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MAXR Maxar

Filed: 4 Nov 19, 5:02pm

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 September 30, 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)

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

Series A Junior Participating Preferred Stock, at $0.01 par value

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:

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

As of October 31, 2019, there were 59,744,715 shares of the registrant’s common stock, at $0.0001 par value, outstanding, and 0 shares of the registrant’s Series A Junior Participating Preferred Stock, at par value $0.01 per share, outstanding.

PART I. FINANCIAL INFORMATION

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Statements of Operations

(In millions, except per share amounts)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Revenues:

Product

$

158

$

201

$

542

$

686

Service

321

308

931

959

Total revenues

$

479

$

509

$

1,473

$

1,645

Costs and expenses:

Product costs, excluding depreciation and amortization

$

159

$

220

$

521

$

661

Service costs, excluding depreciation and amortization

105

100

336

296

Selling, general and administrative

92

132

275

368

Depreciation and amortization

 

96

 

119

 

293

 

343

Impairment losses

175

12

175

Satellite insurance recovery

(183)

Operating income (loss)

 

27

 

(237)

 

219

 

(198)

Interest expense, net

 

50

 

52

 

148

 

155

Other (income) expense, net

(1)

5

2

10

Income (loss) before taxes

 

(22)

 

(294)

 

69

 

(363)

Income tax expense (benefit)

 

3

 

(6)

 

4

 

(47)

Equity in loss (income) from joint ventures, net of tax

1

1

4

(2)

Net (loss) income

$

(26)

$

(289)

$

61

$

(314)

(Loss) income per common share:

 

  

 

  

 

  

 

  

Basic

$

(0.44)

$

(4.88)

$

1.02

$

(5.45)

Diluted

$

(0.44)

$

(4.88)

$

1.02

$

(5.45)

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

Nine Months Ended

September 30, 

September 30, 

    

2019

2018

    

2019

2018

Net (loss) income

$

(26)

$

(289)

$

61

$

(314)

Other comprehensive (loss) income, net of tax:

 

  

  

 

  

  

Foreign currency translation adjustments 1

 

(5)

(4)

 

6

(4)

Unrealized (loss) gain on derivatives

 

(1)

5

 

(17)

5

Change in pension and other postretirement benefit plans

(1)

2

(1)

Other comprehensive (loss) income, net of tax

 

(6)

 

(9)

Comprehensive (loss) income, net of tax

$

(32)

$

(289)

$

52

$

(314)

1

Included within Foreign currency translation adjustments is a net gain on hedge of net investment in foreign operations of $0 million and $5 million for the three and nine months ended September 30, 2019, respectively and a net gain on hedge of net investment in foreign operations of $6 million and a net loss of $6 million for the three and nine months ended September 30, 2018, respectively.

See accompanying notes to the unaudited condensed consolidated financial statements.

4

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Balance Sheets

(In millions)

    

September 30, 

    

December 31, 

2019

2018

Assets

  

  

Current assets:

 

Cash and cash equivalents

 

$

52

$

35

Trade and other receivables, net

 

 

484

 

464

Inventory

 

 

20

 

31

Advances to suppliers

7

42

Income taxes receivable

 

 

21

 

14

Prepaid and other current assets

44

51

Total current assets

 

 

628

 

637

Non-current assets:

 

 

  

 

  

Orbital receivables

 

 

412

407

Deferred tax assets

 

 

110

103

Property, plant and equipment, net

 

 

824

747

Intangible assets, net

 

 

1,065

1,232

Non-current operating lease assets

125

Goodwill

 

 

1,759

1,751

Other assets

119

124

Total assets

 

$

5,042

$

5,001

Liabilities and stockholders’ equity

 

 

  

 

  

Current liabilities:

 

 

  

 

  

Accounts payable

 

$

177

$

209

Accrued liabilities

56

116

Accrued compensation and benefits

 

 

99

 

100

Contract liabilities

 

 

279

 

361

Current portion of long-term debt

 

 

17

 

17

Current operating lease liabilities

33

Other current liabilities

59

46

Total current liabilities

 

720

 

849

Non-current liabilities:

 

 

  

 

  

Pension and other postretirement benefits

 

 

187

196

Contract liabilities

5

60

Operating lease liabilities

132

Long-term debt

 

 

3,114

3,030

Other non-current liabilities

182

222

Total liabilities

 

 

4,340

 

4,357

Stockholders’ equity:

 

 

  

 

  

Common stock ($0.0001 par value, 240 million common shares authorized and 59.6 million outstanding at September 30, 2019; 0 par value, unlimited authorized common shares and 59.4 million outstanding at December 31, 2018)

 

 

1,713

Additional paid-in capital

 

 

1,780

59

Accumulated deficit

 

 

(1,152)

(1,211)

Accumulated other comprehensive income

 

 

73

82

Total Maxar stockholders' equity

701

643

Noncontrolling interest

1

1

Total stockholders' equity

 

 

702

 

644

Total liabilities and stockholders' equity

 

$

5,042

$

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)

Nine Months Ended

September 30, 

    

2019

    

2018

Cash flows provided by (used in):

Operating activities:

 

  

 

  

Net income (loss)

$

61

$

(314)

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

 

 

Depreciation of property, plant and equipment

 

85

 

121

Amortization of intangible assets

 

208

 

222

Stock-based compensation expense

 

10

 

14

Amortization of debt issuance costs and other noncash interest expense

 

6

 

7

Impairment losses

15

213

Foreign exchange losses

 

5

 

3

Deferred income tax expense (benefit)

 

 

(29)

Other

7

12

Changes in operating assets and liabilities:

 

Trade and other receivables

(24)

(24)

Accrued compensation and benefits

(11)

(6)

Trade and other payables

(31)

(55)

Accrued liabilities

(64)

16

Contract liabilities

(143)

(156)

Advances to suppliers

35

39

Deferred tax assets

(5)

(23)

Deferred tax liabilities

4

34

Other

(16)

(26)

Cash provided by operating activities

 

142

48

Investing activities:

 

  

 

  

Purchase of property, plant and equipment

 

(163)

 

(111)

Purchase or development of software

 

(43)

 

(42)

Cash collected on note receivable

5

Disposal of subsidiary and short-term investments

 

3

 

(1)

Acquisitions, net of cash acquired

(6)

Cash used in investing activities

 

(203)

 

(155)

Financing activities:

 

  

 

  

Net proceeds from revolving credit facility

 

107

 

150

Repayments of long-term debt

(22)

(25)

Proceeds from securitization of orbital receivables

18

Settlement of securitization liability

 

(7)

 

(12)

Payment of dividends

(2)

(49)

Change in overdraft balance

2

Other financing activities

(1)

Cash provided by financing activities

75

84

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

14

(23)

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

43

42

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

$

57

$

19

Reconciliation of cash flow information:

Cash and cash equivalents

$

52

$

9

Restricted cash included in prepaid and other current assets

1

8

Restricted cash included in other assets

4

2

Total cash, cash equivalents, and restricted cash

$

57

$

19

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 and nine months ended September 30, 2019:

Common Stock

Additional

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 loss

(59)

(6)

(65)

Balance as of March 31, 2019

59.6

1,774

(1,271)

76

1

580

Common stock issued under employee stock purchase plan

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

Equity classified stock-based compensation expense

2

2

Dividends ($0.01 per common share)

Comprehensive income

146

3

149

Balance as of June 30, 2019

59.6

1,776

(1,125)

79

1

731

Common stock issued under employee stock purchase plan

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

Equity classified stock-based compensation expense

4

4

Dividends ($0.01 per common share)

(1)

(1)

Comprehensive loss

(26)

(6)

(32)

Balance as of September 30, 2019

59.6

$

$

1,780

$

(1,152)

$

73

$

1

$

702

7

MAXAR TECHNOLOGIES INC.

Unaudited Condensed Consolidated Statements of Change in Stockholders’ Equity

(In millions)

Three and nine months ended September 30, 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

Common shares issued as part of dissenting shareholder settlement

2.2

111

111

Common stock issued under employee stock purchase plan

0.1

1

1

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

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

(1)

(1)

Equity classified stock-based compensation expense

9

9

Dividends ($0.29 per common share)

(16)

(16)

Comprehensive income (loss)

(40)

8

(32)

Balance as of June 30, 2018

58.7

1,670

61

61

113

1

1,906

Common shares issued as part of dissenting shareholder settlement

Common shares issued as part of Neptec acquisition

0.5

25

25

Common stock issued under employee stock purchase plan

1

1

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

1

(1)

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

(1)

1

Equity classified stock-based compensation expense

7

7

Dividends ($0.28 per common share)

(17)

(17)

Comprehensive income (loss)

(289)

(289)

Balance as of September 30, 2018

59.2

$

1,696

$

68

$

(245)

$

113

$

1

$

1,633

See accompanying notes to the unaudited condensed consolidated financial statements.

8

Table of Contents

MAXAR TECHNOLOGIES INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

1.  GENERAL BUSINESS DESCRIPTION

Maxar Technologies Inc. (the “Company” or “Maxar”) is a leading provider of solutions in Earth intelligence and space infrastructure. Maxar helps government and commercial customers to monitor, understand and navigate the changing planet; deliver global broadband communications infrastructure; and explore and advance the use of space. The Company’s approach combines decades of deep mission understanding and a proven commercial and defense foundation to deliver services with speed, scale and cost effectiveness. The Company’s 5,800 team members in more than 30 global locations work to help customers harness the potential of space. Maxar’s stock trades on the New York Stock Exchange and Toronto Stock Exchange under the symbol “MAXR”.

Maxar’s businesses are organized and managed in 3 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 subsidiaries. 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 in 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.

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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)

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.

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. ASC 326, as amended, significantly changes the impairment model for most financial assets and certain other instruments. ASC 326, as amended, 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 will adopt this standard and related amendments effective January 1, 2020. 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. BUSINESS COMBINATION

On July 16, 2018, the Company acquired Neptec Design Group Ltd. (“Neptec”), a leading electro-optical and electro-mechanical systems and high-performance intelligent Light Detection and Ranging company for $30 million, net of cash acquired, comprised of approximately $6 million in cash and the balance in common shares of Maxar. With Neptec, the Company will deliver end-to-end robotic systems and an expanded set of solutions in order to capture growth and accelerate advancement into new and expanding space segments. As a result of the transaction, the Company recognized $21 million of goodwill (not deductible for tax purposes), $11 million of intangible assets and $2 million of net liabilities. Neptec’s operating results are included in the Company’s consolidated financial statements beginning from the date of acquisition and had an immaterial effect on the Company’s Unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018. Direct transaction costs of the Neptec acquisition were not material and were expensed as incurred.

There were 0 business combinations during the nine months ended September 30, 2019.

4.  TRADE AND OTHER RECEIVABLES, NET

Trade and other receivables, net consisted of the following:

September 30, 

December 31, 

2019

    

2018

Billed

$

218

$

242

Unbilled

 

221

 

172

Total trade receivables

439

414

Orbital receivables, current portion

37

34

Other

10

17

Allowance for doubtful accounts

(2)

(1)

Total trade and other receivables, net

$

484

$

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 September 30, 2019 and December 31, 2018, long-term orbital receivables were $412 million and $407 million, respectively, and are included in Non-current assets on the Unaudited Condensed Consolidated Balance Sheets.

During 2018, the Company sold orbital receivables for net proceeds of $18 million. These orbital receivables were purchased in tranches that span multiple years and include longer-term maturities. The orbital receivables that were securitized remain recognized on the consolidated balance sheets as the Company did not meet the accounting criteria for surrendering control of the receivables. The net proceeds received have been recognized as securitization liabilities and are subsequently measured at amortized cost using the effective interest rate method. The securitized orbital receivables and the securitization liabilities are being drawn down as payments are received from the customers and passed on to the purchaser of the tranche. The Company continues 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. The amount of securitization liabilities was $103 million and $109 million at September 30, 2019 and December 31, 2018, respectively, of which $16 million and $15 million, respectively, is included in Other current liabilities on the Unaudited Condensed Consolidated Balance Sheets. The non-current amount of securitization liabilities is included in Other non-current liabilities on the 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)

5.  INVENTORY

Inventory consisted of the following:

    

September 30, 

December 31, 

2019

    

2018

Raw materials

$

13

$

21

Work in process

7

10

Total inventory

$

20

$

31

6.  PROPERTY, PLANT AND EQUIPMENT, NET

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

    

September 30, 

December 31, 

2019

    

2018

Satellites

$

397

$

397

Equipment

230

229

Leasehold improvements

98

97

Computer hardware

96

92

Land and land improvements

88

88

Buildings

 

46

46

Furniture and fixtures

19

19

Construction in process

298

142

Property, plant and equipment, at cost

1,272

1,110

Accumulated depreciation

 

(448)

(363)

Property, plant and equipment, net

$

824

$

747

Depreciation expense for property, plant and equipment was $26 million and $85 million, and $43 million and $121 million for the three and nine months ended September 30, 2019 and September 30, 2018, respectively.

During the second quarter of 2019, the Company received insurance recoveries of $183 million related to the loss of the WorldView-4 satellite. The insurance proceeds are included in operating cash flows as they are considered business interruption insurance and represent the Company’s satellite’s loss of capacity to produce imagery for sale to the Company’s customers.

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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)

7.  INTANGIBLE ASSETS

Intangible assets consisted of the following:

    

September 30, 2019

December 31, 2018

Gross carrying value

Accumulated amortization

Net carrying value

Gross carrying value

Accumulated amortization

Net carrying value

Customer relationships

$

619

$

(92)

$

527

$

619

$

(58)

$

561

Backlog

 

332

 

(194)

 

138

 

332

 

(120)

 

212

Technologies

328

(133)

195

330

(86)

244

Software

239

(100)

139

198

(71)

127

Image library

80

(44)

36

80

(32)

48

Trade names and other

41

(13)

28

41

(9)

32

Non-compete agreements

21

(19)

2

21

(13)

8

Total intangible assets

$

1,660

$

(595)

$

1,065

$

1,621

$

(389)

$

1,232

Amortization expense related to intangible assets was $70 million and $208 million, and $76 million and $222 million for the three and nine months ended September 30, 2019 and September 30, 2018, respectively.

8.  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 approximately one year to 15 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 consolidated balance sheets and will recognize lease expense on a straight-line basis in the consolidated statements 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 also elected to include in minimum lease payments any executory costs that are part of the fixed lease payment.

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 September 30, 

Nine Months Ended September 30, 

    

Classification

2019

2019

Operating lease expense

Selling, general, and administrative expense, Product and Service costs 1

$

8

$

25

1Excluding depreciation and amortization

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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)

Supplemental lease balance sheet information consists of the following:

September 30, 

Classification

2019

Assets:

Operating

Non-current operating lease assets

$

125

Finance

Property, plant and equipment, net

8

Total lease assets

$

133

Liabilities:

Current

Operating

Current operating lease liabilities

$

33

Finance

Current portion of long-term debt

3

Non-current

Operating

Operating lease liabilities

132

Finance

Long-term debt

3

Total lease liabilities

$

171

Supplemental lease cash flow information is as follows:

Three Months Ended September 30, 

Nine Months Ended September 30, 

2019

2019

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

Operating cash flows from operating leases

$

9

$

27

Other supplemental lease information consists of the following:

September 30, 

2019

Weighted average remaining lease term

Operating leases

9 years

Finance leases

3 years

Weighted average discount rate

Operating leases

7.0%

Finance leases

4.6%

Maturities of lease liabilities are as follows:

2019 1

    

2020

2021

2022

2023

Thereafter

Less: Imputed Interest

Total Minimum Lease Payments

Operating leases

$

9

$

33

$

30

$

26

$

23

$

101

$

(57)

$

165

Finance leases

1

3

1

1

6

1Excludes the nine months ended September 30, 2019.

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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)

9.  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, with cash payments occurring throughout 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

21

Payments

(19)

Release of reserves

(2)

Balance as of September 30, 2019

$

6

10.  LONG-TERM DEBT AND INTEREST EXPENSE, NET

September 30, 

December 31, 

    

2019

    

2018

Syndicated Credit Facility:

 

  

 

  

Revolving Credit Facility

$

696

$

595

Term Loan A

 

500

 

500

Term Loan B

 

1,960

 

1,980

Debt issuance costs

 

(35)

 

(41)

Obligations under finance leases and other

 

10

 

13

Total long-term debt

 

3,131

 

3,047

Current portion

 

(17)

 

(17)

Non-current portion

$

3,114

$

3,030

The Syndicated Credit Facility, with an aggregate capacity of up to $3.75 billion, is composed of: (i) a four-year senior secured first lien revolving credit facility and a four-year senior secured first lien operating credit 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”).

The Revolving Credit Facility includes an aggregate $200 million sub limit under which letters of credit can be issued. As of September 30, 2019 and December 31, 2018, the Company had $18 million of issued and undrawn letters of credit outstanding under the Revolving Credit Facility.

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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)

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

2019

    

2018

2019

    

2018

Interest on long-term debt

$

50

$

46

$

143

$

129

Interest expense on advance payments from customers

3

6

12

20

Interest on orbital securitization liability

2

1

6

5

Imputed interest and other

1

2

Capitalized interest

(5)

(2)

(13)

(4)

Interest expense on dissenting stockholder liability

3

Interest expense, net

$

50

$

52

$

148

$

155

11.  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 set forth the Company’s assets and liabilities measured at fair value on a recurring basis categorized by level within the fair value hierarchy. Financial assets and liabilities are classified within the hierarchy 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.

Recurring Fair Value Measurements of as of September 30, 2019

Level 1

Level 2

Level 3

Total

Assets

 

  

 

  

 

  

 

  

Short-term investments

$

5

$

$

$

5

Long-term investments

12

12

Derivative financial instruments

Foreign exchange forward contracts & embedded derivatives

3

3

$

5

$

3

$

12

$

20

Liabilities

Derivative financial instruments

Foreign exchange forward contracts & embedded derivatives

$

$

1

$

$

1

Interest rate swaps

22

22

$

$

23

$

$

23

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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 December 31, 2018

Level 1

Level 2

Level 3

Total

Assets

 

  

 

  

 

  

 

  

Short-term investments

$

3

$

$

$

3

Long-term investments

1

24

25

Derivative financial instruments

Foreign exchange forward contracts & embedded derivatives

5

5

$

3

$

6

$

24

$

33

Liabilities

Derivative financial instruments

Foreign exchange forward contracts & embedded derivatives

$

$

8

$

$

8

Interest rate swaps

4

4

$

$

12

$

$

12

In the second quarter of 2019, the Company noted an observable price change related to its investment in a privately held company and, as a result, recorded an impairment loss of $12 million. There were 0 investment impairment losses recognized in the three and nine months ended September 30, 2018.

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 September 30, 2019

Carrying Value

Fair Value

Fair Value Hierarchy

Long-term debt, excluding finance leases and other

$

3,121

$

2,943

Level 2

Orbital receivables

449

449

Level 2

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 nine months ended September 30, 2019 or year ended December 31, 2018.

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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)

12. STOCKHOLDERS’ EQUITY

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 was recorded within the Unaudited Condensed Consolidated Statements of Change in Stockholders’ Equity in the first quarter of 2019.

Tax Benefit Preservation Plan

On May 12, 2019, the Company implemented a Tax Benefit Preservation Plan (“Tax Plan”), with the intent to preserve the value of certain deferred tax benefits (the “Tax Benefits”). The Tax Plan is intended to act as a deterrent to any person or entity acquiring shares of the Company equal to or exceeding 4.9%. For each common stock outstanding as of May 28, 2019, a dividend of 1 preferred stock purchase right is granted. The Tax Plan gives current shareholders the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock (“Series A Preferred”) at a set price of $30.92 which, upon exercise, provides for 1 additional share of common stock at a 50% discount on the exercise date with no cash settlement options. The Tax Plan reduces the likelihood that changes in the Company’s investor base have the unintended effect of limiting the use of the Company’s Tax Benefits. There is no impact to the financial statements as a result of the Tax Plan.

As of September 30, 2019, the Company had 2,400,000 shares authorized and 0 shares outstanding of the Series A Preferred stock. As of December 31, 2018, the Company had 0 Series A Preferred stock authorized or outstanding.

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

Foreign

Total

Currency

Unrecognized

Accumulated Other

Translation

(Loss) Gain on

Pension

Comprehensive

Adjustments1

Derivatives2

Adjustments

Income (Loss)

Balance as of December 31, 2018

$

111

$

(4)

$

(25)

$

82

Other comprehensive (loss) income

(4)

(4)

3

(5)

Tax expense

(1)

(1)

Balance as of March 31, 2019

107

(8)

(23)

76

Other comprehensive income (loss)

15

(12)

3

Tax expense

Balance as of June 30, 2019

122

(20)

(23)

79

Other comprehensive (loss) income

(5)

(1)

(6)

Tax expense

Balance as of September 30, 2019

$

117

$

(21)

$

(23)

$

73

1

As a result of the Company’s U.S. Domestication on January 1, 2019, and the associated change from a Canadian parent company to a U.S. parent company, the Company’s net investment hedge was no longer necessary from the domestication date onwards. As of December 31, 2018, there was a $51 million net loss on hedge investments in foreign operations which is included in Foreign Currency Translation Adjustments.

2

As 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 September 30, 2019, the balance consisted of unrecognized loss on the Company’s interest rate swaps.

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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)

13. REVENUE

On September 30, 2019, the Company had $2.2 billion of remaining performance obligations, which represents the transaction price of firm orders less inception to date revenues recognized. Remaining performance obligations exclude unexercised contract options and indefinite delivery/indefinite quantity contracts. The Company expects to recognize revenues relating to existing performance obligations of approximately $1.3 billion, $0.5 billion, and $0.4 billion in the three months ended December 31, 2019, year ended 2020 and thereafter, respectively.

Contract liabilities by segment are as follows:

Space

    

As of September 30, 2019

    

Systems

    

Imagery1

    

Services

Total

Contract liabilities

$

121

$

157

$

6

$

284

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 $105 million and $184 million as of September 30, 2019 and December 31, 2018, respectively. During the nine months ended September 30, 2019, imputed interest on advanced payments increased the contract liability balance by $12 million, which was more than offset by $91 million in revenue recognition. The contract liability balance associated with the Company’s EnhancedView Contract is expected to be recognized as revenue through August 31, 2020. There were 0 deferred contract costs on the Unaudited Condensed Consolidated Balance Sheets associated with this contract as of September 30, 2019 or December 31, 2018.

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

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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 primary sources of revenues are as follows:

Three Months Ended September 30, 2019

    

Space Systems

    

Imagery

    

Services

    

Eliminations

    

Total

Product revenues

$

158

$

$

$

$

158

Service revenues

 

30

 

219

 

72

 

 

321

Intersegment

32

 

1

 

1

 

(34)

 

$

220

$

220

$

73

$

(34)

$

479

Three Months Ended September 30, 2018

    

Space Systems

    

Imagery

    

Services

    

Eliminations

    

Total

Product revenues

$

201

$

$

$

$

201

Service revenues

 

39

 

209

 

60

 

 

308

Intersegment

23

1

2

(26)

$

263

$

210

$

62

$

(26)

$

509

Nine Months Ended September 30, 2019

    

Space Systems

    

Imagery

    

Services

    

Eliminations

    

Total

Product revenues

$

542

$

$

$

$

542

Service revenues

 

101

 

618

 

212

 

 

931

Intersegment

108

 

3

 

3

 

(114)

 

$

751

$

621

$

215

$

(114)

$

1,473

Nine Months Ended September 30, 2018

    

Space Systems

    

Imagery

    

Services

    

Eliminations

    

Total

Product revenues

$

686

$

$

$

$

686

Service revenues

 

137

 

630

 

192

 

 

959

Intersegment

63

3

6

(72)

$

886

$

633

$

198

$

(72)

$

1,645

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 $8 million and $23 million for the three and nine months ended September 30, 2019, respectively, as compared to $8 million and $24 million for the three and nine months ended September 30, 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 revenues based on geographic location of customers are as follows:

Three Months Ended September 30, 

    

2019

    

2018

United States

$

320

$

312

Asia

 

63

 

92

Canada

 

19

 

38

Europe

 

43

 

28

South America

18

32

Other

 

16

 

7

Total revenues

$

479

$

509

Nine Months Ended September 30, 

    

2019

    

2018

United States

$

1,007

$

1,020

Asia

 

183

 

264

Canada

 

72

 

139

Europe

 

103

 

97

South America

83

99

Other

 

25

 

26

Total revenues

$

1,473

$

1,645

Revenues from significant customers are as follows:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2019

    

2018

    

2019

2018

U.S. Federal Government and agencies

$

242

$

207

$

736

$

658

Canadian Federal Government and agencies

13

24

58

83

  

14.  SEGMENT INFORMATION

The Company’s business is organized into 3 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’s 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 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.

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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 Chief Operating Decision Maker (“CODM”) measures the performance of each segment based on revenue and Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortization (“EBITDA”) adjusted for certain items affecting comparability as specified in the calculation. Certain items affecting comparability include restructuring, impairments, satellite insurance recovery, CEO severance and transaction and integration related expense. Transaction and integration related expense includes costs associated with de-leveraging activities, acquisitions and dispositions and the integration of acquisitions. Other unallocated expenses include 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:

Three Months Ended September 30, 

Nine Months Ended September 30, 

2019

    

2018

2019

    

2018

Revenues:

  

 

  

 

  

 

  

Space Systems

$

220

$

263

$

751

$

886

Imagery

 

220

 

210

 

621

 

633

Services

73

62

215

198

Intersegment eliminations

(34)

(26)

(114)

(72)

Total revenues

$

479

$

509

$

1,473

$

1,645

Adjusted EBITDA:

Space Systems

$

11

$

(7)

$

49

$

34

Imagery

140

129

384

396

Services

9

9

22

19

Intersegment eliminations

(13)

(7)

(26)

(16)

Depreciation and amortization

(96)

(119)

(293)

(343)

Corporate and other expenses

(19)

(19)

(55)

(44)

Restructuring

1

(2)

(21)

(15)

Transaction and integration related expense

(7)

(14)

(13)

(24)

Impairment losses, including inventory

(213)

(15)

(213)

Satellite insurance recovery

183

CEO severance

(3)

Interest expense, net

(50)

(52)

(148)

(155)

Interest income

1

1

Equity loss (income) from joint ventures, net of tax

1

1

4

(2)

Income (loss) before taxes

$

(22)

$

(294)

$

69

$

(363)

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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:

Three Months Ended September 30, 2019

Space Systems

    

Imagery

    

Services

    

Corporate and eliminations

Total

Capital expenditures:

Property, plant and equipment

$

7

$

51

$

$

8

$

66

Intangible assets

 

1

 

14

 

1

 

(1)

 

15

$

8

$

65

$

1

$

7

$

81

Three Months Ended September 30, 2018

Space Systems

    

Imagery

    

Services

    

Corporate and eliminations

Total

Capital expenditures:

Property, plant and equipment

$

$

39

$

$

(11)

$

28

Intangible assets

 

5

 

7

 

 

(7)

 

5

$

5

$

46

$

$

(18)

$

33

Nine Months Ended September 30, 2019

Space Systems

    

Imagery

    

Services

    

Corporate and eliminations

Total

Capital expenditures:

Property, plant and equipment

$

14

$

152

$

$

(3)

$

163

Intangible assets

 

2

 

41

 

1

 

(1)

 

43

$

16

$

193

$

1

$

(4)

$

206

Nine Months Ended September 30, 2018

Space Systems

    

Imagery

    

Services

    

Corporate and eliminations

Total

Capital expenditures:

Property, plant and equipment

$

9

$

118

$

1

$

(17)

$

111

Intangible assets

 

9

 

39

 

2

 

(8)

 

42

$

18

$

157

$

3

$

(25)

$

153

Substantially all of the Company’s long-lived tangible assets were in the United States as of September 30, 2019 and December 31, 2018.

15. IMPAIRMENT LOSSES

Property, plant and equipment impairment

The Company recognized an impairment loss of $86 million on its property, plant and equipment for the three months ended September 30, 2018. The impairment loss on property, plant and equipment was due to obsolescence and reduced future use of equipment and buildings in the Space Systems segment. Impairment loss in the Space Systems segment was based on fair value less cost of disposal for those assets in an orderly liquidation. Fair value was based on observable inputs where possible (Level 2), in which market data could be applied. However, due to the specialized nature of the majority of these assets, inputs for the valuation were unobservable (Level 3). The Company did not have material property, plant and equipment impairment during the nine months ended September 30, 2019.

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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)

Intangible asset impairment

The Company identified triggering events for impairment during the three months ended September 30, 2018 related to intangible assets of its GeoComm business, a reporting unit in the Space Systems segment. At the beginning of the year, the Company forecasted it would be awarded 3 to 4 contracts for GeoComm satellites, or approximately 30 percent of the overall 2018 industry awards. During the three months ended September 30, 2018, it became clear that industry and macroeconomic factors had declined substantially from earlier forecasts. Due to the decline in the GeoComm market, and the uncertainty surrounding the future of the Company’s GeoComm business, an impairment loss was recognized, primarily due to future cash flows associated with the intangible assets not being sufficient to cover the total book value of those assets. For the nine months ended September 30, 2018, the Company recognized a total impairment loss of $89 million related to the technology, trade name, software, and customer relationship intangible assets of the GeoComm business. The Company did not record an impairment of intangible assets for the nine months ended September 30, 2019.

Inventory impairment

The Company re-evaluated the carrying value of its inventory that was previously pegged to forecasted usage. All GeoComm inventory subject to future use based on forecasts was assessed for possible obsolescence. The result of the reassessment of future usage of the on hand inventory was inventory impairment of $38 million for the three months ended September 30, 2018 which is included in Product costs, excluding depreciation and amortization on the Unaudited Condensed Consolidated Statement of Operations. The Company did not have material inventory impairment during the nine months ended September 30, 2019.

16.  EMPLOYEE BENEFIT PLANS

The following table summarizes the components of net periodic benefit cost for the Company’s pension plans:

Three Months Ended September 30, 

Nine Months Ended September 30, 

Pension

Pension

2019

2018

2019

2018

Service cost

$

1

$

2

$

3

$

5

Interest cost

 

5

 

 

17

 

Expected return on plan assets

(7)

(22)

Amortization of net loss

1

Expenses paid

1

2

Net periodic benefit cost

$

$

2

$

1

$

5

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. The Company expects to contribute approximately $14 million to its pension plans for the year ending December 31, 2019. As of September 30, 2019, all legal funding requirements had been met.

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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)

17.  INCOME TAXES

On January 1, 2019, the Company completed the U.S. Domestication. The Company has estimated there are no material corporate tax liabilities 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 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. The Company is also subject to the Base Erosion and Anti-Abuse Tax (“BEAT”).

In computing income tax expense for the nine months ended September 30, 2019, the Company applied the estimated annual effective tax rate to non-U.S. pre-tax income. No income tax expense or benefit was recognized on U.S. source income or loss as the Company does not expect to recognize the tax expense or benefit on U.S. source income or loss projected for the year. This resulted in an effective income tax rate of 13.5% for the nine months ended September 30, 2019. For the nine months ended September 30, 2018, income tax expense was computed as (22.0%). The effective tax rate increased primarily due to changes in corporate structure, the application of U.S. tax law and a change in the mix of income between jurisdictions.

18. EARNINGS PER SHARE

The following table includes the calculation of basic and diluted net (loss) income per common share:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2019

    

2018

    

2019

    

2018

Net (loss) income

$

(26)

$

(289)

$

61

$

(314)

Weighted average number of common shares outstanding-basic

59.6

59.2

59.6

57.6

Weighted dilutive effect of equity awards

 

 

 

0.4

 

Weighted average number of common shares outstanding-diluted

59.6

59.2

60.0

57.6

(Loss) income per common share:

 

 

Basic

$

(0.44)

$

(4.88)

$

1.02

$

(5.45)

Diluted

$

(0.44)

$

(4.88)

$

1.02

$

(5.45)

25

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)

19.   CONTINGENCIES

Contingencies in the normal course of business

As discussed in Note 4, 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. With respect to the Company’s securitized liability for the orbital receivables, upon the occurrence of an event of default under the securitization facility agreement or upon the occurrence of limited events, the Company may be required to repurchase on demand any affected receivables at their then net present value.  

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. Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes. Unrecoverable costs on contracts that are expected to be incurred in future periods are recorded in program cost in the current period.

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 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.

26

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)

Legal proceedings

In 2010, the Company 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, the Company 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 Maxar. Maxar 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 Maxar, challenging the Company’s right to terminate for force majeure, purporting to terminate the contract for default by Maxar (a position since withdrawn), and seeking recovery from Maxar 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. The Company believes it has sound defenses to the petitioner’s claims, and will vigorously defend the claims asserted. The Company has accrued an amount that it believes is within the range of probable outcomes for resolving this matter; the amount is not material to the 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 the Company in excess of the amount reserved, the Company could incur additional amounts and its results of operations and financial condition could be adversely affected.

On January 14, 2019, a Maxar stockholder filed a putative class action lawsuit captioned Oregon Laborers Employers Pension Trust Fund, et al. v. Maxar Technologies Inc., No. 1:19-cv-00124-WJM-SKC in the District Court of Colorado, naming Maxar and members of management as defendants alleging, among other things, that the Company’s public disclosures were deficient in violation of the federal securities laws and seeking monetary damages. On August 7, 2019, the Court appointed a lead plaintiff and lead counsel. On October 7, 2019, the lead plaintiff filed a consolidated amended complaint alleging violations of Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 against the Company and members of management in connection with the Company’s public disclosures between March 26, 2018 and January 6, 2019. The consolidated complaint alleges that the Company’s statements regarding the AMOS-8 contract, accounting for its GEO communications assets, and WorldView-4 were allegedly false and/or misleading during the class period. Also in January 2019, a Maxar stockholder resident in Canada issued a putative class action lawsuit captioned Charles O’Brien vs. Maxar Technologies Inc., No. CV-19-00613564-00CP 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 Company believes that these cases are without merit and intends to vigorously defend against them.

On October 21, 2019, a Maxar stockholder filed a putative class action lawsuit captioned McCurdy v. Maxar Technologies Inc., et al. No. T19-074 in the Superior Court of the State of California, County of Santa Clara, naming Maxar, and certain members of management and the board of directors as defendants. The lawsuit alleges violations of Section 11, 12(a)(2) and 15 of the Securities Act of 1933 in connection with the Company’s June 2, 2017 Registration Statement and prospectus filed in anticipation of its October 17, 2017 merger with DigitalGlobe. Although the lawsuit alleges different legal claims than the federal putative class action, it is based upon many of the same underlying factual allegations. Specifically, the lawsuit alleges the Company’s statements regarding its accounting methods and risk factors, including those related to the GEO communications business, were false and/or misleading when made. The Company believes that this lawsuit is without merit and intends to vigorously defend against it.

The Company is 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, the Company is prepared both to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities. The Company has 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 the Company’s financial position, results of operations or liquidity.

27

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)

20.  SUPPLEMENTAL CASH FLOW

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

Nine Months Ended

September 30, 

2019

    

2018

Supplemental cash flow information:

Cash paid for interest

$

(174)

$

(139)

Income tax (payments) refunds

(4)

2

Supplemental non-cash investing and financing activities:

Accrued capital expenditures

20

27

Acquisitions

25

Impairment loss on equity investment

12

21. SUBSEQUENT EVENTS

Senior Secured Notes

On November 4, 2019, the Company announced the commencement of a private offering of $1.25 billion aggregate principal amount of Senior Secured Notes due 2023 (the “Notes”). The Notes will be senior, first-priority secured obligations of the Company initially guaranteed on a senior, first-priority secured basis by the Company’s subsidiaries that are guarantors under its existing syndicated credit facility.

Concurrent Amendment to Revolving Credit Facility

 

On November 4, 2019, the Company entered into an amendment (the “Credit Facility Amendment”) with lenders under the Company’s Revolving Credit Facility under the Syndicated Credit Facility Agreement.

The terms of the Credit Facility Amendment (1) modify certain financial covenant levels to permit maximum levels of Consolidated Debt to EBITDA (each as defined in the Syndicated Credit Facility Agreement) of 7.25x at the end of the current fiscal year, 7.50x at the end of the next fiscal quarter, 7.75x at the end of each fiscal quarter for the next 18 months, 7.50x at the end of each fiscal quarter for the next twelve months, 6.50x at the end of each fiscal quarter for the next six months and 5.75x for each fiscal quarter thereafter (subject to a 0.25x reduction in each maximum level upon a disposition of a business line for greater than $500 million); (2) extend the maturity of the Revolving Credit Facility to a date that is approximately four years subsequent to closing of the Credit Facility Amendment; (3) restrict investment capacity in certain permitted investments; (4) restrict future increases in quarterly dividend payment levels; (5) modify certain margin and standby fee terms; (6) modify the priority of application of voluntary prepayments resulting from certain asset sales (including to allow the Company to prioritize prepayment of the Company’s Term Loan A-1 and Term Loan A-2 ahead of Term Loan B Facility with proceeds from the Company’s Palo Alto land sale); and (7) restrict use of proceeds of future borrowings. The Credit Facility Amendment is conditioned on consummation of Notes offering other than with respect to priority of prepayments resulting from asset sale proceeds and certain other technical amendments, which are effective immediately. In addition, the Company intends to cancel the Operating Credit Facility and reduce committed borrowing capacity under the Revolving Credit Facility to $500 million. As of September 30, 2019, on an as adjusted basis after giving effect to the Amendment to the Revolving Credit Facility and Notes offering, the Company would have $500 million in available borrowing capacity under the Revolving Credit Facility less any letters of credit outstanding thereunder.

28

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)

Sale Leaseback Agreements

On November 1, 2019, the Company entered into a purchase and sale agreement for 2 properties in Palo Alto, California, for a total of $291 million. Contemporaneously with the closing of the sale, the Company will enter into 2 lease agreements, for which the Company will leaseback the properties. The leases will be considered operating leases with gross annual rent payments of $12 million for a period of two years for one property, and annual payments of $8 million for a period of ten years for the other property, both subject to 3% annual escalation.

29

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 leading provider of solutions in Earth intelligence and space infrastructure. We help government and commercial customers to monitor, understand and navigate the changing planet; deliver global broadband communications infrastructure; and explore and advance the use of space. Our approach combines decades of deep mission understanding and a proven commercial and defense foundation to deliver our services with speed, scale and cost effectiveness. Our 5,800 team members in more than 30 global locations work to help our customers harness the potential of space. Our stock trades on the New York Stock Exchange and Toronto Stock Exchange under the symbol “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.

30

RECENT DEVELOPMENTS

Senior Secured Notes

On November 4, 2019, we announced the commencement of a private offering of $1.25 billion aggregate principal amount of Senior Secured Notes due 2023 (the “Notes”). The Notes will be senior, first-priority secured obligations initially guaranteed on a senior, first-priority secured basis by our subsidiaries that are guarantors under our existing syndicated credit facility.

Concurrent Amendment to Revolving Credit Facility

 

On November 4, 2019, we entered into an amendment (the “Credit Facility Amendment”) with lenders under our Revolving Credit Facility under our Syndicated Credit Facility Agreement.

The terms of the Credit Facility Amendment (1) modify certain financial covenant levels to permit maximum levels of Consolidated Debt to EBITDA (each as defined in the Syndicated Credit Facility Agreement) of 7.25x at the end of the current fiscal year, 7.50x at the end of the next fiscal quarter, 7.75x at the end of each fiscal quarter for the next 18 months, 7.50x at the end of each fiscal quarter for the next twelve months, 6.50x at the end of each fiscal quarter for the next six months and 5.75x for each fiscal quarter thereafter (subject to a 0.25x reduction in each maximum level upon a disposition of a business line for greater than $500 million); (2) extend the maturity of the Revolving Credit Facility to a date that is approximately four years subsequent to closing of the Credit Facility Amendment; (3) restrict investment capacity in certain permitted investments; (4) restrict future increases in quarterly dividend payment levels; (5) modify certain margin and standby fee terms; (6) modify the priority of application of voluntary prepayments resulting from certain asset sales (including to allow us to prioritize prepayment of our Term Loan A-1 and Term Loan A-2 ahead of Term Loan B Facility with proceeds from our Palo Alto land sale); and (7) restrict use of proceeds of future borrowings. The Credit Facility Amendment is conditioned on consummation of Notes offering other than with respect to priority of prepayments resulting from asset sale proceeds and certain other technical amendments, which are effective immediately. In addition, we intend to cancel the Operating Credit and reduce committed borrowing capacity under our Revolving Credit Facility to $500 million. As of September 30, 2019, on an as adjusted basis after giving effect to the Amendment to the Revolving Credit Facility and Notes offering, we would have $500 million in available borrowing capacity under our Revolving Credit Facility less any letters of credit outstanding thereunder.

Sale Leaseback Agreements

On November 1, 2019, we entered into a purchase and sale agreement for two properties in Palo Alto, California, for a total of $291 million. Contemporaneously with the closing of the sale, we will enter into two lease agreements, for which we will leaseback the properties. The leases will be considered operating leases with gross annual rent payments of $12 million for a period of two years for one property, and annual payments of $8 million for a period of ten years for the other property, both subject to 3% annual escalation.

WorldView-4 Insurance Recovery

On May 3, 2019, we announced that our insurance carriers accepted our $183 million claim for loss arising from the WorldView-4 satellite on-orbit failure, and agreed to pay us the full amount. We collected the full insurance proceeds in the second quarter of 2019.

Tax Benefit Preservation Plan

On May 12, 2019, our Board of Directors approved a Tax Benefit Preservation Plan (“Tax Plan”), with the intent to preserve the value of certain deferred tax benefits (the “Tax Benefits”) including those generated by net operating losses. The Tax Plan is intended to act as a deterrent to any person or entity acquiring shares of the Company equal to or exceeding 4.9%. For each common stock outstanding as of May 28, 2019, a dividend of one preferred stock purchase right (“The Rights”) is granted. The Tax Plan gives current stockholders the right to purchase one one-hundredth of a

31

share of Series A Junior Participating Preferred Stock (“Series A preferred Stock”) at a set price of $30.92 which, upon exercise, provides for one additional share of common stock at a 50% discount on the exercise date with no cash settlement options. A Special Meeting of Stockholders was held on October 31, 2019 to approve the Tax Plan. As a result of Stockholder approval, the rights under the Tax Plan will expire on October 5, 2020. The Tax Plan reduces the likelihood that changes in our investor base have the unintended effect of limiting the use of our Tax Benefits. There is no impact to the financial statements as a result of the Tax Plan.

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 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 Daniel L. 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 supplier of innovative mission solutions and satellite manufacturing platform flexibility, serving diverse applications. We are the largest independent manufacturer of satellite subsystems in the world, with leading propulsion power capabilities, including solar-electric propulsion. 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.

32

Imagery

In the Imagery segment, we are a market leader in the in the design, development, integration and operation of space-based RADAR and Electro-Optical missions and satellite-based maritime surveillance, as well as a leading provider of Earth observation ground systems. 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.

RESULTS OF OPERATIONS

The following table provides selected financial information for the three and nine months ended September 30, 2019 and 2018, respectively.

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

  

 

  

  

 

  

Revenues:

Product

$

158

$

201

$

(43)

(21)

%

$

542

$

686

$

(144)

(21)

%

Service

321

308

13

4

931

959

(28)

(3)

Total revenues

$

479

$

509

$

(30)

(6)

%

$

1,473

$

1,645

$

(172)

(10)

%

Costs and expenses:

Product costs, excluding depreciation and amortization

$

159

$

220

$

(61)

(28)

%

$

521

$

661

$

(140)

(21)

%

Service costs, excluding depreciation and amortization

105

100

5

5

336

296

40

14

Selling, general and administrative

92

132

(40)

(30)

275

368

(93)

(25)

Depreciation and amortization

96

119

(23)

(19)

293

343

(50)

(15)

Impairment losses

175

(175)

*

12

175

(163)

(93)

Satellite insurance recovery

*

(183)

(183)

*

Operating income (loss)

$

27

$

(237)

$

264

*

%

219

$

(198)

$

417

*

%

Interest expense, net

50

52

(2)

(4)

148

155

(7)

(5)

Other (income) expense, net

(1)

5

(6)

*

2

10

(8)

(80)

Income (loss) before taxes

$

(22)

$

(294)

$

272

93

%

69

$

(363)

$

432

*

%

Income tax expense (benefit)

3

(6)

9

*

4

(47)

51

*

Equity in loss (income) from joint ventures, net of tax

1

1

*

4

(2)

6

*

Net (loss) income

$

(26)

$

(289)

$

263

91

%

$

61

$

(314)

$

375

*

%

*Not meaningful.

33

Product and service revenues

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Product revenues

 

$

158

$

201

$

(43)

 

(21)

%

$

542

$

686

$

(144)

(21)

%

Service revenues

321

308

13

4

931

959

(28)

(3)

Total revenues

 

$

479

$

509

$

(30)

 

(6)

%

$

1,473

$

1,645

$

(172)

(10)

%

Total revenues decreased to $479 million from $509 million, or by $30 million, for the three months ended September 30, 2019 compared to the same period of 2018. The decrease was primarily driven by a $43 million decrease in the Space Systems segment. The decrease was partially offset by a $10 million increase in the Imagery segment and an $11 million increase in revenues in the Services segment.

Total revenues decreased to $1,473 million from $1,645 million, or by $172 million, for the nine months ended September 30, 2019 compared to the same period of 2018. The decrease in revenues was primarily driven by a $135 million decrease in the Space Systems segment and a $12 million decrease in the Imagery segment. These decreases were partially offset by a $17 million increase in revenues in the Services segment. Further discussion of the drivers behind changes in revenues is included within the “Results by Segment” section below.

See Note 13, “Revenue” 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 September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Product costs, excluding depreciation and amortization

 

$

159

 

$

220

$

(61)

 

(28)

%

$

521

 

$

661

$

(140)

(21)

%

Service costs, excluding depreciation and amortization

105

100

5

5

336

296

40

14

Total costs

 

$

264

 

$

320

$

(56)

 

(18)

%

$

857

 

$

957

$

(100)

(10)

%

Total costs of product and services decreased to $264 million from $320 million, or by $56 million, for the three months ended September 30, 2019 compared to the same period of 2018. The decrease in costs were primarily due to a lower volume of projects and fewer costs in our Space Systems segment which included the impact related to the RADARSAT Constellation Mission (“RCM”) program in Canada which launched in the second quarter of 2019. These decreases were partially offset by increases in the Services segment driven by increased revenue.

Total costs of product and services decreased to $857 million from $957 million, or by $100 million, for the nine months ended September 30, 2019 compared to the same period of 2018. The decrease in costs were primarily due to a lower volume of projects and fewer costs in our Space Systems segment which included the impact related to the RCM program. These decreases were partially offset by increases in the Services segment driven by increased revenue and increases in our Imagery segment driven by a change in product mix.

34

Selling, general and administrative

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Selling, general and administrative

 

$

92

 

$

132

$

(40)

 

(30)

%

$

275

 

$

368

$

(93)

(25)

%

Selling, general and administrative costs decreased to $92 million from $132 million, or by $40 million, for the three months ended September 30, 2019 compared to the same period of 2018. The decrease is primarily due to a decrease in research and development costs of $27 million, a decrease in restructuring costs of $3 million and decreases in labor related expenses.

The decrease in selling, general and administrative costs decreased to $275 million from $368 million, or by $93 million, for the nine months ended September 30, 2019 compared to the same period of 2018. The decrease was primarily driven by a decrease in research and development costs of $63 million, a decrease in business integration costs of $12 million and decreases in labor related expenses. These decreases were partially offset by severance paid to the previous CEO of $3 million.

Depreciation and amortization

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

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Property, plant and equipment

 

$

26

 

$

43

$

(17)

 

(40)

%

$

85

 

$

121

$

(36)

(30)

%

Intangible assets

 

70

 

76

(6)

 

(8)

208

 

222

(14)

(6)

Depreciation and amortization expense

 

$

96

 

$

119

$

(23)

 

(19)

%

$

293

 

$

343

$

(50)

(15)

%

Depreciation and amortization expense decreased to $96 million from $119 million, and to $293 million from $343 million, for the three and nine months ended September 30, 2019, compared to the same periods of 2018, respectively. The decreases were primarily driven by a decrease in depreciation and amortization expense following asset impairments in the second half of 2018.

Impairment losses

Our Space Systems segment has an investment in a privately held company carried at adjusted cost basis. During the second quarter of 2019, we noted an observable price change related to this investment and, as a result, recorded an impairment loss of $12 million.

See Note 11, “Financial instruments and fair value disclosures” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Information” for further disclosure on the investment impairment losses.

During the three months ended September 30, 2018, Management identified a series of events which in aggregate was considered to be a triggering event related to the GeoComm business within the Space Systems segment. The results of these tests indicated that there was an impairment loss of $175 million related to property, plant and equipment and intangible assets and an inventory obsolescence impairment of $38 million which were recorded during the three months ended September 30, 2018.

See Note 15, “Impairment losses” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, “Financial Information” for further disclosure on the impairment losses.

35

Satellite insurance recovery

During the nine months ended September 30, 2019, we received insurance recoveries of $183 million related to the loss of imaging capability of our WorldView-4 satellite in December 2018.

Interest expense, net

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Interest expense:

Interest on long-term debt

 

$

50

 

$

46

$

4

 

9

%

$

143

 

$

129

$

14

11

%

Interest expense on advance payments from customers1

3

6

(3)

(50)

12

20

(8)

(40)

Interest on orbital securitization liability

2

1

1

*

6

5

1

20

Imputed interest and other

1

(1)

*

2

(2)

*

Capitalized interest

(5)

(2)

(3)

*

(13)

(4)

(9)

*

Interest expense on dissenting stockholder liability

*

3

(3)

*

Interest expense, net

 

$

50

 

$

52

$

(2)

 

(4)

%

$

148

 

$

155

$

(7)

(5)

%

*Not meaningful.

1

Under the EnhancedView Contract, we 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 to $50 million from $52 million, or by $2 million, for the three months ended September 30, 2019 compared to the same period in 2018. The decrease was primarily driven by a $3 million decrease in interest expense on advance payments from customers and a $3 million increase in capitalized interest primarily related to the WorldView Legion program. These changes were partially offset by a $4 million increase in interest on long-term debt.

Interest expense, net decreased to $148 million from $155 million, or by $7 million, for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease is primarily due to a $9 million increase in capitalized interest primarily related to the WorldView Legion program and an $8 million decrease in interest expense on advance payments from customers. These changes were partially offset by a $14 million increase in interest expense on long-term debt due to the increase in our long-term debt balance of approximately $32 million since September 30, 2018.

36

Other (income) expense, net

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Other (income) expense, net

 

$

(1)

 

$

5

$

(6)

 

*

%

$

2

 

$

10

$

(8)

(80)

%

*Not meaningful.

Other (income) expense, net changed to $1 million of income from a $5 million expense for the three months ended September 30, 2019 compared to the same period of 2018. This change was primarily driven by $5 million in expenses related to a business dispute that did not reoccur in the comparative period of 2019. This decrease was partially offset by a $1 million increase in foreign exchange losses.

Other (income) expense, net decreased to $2 million from $10 million, or by $8 million, for the nine months ended September 30, 2019 compared to the same period of 2018. The decrease is primarily driven by $5 million in expenses related to a business dispute and $3 million expense for the dissenting stockholders liability neither of which reoccurred in the comparative period of 2019. These decreases were partially offset by a $3 million increase in foreign exchange losses.

Income tax expense (benefit)

Three Months Ended September 30, 

$

%

Nine Months Ended September 30, 

$

%

    

    

2019

    

2018

    

Change

    

Change

    

2019

    

2018

    

Change

    

Change

    

($ millions)

Income tax expense (benefit)

 

$

3

 

$

(6)

$

9

 

*

%

$

4

 

$

(47)

$

51

*

%

*Not meaningful.

Income tax expense (benefit) changed from a benefit of $6 million for the three months ended September 30, 2018 to an expense of $3 million for the three months ended September 30, 2019, primarily due to transactions undertaken in the course of the U.S. Domestication and a change in the mix of income between jurisdictions.

Income tax expense (benefit) increased $51 million for the nine months ended September 30, 2019, compared to the same period of 2018 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 primarily in the first quarter of 2018.

In computing income tax expense for the nine months ended September 30, 2019, we applied the estimated annual effective tax rate to non-U.S. pre-tax income. No income tax expense or benefit was recognized on U.S. source income or loss as we do not expect to recognize the tax expense or benefit on U.S. source income or loss projected for the year. This resulted in an effective income tax rate of 13.5% for the nine months ended September 30, 2019. In the nine months ended September 30, 2018, income tax expense was computed as (22.0%). The effective tax rate increased primarily due to changes in corporate structure, the application of U.S. tax law and a change in the mix of income between jurisdictions.

37

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 September 30, 

    

$

    

%

Nine Months Ended September 30, 

    

$

    

%

    

2019

    

2018

Change

Change

    

2019

    

2018

Change

Change

($ millions)

Revenues:

 

  

 

  

 

  

 

  

Space Systems

$

220

$

263

$

(43)

(16)

%

$

751

$

886

$

(135)

(15)

%

Imagery

 

220

 

210

10

5

 

621

 

633

(12)

(2)

Services

73

62

11

18

215

198

17

9

Intersegment eliminations

(34)

(26)

(8)

31

(114)

(72)

(42)

58

Total revenue

$

479

$

509

$

(30)

(6)

%

$

1,473

$

1,645

$

(172)

(10)

%

Adjusted EBITDA:

Space Systems

$

11

$

(7)

18

*

%

$

49

$

34

15

44

%

Imagery

140

129

11

9

384

396

(12)

(3)

Services

9

9

*

22

19

3

16

Intersegment eliminations

(13)

(7)

(6)

86

(26)

(16)

(10)

63

Corporate and other expenses

(19)

(19)

*

(55)

(44)

(11)

25

Total Adjusted EBITDA

$

128

$

105

23

22

%

$

374

$

389

(15)

(4)

%

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 September 30, 

$

    

%

Nine Months Ended September 30, 

$

    

%

    

    

2019

    

2018

Change

Change

    

2019

    

2018

Change

Change

($ millions)

  

 

  

  

 

  

Total revenues

$

220

 

$

263

$

(43)

(16)

%

$

751

 

$

886

$

(135)

(15)

%  

Adjusted EBITDA

$

11

 

$

(7)

$

18

*

%

$

49

 

$

34

$

15

44

%  

Adjusted EBITDA margin percentage

5.0

%  

(2.7)

%  

6.5

%  

3.8

%  

*Not meaningful.

38

Revenues from the Space Systems segment decreased to $220 million from $263 million, or by $43 million, for the three months ended September 30, 2019 compared to the same period of 2018. Revenues decreased primarily as a result of the impact of reduced volume in our geostationary satellite manufacturing business (“GeoComm”), lower revenues on the RCM program in Canada which launched in the second quarter of 2019, lower volumes on other programs and increases in estimated costs to complete programs during the three months ended September 30, 2019 compared to the same period in 2018. An increase in estimated costs to complete directly impacts revenues, as revenues are recognized over time under the cost-to-cost method.

For the nine months ended September 30, 2019, Space Systems segment revenues decreased to $751 million from $886 million, or by $135 million, compared to the same period of 2018. Revenues decreased primarily as a result of the impact of reduced volume in our GeoComm business, lower revenues on the RCM program in Canada, launched in the second quarter of 2019, lower volumes on other programs and an increase in estimated costs to complete programs during the nine months ended September 30, 2019 compared to the same period in 2018. These decreases were partially offset by increased revenues from Neptec which was acquired in the third quarter of 2018.

Adjusted EBITDA increased to $11 million of income from a loss of $7 million, or by $18 million, for the three months ended September 30, 2019 compared to the same period of 2018. The increase in the Space Systems segment is primarily related to reduced research and development spend of $26 million and headcount reductions from restructuring initiatives resulting in cost reductions. These increases were partially offset by decreases from the effects of lower revenues and higher estimated costs to complete on certain projects within the Space Systems segment.

Adjusted EBITDA increased to $49 million from $34 million, or by $15 million, for the nine months ended September 30, 2019, compared to the same period of 2018. The primary drivers of the change in Adjusted EBITDA within the Space Systems segment were reduced research and development spend of $60 million, headcount reductions from restructuring initiatives resulting in $19 million of cost reductions, a recovery of a previously reserved amount of $7 million, and no liquidated damages incurred to date during 2019 compared to $5 million of liquidated damages that occurred in 2018. These changes were partially offset by decreases from the effects of lower revenues and higher estimated costs to complete on certain projects within the Space Systems segment.

Imagery

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

Three Months Ended September 30, 

$

    

%

Nine Months Ended September 30, 

$

    

%

    

    

2019

    

2018

Change

Change

    

2019

    

2018

Change

Change

($ millions)

  

 

  

  

 

  

Total revenues

$

220

$

210

$

10

5

%

$

621

$

633

$

(12)

(2)

%

Adjusted EBITDA

$

140

$

129

$

11

9

%

$

384

$

396

$

(12)

(3)

%

Adjusted EBITDA margin percentage

63.6

%  

61.4

%  

61.8

%  

62.6

%  

For the three months ended September 30, 2019, Imagery segment revenues increased to $220 million from $210 million, or by $10 million, compared to the same period of 2018. The increase was primarily driven by the recognition of $9 million of revenue as a result of the signing of a previously delayed contract with an existing international customer, $11 million in revenue growth from the U.S. government and an increase in revenue from international governments. These increases were partially offset by the loss of $14 million of WorldView-4 revenues.

39

For the nine months ended September 30, 2019, Imagery segment revenues decreased to $621 million from $633 million, or by $12 million, compared to the same period of 2018. The decrease was primarily due to a $43 million decrease due to the loss of WorldView-4 revenue which was partially offset by $31 million in revenue growth from the U.S. government.

Adjusted EBITDA increased to $140 million from $129 million, or by $11 million, for the three months ended September 30, 2019, as compared to the same period of 2018. The increase was primarily driven by the recognition of revenue as a result of the signing of a previously delayed contract with an existing international customer. Adjusted EBITDA was also impacted by a decrease in service costs, excluding depreciation and amortization during the three months ended September 30, 2019, as compared to the same period of 2018.

Adjusted EBITDA decreased to $384 million from $396 million, or by $12 million, for the nine months ended September 30, 2019, as compared to the same period of 2018. The decrease was primarily driven by the impact of the loss of revenue generated from the WorldView-4 satellite which had higher margins.

Services

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

Three Months Ended September 30, 

$

    

%

Nine Months Ended September 30, 

$

    

%

    

2019

    

2018

Change

Change

    

2019

    

2018

Change

Change

($ millions)

Total revenues

$

73

$

62

$

11

18

%

$

215

$

198

$

17

9

%

Adjusted EBITDA

$

9

$

9

$

*

%

$

22

$

19

$

3

16

%

Adjusted EBITDA margin percentage

12.3

%  

14.5

%  

10.2

%  

9.6

%  

*Not meaningful.

Services segment revenues increased to $73 million from $62 million, or by $11 million, and $215 million from $198 million, or by $17 million, for the three and nine months ended September 30, 2019 compared to the same periods of 2018. The increases were primarily driven by growth from new contract awards and expansion of programs with the U.S. government.

Adjusted EBITDA remained flat at $9 million for the three months ended September 30, 2019 compared to the same period of 2018. For the nine months ended September 30, 2019, Adjusted EBITDA increased to $22 million from $19 million, or by $3 million, compared to the same period of 2018 primarily as a result of higher margin revenue and lower selling, general and administrative spend, which was partially offset by an increase in service costs, excluding depreciation and amortization and a change in an expense related to a lease.

Corporate and other expenses

Corporate and other expenses include items such as corporate office costs, regulatory costs, executive and director compensation, foreign exchange gains and losses, retention costs, and fees for legal and consulting services.

Corporate and other expenses for the three months ended September 30, 2019 and September 30, 2018 were $19 million. These expenses were impacted by a decrease in selling, general and administrative expenses and a decrease in an expense related to a business dispute in 2018, which did not reoccur in 2019. These decreases were primarily offset by an increase in retention costs at Space Solutions and an increase in foreign exchange losses.

40

For the nine months ended September 30, 2019, corporate and other expenses were $55 million compared to $44 million for the same period of 2018. The increase of $11 million, or 25%, is primarily due to an increase in retention costs at Space Solutions and higher foreign exchange losses. These increases were partially offset by a decrease in selling, general and administrative expenses and a decrease in an expense related to a business dispute in 2018 which did not reoccur in 2019.

Intersegment eliminations

Intersegment eliminations are related to projects between our segments, including WorldView Legion. Intersegment eliminations have increased for the three and nine months ended September 30, 2019 compared to the same periods of 2018 primarily related to an increase in intersegment activity.

BACKLOG

Our backlog is as follows:

September 30, 

December 31, 

2019

2018

($ millions)

Total backlog

$

2,171

$

2,411

Unfunded contract options1

1,369

1,213

Total

$

3,540

$

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 $2.2 billion as of September 30, 2019 (December 31, 2018 - $2.4 billion). Backlog decreased primarily due to declines in backlog in our Imagery segment partially offset by an increase in our Space Systems segment and Services segment backlog as a result of new awards during the quarter. Imagery segment backlog declined primarily due to the recognition of EnhancedView revenue during the year 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 September 30, 2019, were primarily comprised 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 annual congressional appropriation of funding and the federal budget process. As each option year is exercised, it will be added to backlog.

41

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 WorldView Legion 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. Over the near-term to medium-term, it is also possible that our customers may fully or partially fund the construction of additional Legion satellites in the future. We also have call options to purchase the remaining ownership interest in Vricon Inc., a joint venture accounted for under the equity method. The call options are exercisable in the first quarter of either 2020 or 2021 which, if exercised, would require use of capital. 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, 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 a cash tax liability as we may experience a limitation in our ability to use our net operating loss carryforwards to offset any gain on such transaction pursuant to Section 382 of the Internal Revenue Code.

Summary of cash flows

Nine Months Ended September 30, 

    

2019

    

2018

($ millions)

Cash provided by operating activities

 

$

142

 

$

48

Cash used in investing activities

 

(203)

 

(155)

Cash provided by financing activities

 

75

 

84

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

 

43

 

42

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

 

$

57

 

$

19

Operating activities

Cash provided by operating activities increased $94 million to $142 million from $48 million for the nine months ended September 30, 2019 compared to the same period in 2018. The increase was primarily due to insurance proceeds of $183 million related to the loss of the WorldView-4 satellite, which were received in the second quarter of 2019. The insurance proceeds are included in operating cash flows as they are considered business interruption insurance and represent our satellite’s loss of capacity to produce imagery for sale to our customers.

42

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 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

Cash used in investing activities increased $48 million to $203 million from $155 million for the nine months ended September 30, 2019, compared to the same period in 2018. The major investing activities included expenditures on property, plant and equipment of $163 million and $111 million, for the nine months ended September 30, 2019 and 2018, respectively, and investments in software of $43 million and $42 million, for the nine months ended September 30, 2019 and 2018, respectively. Property, plant and equipment expenditures for the nine months ended September 30, 2019, were primarily related to the build of our WorldView Legion constellation.

Financing activities

During the nine months ended September 30, 2019, cash provided by financing activities was $75 million, which primarily includes net proceeds from the Syndicated Credit Facility (as described below) of $107 million partially offset by repayments of long-term debt. During the nine months ended September 30, 2018, cash provided by financing activities was $84 million which primarily included proceeds from the Syndicated Credit Facility of $150 million, partially offset by dividend payments of $49 million and repayments of long-term debt.

Credit facilities

The following table summarizes our long-term debt:

September 30, 

December 31, 

    

2019

    

2018

($ millions)

Syndicated Credit Facility:

 

Revolving Credit Facility

$

696

$

595

Term Loan A

500

500

Term Loan B

1,960

1,980

Debt issuance costs

 

(35)

 

(41)

Obligations under finance leases and other

 

10

 

13

Long-term debt

 

$

3,131

 

$

3,047

The Syndicated Credit Facility is composed of: (i) a four-year senior secured first lien revolving credit facility in an aggregate capacity of up to $1.15 billion and a four-year senior secured first lien operating credit facility in an aggregate capacity of up to $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. In April, 2018, we entered into interest rate swaps at a notional value of $1.0 billion maturing in April 2021 or April 2022. As of September 30, 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).

43

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 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 September 30, 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 September 30, 2019 and December 31, 2018, we had $18 million 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 sales of eligible receivables executed in the three or nine months ended September 30, 2019. During the three months ended September 30, 2018, the Company sold orbital receivables for net proceeds of $18 million. These orbital receivables were purchased in tranches that span multiple years and include longer-term maturities.

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 recognize interest expense to accrete the securitization liability.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

As of September 30, 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 September 30, 2019, we had foreign exchange forward purchase contracts of $31 million, foreign exchange sales contracts of $131 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.

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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.

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. Certain items affecting comparability include restructuring, impairments, satellite insurance recovery, CEO severance and transaction and integration related expense. Transaction and integration related expense includes costs associated with de-leveraging activities, acquisitions and dispositions and the integration of acquisitions. 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 (loss) income 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 and nine months ended September 30, 2019 and 2018:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2019

    

2018

    

2019

    

2018

($ millions)

Net (loss) income

$

(26)

$

(289)

$

61

$

(314)

Income tax expense (benefit)

3

(6)

4

(47)

Interest expense, net

50

52

148

155

Interest income

(1)

(1)

Depreciation and amortization

96

119

293

343

EBITDA

$

122

$

(124)

$

505

$

137

Transaction and integration related expense

7

14

13

24

Restructuring

(1)

2

21

15

Impairment losses, including inventory

213

15

213

Satellite insurance recovery

(183)

CEO severance

3

Adjusted EBITDA

$

128

$

105

$

374

$

389

Adjusted EBITDA:

Space Systems

11

(7)

49

34

Imagery

140

129

384

396

Services

9

9

22

19

Intersegment eliminations

(13)

(7)

(26)

(16)

Corporate and other expenses

 

(19)

 

(19)

 

(55)