UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
Commission File Number: 022-28714
GEOEYE, INC.
(Exact name of registrant as specified in its charter)
| | |
DELAWARE | | 20-2759725 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
| | |
21700 Atlantic Boulevard | | |
Dulles, VA | | 20166 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:(703) 480-7500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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.þ Yeso No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.þ Yeso No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Common Stock, par value $0.01, as of November 2, 2007 was 17,593,968 shares.
TABLE OF CONTENTS
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PART 1. Financial Information | | | | |
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Item 1. Financial Statements | | | | |
Condensed Consolidated Statements of Operations (unaudited) – Three Months and Nine Months Ended September 30, 2007 and 2006 | | | 2 | |
Condensed Consolidated Balance Sheets (unaudited) – September 30, 2007 and December 31, 2006 | | | 3 | |
Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months ended September 30, 2007 and 2006 | | | 4 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | | | 5 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 22 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | | | 28 | |
Item 4. Controls and Procedures | | | 28 | |
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PART 2. Other Information | | | 29 | |
| | | | |
Item 1. Legal Proceedings | | | 29 | |
Item 1A. Risk Factors | | | 29 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | 29 | |
Item 3. Defaults Upon Senior Securities | | | 29 | |
Item 4. Submission of Matters to a Vote of Security Holders | | | 29 | |
Item 5. Other Information | | | 29 | |
Item 6. Exhibits | | | 29 | |
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Signatures | | | 30 | |
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
GEOEYE, INC.
Condensed Consolidated Statements of Operations
(Unaudited; in thousands, except share and per share data)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Revenues | | $ | 53,750 | | | $ | 43,531 | | | $ | 138,800 | | | $ | 108,931 | |
| | | | | | | | | | | | | | | | |
Direct expenses | | | 20,799 | | | | 20,218 | | | | 55,071 | | | | 60,833 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 32,951 | | | | 23,313 | | | | 83,729 | | | | 48,098 | |
| | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 8,863 | | | | 6,569 | | | | 22,841 | | | | 18,039 | |
Net gain on satellite insurance proceeds | | | (39,063 | ) | | | — | | | | (3,010 | ) | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income from operations | | | 63,151 | | | | 16,744 | | | | 63,898 | | | | 30,059 | |
| | | | | | | | | | | | | | | | |
Interest expense, net | | | 1,628 | | | | 4,105 | | | | 6,748 | | | | 14,961 | |
Unrealized loss (gain) loss on derivative instrument | | | 2,098 | | | | 2,272 | | | | 3,097 | | | | (2,055 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 59,425 | | | | 10,367 | | | | 54,053 | | | | 17,153 | |
| | | | | | | | | | | | | | | | |
Provision for income taxes | | | 683 | | | | — | | | | 2,111 | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 58,742 | | | $ | 10,367 | | | $ | 51,942 | | | $ | 17,153 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings per common share – basic | | $ | 3.34 | | | $ | 0.60 | | | $ | 2.96 | | | $ | 0.98 | |
| | | | | | | | | | | | | | | | |
Earnings per common share – diluted | | $ | 2.67 | | | $ | 0.48 | | | $ | 2.38 | | | $ | 0.80 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
2
GEOEYE, INC.
Condensed Consolidated Balance Sheets
(Unaudited; in thousands, except share data)
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2007 | | | 2006 | |
ASSETS | | | | | | | | |
| | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 229,299 | | | $ | 199,684 | |
Receivables net of allowances of $742 and $610, respectively | | | 37,848 | | | | 21,208 | |
Other current assets | | | 6,907 | | | | 7,285 | |
| | | | | | |
Total current assets | | | 274,054 | | | | 228,177 | |
| | | | | | | | |
Property, plant and equipment, at cost, less accumulated depreciation of $10,603 and $12,772, respectively | | | 81,505 | | | | 67,389 | |
Satellites and related rights, at cost, less accumulated depreciation and amortization of $9,357 and $60,342, respectively | | | 322,113 | | | | 328,677 | |
Goodwill | | | 32,612 | | | | 28,490 | |
Intangible assets | | | 17,753 | | | | 18,394 | |
Other assets | | | 18,522 | | | | 20,690 | |
| | | | | | |
| | | | | | | | |
Total assets | | $ | 746,559 | | | $ | 691,817 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 23,335 | | | $ | 20,768 | |
Amounts payable to subcontractors | | | 48,888 | | | | 32,721 | |
Accrued interest payable | | | 8,698 | | | | 17,358 | |
Current portion of long-term debt | | | — | | | | 15,146 | |
Current portion of deferred revenue | | | 13,585 | | | | 7,798 | |
Other current liabilities | | | 1,039 | | | | 1,989 | |
| | | | | | |
Total current liabilities | | | 95,545 | | | | 95,780 | |
| | | | | | | | |
Long-term debt | | | 246,610 | | | | 246,075 | |
Deferred revenue, net of current portion | | | 187,281 | | | | 184,481 | |
Other noncurrent liabilities | | | 525 | | | | 2,363 | |
| | | | | | |
| | | | | | | | |
Total liabilities | | | 529,961 | | | | 528,699 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock, par value $0.01; 50,000,000 shares authorized; 17,593,178 shares and 17,475,234 issued and outstanding at September 30, 2007 and December 31, 2006, respectively | | | 176 | | | | 175 | |
Additional paid-in capital | | | 190,068 | | | | 188,531 | |
Retained earnings (accumulated deficit) | | | 26,354 | | | | (25,588 | ) |
| | | | | | |
| | | | | | | | |
Total stockholders’ equity | | | 216,598 | | | | 163,118 | |
| | | | | | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 746,559 | | | $ | 691,817 | |
| | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
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GEOEYE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands, except share data)
| | | | | | | | |
| | Nine Months Ended | |
| | September 30, | |
| | 2007 | | | 2006 | |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 51,942 | | | $ | 17,153 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation, amortization and other | | | 14,044 | | | | 24,024 | |
Net gain on satellite insurance proceeds | | | (3,010 | ) | | | — | |
Amortization of debt discount and issuance costs | | | 2,945 | | | | 4,424 | |
Unrealized loss (gain) on derivative instrument | | | 3,097 | | | | (2,055 | ) |
Loss on sale of equipment | | | 55 | | | | — | |
Stock compensation expense | | | 1,703 | | | | 790 | |
Changes in assets and liabilities, net of effect of acquisitions: | | | | | | | | |
Receivables and other current assets | | | (16,166 | ) | | | (4,368 | ) |
Other assets | | | (731 | ) | | | (24 | ) |
Accounts payable and accrued expenses | | | (23,744 | ) | | | (25,300 | ) |
Deferred revenue | | | 8,544 | | | | 50,071 | |
| | | | | | |
Net cash provided by operating activities | | | 38,679 | | | | 64,715 | |
Cash flows from investing activities: | | | | | | | | |
Capital expenditures | | | (23,954 | ) | | | (90,877 | ) |
Satellite insurance proceeds | | | 40,000 | | | | — | |
Payment for business acquisition, net of cash acquired | | | (10,027 | ) | | | (28,700 | ) |
| | | | | | |
Net cash provided by (used in) investing activities | | | 6,019 | | | | (119,577 | ) |
Cash flows from financing activities: | | | | | | | | |
Issuance of long-term debt | | | — | | | | 50,000 | |
Repayment of long-term debt | | | (15,443 | ) | | | (17,796 | ) |
Long-term debt repayment and issuance costs | | | — | | | | (5,644 | ) |
Equity issuance costs | | | — | | | | (26 | ) |
Issuance of common stock | | | 360 | | | | 62 | |
| | | | | | |
Net cash (used in) provided by financing activities | | | (15,083 | ) | | | 26,596 | |
| | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 29,615 | | | | (28,266 | ) |
Cash and cash equivalents, beginning of period | | | 199,684 | | | | 226,504 | |
| | | | | | |
Cash and cash equivalents, end of period | | $ | 229,299 | | | $ | 198,238 | |
| | | | | | |
| | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Interest paid | | $ | 34,589 | | | $ | 38,456 | |
| | | | | | |
| | | | | | | | |
Non-cash items: | | | | | | | | |
Capital expenditures | | $ | (48,888 | ) | | $ | (31,947 | ) |
Amounts payable to subcontractors | | | 48,888 | | | | 31,947 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
GEOEYE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited interim condensed consolidated financial information reflects all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the information. Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted following the instructions, rules and regulations prescribed by the Securities and Exchange Commission (“SEC”). Although management believes that the disclosures provided are adequate to make the information presented not misleading, you should read these unaudited interim consolidated financial statements in conjunction with the audited financial statements and associated footnotes for the year ended December 31, 2006, which are included in our Form 10-K filed with the SEC. Operating results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year.
Certain prior period amounts have been reclassified to conform with the current period’s presentation.
(2) Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of wholly-owned subsidiaries which the Company controls. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in its financial statements and accompanying notes. Actual results could differ from these estimates.
Revenue Recognition
The Company’s principal source of revenue is the sale of satellite imagery to customers, value-added resellers and distributors. Such sales often require us to provide imagery over the term of multi-year sales contracts under “take-or-pay” arrangements whereby customers pay for access time regardless of usage. Accordingly, we recognize revenues on such imagery contracts on a straight-line basis over the delivery term of the contract. Otherwise we record revenues based on the delivery of imagery to our customer. Deferred revenue represents receipts in advance of the delivery of imagery and are generally recognized as current liabilities. We also derive revenues from maintenance of certain ground stations for our customers, which we account for under the straight-line method. Revenues for other services are recognized as services are performed.
Revenue is recognized on contracts to provide image processing services using the percentage-of-completion method of accounting. Revenue on these contracts is recognized based on costs incurred in relation to total estimated costs. These incurred costs approximate the output of deliverables to the Company’s customers. Revenues recognized in advance of becoming billable are recorded as unbilled receivables. Such amounts generally do not become billable until after the products have been completed and delivered. To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known.
Much of the Company’s revenues are generated through contracts with the U.S. Government. U.S. Government agencies may terminate or suspend their contracts at any time, with or without cause, or may change their policies, priorities or funding levels by reducing agency or program budgets or by imposing budgetary constraints. If a U.S. Government agency terminates or suspends any of its contracts
5
with the Company or changes its policies, priorities, or funding levels, these actions would have a material adverse effect on the business, financial condition and results of operations. Imagery contracts with international customers generally are not cancelable.
For contracts consisting of multiple elements, the Company identifies these elements and considers whether the delivered item(s) has value to the customer on a standalone basis, whether there is objective and reliable evidence of the fair value of the undelivered item(s) and, if the arrangement includes a general right of return relative to the delivered item(s), delivery of performance of the undelivered item(s) considered probable and substantially in the Company’s control.
Allowances for doubtful accounts receivable balances are recorded when circumstances indicate that collection is doubtful for particular accounts receivable or as a general reserve for all accounts receivable. Management estimates such allowances based on historical evidence such as amounts that are subject to risk. Accounts receivable are written off if reasonable collection efforts are not successful.
Satellites and Related Rights
The OrbView-3 satellite and related ground system assets were placed into service in February 2004 and were being depreciated over a five year period in accordance with its design life. As further detailed in Note 4 below, the Company declared the satellite permanently out of service in the first quarter of 2007. The IKONOS satellite was acquired in January 2006, and is being depreciated over its remaining estimated useful life of 2.5 years from the date of acquisition.
The Company is constructing a next generation, high resolution imagery satellite which has been named GeoEye-1. Costs associated with the construction of the GeoEye-1 satellite and the related ground system are capitalized when incurred. Amortization of the capitalized costs begins when the assets are placed in service. The satellite is expected to be depreciated over its design life of seven years. Capitalized costs include interest costs associated with construction in accordance with SFAS No. 34, “Capitalization of Interest Cost,” as well as the cost of any applicable launch insurance.
Stock-based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payments,” and related Securities and Exchange Commission rules included in Staff Accounting Bulletin No. 107 on a modified prospective basis. SFAS No. 123(R) requires stock options and other share-based payments made to employees to be accounted for as compensation expense and recorded at fair value, and to reflect the related tax benefit received upon exercise of the options in the statement of cash flows as a financing activity inflow rather than an adjustment of operating activity. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted subsequent to the date of adoption of SFAS No. 123(R).
The Company’s Employee Stock Incentive Plan provides for the grant of various types of stock-based incentive awards, including stock options, restricted stock and other stock-based grants. The types and mix of stock-based incentive awards are evaluated on an ongoing basis and may vary based on management’s overall strategy regarding compensation, including consideration of the impact of expensing stock option awards on the Company’s results of operations subsequent to the adoption of SFAS No. 123(R).
Derivative Instruments and Hedging Activities
The Company uses a derivative financial instrument to manage its exposure to fluctuations in interest rates on its long-term debt. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company accounts for interest rate swaps in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Under SFAS No. 133, all derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. Changes in the fair value of the Company’s existing derivative financial instrument are recorded in net earnings.
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Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for consistently measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning January 1, 2008, and the provisions of SFAS No. 157 will be applied prospectively as of that date. The Company is currently in the process of assessing the impact the adoption of this statement will have on its consolidated financial position and results of operations when it becomes effective in 2008.
On February 15, 2007, the Financial Accounting Standards Board issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Under this statement, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of hedge accounting under SFAS No. 133 are not met. SFAS No.159 is effective for years beginning after November 15, 2007. Early adoption within 120 days of the beginning of the Company’s 2007 fiscal year is permissible, provided the Company has not yet issued interim financial statements for 2007 and has adopted SFAS No. 157. Management is currently evaluating the potential impact of adopting this statement.
(3) NextView Contract
The U.S. Government, through the National Geospatial-Intelligence Agency (“NGA”), announced in March 2003 that it intended to support the continued development of the commercial satellite imagery industry by sharing the costs for the engineering, construction and launch of the next generation of imagery satellites. This program is known as NextView. On September 30, 2004, NGA announced that the Company had been awarded a contract under the NextView program. Under this program, the Company is the prime contractor constructing the GeoEye-1 satellite. The Company estimates its total project cost (including financing and launch insurance costs) to bring the GeoEye-1 satellite into service will be approximately $502 million. Under the NextView contract, NGA will support the project with a cost share totaling approximately $237 million spread out over the course of the project and subject to various milestones. As of September 30, 2007, NGA had paid the Company $187.3 million. The Company is deferring recognition of the cost share amounts as revenue until GeoEye-1 is put into service and then will recognize revenue on a straight-line basis over the imagery delivery term of the program, which the Company believes will ultimately approximate the expected seven-year life of the satellite. Total capitalized costs of the GeoEye-1 satellite and related ground systems incurred were $335.8 million as of September 30, 2007. Approximately $48.9 million of this amount was payable to subcontractors at September 30, 2007.
The NextView contract also provides for NGA to order approximately $197 million of imagery products beginning February 1, 2007 and continuing until six quarters after GeoEye-1 goes into service. In February 2007, the Company and NGA executed the initial task order under the NextView contract whereby NGA agreed to purchase $54 million of imagery products from the Company’s existing satellites for the period from February 1, 2007 to December 31, 2007, all of which had been delivered to NGA by September 30, 2007. The Company has completed discussions with NGA for a new $60 million task order for the continued delivery of additional products beginning in November 2007. Our fourth quarter results may be affected by the timing of this new task order and any potential impacts that may occur because the U.S. Government has not finalized its 2008 fiscal budget, which began October 1, 2007.
The NextView contract, as modified, provides the ability for any of the Company’s spacecraft which could technically meet the specifications of a particular collection requirement to satisfy that requirement both before and after the GeoEye-1 launch. While this could reduce the amount available to GeoEye-1 imagery, the NextView contract permits NGA to add funds for additional collection. Based on NGA’s public announcement of expected ongoing support, the Company expects NGA to continue to purchase our imagery products following expiration of the initial 18-month period covered by the contract. The
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Company anticipates that NGA will account for approximately half of the satellites’ imagery-taking capacity during this time, with the remaining capacity available to generate commercial sales, including sales to international ground station customers and municipal customers. Once the GeoEye-1 satellite is placed into service, NGA will have the first right to order images from the satellite, which would utilize slightly more than half of the satellite’s imagery-taking capacity at any given time, with the remainder available for commercial and state and foreign government sales by the Company.
We continue to make progress toward launch of the GeoEye-1 satellite in accordance with the plan previously disclosed. Boeing has indicated that, given their other launch commitments, our target launch date is April 16, 2008. The exact timing of the actual launch date will depend on a number of factors, many of which are outside of the Company’s control. Such factors include the timeliness and success of preceding Boeing launches, weather and launch site conditions. Such factors could result in the launch occurring either earlier or later than the target launch date. We have encountered typical technical issues during the testing phase but have uncovered no substantial design issues. As testing continues, we expect to uncover other issues, some of which could affect our schedule.
In September 2007, the Company secured $220 million of launch plus first year on-orbit insurance coverage and $50 million of launch plus three-year on-orbit coverage to cover to be paid in the event of a launch failure or if on-orbit anomalies prevent the satellite from being placed into service. The premiums to be paid to the underwriters by the Company will be approximately $41.4 million and will be capitalized as part of the satellite’s cost and depreciated over its estimated seven year life. In October 2007, the Company paid $2.2 million of the insurance premium.
(4) Loss of OrbView-3 Satellite
On March 4, 2007, the Company’s OrbView-3 satellite began to experience technical problems which affected its image quality. The Company and the vendors who built the OrbView-3 spacecraft and ground systems investigated the problem, and identified the problem to a specific unit within the camera electronics. On April 23, 2007, the Company announced that the satellite had been declared permanently out of service. The Company recorded a loss of $36.1 million in the first quarter of 2007. This loss consists of a $35.8 million impairment charge for the remaining book value of the satellite as well as a $3.9 million charge for the related ground system hardware and software. These amounts were offset by the write-off of the remaining on-orbit incentive obligation payable to Orbital Sciences Corporation, the manufacturer of the satellite, of $3.7 million.
The OrbView-3 satellite was insured for $40.0 million. The Company submitted a $40.0 million insurance claim on June 8, 2007 and received the proceeds during the third quarter of 2007. Upon receipt of the proceeds, the Company wrote off approximately $0.9 million of the remaining prepaid insurance premiums resulting in a net gain of $39.1 million which was recorded in the third quarter of 2007.
Both the first quarter loss on the satellite that was recorded in the first quarter of 2007 and the subsequent gain on the receipt of insurance proceeds in the third quarter of 2007 were reported in the Company’s Imagery industry segment in their respective periods.
The Company continues to be in communication with and in control of OrbView-3, but the satellite no longer produces usable imagery. With the loss of OrbView-3’s imagery capabilities, the Company is satisfying customers’ imagery needs with imagery from its IKONOS satellite where possible. Although OrbView-3 is not collecting new imagery, the Company has sold archived OrbView-3 products.
(5) Acquisition and Investment Activities
On March 15, 2007, our subsidiary, ORBIMAGE SI Opco, Inc. (“OISI Opco”), acquired MJ Harden Associates, Inc. from General Electric Company through a stock purchase of all of the outstanding stock of MJ Harden’s sole owner, i5, Inc. MJ Harden is a provider of both aerial and digital LiDAR imagery and geospatial information solutions. With this acquisition, GeoEye now has access to M. J. Harden’s digital
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aerial imagery capture capability, photogrammetry services, mobile and geographic information system technology and implementation services, field data collection and other related services that provide customers with asset-mapping and corridor management solutions. Customers include utilities, engineering companies, developers and federal, state and local government agencies, among others. MJ Harden is located in Mission, Kansas, and has approximately 60 employees.
The Company hired an independent third party to perform a fair market valuation of the MJ Harden assets purchased. The results of that valuation were the basis for a $2.2 million allocation of costs to intangible assets. Those intangible assets will be subject to amortization over the assigned lives of six and ten years. The remaining excess of cost over fair value of the net assets of $4.1 million was allocated to acquired goodwill and is not subject to amortization. The accompanying condensed consolidated statements of operations include the operating results of MJ Harden from the date of acquisition.
On June 8, 2007, Opco acquired a 4.9 percent equity position in Spadac, Inc., a privately held corporation, for $1.0 million through the acquisition of Series A Preferred Stock. SPADAC delivers innovative comprehensive geointelligence and predictive analysis solutions, including applied research and development, to customers primarily in defense, intelligence and homeland security agencies. The stock purchase transaction is treated as a long term investment in accordance with APB Opinion 18, “The Equity Method for Investments in Common Stock,” and accounted for using the cost method.
On August 2, 2007, Opco purchased a 3.0 percent ownership position in East-Dawn Group, Inc. (“East-Dawn”), a privately-held corporation established to provide satellite imagery and value-added products in China and to provide production services to international customers, for $1.0 million. East-Dawn was in turn, formed as a new company, Beijing Earth Observation (“BEO”), to implement this strategy. BEO will be GeoEye’s exclusive master reseller in China for IKONOS imagery products, including the IKONOS archive. As part of the transaction, BEO placed two of GeoEye’s employees on its board of directors. The stock purchase transaction is treated as a long term investment in accordance with APB Opinion 18, “The Equity Method for Investments in Common Stock,” and accounted for using the cost method.
(6) Other Comprehensive Income
For the three and nine months ended September 30, 2007, there were no material differences between net income as reported and comprehensive income.
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(7) Earnings per Common Share
The computations of basic and diluted earnings per common share were as follows for the three and nine months ended September 30, 2007 and 2006 respectively (in thousands, except share data):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Numerator for basic and diluted earnings per common share: | | | | | | | | | | | | | | | | |
Earnings available to common stockholders | | $ | 58,742 | | | $ | 10,367 | | | $ | 51,942 | | | $ | 17,153 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Denominator for basic and diluted earnings per common share: | | | | | | | | | | | | | | | | |
Average number of common shares outstanding for basic computations | | | 17,588,910 | | | | 17,422,601 | | | | 17,548,966 | | | | 17,415,815 | |
Dilutive effect of warrants, restricted stock and stock options | | | 4,374,487 | | | | 4,170,055 | | | | 4,314,639 | | | | 4,126,767 | |
| | | | | | | | | | | | |
Average number of common shares outstanding for diluted computations | | | 21,963,397 | | | | 21,592,656 | | | | 21,863,605 | | | | 21,542,582 | |
| | | | | | | | | | | | | | | | |
Earnings per common share – basic | | $ | 3.34 | | | $ | 0.60 | | | $ | 2.96 | | | $ | 0.98 | |
| | | | | | | | | | | | |
Earnings per common share – diluted | | $ | 2.67 | | | $ | 0.48 | | | $ | 2.38 | | | $ | 0.80 | |
| | | | | | | | | | | | |
(8) Long-Term Debt
On January 10, 2006, in conjunction with the acquisition of the operating assets of Space Imaging LLC, the Company and its wholly owned subsidiaries, Opco and ORBIMAGE SI Holdco Inc.(“Holdco”), entered into a Credit Agreement (the “SI Credit Agreement”) whereby Opco borrowed $50 million of senior secured term loans on the closing date. The term loans were to mature on July 1, 2008, at which time the principal amount of the loans were required to be paid in full. Opco was to prepay the loans with 100 percent excess cash flow of Holdco and its consolidated subsidiaries, calculated on a quarterly basis. The loans and other obligations under the SI Credit Agreement were guaranteed by Holdco and secured by substantially all of the tangible and intangible assets of each of Holdco and Opco. As of December 31, 2006, Opco had repaid approximately $34.6 million of these loans. On February 2, 2007, Opco repaid the remaining $15.4 million principal balance. In conjunction with the repayment of the remaining principal balance, all restrictive covenants associated with the debt were retired. The interest rate per annum applicable to the loans was 11 percent in 2007. Interest expense recognized in 2007 also included remaining unamortized prepaid financing costs of $1.0 million and $0.3 million of amortization of the debt discount that was outstanding at year-end.
The terms of the Company’s Senior Secured Floating Rate Notes require the Company to make a tender for the Notes for the $40 million of insurance proceeds received from the loss of the OrbView-3 satellite, plus any accrued interest. The tender offer to the existing Noteholders was filed on October 2, 2007 and expired on November 1, 2007. None of the Noteholders accepted the terms of the tender offer to redeem their Notes for payment. Therefore, the Company will retain the entire $40 million of insurance proceeds and will use the funds for its general operations as allowed under the indenture.
The Company began capitalizing interest costs associated with the debt incurred for the construction of the GeoEye-1 satellite and related ground segment and system assets in the third quarter of 2005. The capitalized interest is recorded as part of the historical cost of those assets and will be amortized over the
10
assets’ useful lives when placed into service. Capitalized interest totaled $42.0 million at September 30, 2007.
(9) Income Taxes
The Company recorded a provision for income taxes of $0.7 million for the third quarter of 2007 and $2.1 million for the nine months ended September 30, 2007. The tax provision was calculated using the Company’s estimated effective tax rate and includes the one time gain on the disposal of the OrbView-3 asset described in Note 4 above.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) effective January 1, 2007. FIN 48 provides a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. tax examinations for years before 2003. State jurisdictions that remain subject to examination range from 2003 to 2005. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter.
(10) Stock Incentive Plans
The Company’s employee stock incentive plans provide for the grant of various types of stock-based incentive awards, including stock options, restricted stock and other stock-based grants. The types and mix of stock-based incentive awards are evaluated on an ongoing basis and may vary based on management’s overall strategy regarding compensation. All grants or awards made under the plans are governed by written agreements between the Company and the participants.
Stock Options
Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on 4 — 5 years of continuous service and have 10-year contractual terms. The Company recognized expense associated with stock-based compensation of approximately $0.1 million in the third quarter of 2007 and $1.1 million for the 2007 year to date period, which reduced earnings per basic and diluted share for the nine months ended September 30, 2007 by $0.06 and $0.05 respectively. These costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations. The cash received from the exercise of options and the related tax benefit realized for the tax deductions from exercise of the share-based payment arrangements were not material.
The fair value of each option granted has been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | | |
| | 2007 | | 2006 |
Volatility | | 51.34% - 52.35% | | 62.50% |
Dividend yield | | 0.0% | | 0.0% |
Risk-free interest rate | | 4.65% - 4.66% | | 3.70% - 4.70% |
Expected average life | | 5.25 years – 6.24 years | | 5.50 years – 6.33 years |
Exercise price per option | | $6.50 – $20.24 | | $6.50 – $18.25 |
11
This model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the expected life of the option being valued, and requires certain assumptions, such as the expected amount of time the option will be outstanding until it is exercised or it expires, to calculate the fair value per share of options issued. Expected volatilities are based on historical volatility of the Company’s stock. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The following table summarizes stock option activity for the nine months ended September 30, 2007:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Weighted | | | | |
| | | | | | Weighted | | | Average | | | Aggregate | |
| | | | | | Average | | | Remaining | | | Intrinsic | |
| | Number of | | | Exercise | | | Contractual | | | Value | |
| | Shares | | | Price | | | Term (Years) | | | (In thousands) | |
Outstanding at December 31, 2006 | | | 461,485 | | | $ | 9.84 | | | | | | | | | |
Granted | | | 221,734 | | | | 18.03 | | | | | | | | | |
Exercised | | | (54,668 | ) | | | 8.10 | | | | | | | | | |
Forfeited | | | (21,884 | ) | | | 11.65 | | | | | | | | | |
| | | | | | | | | | | | | | |
Outstanding at September 30, 2007 | | | 606,667 | | | $ | 12.91 | | | 8.2 years | | $ | 7,725 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Exercisable at September 30, 2007 | | | 160,142 | | | $ | 8.41 | | | 7.9 years | | $ | 2,777 | |
| | | | | | | | | | | | |
The intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $1.0 million and $ 0, respectively. No options vested during the three months ended September 30, 2007.
Restricted Stock
As of September 30, 2007 and 2006, there was $1.2 million and $ 0.5 million respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. A summary of the status of the Company’s nonvested shares as of September 30, 2007 and changes during the three-month period is presented below:
| | | | | | | | |
| | | | | | Weighted- | |
| | | | | | Average | |
| | No. of | | | Grant-Date | |
Nonvested Restricted Stock | | Shares | | | Fair Value | |
Nonvested at December 31, 2006 | | | 38,300 | | | $ | 13.75 | |
Granted | | | 135,747 | | | | 18.16 | |
Forfeited | | | (13,747 | ) | | | 17.67 | |
Vested | | | (78,164 | ) | | | 15.92 | |
| | | | | | |
Nonvested at September 30, 2007 | | | 82,136 | | | $ | 17.43 | |
| | | | | | |
12
(11) Industry Segments and Major Customers
The Company operates in two industry segments: Imagery and Production and Other Services. The business segments have been organized based on the nature of the products and services offered. In the following tables of financial data, the total of the operating results of these industry segments is reconciled to the corresponding consolidated amount.
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
Net sales | | | | | | | | | | | | | | | | |
Imagery | | $ | 44,947 | | | $ | 32,349 | | | $ | 110,153 | | | $ | 86,194 | |
Production and Other Services | | | 8,803 | | | | 11,182 | | | | 28,647 | | | | 22,737 | |
| | | | | | | | | | | | |
Total net sales | | $ | 53,750 | | | $ | 43,531 | | | $ | 138,800 | | | $ | 108,931 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating profit | | | | | | | | | | | | | | | | |
Imagery | | | | | | | | | | | | | | | | |
Net effect of satellite loss | | $ | 39,063 | | | $ | — | | | $ | 3,010 | | | $ | — | |
Other operating profit | | | 22,665 | | | | 10,062 | | | | 50,589 | | | | 19,241 | |
| | | | | | | | | | | | |
Total Imagery | | | 61,728 | | | | 10,062 | | | | 53,599 | | | | 19,241 | |
Production and Other Services | | | 1,423 | | | | 6,682 | | | | 10,299 | | | | 10,818 | |
| | | | | | | | | | | | |
Total operating profit | | $ | 63,151 | | | $ | 16,744 | | | $ | 63,898 | | | $ | 30,059 | |
| | | | | | | | | | | | |
Selling, general and administrative costs are allocated to industry segments based upon the proportion of direct costs incurred for each segment. During the second quarter of 2007, this allocation changed as a result of the absence of depreciation expense for the OrbView-3 satellite and from the outlay of costs associated with source material for new value-added production initiatives, resulting in additional costs being allocated to the Production and Other segment.
The U.S. Government is the Company’s largest customer. The Company recognized revenue related to the U.S. Government of approximately $30.4 million for the third quarter of 2007, which represents 57 percent of total revenues for the current quarter and approximately $71.0 million or 56 percent of total year to date revenue. Total revenues from the U.S. Government for the corresponding quarter of 2006 were $18.2 million, which represents 42 percent of total revenues for that period and $49.2 million, or 45 percent of total year to date revenue. No other customer accounted for more than 10 percent of the Company’s revenues for the third quarter of 2007 or 2006.
(12) Financial Information of Guarantor Subsidiary
The Senior Secured Floating Rate Notes issued by the Company are guaranteed by ORBIMAGE Inc., its wholly-owned subsidiary. The Company does not have any independent assets or operations other than its ownership in all of the capital stock of ORBIMAGE Inc., the subsidiary guarantor of the Notes, and the capital stock of its other non-guarantor subsidiaries. Since inception, all of the Company’s operations were conducted through its wholly-owned subsidiaries. ORBIMAGE Inc.’s guarantee of the Notes is full and unconditional. There are no significant restrictions on the ability of the Company to obtain funds from ORBIMAGE Inc. by dividend or loan. There are also no significant restrictions on the ability of ORBIMAGE Inc. to obtain funds from the Company by dividend or loan.
The following condensed consolidating financial information for the Company presents the financial information of the Company, the guarantor subsidiaries and the non-guarantor subsidiaries based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 under the Securities and Exchange Commission’s Regulation S-X. In this presentation, GeoEye, Inc. consists of the parent company’s operations. Guarantor subsidiaries and non-guarantor subsidiaries of the Company are reported on an equity basis. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor subsidiaries or non-guarantor subsidiaries operated as independent entities.
13
GEOEYE, INC.
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2007
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Revenues | | $ | — | | | $ | 29,727 | | | $ | 43,473 | | | $ | (19,450 | ) | | $ | 53,750 | |
| | | | | | | | | | | | | | | | | | | | |
Direct expenses | | | — | | | | 22,508 | | | | 17,741 | | | | (19,450 | ) | | | 20,799 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 7,219 | | | | 25,732 | | | | — | | | | 32,951 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | | | | | 4,761 | | | | 4,102 | | | | | | | | 8,863 | |
Gain on satellite insurance proceeds | | | — | | | | (39,063 | ) | | | — | | | | — | | | | (39,063 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income from operations | | | — | | | | 41,521 | | | | 21,630 | | | | — | | | | 63,151 | |
| | | | | | | | | | | | | | | | | | | | |
Interest expense (income), net | | | 2,938 | | | | (1,178 | ) | | | (132 | ) | | | — | | | | 1,628 | |
Unrealized loss on derivative instrument | | | 2,098 | | | | — | | | | — | | | | | | | | 2,098 | |
Equity in earnings of subsidiaries | | | (64,461 | ) | | | — | | | | — | | | | 64,461 | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 59,425 | | | | 42,699 | | | | 21,762 | | | | (64,461 | ) | | | 59,425 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | 683 | | | | — | | | | — | | | | — | | | | 683 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 58,742 | | | $ | 42,699 | | | $ | 21,762 | | | $ | (64,461 | ) | | $ | 58,742 | |
| | | | | | | | | | | | | | | |
14
GEOEYE, INC.
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2006
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Revenues | | $ | — | | | $ | 11,502 | | | $ | 32,231 | | | $ | (202 | ) | | $ | 43,531 | |
| | | | | | | | | | | | | | | | | | | | |
Direct expenses | | | — | | | | 9,176 | | | | 11,244 | | | | (202 | ) | | | 20,218 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 2,326 | | | | 20,987 | | | | — | | | | 23,313 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | — | | | | 3,302 | | | | 3,267 | | | | — | | | | 6,569 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income from operations | | | — | | | | (976 | ) | | | 17,720 | | | | — | | | | 16,744 | |
| | | | | | | | | | | | | | | | | | | | |
Interest expense (income), net | | | 4,041 | | | | (1,560 | ) | | | 1,624 | | | | — | | | | 4,105 | |
Unrealized loss on derivative instrument | | | 2,272 | | | | — | | | | — | | | | — | | | | 2,272 | |
Equity in earnings of subsidiaries | | | (16,680 | ) | | | — | | | | — | | | | 16,680 | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 10,367 | | | | 584 | | | | 16,096 | | | | (16,680 | ) | | | 10,367 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 10,367 | | | $ | 584 | | | $ | 16,096 | | | $ | (16,680 | ) | | $ | 10,367 | |
| | | | | | | | | | | | | | | |
15
GEOEYE, INC.
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2007
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Revenues | | $ | — | | | $ | 72,934 | | | $ | 111,312 | | | $ | (45,446 | ) | | $ | 138,800 | |
| | | | | | | | | | | | | | | | | | | | |
Direct expenses | | | — | | | | 60,831 | | | | 39,686 | | | | (45,446 | ) | | | 55,071 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 12,103 | | | | 71,626 | | | | — | | | | 83,729 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | — | | | | 8,725 | | | | 14,116 | | | | — | | | | 22,841 | |
Net gain on satellite insurance proceeds | | | — | | | | (3,010 | ) | | | — | | | | — | | | | (3,010 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income from operations | | | — | | | | 6,388 | | | | 57,510 | | | | — | | | | 63,898 | |
| | | | | | | | | | | | | | | | | | | | |
Interest expense (income), net | | | 9,259 | | | | (3,535 | ) | | | 1,024 | | | | — | | | | 6,748 | |
Unrealized loss on derivative instrument | | | 3,097 | | | | — | | | | — | | | | — | | | | 3,097 | |
Equity in earnings of subsidiaries | | | (65,895 | ) | | | — | | | | — | | | | 65,895 | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | 53,539 | | | | 9,923 | | | | 56,486 | | | | (65,895 | ) | | | 54,053 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | 1,597 | | | | — | | | | 514 | | | | — | | | | 2,111 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 51,942 | | | $ | 9,923 | | | $ | 55,972 | | | $ | (65,895 | ) | | $ | 51,942 | |
| | | | | | | | | | | | | | | |
16
GEOEYE, INC.
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2006
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Revenues | | $ | — | | | $ | 29,689 | | | $ | 79,476 | | | $ | (234 | ) | | $ | 108,931 | |
| | | | | | | | | | | | | | | | | | | | |
Direct expenses | | | — | | | | 28,185 | | | | 32,882 | | | | (234 | ) | | | 60,833 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 1,504 | | | | 46,594 | | | | — | | | | 48,098 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | — | | | | 9,624 | | | | 8,415 | | | | — | | | | 18,039 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | — | | | | (8,120 | ) | | | 38,179 | | | | — | | | | 30,059 | |
| | | | | | | | | | | | | | | | | | | | |
Interest expense (income), net | | | 14,273 | | | | (4,521 | ) | | | 5,209 | | | | — | | | | 14,961 | |
Unrealized gain on derivative instrument | | | (2,055 | ) | | | — | | | | — | | | | — | | | | (2,055 | ) |
Equity in earnings of subsidiaries | | | (29,371 | ) | | | — | | | | — | | | | 29,371 | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before provision for income taxes | | | 17,153 | | | | (3,599 | ) | | | 32,970 | | | | (29,371 | ) | | | 17,153 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 17,153 | | | $ | (3,599 | ) | | $ | 32,970 | | | $ | (29,371 | ) | | $ | 17,153 | |
| | | | | | | | | | | | | | | |
17
GEOEYE, INC.
Condensed Consolidating Balance Sheet
September 30, 2007
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 38,216 | | | $ | 121,507 | | | $ | 69,576 | | | $ | — | | | $ | 229,299 | |
Receivables, net | | | — | | | | 14,750 | | | | 23,098 | | | | — | | | | 37,848 | |
Amounts due from related parties | | | 2,770 | | | | — | | | | 39,299 | | | | (42,069 | ) | | | — | |
Other current assets | | | — | | | | 1,963 | | | | 4,944 | | | | — | | | | 6,907 | |
| | | | | | | | | | | | | | | |
Total current assets | | | 40,986 | | | | 138,220 | | | | 136,917 | | | | (42,069 | ) | | | 274,054 | |
| | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | — | | | | 67,737 | | | | 13,768 | | | | — | | | | 81,505 | |
Satellites and related rights, net | | | — | | | | 319,250 | | | | 2,863 | | | | — | | | | 322,113 | |
Investment in subsidiaries | | | 415,364 | | | | — | | | | — | | | | (415,364 | ) | | | — | |
Goodwill | | | — | | | | 28,490 | | | | 4,122 | | | | — | | | | 32,612 | |
Intangible assets | | | — | | | | 113 | | | | 17,640 | | | | — | | | | 17,753 | |
Other assets | | | 16,445 | | | | 77 | | | | 2,000 | | | | — | | | | 18,522 | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 472,795 | | | $ | 553,887 | | | $ | 177,310 | | | $ | (457,433 | ) | | $ | 746,559 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | — | | | $ | 12,253 | | | $ | 11,082 | | | | — | | | $ | 23,335 | |
Amounts payable to related parties | | | — | | | | 42,069 | | | | — | | | | (42,069 | ) | | | — | |
Amounts payable to subcontractors | | | — | | | | 48,888 | | | | — | | | | — | | | | 48,888 | |
Accrued interest payable | | | 8,698 | | | | — | | | | — | | | | — | | | | 8,698 | |
Current portion of deferred revenue | | | — | | | | 472 | | | | 13,113 | | | | — | | | | 13,585 | |
Other current liabilities | | | 889 | | | | — | | | | 150 | | | | — | | | | 1,039 | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | 9,587 | | | | 103,683 | | | | 24,345 | | | | (42,069 | ) | | | 95,545 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 246,610 | | | | — | | | | — | | | | — | | | | 246,610 | |
Deferred revenue, net of current portion | | | — | | | | 187,281 | | | | — | | | | — | | | | 187,281 | |
Other noncurrent liabilities | | | — | | | | 525 | | | | — | | | | — | | | | 525 | |
| | | | | | | | | | | | | | | |
Total liabilities | | | 256,197 | | | | 291,488 | | | | 24,345 | | | | (42,069 | ) | | | 529,961 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholders’ equity | | | 216,598 | | | | 262,399 | | | | 152,965 | | | | (415,364 | ) | | | 216,598 | |
| | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 472,795 | | | $ | 553,887 | | | $ | 177,310 | | | $ | (457,433 | ) | | $ | 746,559 | |
| | | | | | | | | | | | | | | |
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GEOEYE, INC.
Condensed Consolidating Balance Sheet
December 31, 2006
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
|
Current assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 55,056 | | | $ | 105,056 | | | $ | 39,572 | | | $ | — | | | $ | 199,684 | |
Receivables, net | | | — | | | | 8,351 | | | | 12,857 | | | | — | | | | 21,208 | |
Amounts due from related parties | | | 55,107 | | | | — | | | | — | | | | (55,107 | ) | | | — | |
Other current assets | | | 3 | | | | 1,192 | | | | 6,090 | | | | — | | | | 7,285 | |
| | | | | | | | | | | | | | | |
Total current assets | | | 110,166 | | | | 114,599 | | | | 58,519 | | | | (55,107 | ) | | | 228,177 | |
| | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | — | | | | 58,025 | | | | 9,364 | | | | — | | | | 67,389 | |
Satellites and related rights, net | | | — | | | | 322,952 | | | | 5,725 | | | | — | | | | 328,677 | |
Investment in subsidiaries | | | 296,345 | | | | — | | | | — | | | | (296,345 | ) | | | — | |
Goodwill | | | — | | | | 28,490 | | | | — | | | | — | | | | 28,490 | |
Intangible assets | | | — | | | | 178 | | | | 18,216 | | | | — | | | | 18,394 | |
Other assets | | | 20,481 | | | | 209 | | | | — | | | | — | | | | 20,690 | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 426,992 | | | $ | 524,453 | | | $ | 91,824 | | | $ | (351,452 | ) | | $ | 691,817 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | — | | | $ | 11,692 | | | $ | 9,076 | | | $ | — | | | $ | 20,768 | |
Amounts payable to related parties | | | — | | | | 39,153 | | | | 15,954 | | | | (55,107 | ) | | | — | |
Amounts payable to subcontractors | | | — | | | | 32,721 | | | | — | | | | — | | | | 32,721 | |
Accrued interest payable | | | 17,292 | | | | — | | | | 66 | | | | — | | | | 17,358 | |
Current portion of long-term debt | | | — | | | | — | | | | 15,146 | | | | — | | | | 15,146 | |
Current portion of deferred revenue | | | — | | | | 293 | | | | 7,505 | | | | — | | | | 7,798 | |
Other current liabilities | | | 507 | | | | 1,275 | | | | 207 | | | | — | | | | 1,989 | |
| | | | | | | | | | | | | | | |
Total current liabilities | | | 17,799 | | | | 85,134 | | | | 47,954 | | | | (55,107 | ) | | | 95,780 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 246,075 | | | | — | | | | — | | | | — | | | | 246,075 | |
Deferred revenue, net of current portion | | | — | | | | 184,481 | | | | — | | | | — | | | | 184,481 | |
Other noncurrent liabilities | | | — | | | | 2,363 | | | | — | | | | — | | | | 2,363 | |
Total liabilities | | | 263,874 | | | | 271,978 | | | | 47,954 | | | | (55,107 | ) | | | 528,699 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Stockholders’ equity | | | 163,118 | | | | 252,475 | | | | 43,870 | | | | (296,345 | ) | | | 163,118 | |
| | | | | | | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 426,992 | | | $ | 524,453 | | | $ | 91,824 | | | $ | (351,452 | ) | | $ | 691,817 | |
| | | | | | | | | | | | | | | |
19
GEOEYE, INC.
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2007
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net cash provided by (used in) operating activities | | $ | (17,200 | ) | | $ | (4,802 | ) | | $ | 60,681 | | | $ | — | | | $ | 38,679 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (18,747 | ) | | | (5,207 | ) | | | — | | | | (23,954 | ) |
Satellite insurance proceeds | | | — | | | | 40,000 | | | | — | | | | — | | | | 40,000 | |
Payment for business acquisitions, net of cash acquired | | | — | | | | — | | | | (10,027 | ) | | | — | | | | (10,027 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | — | | | | 21,253 | | | | (15,234 | ) | | | — | | | | 6,019 | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Repayment of long-term debt | | | — | | | | — | | | | (15,443 | ) | | | — | | | | (15,443 | ) |
Issuance of common stock | | | 360 | | | | — | | | | — | | | | — | | | | 360 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 360 | | | | — | | | | (15,443 | ) | | | — | | | | (15,083 | ) |
| | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (16,840 | ) | | | 16,451 | | | | 30,004 | | | | — | | | | 29,615 | |
Cash and cash equivalents, beginning of period | | | 55,056 | | | | 105,056 | | | | 39,572 | | | | — | | | | 199,684 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 38,216 | | | $ | 121,507 | | | $ | 69,576 | | | $ | — | | | $ | 229,299 | |
| | | | | | | | | | | | | | | |
20
GEOEYE, INC.
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2006
(Unaudited; in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Unconsolidated | | | | | | | |
| | | | | | | | | | Non- | | | | | | | |
| | | | | | Guarantor | | | Guarantor | | | | | | | |
| | Parent | | | Subsidiary | | | Subsidiaries | | | Eliminations | | | Consolidated | |
Net cash provided by operating activities | | $ | 1,564 | | | $ | 28,383 | | | $ | 34,768 | | | $ | — | | | $ | 64,715 | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | — | | | | (90,054 | ) | | | (823 | ) | | | — | | | | (90,877 | ) |
Payment for business acquisition, net of cash acquired | | | — | | | | — | | | | (28,700 | ) | | | — | | | | (28,700 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | — | | | | (90,054 | ) | | | (29,523 | ) | | | — | | | | (119,577 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Issuance of long-term debt | | | — | | | | — | | | | 50,000 | | | | — | | | | 50,000 | |
Repayment of long-term debt | | | — | | | | — | | | | (17,796 | ) | | | — | | | | (17,796 | ) |
Long-term debt repayment and issuance costs | | | — | | | | — | | | | (5,644 | ) | | | — | | | | (5,644 | ) |
Issuance of common stock | | | 62 | | | | — | | | | — | | | | — | | | | 62 | |
Equity issuance costs | | | (26 | ) | | | — | | | | — | | | | — | | | | (26 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 36 | | | | — | | | | 26,560 | | | | — | | | | 26,596 | |
| | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 1,600 | | | | (61,671 | ) | | | 31,805 | | | | — | | | | (28,266 | ) |
Cash and cash equivalents, beginning of period | | | 52,837 | | | | 173,667 | | | | — | | | | — | | | | 226,504 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 54,437 | | | $ | 111,996 | | | $ | 31,805 | | | $ | — | | | $ | 198,238 | |
| | | | | | | | | | | | | | | |
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\
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
GeoEye, Inc., a Delaware corporation, together with its subsidiaries (collectively, the “Company”), operates satellites that collect, process and distribute digital imagery of the Earth’s surface, atmosphere and weather conditions. In addition to the IKONOS and OrbView-2 satellites, the satellite system also includes a U.S. ground system necessary to operate the satellites and to collect, process and distribute imagery from the satellites. In addition, the Company maintains an image processing and production center at its headquarters in Dulles, Virginia, and advanced image processing and geospatial information technology development and production centers in St. Louis, Missouri and Thornton, Colorado. The Company is also constructing a next-generation high-resolution imagery satellite, which has been designated GeoEye-1. As a result of the acquisition of MJ Harden Associates, Inc. in the first quarter of 2007 as described below, the Company is also a provider of both aerial and digital LiDAR imagery and geospatial information solutions.
The principal sources of revenue are the sale of satellite imagery to customers and regional distributors and the processing and production of imagery and geospatial information. The Company has entered into several long-term sales contracts to provide imagery products and, in certain circumstances, will be entitled to receive contractual payments in advance of product delivery. Deferred revenue will initially be recorded for the total amount of the advance payments under these contracts and recognized as revenue over the contractual delivery period.
NextView Program. On September 30, 2004, the U.S. Government, through the National Geospatial-Intelligence Agency (“NGA”), announced that the Company had been awarded a contract under the NextView Second Vendor program. Under this program, the Company is the prime contractor constructing a new satellite, which has been named GeoEye-1. The Company estimates its total project cost (including financing and launch insurance costs) to bring the GeoEye-1 satellite into service will be approximately $502 million. NGA is supporting the project with a cost share totaling approximately $237 million spread out over the course of the project and subject to various milestones.
The NextView contract also provides for NGA to order approximately $197 million of imagery products beginning February 1, 2007 and continuing until six quarters after GeoEye-1 goes into service. In February 2007, the Company and NGA executed the initial task order under the NextView contract whereby NGA agreed to purchase $54 million of imagery products from the Company’s existing satellites for the period from February 1, 2007 to December 31, 2007, all of which had been delivered to NGA by September 30, 2007. The Company has completed discussions with NGA for a new $60 million task order for the continued delivery of additional products beginning in November 2007. Our fourth quarter results may be affected by the timing of this new task order and any potential impacts that may occur because the U.S. Government has not finalized its 2008 fiscal budget, which began October 1, 2007.
The NextView contract, as modified, provides the ability for any spacecraft which could technically meet the specifications of a particular collection requirement to satisfy that requirement both before and after the GeoEye-1 launch. While this could reduce the amount available to GeoEye-1 imagery, the NextView contract permits NGA to add funds to the contract for additional collection. Based on NGA’s public announcement of expected ongoing support, the Company expects NGA to continue to purchase our imagery products following expiration of the initial 18-month period covered by the NextView contract. The Company anticipates that NGA will account for approximately half of the satellites’ imagery-taking capacity during this time, with the remaining capacity available to generate commercial sales, including sales to international ground station customers and municipal customers.
We continue to make progress toward launch of the GeoEye-1 satellite in accordance with the plan previously disclosed. Boeing has indicated that, given their other launch commitments, our target launch date is April 16, 2008. The exact timing of the actual launch date will depend on a number of factors, many of which are outside of the Company’s control. Such factors include the timeliness and success of preceding Boeing launches, weather and launch site conditions. Such factors could result in the launch occurring either earlier or later than the target launch date. We have encountered typical technical issues
22
during the testing phase but have uncovered no substantial design issues. As testing continues, we expect to uncover other issues, some of which could affect our schedule.
As of September 26, 2007, the Company has secured $220 million of launch and first year on-orbit insurance and $50 million of launch plus three-year on-orbit insurance for the GeoEye-1 satellite to be paid in the event of a launch failure or if on-orbit anomalies prevent the satellite from being placed into service. The insurance coverage of approximately $41.4 million was obtained at a premium rate that was less than previously anticipated. Depending on market and economic conditions, we may attempt to procure additional insurance on the satellite.
MJ Harden Acquisition. On March 15, 2007, our subsidiary, ORBIMAGE SI Opco, Inc., acquired MJ Harden Associates, Inc. from General Electric Company through a stock purchase of all of the outstanding stock of MJ Harden’s sole owner, i5, Inc. MJ Harden is a provider of both aerial and digital LiDAR (laser based Light Detection and Ranging technology) imagery and geospatial information solutions.
With the acquisition GeoEye now has access to M. J. Harden’s aerial and digital LiDAR imagery capture capability, photogrammetry services, mobile and geographic information system technology and implementation services, field data collection and other related services that provide customers with asset-mapping and corridor management solutions. Customers include utilities, engineering companies, developers and federal, state and local government agencies, among others. MJ Harden is located in Mission, Kansas, and has approximately 60 employees.
The Company hired an independent, third party appraisal firm to perform a fair market valuation of the MJ Harden assets purchased. The results of that valuation were the basis for a $2.2 million allocation of costs to intangible assets. Those intangible assets will be subject to amortization over their assigned lives of six and ten years. The remaining excess of cost over the fair value of net assets of $4.1 million was allocated to goodwill and is not subject to amortization. The accompanying condensed consolidated statements of operations include the operating results of MJ Harden from the date of acquisition.
SPADAC Investment. On June 8, 2007, the Company purchased a 4.9 percent of the outstanding voting shares in SPADAC, Inc. (“SPADAC”), a privately held entity, for $1.0 million. SPADAC delivers innovative comprehensive geointelligence and predictive analysis solutions, including applied research and development, to customers primarily in defense, intelligence and homeland security agencies.
East-Dawn Investment. On August 2, 2007, the Company purchased a 3.0 percent ownership position in East-Dawn Group, Inc. (“East-Dawn”), a privately held corporation, for $1.0 million. East-Dawn was established to provide satellite imagery and value-added products in China and to provide production services to international customers. East-Dawn, in turn, formed a new company, Beijing Earth Observation (“BEO”), to implement this strategy. BEO will be GeoEye’s exclusive master reseller in China for IKONOS imagery products, including the IKONOS archive. As part of the transaction, BEO placed two of GeoEye’s employees on its board of directors.
Loss of OrbView-3 Satellite. On March 4, 2007, the Company’s OrbView-3 satellite began to experience technical problems which affected its image quality. The Company and the vendors who built the OrbView-3 spacecraft and ground systems spent several weeks troubleshooting the problem, and identified the problem to a specific unit within the camera electronics. On April 23, 2007, the Company announced that the satellite has been declared permanently out of service. Though the Company continues to be in communication with and in control of OrbView-3, the satellite no longer produces usable imagery.
The Company recorded a loss of $36.1 million in the first quarter of 2007. This loss consists of a $35.8 million write-off of the remaining book value of the satellite as well as a $3.9 million write-off of the related ground system hardware and software. These amounts were offset by the write-off of the remaining on-orbit incentive obligation payable to Orbital Sciences Corporation, the manufacturer of the satellite, of $3.7 million.
The OrbView-3 satellite was insured for $40.0 million. The Company submitted a $40.0 million insurance claim on June 8, 2007 and received the proceeds during the third quarter of 2007. Upon receipt of
23
the proceeds, the Company wrote off approximately $0.9 million of the remaining prepaid insurance premiums resulting in a net gain of $39.1 million which recorded in the third quarter of 2007.
As a result of the loss of the OrbView-3 satellite, the Company has reallocated imagery resources from its IKONOS satellite to satisfy customers’ imagery needs when possible. The IKONOS satellite has sufficient collection capacity that we believe will satisfy contractual requirements until the launch of GeoEye-1. Although OrbView-3 is not collecting new imagery, we continue to sell archived OrbView-3 products.
GeoEye-2 Satellite. The Company announced in October 2007 that it has entered into a contract with ITT Corporation to begin work on the camera for GeoEye’s next earth imaging satellite to be named GeoEye-2. This is the first step in a phased development process for an advanced, third-generation satellite. GeoEye-2 will be of the same general class as GeoEye-1, but will benefit from significant improvements in capability and the potential to collect imagery of the Earth’s surface at approximately 0.25 meter or 9.75 inch ground resolution. The Company expects to contract with a satellite builder in 2008 and launch the satellite approximately three years after work begins on that contract. The Company will evaluate is options for financing the construction of GeoEye-2 in conjunction with its selection of the satellite builder.
RESULTS OF OPERATIONS
Revenues. Total revenues for the Company were $53.8 million and $43.5 million for the three months ended September 30, 2007 and 2006, respectively, and $138.8 million and $108.9 million for the nine months ended September 30, 2007 and 2006, respectively. The increases for both periods were mostly attributable to an increase in deliveries of imagery and production services under contracts with NGA of $13.1 million for the third quarter and $31.2 million for the nine month period. The remaining variance is attributable to increases and decreases across the Company’s other businesses, namely the inclusion of the operations of M.J. Harden Associates, Inc., which was acquired in March 2007, offset by the absence of revenue generated from the OrbView-3 satellite, which suffered an anomaly during the first quarter of 2007 and was deemed to be permanently impaired.
Direct Expenses. Direct expenses include the costs of operating and depreciating the Company’s satellites and related ground systems, as well as construction and on-going maintenance costs related to distributor-owned ground stations. Labor expenses and depreciation represent the largest components of direct expenses. Direct expenses were $20.8 million and $20.2 million for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, direct expenses were $55.1 million and $60.8 million respectively. The $0.6 million increase in direct expenses for the third quarter of 2007 primarily resulted from an increase in expenditures associated with the purchase of imagery to satisfy contractual requirements and the additional direct operational expenses associated with the acquisition of MJ Harden, offset by a reduction in depreciation expense as a result of the OrbView-3 satellite write-off during March 2007 for the three months ended September 30, 2007.
The $5.8 million decrease in direct expenses for the nine months ended September 30, 2007 was the result of the absence of $11.2 million of depreciation expense associated with the OrbView-3 satellite offset by the additional direct operational expenses associated with the acquisition of MJ Harden.
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses include the costs of marketing, advertising, promotion and other selling expenses, as well as the costs of the finance, administrative and general management functions of the Company. SG&A expenses were $8.9 million and $6.6 million for the three months ended September 30, 2007 and 2006, respectively, and were $22.8 million and $18.0 million for the nine months ended September 30, 2007 and 2006, respectively. The increase in both periods were attributable to the incurrence of additional SG&A expenses associated with the acquisition of MJ Harden operations, increases in headcount from the prior year, and increased stock-based compensation expense over the prior year.
24
Interest Expense, net. The Company recorded net interest expense of $1.6 million and $4.1 million for the three months ended September 30, 2007 and 2006, respectively. Net interest expense for the nine months ended September 30, 2007 and 2006 was $6.7 million and $15.0 million, respectively. As presented in the table below, the majority of interest expense incurred for these periods pertained to interest expense associated with the Company’s $250 million Senior Secured Floating Rate Notes due 2012 (the “Notes”). Interest expense incurred on these Notes includes amortized prepaid financing costs and amortization of debt discount and excludes capitalized interest expense associated with the construction of the GeoEye-1 satellite and related ground systems. The composition of interest costs incurred on the Notes is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2007 | | 2006 | | 2007 | | 2006 |
Interest expense | | $ | 3,429 | | | $ | 4,645 | | | $ | 10,810 | | | $ | 15,872 | |
Capitalized interest | | | 6,047 | | | | 4,930 | | | | 17,619 | | | | 13,228 | |
| | | | | | | | | | | | |
Total interest costs on Notes | | $ | 9,476 | | | $ | 9,575 | | | $ | 28,429 | | | $ | 29,100 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
In addition, as more fully described in the Liquidity and Capital Resources section below, the Company entered into a Credit Agreement on January 10, 2006, in order to finance the Space Imaging acquisition, pursuant to which the Company borrowed $50 million of senior secured term loans. The remaining principal balance of these term loans was repaid in February 2007. Interest expense related to these loans was $1.4 million for 2007 and $1.7 million for 2006, inclusive of amortization of prepaid financing costs.
The Company recorded interest income of $1.5 million and $2.2 million for the three months ended September 30, 2007 and 2006, respectively, and $5.6 million and $6.3 million for the nine months ended September 30, 2007 and 2006, respectively.
Unrealized Gain (Loss) on Derivative Instrument. In June 2005, the Company entered into an interest rate swap agreement, effectively hedging $250 million of its LIBOR-based floating rate term debt for three years. As a result of entering into the agreement, the interest rate to be paid by the Company relating to the hedged portion of its debt will be fixed at 13.75 percent rather than on a three-month LIBOR plus 9.5 percent. Although the interest rate swap agreement provides the Company with an economic hedge against interest rate risk, the Company is applying “mark to market” accounting, the effect of which is the inclusion in net income of any increases or decreases in the fair value of derivative instruments previously designated as hedges during the periods in which such increases or decreases in their fair values occurred.
The Company recorded unrealized losses of $2.1 million and $ 3.1 million for the three months and nine months ended September 30, 2007, respectively. The Company recorded an unrealized loss on this derivative instrument of $2.3 million for the three months ended September 30, 2006 and an unrealized gain of $2.1 million for the nine months ended September 30, 2006.
Provision for Income Taxes. The Company recorded an income tax provision of $0.7 million for the three months ended September 30, 2007 and $2.1 million for the 2007 year-to-date period. This provision is principally the result of state income tax expense obligations incurred that are associated with the acquired Space Imaging operations. No income tax benefit was recorded for the three months and nine months ended September 30, 2006.
Backlog. Total negotiated backlog excluding NGA’s expected remaining contribution relating to GeoEye-1 construction costs was $234.3 million at September 30, 2007. This amount includes both funded backlog (unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding has not yet been appropriated). Negotiated backlog does not include unexercised options or task orders to be issued under indefinite-delivery/indefinite quantity (“IDIQ”) type contracts. Total funded backlog was $146.8 million at September 30, 2007. In addition, NGA’s share of GeoEye-1 construction costs of up to $237.4 million will be recognized as revenue on a straight-line basis over the expected imagery delivery term of the program, which we expect to be equivalent to the useful life of GeoEye-1, once GeoEye-1 is placed into service. The contracts are generally for terms of up to four years, and the customers have options to renew.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $38.7 million for the nine months ended September 30, 2007 and $64.7 million for the nine months ended September 30, 2006. The $26.0 million decrease is the result of a decrease in working capital balances of $52.5 million, offset by a favorable increase in net earnings (net of non-cash charges) of $26.4 million. The decrease in working capital balances resulted from a $41.5 million decrease in deferred revenue associated with milestone payments collected from NGA associated with the construction of the GeoEye-1 satellite, and a $13.0 million increase in accounts receivable caused mainly by an increase in receivables associated with purchases of imagery and value-added services.
Net cash provided by investing activities was $6.0 million for the nine months ended September 30, 2007. Net cash used in investing activities was $119.6 million for the nine months ended September 30, 2006. Capital expenditures decreased by $67.0 million in 2007 compared to the similar period in 2006 due to lower cash outflows for the construction of GeoEye-1 and its related ground system assets in accordance with the construction schedule. During 2007, the Company received $40.0 million of proceeds from insurance for the loss of the OrbView-3 satellite. In addition, during 2007, the Company completed its acquisition of MJ Harden, acquired a 4.9 percent ownership interest in SPADAC Inc., and invested in a strategic partnership with the East-Dawn Group in China, while in 2006 the Company completed the acquisition of Space Imaging pursuant to the terms of the Purchase Agreement and paid the sellers approximately $43.0 million. The acquisition of Space Imaging was funded with a combination of (i) the issuance of $50 million of indebtedness under the SI Credit Agreement; (ii) debt repayment made by Space Imaging prior to the closing; and (iii) cash of Space Imaging LLC acquired in the acquisition. Related cash outflows for the purchase were offset by $14.5 million of cash acquired from Space Imaging.
Net cash used in financing activities was $15.1 million for the first nine months of 2007. Net cash provided by financing activities was $26.6 million for the nine months ended September 30, 2006. As discussed above, the Company entered into a Credit Agreement whereby it borrowed $50 million of senior secured term loans on the closing date. In 2006, the Company incurred costs of $5.6 million associated with the Credit Agreement in 2006 which were amortized over the expected payout period, and repaid approximately $17.8 million of the outstanding principal. In the first quarter of 2007, the Company repaid the remaining $15.4 million balance on the notes.
The terms of our Senior Secured Floating Rate Notes required us to make a tender for the Notes for the amount of insurance proceeds received, plus any accrued interest. The tender offer to the existing noteholders was filed on October 2, 2007 and expired on November 1, 2007. None of the Noteholders accepted the terms of the tender offer to redeem their Notes for payment. Therefore, the Company will retain the entire $40 million of insurance proceeds and will use the funds for its general operations as allowed under the indenture.
On September 30, 2007, the Company had $229.3 million of cash and cash equivalents from its combined operations which includes the $40 million of OrbView-3 insurance proceeds that we have offered to tender to our note holders. At that date, our total long-term debt consisted of $246.6 million of Senior Secured Floating Rate Notes, net of unamortized discount of $3.4 million. The Company entered into an interest rate swap agreement in conjunction with the issuance of the Notes. With this swap agreement, our entire long-term debt portfolio effectively bears interest at fixed rates. Our debt to capital ratio (debt/debt plus equity), net of unamortized discounts, was approximately 53 percent at September 30, 2007 as compared to 62 percent at December 31, 2006. Our stockholders’ equity was $216.6 million at September 30, 2007.
The Company’s performance under the NextView contract requires significant capital expenditures to develop, manufacture and launch the GeoEye-1 satellite. Funding of the Company’s operations and obligations under the NextView contract requires approximately $265 million, most of which has been incurred, over a period of approximately two and one half years, most of which has passed. The construction of the GeoEye-1 satellite under the NextView program continues to be on budget.
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Cash and cash equivalents, cash flow from operations and other available financing resources are expected to be sufficient to meet anticipated operating, capital expenditure and debt service requirements, as well as acquisition and other discretionary investment needs, projected over the next twelve months.
CRITICAL ACCOUNTING POLICIES
The foregoing discussion of our financial condition and results of operations is based on the consolidated financial statements included in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and the related disclosures of contingencies. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
During the quarter ended September 30, 2007, there were no significant changes to the critical accounting policies we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for consistently measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning January 1, 2008, and the provisions of SFAS No. 157 will be applied prospectively as of that date. The Company is currently in the process of assessing the impact the adoption of this statement will have on its consolidated financial position and results of operations when it becomes effective in 2008.
On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” (SFAS 159). Under this statement, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of hedge accounting under SFAS No. 133 are not met. SFAS No.159 is effective for years beginning after November 15, 2007. Early adoption within 120 days of the beginning of the Company’s 2007 fiscal year is permissible, provided the Company has not yet issued interim financial statements for 2007 and has adopted SFAS No. 157. Management is currently evaluating the potential impact of adopting this statement.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary exposure to market risk relates to interest rates. The financial instruments which are subject to interest rate risk principally are limited to floating rate long-term debt. These notes are subject to interest rate fluctuation because the interest rate is reset semiannually for the term of the notes. A 100 basis point increase in market interest rates on the notes would result in an annual increase in the Company’s interest expense of approximately $2.5 million. The Company is using an interest rate swap to mitigate its interest rate exposure with respect to the $250 million of Floating Rate Notes.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its management, including its principal executive officer, principal financial officer and principal accounting officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to use its judgment in evaluating the cost to benefit relationship of possible controls and procedures.
The Company routinely reviews its system of internal controls over financial reporting and makes changes to its processes and systems to improve controls and increase efficiency, while ensuring that it maintains an effective internal control environment. Based on that evaluation, the Company’s principal executive officer, principal financial officer and principal accounting officer concluded that the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to management in a manner that allows timely decisions regarding required disclosure. The Company’s management has concluded that the financial statements included in this Form 10-Q fairly present in all material respects the Company’s financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
There have been no significant changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, we are party to various lawsuits, legal proceedings and claims arising out of our business. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
We do not believe that there have been any material changes to the risk factors previously disclosed in our 2006 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
| | |
Exhibit 31.1 | | Rule 13a-14(a) Certification of Matthew M. O’Connell |
| | |
Exhibit 31.2 | | Rule 13a-14(a) Certification of Henry E. Dubois |
| | |
Exhibit 31.3 | | Rule 13a-14(a) Certification of Tony A. Anzilotti |
| | |
Exhibit 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350 of Matthew M. O’Connell |
| | |
Exhibit 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350 of Henry E. Dubois |
| | |
Exhibit 32.3 | | Certification Pursuant to 18 U.S.C. Section 1350 of Tony A. Anzilotti |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| | GeoEye, Inc. |
| | |
| | (Registrant) |
| | |
Date: November 5, 2007 | | by: /s/ MATTHEW M. O’CONNELL |
| | |
| | Matthew M. O’Connell |
| | President and Chief Executive Officer |
| | |
| | by: /s/ HENRY E. DUBOIS |
| | |
| | Henry E. Dubois |
| | Executive Vice President and |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| | by: /s/ TONY A. ANZILOTTI |
| | |
| | Tony A. Anzilotti |
| | Vice President Finance and |
| | Corporate Controller |
| | (Principal Accounting Officer) |
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