December 31, 2018.

We are a party to legal proceedings, investigations and other claims or disputes, which are costly to defend and, if determined adversely to us, could require us to pay fines or damages, undertake remedial measures or prevent us from taking certain actions, any of which could adversely affect our business.

 

In the course of our business, we are, and in the future may be, a party to legal proceedings, investigations and other claims or disputes, which may relate to subjects including commercial transactions, intellectual property, securities, employee relations, or compliance with applicable laws and regulations. For instance, we are currently defending against a claim that we improperly terminated a contract with a Ukrainian customer in response to the force majeure event caused by the annexation of Crimea. And, we are a defendant in certain putative securities class actions brought as a result of volatility in the price of our common stock. These legal proceedings could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition. See Part II, Item 1, “Legal Proceedings” in this Quarterly Report on Form 10-Q for additional information.

 

These and other legal proceedings and investigations are inherently uncertain and we cannot predict their duration, scope, outcome or consequences. There can be no assurance that these or any such matters that have been or may in the future be brought against us will be resolved favorably.

 

In connection with any government investigations, in the event the government takes action against us or the parties resolve or settle the matter, we may be required to pay substantial fines or civil and criminal penalties and/or be subject to equitable remedies, including disgorgement or injunctive relief. Other legal or regulatory proceedings, including lawsuits filed by private litigants, may also follow as a consequence. These matters are likely to be expensive and time-consuming to defend, settle and/or resolve, and may require us to implement certain remedial measures that could prove costly or disruptive to our business and operations. They may also cause damage to our business reputation. The unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial condition or cash flows.

 

We may not realize all of the anticipated benefits from the U.S. Domestication.

 

We believe that we will continue to capitalize on projected benefits resulting from completion of the U.S. Domestication. Over the past several years, we have invested a significant amount of capital to develop infrastructure, technologies, products and markets to better access the U.S. government in both the civilian and military/classified space. Failure to realize all of the anticipated benefits from the U.S. Domestication could have a material adverse effect on our U.S. government business and prospects moving forward, including future EnhancedView awards and fully realizing our U.S. Access Plan. Similarly, there can be no guarantee that our historical ability to secure business in Canada will be unaffected by the U.S. Domestication.

 

Fluctuations in foreign exchange rates could have a negative impact on our business.

Our revenues, expenses, assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars for the purposes of compiling our consolidated financial statements. We use hedging strategies to manage

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and minimize the impact of exchange rate fluctuations on our cash flow and economic profits. There are complexities inherent in determining whether and when foreign exchange exposures will materialize, in particular given the possibility of unpredictable revenue variations arising from schedule delays and contract postponements. Furthermore, we could be exposed to the risk of non-performance of our hedging counterparties. We may also have difficulty in fully implementing our hedging strategy depending on the willingness of hedging counterparties to extend credit. Accordingly, no assurances may be given that our exchange rate hedging strategy will protect us from significant changes or fluctuations in revenues and expenses denominated in non-Canadian or U.S. dollars.

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 headcount and implement other efficiency initiatives. We cannot be certain that we will be able to complete these initiatives as planned or without business interruption, that these initiatives will not generate additional costs, such as severance or other charges, or that the estimated operating efficiencies or cost savings from such activities will be fully realized or maintained over time.

 

Future acquisitions could result in adverse impacts on our operations.

 

In order to grow our business, we may seek to acquire additional assets or companies. There can be no assurance that we will be able to identify, acquire, obtain the required regulatory approvals, or profitably manage additional businesses or successfully integrate any acquired businesses, products or technologies without substantial expenses, delays or other operational, regulatory, or financial problems. In addition, any acquired businesses, products or technologies may not achieve anticipated revenues and income growth. Further, acquisitions may involve a number of additional risks, including diversion of management’s attention, failure to retain key personnel, or failure to attract the right talent to manage organizational growth. We may become responsible for unexpected liabilities that we failed or were unable to discover in the course of performing due diligence in connection with historical acquisitions and any future acquisitions. The failure to manage our acquisitions strategy successfully could have a material adverse effect on our business, results of operations and financial condition.

 

Risks Related to Legal and Regulatory Matters

 

Our operations in the U.S. government market are subject to significant regulatory risk.

 

Our operations in the U.S. government market are subject to significant government regulation. The costs associated with execution of our U.S. Access Plan are significant. A failure by us to maintain the relevant clearances and approvals could limit our ability to operate in the U.S. market. Further, there can be no assurance that we will continue to be awarded contracts by the U.S. government. In addition, a failure by us to keep current and compliant with relevant U.S. regulations could result in fines, penalties, repayments, or suspension or debarment from U.S. government contracting or subcontracting for a period of time and could have an adverse effect on our standing and eligibility for future U.S. government contracts.

 

Failure to comply with the requirements of the National Industrial Security Program Operating Manual 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 with the U.S. government.

 

We and our subsidiaries are parties to certain contracts with various departments and agencies of the U.S. government, including the U.S. Department of Defense, which require that certain of our subsidiaries (including SSL, DigitalGlobe and subsidiaries within the Services segment) be issued facility security clearances under the National Industrial Security Program. The National Industrial Security Program requires that a corporation maintaining a facility security clearance be effectively insulated from foreign ownership, control or influence (“FOCI”). Prior to the U.S. Domestication, we were incorporated under the laws of Canada, and had entered into a Security Control Agreement, dated January 26, 2017, by and among us, our wholly owned subsidiary, Maxar Technologies Holdings Inc. (“Maxar Holdings”) and the U.S. Department of Defense (the “SCA”), as a suitable FOCI mitigation arrangement under the National Industrial Security Program Operating Manual. A FOCI mitigation arrangement was necessary for certain of our U.S. subsidiaries, including SSL, DigitalGlobe and subsidiaries within the Services segment, to acquire and continue to maintain the

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requisite facility security clearances thereby enabling them to enter into contracts with U.S. government entities to perform classified work and to complete the performance under those contracts. Following U.S. Domestication, we are seeking to modify or terminate our FOCI mitigation arrangement with the U.S. Department of Defense. In the meantime, failure to maintain an appropriate agreement with the U.S. Department of Defense regarding the appropriate FOCI mitigation arrangement could result in invalidation or termination of the facility security clearances, which in turn would mean that our U.S. subsidiaries would not be able to enter into future contracts with the U.S. government requiring facility security clearances, and may result in the loss of the ability of those subsidiaries to complete existing contracts with the U.S. government.

 

Our business is subject to various regulatory risks that could adversely affect our operations.

The environment in which we operate is highly regulated due to the sensitive nature of our complex and technologically advanced systems, including satellites, products, hardware and software, in addition to those regulations broadly applicable to publicly listed corporations. There are numerous regulatory risks that could adversely affect operations, including but not limited to:

·

Changes in laws and regulations. It is possible that the laws and regulations governing our business and operations will change in the future. A substantial portion of our revenue is generated from customers outside of Canada and the U.S. There may be a material adverse effect on our financial condition and results of operations if we are required to alter our business to comply with changes in both domestic and foreign regulations, telecommunications standards, tariffs or taxes and other trade barriers that reduce or restrict our ability to sell our products and services on a global basis, or by political and economic instability in the countries in which we conduct business. Any failure to comply with such regulatory requirements could also subject us to various penalties or sanctions.

·

Export Restrictions. Certain of our businesses and satellites, systems, products, services or technologies we have developed require the implementation or acquisition of products or technologies from third parties, including those in other jurisdictions. In addition, certain of our satellites, systems, products or technologies may be required to be forwarded or exported to other jurisdictions. In certain cases, if the use of the technologies can be viewed by the jurisdiction in which that supplier or subcontractor resides as being subject to export constraints or restrictions relating to national security, we may not be able to obtain the technologies and products that we require from subcontractors who would otherwise be our preferred choice or may not be able to obtain the export permits necessary to transfer or export our technology. To the extent that we are able, we obtain pre-authorization for re-export prior to signing contracts which oblige us to export subject technologies, including specific foreign government approval as needed. In the event of export restrictions, we may have the ability through contract force majeure provisions to be excused from our obligations. Notwithstanding these provisions, the inability to obtain export approvals, export restrictions or changes during contract execution or non-compliance by our customers could have an adverse effect on our revenues and margins.

·

U.S. Government Approval Requirements. For certain aspects of our business operations, we are required to obtain U.S. government licenses and approvals and to enter into agreements with various government bodies in order to export satellites and related equipment, to disclose technical data or provide defense services to foreign persons. The delayed receipt of or the failure to obtain the necessary U.S. government licenses, approvals and agreements may prohibit entry into or interrupt the completion of contracts which could lead to a customer’s termination of a contract for default, monetary penalties and/or the loss of incentive payments.

·

Competitive Impact of U.S. Regulations on Satellite Sales. Some of our customers and potential customers, along with insurance underwriters and brokers, have asserted that U.S. export control laws and regulations governing disclosures to foreign persons excessively restrict their access to information about the satellite during construction and on-orbit. Office of Foreign Assets Control (“OFAC”) sanctions and requirements may also limit certain business opportunities or delay or restrict our ability to contract with potential foreign customers or operators. To the extent that our non-U.S. competitors are not subject to OFAC or similar export control or economic sanctions laws and regulations, they may enjoy a competitive advantage with foreign customers, and it could become increasingly difficult for the U.S. satellite manufacturing industry, including us,

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to recapture this lost market share. Customers concerned over the possibility that the U.S. government may deny the export license necessary for us to deliver their purchased satellite to them, or the restrictions or delays imposed by the U.S. government licensing requirements, even where an export license is granted, may elect to choose a satellite that is purportedly free of International Traffic in Arms Regulations (“ITAR”) offered by one of our European competitors. We are further disadvantaged by the fact that a purportedly “ITAR-free” satellite may be launched less expensively in China on the Chinese Long March rocket, a launch vehicle that, because of ITAR restrictions, is not available to us.

·

Anti-Corruption Laws. As part of the regulatory and legal environments in which we operate, we are subject to global anti-corruption laws that prohibit improper payments directly or indirectly to government officials, authorities or persons defined in those anti-corruption laws in order to obtain or retain business or other improper advantages in the conduct of business. Our policies mandate compliance with anti-corruption laws. Failure by our employees, agents, subcontractors, suppliers and/or partners to comply with anti-corruption laws could impact us in various ways that include, but are not limited to, criminal, civil and administrative fines and/or legal sanctions and the inability to bid for or enter into contracts with certain entities, all of which could have a significant adverse effect on our reputation, operations and financial results.

Changes in tax law, in our tax rates or in exposure to additional income tax liabilities or assessments may materially and adversely affect our financial condition, results of operations, and cash flows.

Changes in law and policy relating to taxes may materially and adversely affect our financial condition, results of operations, and cash flows. For example, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions and certain deductions for executive compensation, permitting immediate expensing of certain capital expenditures, adopting elements of a territorial tax system, revising the rules governing net operating losses, and introducing new anti-base erosion and global intangible low-taxed income inclusion provisions. Many of these changes were effective immediately, without any transition periods or grandfathering for existing transactions. The 2017 Tax Act remains unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and United States Internal Revenue Service (“IRS”), any of which could lessen or increase certain adverse impacts of the 2017 Tax Act. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. We could be subject to tax audits, challenges to our tax positions or adverse changes or interpretations of tax laws. Adverse positions taken by tax authorities and tax audits could impact our operating results.

While our analysis and interpretation of the 2017 Tax Act is ongoing, based on our current evaluation, the limitation on interest deductions, and anti-base erosion and global intangible low-taxed income inclusion provisions may negatively impact our cash flows going forward. Further, there may be other material adverse effects resulting from the 2017 Tax Act that we have not yet identified, including as a result of and following the U.S. Domestication. While some of the changes made by the 2017 Tax Act may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the 2017 Tax Act as a whole will have on us.

Our ability to use our U.S. federal and state net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2018, we had approximately $1,083 million of net operating loss (“NOL”) carryforwards and $214 million tax credit carryforwards related to research and development expenditures and we may generate additional NOL and tax credit carryforwards during 2019. A significant portion of our NOL and tax credit carryforwards are comprised of U.S. federal and state NOL and tax credit carryforwards.

 

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change U.S. federal NOL carryforwards and other tax attributes (such as research tax credits) to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a greater than 50 percentage point change (by value) in a corporation’s equity

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ownership by certain stockholders over a rolling three-year period. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. While we do not believe that we have experienced ownership changes in the past that would materially limit our ability to utilize our NOL carryforwards, the Section 382 rules are complex and there is no assurance our view is correct.  Moreover, as a result of the shift in ownership of our stock that occurred in connection with the acquisition of DigitalGlobe in October 2017, we could experience an ownership change in the near future if there are certain significant purchases of our stock or other events outside of our control. In the event that we experience ownership changes in the future, our ability to use pre-change NOL carryforwards and other tax attributes to offset post-change taxable income will be subject to limitations. As a result, we may be unable to use a material portion of our NOL carryforwards and other tax attributes, which could adversely affect our future cash flows.

 

Additionally, the 2017 Tax Act changed the rules governing the use of U.S. federal NOLs, including by imposing a reduction to the maximum deduction allowed for NOLs generated in tax years beginning after December 31, 2017. In addition, NOL carryforwards arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited. Such limitations may significantly impact our ability to use NOL carryforwards generated after December 31, 2017, as well as the timing of any such use, and could adversely affect our future cash flows.

 

We are incurring increased costs and demands in order to comply with laws and regulations applicable to public companies.

We became a “domestic issuer” for SEC reporting purposes in January 2019. The obligations of being a public company in the U.S. require significant expenditures and will place significant demands on our management and other personnel, including costs resulting from public company reporting obligations under the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the listing requirements of the NYSE and the TSX. These rules require that we maintain effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to monitor and maintain compliance with. Our management and other personnel will need to devote a substantial amount of time to ensure compliance with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk becoming subject to reputational damage, litigation or being delisted, among other potential problems.

We have material weaknesses in internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.

Management has identified material weaknesses in our internal control over financial reporting as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 2 that affected our financial statements for the year ended December 31, 2018. No material errors were identified in the financial statements as a result of the material weaknesses.  See Part I, Item 4, “Controls and Procedures”  in this Quarterly Report on Form 10-Q for more information.

We cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price. In addition, if we fail to maintain effective internal controls, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE.

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Our operations are subject to governmental law and regulations relating to environmental matters, which may expose us to significant costs and liabilities that could negatively impact our financial condition.

We are subject to various federal, state, provincial and local environmental laws and regulations relating to the operation of our businesses, including those governing pollution, the handling, storage, disposal and transportation of hazardous substances, and the ownership and operation of real property. We have been designated, along with numerous other companies, as a potentially responsible party for the cleanup of hazardous waste on certain sites in California where we operate and there can be no assurance that the previous owners of those properties strictly complied with such environmental laws and regulations. Such laws and regulations may result in significant liabilities and costs to us due to the actions or inactions of the previous owners. In addition, new laws and regulations, more stringent enforcement of existing laws and regulations or the discovery of previously unknown contamination could result in additional costs.

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

A significant portion of our revenue is derived from non-U.S. or Canadian 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 U.S. and/or Canada and a particular foreign country; increases in tariffs and taxes and other trade barriers; foreign currency fluctuations; changes in political and economic stability; effects of austerity programs or similar significant budget reduction programs; potential preferences by prospective customers to purchase from local (non-U.S. or Canadian) 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.

Our operations in the United Kingdom and Europe may pose additional risks to our profitability and operating results.

 

Following a referendum on June 23, 2016 in which voters in the United Kingdom (“U.K.”) approved an exit from the European Union (“EU”), the U.K. government has initiated a process to leave the EU (often referred to as “Brexit”), including negotiating the terms of the U.K.’s future relationship with the EU. Such an exit from the EU is unprecedented, and it is unclear how the U.K.’s access to the EU single market, and the wider commercial, legal and regulatory environment, will impact our U.K. and European operations and customers. Our U.K. operations service customers in the U.K. as well as in other countries in the EU, and these operations could be disrupted by Brexit, particularly if there is a change in the U.K.’s relationship to the EU single market. While the full scope of implementation of the referendum decision is still unclear, companies exposed to or with operations in the U.K., such as ours, may face significant regulatory changes as a result of Brexit implementation, and complying with such new regulatory mandates may prove challenging and costly. The announcement of Brexit has created economic uncertainty surrounding the terms of the U.K.’s exit and its consequences could adversely impact customer confidence resulting in customers reducing their spending budgets on our products and services, which would adversely affect our businesses and results of operations.

Risks Related to Our Indebtedness and Our Common Stock

Our business is capital intensive, and we may not be able to raise adequate capital to finance our business strategies, including funding future satellites, or we may be able to do so only on terms that significantly restrict our ability to operate our business.

The implementation of our business strategies, such as expanding our satellite constellation and our products and services offerings, requires a substantial outlay of capital. As we pursue our business strategies and seek to respond to opportunities and trends in our industry, our actual capital expenditures may differ from our expected capital

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expenditures, and there can be no assurance that we will be able to satisfy our capital requirements in the future. We are highly leveraged, but we currently expect that our ongoing liquidity requirements for sustaining our operations will be satisfied by cash on hand and cash generated from our existing and future operations supplemented, where necessary, by available credit. However, we cannot provide assurances that our businesses will generate sufficient cash flow from operations in the future or that additional capital will be available in amounts sufficient to enable us to execute our business strategies. Our ability to increase our debt financing and/or renew existing credit facilities may be limited by our existing financial covenants, credit objectives, or the conditions of the debt capital market generally. Furthermore, our current financing arrangements contain certain restrictive covenants (e.g., the achievement or maintenance of stated financial ratios) that may impact our access to those facilities and significantly limit future operating and financial flexibility.

Our ability to obtain additional debt or equity financing or government grants to finance operating working capital requirements and growth initiatives may be limited or difficult to obtain, which could adversely affect our operations and financial condition.

We need capital to finance operating working capital requirements and growth initiatives and to pay our outstanding debt obligations as they become due for payment. If the cash generated from our businesses, together with the credit available under existing bank facilities, is not sufficient to fund future capital requirements, we will require additional debt or equity financing. Our ability to access capital markets on terms that are acceptable to us will be dependent on prevailing market conditions, as well as our future financial condition. Further, our ability to increase our debt financing and/or renew existing facilities may be limited by our existing leverage, financial covenants, credit objectives, and debt capital market conditions.

We have in the past, and may continue in the future to, receive government grants for research and development activities and other business initiatives. Any agreement or grant of this nature with government may be accompanied by contractual obligations applicable to us, which may result in the grant money becoming repayable if certain requirements are not met. A failure to meet contractual obligations under such agreements and grants and a consequent requirement to repay money received could negatively impact our results of operations and financial condition.

Our substantial indebtedness and other contractual obligations could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could divert our cash flow from operations for debt payments.

 

We have a significant amount of indebtedness and leverage. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on, or other amounts due with respect to our indebtedness. Our long-term debt bears interest at floating rates related to U.S. LIBOR (for U.S. dollar borrowings) and CDOR or Canadian Bankers’ Acceptances (for Canadian dollar borrowings), plus a margin. As a result, our interest payment obligations on such indebtedness will increase if such interest rates increase. Our leverage and debt service obligations could adversely impact our business, including by:

 

·

impairing our ability to meet one or more of the financial ratios contained in our credit facilities or to generate cash sufficient to pay interest or principal, including periodic principal payments;

·

increasing our vulnerability to general adverse economic and industry conditions;

·

limiting our ability to obtain additional debt or equity financing on favorable terms, if at all;

·

requiring the dedication of a portion of our cash flow from operations to service our debt, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures, dividends to stockholders or to pursue future business opportunities;

·

requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;

·

limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and

·

placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

 

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Any of the forgoing factors could have negative consequences on our financial condition and results of operation.

 

Our current financing arrangements contain certain restrictive covenants that impact our future operating and financial flexibility.

Our current financing arrangements contain certain restrictive covenants that impact our future operating and financial flexibility. Our debt funding is provided under our credit agreements, which contains a series of positive and negative covenants with which we must comply, including the achievement or maintenance of stated financial ratios. If we fail to comply with any covenants and are unable to obtain a waiver thereof, the lenders under the senior secured syndicated credit facility (the “Syndicated Credit Facility”) may be able to take certain actions with respect to the amounts owing under such agreements, including early payment thereof. Any such actions could have a material adverse effect on our financial condition. These covenants could also have the effect of limiting our flexibility in planning for or reacting to changes in our business and the markets in which we compete.

There can be no assurance that we will pay dividends on our common stock.

 

Although our Board of Directors has historically declared a quarterly cash dividend which we have paid, the payment of future dividends is subject to a number of risks and uncertainties, and we may not pay quarterly dividends in the same amounts or at all in the future. The declaration, amount and timing of cash dividends are subject to capital availability and determinations by our Board of Directors that such dividends are in the best interest of our stockholders and are in compliance with all respective laws and applicable agreements. Our ability to pay dividends will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors that our Board of Directors may deem relevant. The elimination of our dividend payments and/or our dividend program could have a negative effect on our stock price.

 

We could be adversely impacted by actions of activist stockholders, and such activism could impact the value of our securities.

 

We value constructive input from our stockholders and the investment community. However, there is no assurance that the actions taken by our Board of Directors and management in seeking to maintain constructive engagement with our stockholders will be successful. Certain of our stockholders have expressed views with respect to the operation of our business, our business strategy, corporate governance considerations or other matters. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. The perceived uncertainties as to our future direction due to activist actions could affect the market price of our stock, result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel, board members and business partners.

 

The price of our common stock may be volatile and fluctuate substantially.

 

Our common stock is listed on the NYSE and the TSX and the price for our common stock has historically been volatile. The market price of our common stock may continue to be highly volatile and may fluctuate substantially due to the following factors (in addition to the other risk factors described in this section):

 

·

general economic conditions;

·

fluctuations in our operating results;

·

variance in our financial performance from the expectations of equity and/or debt research analysts;

·

conditions and trends in the markets we serve;

·

additions of or changes to key employees;

·

changes in market valuations or earnings of our competitors;

·

trading volumes of our common stock;

·

future sales of our equity securities and/or future issuances of indebtedness;

·

changes in the estimation of the future sizes and growth rates of our markets; and

·

legislation or regulatory policies, practices or actions.

 

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In addition, the stock markets in general have experienced extreme price and volume fluctuations that have at times been unrelated or disproportionate to the operating performance of the particular companies affected. These market and industry factors may materially harm the market price of our common stock irrespective of our operating performance.

 

The market price of our common stock recently experienced a significant decline from which it has not fully recovered. A significant or prolonged decrease in our market capitalization, including a decline in stock price, or a negative long-term performance outlook, could result in an impairment of our assets which results when the carrying value of our assets exceed their fair value.

 

In addition, in the first quarter of 2019, we became subject to certain securities class action litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition. See Part II, Item 1, “Legal Proceedings” in this Quarterly Report on Form 10-Q for additional information.

 

Techniques employed by short sellers may drive down the market price of our common stock.

 

Short selling is the practice of selling securities that the seller does not own, but rather has borrowed from a third-party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market. In the past several years, our securities have been the subject of short selling. Reports and information have been published about us that we believe are mischaracterized or incorrect, and which have in the past been followed by a decline in our stock price.

 

It is not clear what additional effects the negative publicity will have on us, if any, other than potentially affecting the market price of our common stock. If we continue to be the subject of unfavorable allegations, we may have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could be distracting for our management team. Additionally, such allegations against us could negatively impact our business operations and stockholders' equity, and the value of any investment in our stock could be reduced.

 

If securities or industry analysts discontinue publishing research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

 

Our amended and restated certificate of incorporation and our amended and restated bylaws may impede or

discourage a takeover, changes in management or changes in the Board of Directors, which could reduce the market price of our common stock.

 

Certain provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may delay or prevent a third-party from acquiring control of us, even if a change in control would be beneficial to our existing stockholders. These provisions include:

 

·

no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

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·

the exclusive right of the Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on the Board of Directors;

·

the ability of the Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

·

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders;

·

the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors or two or more stockholders who hold, in the aggregate, at least ten percent (10%) of the voting power of our outstanding shares, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

·

advance notice procedures that stockholders must comply with in order to nominate candidates to the Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our business.

 

These provisions could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock. In addition, our amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that derivative actions brought in our name, actions against our directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware.

 

Our actual operating results may differ significantly from our guidance.

 

From time to time, we release guidance regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information contained or referred to in the release. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither any independent registered public accounting firm nor any other independent expert or outside party compiles, examines or reviews the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.

 

Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of these ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.

 

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results, particularly any guidance relating to the results of operations of acquired businesses or companies as our management will be less familiar with their business, procedures and operations. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data will diminish the farther in the future that the data are forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.

 

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Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in our Annual Report on Form 10-K for the year ended December 31, 2018 could result in the actual operating results being different than the guidance, and such differences may be adverse and material.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

#Certain portions of this exhibit have been omitted by redacting a portion of the text. This exhibit has been filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment.

 

*Management contract or compensatory plan arrangement.

 

+XBRL (eXtensible Business Reporting Language) Information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

57

 


 

 

 

EXHIBIT INDEX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incorporated by Reference

 

 

Exhibit No

  

Exhibit Description

  

Form

 

SEC File No.

   

Exhibit

   

Filing Date

  

Filed or Furnished
Herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Maxar Technologies Inc., as filed with the Delaware Secretary of State

 

8-K

 

001-38228

 

3.1

 

1/2/19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of Maxar Technologies Inc.

 

8-K

 

001-38228

 

3.2

 

1/2/19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Restated Credit Agreement by and among Maxar Technologies Ltd., Royal Bank of Canada and the Lenders named therein, dated as of October 5, 2017

 

6-K

 

001-38228

 

10.1

 

10/16/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.2

 

First Amending Agreement dated as of December 21, 2018 to the Restated Credit Agreement dated as of October 5, 2017

 

10-K

 

001-38228

 

4.2

 

3/1/19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.3

 

Second Amending Agreement dated as of December 21, 2018 to the to the Restated Credit Agreement dated as of October 5, 2017

 

6-K

 

001-38228

 

99.2

 

12/21/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1#

 

Modification P00062 to Contract #HM021010CN002, by and between DigitalGlobe, Inc. and National Geospatial-Intelligence Agency.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2*

 

Maxar Technologies Inc. 2019 Incentive Award Plan

 

S-8

 

001-38228

 

4.3

 

5/8/19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3*

 

Maxar Technologies Inc. Employee Stock Purchase Plan

 

S-8

 

001-38228

 

4.4

 

5/8/19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.4*

 

Form of PSU Award Agreement pursuant to 2019 Incentive Award Plan

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5*

 

Form of RSU Award Agreement pursuant to 2019 Incentive Award Plan 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6*

 

Form Option Award Agreement pursuant to 2019 Incentive Award Plan

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7*

 

Form Director RSU Award Agreement pursuant to 2019 Incentive Award Plan

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

58

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incorporated by Reference

 

 

Exhibit No

  

Exhibit Description

  

Form

 

SEC File No.

   

Exhibit

   

Filing Date

  

Filed or Furnished
Herewith

10.8*

 

Form Cash-Settled RSU Award Agreement pursuant to 2019 Incentive Award Plan

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.9*

 

Form Cash Incentive Award Agreement pursuant to 2019 Incentive Award Plan

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.10*

 

Form PSU Award Agreement pursuant to Omnibus Plan

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certification of the Company’s Chief Executive Officer, Daniel L. Jablonsky, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of the Company’s Chief Financial Officer, Biggs C. Porter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

X

32.1†

 

Certification of the Company’s Chief Executive Officer, Daniel L. Jablonsky, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2†

 

Certification of the Company’s Chief Financial Officer, Biggs C. Porter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101

 

The following materials for the Maxar Technologies Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, Commission File No. 001-38228, formatted in eXtensible Business Reporting Language (XBRL):

(i.) Unaudited Condensed Consolidated Statements of Operations

(ii.) Unaudited Condensed Consolidated Balance Sheets

(iii.) Unaudited Condensed Consolidated Statements of Cash Flows

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

 

 

 

 

 

 

 

 

 

X

 

#Certain portions of this exhibit have been omitted by redacting a portion of the text. This exhibit has been filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment.

*Management contract or compensatory plan arrangement.

Furnished herewith.

 

 

59

 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

May 9, 2019

Maxar Technologies Inc.

 

 

By: /s/ Daniel L. Jablonsky                        

Daniel L. Jablonsky

Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

 

 

By: /s/ Biggs C. Porter                            

Biggs C. Porter

Executive Vice President and Chief Financial Officer

(Principal Financial Officer, Principal Accounting Officer and Duly Authorized Officer)

 

60