MAXAR TECHNOLOGIES
This management's discussion and analysis ("MD&A") contains "forward-looking
statements" as defined in Section 27A of the United States Securities Act of
1933, as amended, and Section 21E of the United States Securities Exchange Act
of 1934, as amended ("Exchange Act"). Forward-looking statements usually relate
to future events and anticipated revenues, earnings, cash flows or other aspects
of our operations or operating results. Forward-looking statements are often
identified by the words "believe," "expect," "anticipate," "plan," "intend,"
"foresee," "should," "would," "could," "may," "estimate," "outlook" and similar
expressions, including the negative thereof. The absence of these words,
however, does not mean that the statements are not forward-looking. These
forward-looking statements are based on our current expectations, beliefs and
assumptions concerning future developments and business conditions and their
potential effect on us. While management believes that these forward-looking
statements are reasonable as and when made, there can be no assurance that
future developments affecting us will be those that we anticipate.
All of our forward-looking statements involve risks and uncertainties (some of
which are significant or beyond our control) and assumptions that could cause
actual results to differ materially from our historical experience and our
present expectations or projections. Known material factors that could cause
actual results to differ materially from those contemplated in the
forward-looking statements include those set forth in Part II, Item 1A, "Risk
Factors" and elsewhere in this MD&A. We caution you not to place undue reliance
on any forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly update or revise any of our forward-looking
statements after the date they are made, whether as a result of new information,
future events or otherwise, except to the extent required by law.
*****
Unless stated otherwise or the context otherwise requires, references to the
terms "Company," "
OVERVIEW
We are a partner and innovator in Earth Intelligence and Space Infrastructure. We help government and commercial customers monitor, understand and navigate our changing planet; deliver global broadband communications; and explore and advance the use of space. Our approach combines decades of deep mission understanding and a proven commercial and defense foundation to deploy solutions and deliver insights with speed, scale and cost effectiveness. Our businesses are organized and managed in two reportable segments: Earth Intelligence and Space Infrastructure, as described below under "Segment Results". Unless otherwise indicated, our significant accounting policies and estimates, contractual obligations, commitments, contingencies and business risks and uncertainties as described in our MD&A and consolidated financial statements for the year endedDecember 31, 2020 , are substantially unchanged. RECENT DEVELOPMENTS Common stock offering OnMarch 22, 2021 , we completed an underwritten public offering of 10 million shares of our common stock at a public offering price of$40 per share ("Offering"). We received proceeds of$380 million , net of$20 million of transaction fees. The underwriters did not exercise the option to purchase an additional 1.5 million shares of our common stock prior to the expiration of the option. OnMarch 26, 2021 , we redeemed$350 million aggregate principal amount of our 9.75% Senior Secured Notes due 2023 ("2023 Notes") using a portion of the net proceeds from the Offering. Additionally, we paid premiums of approximately$34 million related to the early redemption. 29 Table of Contents
COVID-19 operational posture and current impact
We continue to monitor and adapt our pandemic crisis response plan, while maintaining a focus on the protection of the health and safety of our employees, families, customers and communities. All our locations continue to operate through a combination of work from home and personnel working on-site, though in some cases capacity utilization and productivity are below normalized levels. We are observing stress in our supplier base inside and outside theU.S. and will continue to monitor and assess the actual and potential COVID-19 impacts on employees, customers, suppliers and the productivity of the work being done, all of which to some extent will affect revenues, estimated costs to complete projects, earnings and cash flow. Our results of operations for the three and nine months endedSeptember 30, 2021 , were not materially impacted by COVID-19. We are in the process of complying with theSeptember 9, 2021 Presidential Executive Order on "Ensuring Adequate COVID Safety Protocols for Federal Contractors" which requires federal contractors and subcontractors to comply with COVID-19 safety protocols, including a requirement thatU.S. based employees be fully vaccinated against COVID-19 byDecember 8, 2021 . Exceptions to the federal vaccine requirement will be limited to team members who are legally entitled to a medical or religious exemption that can be reasonably accommodated. AllU.S. Maxar employees who do not qualify for an exemption and accommodation are required to comply with the requirements, including our remote employees. While we expect employee submission of proof of vaccination to continue throughDecember 8, 2021 , to date, we have received evidence that approximately 92% of ourU.S. based employees have been vaccinated. It is uncertain to what extent compliance with the vaccine mandate may result in employee turnover for us or our suppliers. If turnover is significant, our operations and ability to execute on our contracts could be adversely affected. We will continue to monitor and comply with any potential changes to COVID-19 government requirements.
WorldView Legion satellites update
We encountered certain issues with component suppliers and subsystems (including software, integration and testing) related to our WorldView Legion satellites, which led to delays from our expected timetable. We have resolved some of the supplier issues and continue to make progress on the other issues identified. We currently expect the first launch timeframe of our WorldView Legion satellites to be between March and June of 2022. We continue to expect the remainder of the WorldView Legion satellites to launch three to six months after the first.
SEGMENT RESULTS
Our Chief Operating Decision Maker ("CODM") measures performance of our reportable segments based on revenue and Adjusted EBITDA. Our operating and reportable segments are: Earth Intelligence and Space Infrastructure.
Earth Intelligence
In the Earth Intelligence segment, we are a global leader in high resolution space-based Earth observation imagery products and analytics. We launched the world's first high resolution commercial imaging satellite in 1999 and currently operate a four-satellite imaging constellation, providing us with 20 years and 125 petabytes of imagery over our history (referred to as our "ImageLibrary") of the highest-resolution, commercially available imagery. Our imagery solutions provide customers with timely, accurate and mission-critical information about our changing planet and support a wide variety of government and commercial applications, including mission planning, mapping and analysis, environmental monitoring, disaster management, crop management, oil and gas exploration and infrastructure management. Our principal customers in the Earth Intelligence segment areU.S. and other international government agencies (primarily defense and intelligence agencies), as well as a wide variety of commercial customers in multiple markets. We are a market leader in the commercial satellite Earth observation industry. We also provide geospatial services that combine imagery, analytic expertise and innovative technology to deliver intelligence solutions to customers. Our cleared developers, analysts and data scientists provide analytic solutions that accurately document change and enable geospatial modeling and analysis that help predict where events will occur. Our primary customer of geospatial services is theU.S. government, but we also support intelligence requirements for otherU.S. allied governments, global development organizations and commercial customers. 30 Table of Contents Space Infrastructure In the Space Infrastructure segment, we design, build, integrate and test solutions for space-based communications satellites, Earth observation, on-orbit servicing, robotic assembly and space exploration. We address a broad spectrum of needs for our customers, including mission systems engineering, product design, spacecraft manufacturing, assembly integration and testing. We provide advanced, reliable and affordable spacecraft that enable our commercial customers to deliver valuable global services. We are successfully partnering with theU.S. government in new space opportunities leveraging our high-performance spacecraft subsystems. Our principal customers in the Space Infrastructure segment are commercial satellite operators and government agencies worldwide. RESULTS OF OPERATIONS Three Months Ended Nine Months Ended September 30, $ % September 30, $ % 2021 2020 Change Change 2021 2020 Change Change ($ millions) Revenues: Product$ 166 $ 161 $ 5 3 %$ 498 $ 425 $ 73 17 % Service 271 275 (4) (1) 804 831 (27) (3) Total revenues 437 436 1 0$ 1,302 $ 1,256 $ 46 4 % Costs and expenses: Product costs, excluding depreciation and amortization 144 145 (1) (1) 448 434 14 3 Service costs, excluding depreciation and amortization 93 95 (2) (2) 286 275 11 4 Selling, general and administrative 89 90 (1) (1) 261 237 24 10 Depreciation and amortization 74 95 (21) (22) 221 274 (53) (19) Impairment loss - - - * - 14 (14) (100) Reduction of gain on sale leaseback - 4 (4) (100) - 4 (4) (100) Operating income$ 37 $ 7 $ 30 * %$ 86 $ 18 $ 68 * % Interest expense, net 25 36 (11) (31) 127 133 (6) (5) Other income, net (2) (91) 89 (98) (6) (98) 92 (94) Income (loss) before taxes$ 14 $ 62 $ (48) (77) %$ (35) $ (17) $ (18) 106 % Income tax benefit - (22) 22 (100) (10) (22) 12 (55) Equity in income from joint ventures, net of tax - - - * - (1) 1 (100) Income (loss) from continuing operations 14 84 (70) (83)$ (25) $ 6 $ (31) * Discontinued operations: Income from operations of discontinued operations, net of tax - - - * - 32 (32) (100) Gain on disposal of discontinued operations, net of tax - 1 (1) (100) - 305 (305) (100) Income from discontinued operations, net of tax - 1 (1) (100) - 337 (337) (100) Net income (loss)$ 14 $ 85 $ (71) (84) %$ (25) $ 343 $ (368) (107) % * Not meaningful. 31 Table of Contents
Product and service revenues
Nine Months Ended
Three Months Ended September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Product revenues $ 166 $ 161 $ 5 3 % $ 498 $ 425 $ 73 17 %
Service revenues 271 275 (4) (1) 804 831 (27) (3)
Total revenues $ 437 $ 436 $ 1 0 % $ 1,302 $ 1,256 $ 46 4 %
Total revenues remained relatively unchanged as they increased to $437 million
from $436 million , or by $1 million , for the three months ended September 30,
2021 , compared to the same period of 2020. Revenue in our Earth Intelligence
segment was inclusive of a $20 million decrease in the recognition of deferred
revenue related to the EnhancedView Contract.
Total revenues increased to
Further discussion of the drivers behind changes in revenues is included within the "Results by Segment" section below.
See Note 12, "Revenue" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, "Financial Information" for product and service revenue by segment.
Product and service costs
Three Months Ended September 30, $ % Nine Months Ended September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Product costs,
excluding
depreciation and
amortization $ 144 $ 145 $ (1) (1) % $ 448 $ 434 $ 14 3 %
Service costs,
excluding
depreciation and
amortization 93 95 (2) (2) 286 275 11 4
Total costs $ 237 $ 240 $ (3) (1) % $ 734 $ 709 $ 25 4 %
Total costs of product and services decreased to $237 million from $240 million ,
or by $3 million , for the three months ended September 30, 2021 , compared to the
same period of 2020. The decrease in costs was primarily driven by a decrease in
service costs within our Earth Intelligence segment and a decrease in product
costs within our Space Infrastructure segment.
Total costs of product and services increased to $734 million from $709 million ,
or by $25 million , for the nine months ended September 30, 2021 , compared to the
same period of 2020. The increase in costs was driven by an increase in product
costs within our Space Infrastructure segment and an increase in service costs
within our Earth Intelligence segment.
Selling, general and administrative
Nine Months Ended September
Three Months Ended September 30, $ % 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Selling, general and
administrative $ 89 $ 90 $ (1) (1) % $ 261 $ 237 $ 24 10 %
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Selling, general and administrative costs remained relatively unchanged as they
decreased to
Selling, general and administrative costs increased to$261 million from$237 million , or by$24 million , for the nine months endedSeptember 30, 2021 , compared to the same period of 2020. The increase was primarily due to an increase in labor related expenses of$13 million , an increase in stock-based compensation expense of$7 million and an increase in other expenses of$4 million . The increase in labor related expenses was primarily driven by an increase in headcount and employee compensation. Stock-based compensation expense increased primarily due to a higher stock price which increased the fair market value of equity awards granted in addition to the incremental expense related to liability classified awards for the nine months endedSeptember 30, 2021 . Depreciation and amortization Three Months Ended September 30, $ % Nine Months Ended September 30, $ % 2021 2020 Change Change 2021 2020 Change Change ($ millions)
Property, plant and equipment $ 23 $
24 $ (1) (4) % $ 67 $ 71 $ (4) (6) %
Intangible assets 51 71 (20) (28) 154 203 (49) (24)Depreciation and amortization expense $ 74 $
95 $ (21) (22) % $ 221 $ 274 $ (53) (19) %
Depreciation and amortization expense decreased to $74 million from $95 million ,
or by $21 million , for the three months ended September 30, 2021 , compared to
the same period of 2020. The decrease was primarily driven by a decrease in
amortization expense for backlog acquired as part of the acquisition of
DigitalGlobe, Inc. on October 5, 2017 . We recognized a full quarter of
amortization expense for the three months ended September 30, 2020 , compared to
none for the three months ended September 30, 2021 , as all of the U.S.
government acquired backlog was fully amortized as of October 2020 .
Depreciation and amortization expense decreased to $221 million from $274
million , or by $53 million , for the nine months ended September 30, 2021 ,
compared to the same period of 2020. The decrease was primarily driven by a
decrease in amortization expense for backlog acquired as part of the acquisition
of DigitalGlobe, Inc. on October 5, 2017 . We recognized three full quarters of
amortization expense for the nine months ended September 30, 2020 , compared to
none for the nine months ended September 30, 2021 , as all of the U.S. government
acquired backlog was fully amortized as of October 2020 . The decrease was also
driven by a decrease in depreciation expense related to the extension of the
useful lives of two satellites in the fourth quarter of 2020. These decreases
were partially offset by the inclusion of three quarters of depreciation and
amortization expense from property, plant and equipment and intangible assets
acquired as part of Vricon, Inc. ("Vricon Acquisition") on July 1, 2020 ,
compared to one quarter of expense in the same period of 2020.
Impairment loss
Nine Months Ended September
Three Months Ended September 30, $ % 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Impairment loss $ - $ - $ - * % $ - $ 14 $ (14) (100) %
* Not meaningful.
There were no impairment losses recorded for the three or nine months ended
loss was primarily due to a decrease in credit ratings associated with our
largest orbital customer. There were no impairment losses recorded for the three
months ended
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Reduction of gain on sale leaseback
Three Months Ended September 30, $ % Nine Months Ended September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Reduction of gain on
sale leaseback $ - $ 4 $ (4) (100) % $ - $ 4 $ (4) (100) %
There were no reductions of the gain on sale leaseback during the three or nine
months ended
During the three and nine months endedSeptember 30, 2020 , we recognized a$4 million reduction in the gain on our sale and subsequent leaseback of our owned properties inPalo Alto, California due to the extension of our lease term on one of the properties. The sale and subsequent leaseback occurred onDecember 10, 2019 and resulted in a gain on the sale of properties of$136 million . Interest expense, net Three Months Ended September 30, $ % Nine Months Ended September 30, $ % 2021 2020 Change Change 2021 2020
Change Change ($ millions) Interest expense: Interest on long-term debt $ 33 $ 44$ (11) (25) %$ 110 $ 146$ (36) (25) % Loss on debt extinguishment - - - * 41 7 34 *
Interest on orbital securitization liability 1 1 - - 3 4 (1) (25) Imputed interest and other 1 2 (1) (50) 2 2 - - Interest expense on advance payments from customers1 - - - * - 3 (3) (100) Capitalized interest (10) (11) 1 (9) (29) (29) - - Interest expense, net $ 25 $ 36$ (11) (31) %$ 127 $ 133$ (6) (5) % * Not meaningful.
Under the EnhancedView Follow-On agreement ("EnhancedView Contract"), we
received advanced payments from the
phase of the WorldView-1 satellite, which was more than one year before 1 capacity was made available to them. The effect of imputing interest on these
advanced payments was to increase contract liabilities with an offsetting
charge to interest expense. As capacity was provided to the customer, revenue
was recognized and the contract liabilities balance decreased. The remaining
revenue was fully recognized as ofAugust 31, 2020 .
Interest expense, net decreased to$25 million from$36 million , or by$11 million , for the three months endedSeptember 30, 2021 , compared to the same period in 2020. The decrease was primarily driven by an$11 million decrease in interest on long-term debt primarily due to a lower principal balance on the 2023 Notes due to a partial redemption of the 2023 Notes in the first quarter of 2021.
Interest expense, net decreased to$127 million from$133 million , or by$6 million , for the nine months endedSeptember 30, 2021 , compared to the same period in 2020. The decrease was primarily due to a$36 million decrease in interest on long-term debt primarily driven by lower principal balances on the 2023 Notes and Term Loan B due to a repurchase of a portion of the 2023 Notes in the second quarter of 2020, a partial redemption of the 2023 Notes in the first quarter of 2021 and a repayment made on Term Loan B in the second quarter of 2020. There was also a decrease in interest expense on advance payments from customers of$3 million . These decreases were partially offset by a$41 million loss on debt extinguishment from the partial redemption of our 2023 Notes using proceeds from the Offering for the nine months endedSeptember 30, 2021 , compared to a$7 million loss on debt extinguishment for the same period in
2020.
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Other income, net
Nine Months Ended
Three Months Ended September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Other income, net $ (2) $ (91) $ 89 (98) % $ (6) $ (98) $ 92 (94) %
Other income, net decreased to $2 million from $91 million , or by $89 million ,
for the three months ended September 30, 2021 , compared to the same period in
2020. The decrease was primarily driven by a gain of $85 million recorded as a
result of the remeasurement of our previously held equity interest in Vricon due
to the Vricon Acquisition for the three months ended September 30, 2020 .
Other income, net decreased to $6 million from $98 million , or by $92 million ,
for the nine months ended September 30, 2021 , compared to the same period in
2020. The decrease was primarily driven by a gain of $85 million recorded as a
result of the remeasurement of our previously held equity interest in Vricon due
to the Vricon Acquisition for the nine months ended September 30, 2020 . In
addition, this decrease was driven by a $2 million foreign exchange loss for the
nine months ended September 30, 2021 compared to a $4 million foreign exchange
gain for the nine months ended September 30, 2020 .
Income tax benefit
Three Months Ended Nine Months Ended
September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Income tax benefit $ - $ (22) $ 22 (100) % $ (10) $ (22) $ 12 (55) %
Income tax benefit changed to $0 million from $22 million , or by $22 million ,
for the three months ended September 30, 2021 , compared to the same period in
2020, primarily due to the release of a $17 million valuation allowance related
to the deferred tax liability recorded in connection with the Vricon Acquisition
on July 1, 2020 and the reversal of the federal Base Erosion and Anti-Abuse Tax
("BEAT") estimated at December 31, 2019 .
Income tax benefit changed to $10 million from $22 million , or by $12 million ,
for the nine months ended September 30, 2021 , compared to the same period in
2020, primarily due to the release of a $17 million valuation allowance related
to the deferred tax liability recorded in connection with the Vricon Acquisition
on July 1, 2020 , the reversal of the BEAT estimated at December 31, 2019 and tax
on foreign earnings. The change was partially offset by a change in the
estimated 2020 BEAT driven by a change in tax strategy enabled by a reduction in
forecasted interest expense.
During all comparative quarters, we have a valuation allowance recorded for the
U.S. deferred tax assets that are more-than-likely to not be recognized. In
computing income tax benefit for the nine months ended September 30, 2021 and
September 30, 2020 , we applied the estimated annual effective tax rate to the
pre-tax income (loss) and adjusted the valuation allowance accordingly.
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Discontinued operations
Nine Months Ended
Three Months Ended September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change($ millions) Discontinued operations: Income from operations of discontinued operations, net of tax $ - $ - $ - * % $ -$ 32 $ (32) (100) % Gain on disposal of discontinued operations, net of tax - 1 - - - 305 (305) (100) Income from discontinued operations, net of tax $ - $ 1 $ - - % $ -$ 337 $ (337) (100) % * Not meaningful.
There was no income from discontinued operations, net of tax for the three or
nine months ended
There was$1 million in income from discontinued operations, net of tax for the three months endedSeptember 30, 2020 , driven by a reduction of the tax on the gain on disposal of the MDA Business. There was$337 million in income from discontinued operations, net of tax for the nine months endedSeptember 30, 2020 , primarily due to the$305 million after-tax gain on disposal of the MDA Business. Income from discontinued operations, net of tax was also impacted by a$39 million recovery of a previously recorded liability in relation to the Company's dispute with a Ukrainian customer. The recovery was partially offset by decreases in program margins driven by our estimated total costs-at-completion ("EAC") growth and lower volumes and an impairment loss of$12 million related to the investment by the MDA Business in a privately held company. 36 Table of Contents RESULTS BY SEGMENT We analyze financial performance by segments, which group related activities within our business. We report our financial performance based on two reportable segments: Earth Intelligence and Space Infrastructure. Intrasegment transactions have been eliminated from the segmented financial information discussed below. Three Months Ended September 30, $ % Nine Months Ended September 30, $ % 2021 2020 Change Change 2021 2020 Change Change ($ millions) Revenues: Earth Intelligence$ 271 $ 274 $ (3) (1) % $ 804 $ 823$ (19) (2) % Space Infrastructure 180 181 (1) (1) 541 497 44 9 Intersegment eliminations (14) (19) 5 (26) (43) (64) 21 (33) Total revenues$ 437 $ 436 $ 1 0 % $ 1,302 $ 1,256$ 46 4 % Adjusted EBITDA: Earth Intelligence$ 124 $ 128 $ (4) (3) % $ 362 $ 407$ (45) (11) % Space Infrastructure 14 12 2 17 29 (16) 45 * Intersegment eliminations (5) (7) 2 (29) (17) (21) 4 (19)
Corporate and other expenses (20) (21) 1
(5) (62) (43) (19) 44 Total Adjusted EBITDA$ 113 $ 112 $ 1 1 % $ 312 $ 327$ (15) (5) % * Not meaningful. See also Note 13, "Segment Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, "Financial Information" in this Quarterly Report on Form 10-Q for additional information about how we use Adjusted EBITDA to measure the performance of each of our segments. In addition, Total Adjusted EBITDA is a non-GAAP measure. See "Non-GAAP Financial Measures" below for further discussion of Adjusted EBITDA disclosures.
Earth Intelligence
The following table provides selected financial information for the Earth
Intelligence segment.
Three Months Ended Nine Months Ended
September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Total revenues $ 271 $ 274 $ (3) (1) % $ 804 $ 823 $ (19) (2) %
Adjusted EBITDA $ 124 $ 128 $ (4) (3) % $ 362 $ 407 $ (45) (11) %
Adjusted EBITDA margin
(as a % of total revenues) 45.8 % 46.7 %
45.0 % 49.5 %
Revenues from the Earth Intelligence segment decreased to$271 million from$274 million , or by$3 million , for the three months endedSeptember 30, 2021 , compared to the same period in 2020. The decrease was primarily driven by a$20 million decrease in the recognition of deferred revenue related to the EnhancedView Contract and a$6 million decrease in revenues fromU.S. government contracts. We recognized$20 million of deferred revenue from the EnhancedView Contract for the three months endedSeptember 30, 2020 , compared to none for the three months endedSeptember 30, 2021 , as it was fully recognized as ofAugust 31, 2020 . The decrease was partially offset by a$20 million increase in commercial programs primarily driven by the expansion of contracts with existing customers and a$4 million increase in revenue from international defense and intelligence customers. 37 Table of Contents
Revenues from the Earth Intelligence segment decreased to$804 million from$823 million , or by$19 million , for the nine months endedSeptember 30, 2021 , compared to the same period in 2020. The decrease was primarily driven by a$80 million decrease in the recognition of deferred revenue related to the EnhancedView Contract. We recognized$80 million of deferred revenue from the EnhancedView Contract for the nine months endedSeptember 30, 2020 , compared to none for the nine months endedSeptember 30, 2021 , as it was fully recognized as ofAugust 31, 2020 . The decrease was partially offset by a$32 million increase in revenue from international defense and intelligence customers and a$30 million increase in new and expanded commercial programs. Revenue from theU.S. government remained relatively unchanged for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Adjusted EBITDA decreased to$124 million from$128 million , or by$4 million , for the three months endedSeptember 30, 2021 , as compared to the same period of 2020. The decrease was primarily driven by a decrease in the recognition of deferred revenue related to the EnhancedView Contract as mentioned above. The decrease was also driven by an increase in service costs for the three months endedSeptember 30, 2021 , as compared to the same period of 2020. These decreases were partially offset by the expansion of contracts with existing commercial and international defense and intelligence customers contributing to positive program margin growth. Adjusted EBITDA decreased to$362 million from$407 million , or by$45 million , for the nine months endedSeptember 30, 2021 , as compared to the same period of 2020. The decrease was primarily driven by a decrease in the recognition of deferred revenue related to the EnhancedView Contract as mentioned above. These decreases were partially offset by the expansion of contracts with existing commercial and international defense and intelligence customers contributing to positive program margin growth.
Space Infrastructure
The following table provides selected financial information for the Space Infrastructure segment.
Nine Months Ended
Three Months Ended September 30, $ % September 30, $ %
2021 2020 Change Change 2021 2020 Change Change
($ millions)
Total revenues $ 180 $ 181 $ (1) (1) % $ 541 $ 497 $ 44 9 %
Adjusted EBITDA $ 14 $ 12 $ 2 17 $ 29 $ (16) $ 45 * %
Adjusted EBITDA margin
(as a % of total revenues) 7.8 % 6.6 % 5.4 % (3.2) %
* Not meaningful.
Changes in revenues from year to year are influenced by the size, timing and
number of satellite contracts awarded in the current and preceding years and the
length of the construction period for satellite contracts awarded. Revenues on
satellite contracts are recognized using the cost-to-cost method of accounting
to determine the percentage of completion over the construction period, which
typically ranges between 20 to 36 months, and up to 48 months in certain
situations. Adjusted EBITDA margins can vary from quarter to quarter due to the
mix of our revenues and changes in our EACs as our risks are retired and as our
EACs are increased or decreased based on contract performance. Adjusted EBITDA
margins are also impacted by estimated contractual consideration.
Revenues from the Space Infrastructure segment decreased to $180 million from
$181 million , or by $1 million , for the three months ended September 30, 2021 ,
compared to the same period in 2020. Revenues decreased primarily as a result of
a $16 million decrease in revenues from U.S. government contracts. The decrease
is partially offset by an increase in revenues from commercial programs of $14
million due to higher volumes related to new programs and lower EAC growth for
the three months ended September 30, 2021 .
Revenues from the Space Infrastructure segment increased to $541 million from
$497 million , or by $44 million , for the nine months ended September 30, 2021 ,
compared to the same period in 2020. Revenues increased primarily as a result of
an increase in revenues from commercial programs of $92 million due to higher
volumes related to new programs and
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lower EAC growth primarily due to no COVID-19 program impacts for the nine months endedSeptember 30, 2021 . Revenues were negatively impacted by a$19 million decrease year over year related to our contract with Sirius XM Holdings Inc. ("Sirius XM"). The nine months endedSeptember 30, 2021 , included a$30 million cumulative adjustment to revenue primarily related to the loss of final milestone and expected orbital payments fromSirius XM due to the non-performance of the SXM-7 satellite and other adjustments that were recorded in 2021. After exhausting efforts to fully recover the satellite and further discussions withSirius XM , inApril 2021 , we made the determination to record the cumulative adjustment to revenue. In addition, there were$3 million of costs incurred in the first quarter related to attempts to repair and fully recover the SXM-7 satellite. The aggregate impact for the nine months endedSeptember 30, 2021 , was$33 million which compares favorably to the previously disclosed potential exposure of$38 million . The$33 million decrease was partially offset by the non-reoccurrence of a$14 million adjustment to revenue due to the identification of a design anomaly on the commercial satellite program, which was recorded for the nine months endedSeptember 30, 2020 . In addition, the total increase in revenues from the Space Infrastructure segment was partially offset by a$30 million decrease in revenues fromU.S. government contracts. Adjusted EBITDA increased to$14 million from$12 million , or by$2 million , for the three months endedSeptember 30, 2021 , compared to the same period of 2020. The increase in the Space Infrastructure segment was primarily related to a$10 million increase driven by increased volumes on commercial programs which resulted in increased margins and fewer negative EAC impacts during the period as compared to the three months endedSeptember 30, 2020 . The increase in commercial program margins has been driven by a change in program mix related to the completion of less profitable programs offset by more profitable programs. The remaining$8 million change is related to an increase in indirect costs and selling, general and administrative costs. Adjusted EBITDA increased to$29 million from a loss of$16 million , or by$45 million , for the nine months endedSeptember 30, 2021 , compared to the same period of 2020. The increase in the Space Infrastructure segment was primarily related to a$83 million increase driven by increased volumes on commercial programs which resulted in increased margins and fewer negative EAC impacts during the period as compared to the nine months endedSeptember 30, 2020 , which included negative EAC impacts due to COVID-19. The increase in commercial program margins has been driven by a change in program mix related to the completion of less profitable programs offset by new, more profitable programs. These increases were partially offset by the$19 million reduction in revenue related to the above-mentioned SXM-7 satellite impacts and a$18 million increase in indirect costs and selling, general and administrative costs.
Corporate and other expenses
Corporate and other expenses include items such as corporate office costs, regulatory costs, executive and director compensation, foreign exchange gains and losses, retention costs and fees for legal and consulting services.
Corporate and other expenses remained relatively unchanged as they decreased to
Corporate and other expenses for the nine months endedSeptember 30, 2021 increased to$62 million from$43 million , or by$19 million , compared to the same period in 2020. The increase was primarily driven by an$8 million increase in selling, general and administrative costs primarily due to an increase in labor related expenses driven by an increase in headcount and employee compensation. There was also an increase in stock-based compensation expense of$4 million primarily driven by a higher stock price. The increase was also driven by a$2 million foreign exchange loss for the nine months endedSeptember 30, 2021 , compared to a$4 million foreign exchange gain for the nine months endedSeptember 30, 2020 . Intersegment eliminations
Intersegment eliminations are related to projects between our segments,
including the construction of our WorldView Legion satellites. Intersegment
eliminations decreased to
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Intersegment eliminations have decreased to $17 million from $21 million , or by
$4 million , for the nine months ended September 30, 2021 , compared to the same
period in 2020, primarily related to a decrease in intersegment satellite
construction activity.
BACKLOG
Our backlog by segment from continuing operations is as follows:
September 30, December 31,
2021 2020
($ millions)
Earth Intelligence $ 1,016 $ 880
Space Infrastructure 1,038 1,024
Total backlog 2,054 1,904
Unfunded contract options 588 856
Total $ 2,642 $ 2,760
Order backlog, representing the estimated dollar value of firm contracts for
which work has not yet been performed (also known as the remaining performance
obligations on a contract), was $2.1 billion as of September 30, 2021 compared
to $1.9 billion as of December 31, 2020 . Order backlog generally does not
include unexercised contract options and potential orders under indefinite
delivery/indefinite quantity contracts.
Backlog in the Space Infrastructure segment is primarily comprised of multi-year
awards, such as satellite builds. Fluctuations in backlog are driven primarily
by the timing of large program wins. Backlog in the Earth Intelligence segment
consists of both multi-year and annual contracts, which renew at various times
throughout the year. As a result, the timing of when contracts are awarded and
when option years are exercised may cause backlog to fluctuate significantly
from period to period.
Although backlog reflects business that is considered to be firm, terminations,
amendments or cancellations may occur, which could result in a reduction inour total backlog. Our unfunded contract options totaled$0.6 billion and$0.9 billion as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Unfunded contract options represent estimated amounts of revenue to be earned in the future from negotiated contracts with unexercised contract options and indefinite delivery/indefinite quantity contracts. Unfunded contract options as ofSeptember 30, 2021 were primarily comprised of the option year in the EnhancedView Contract (September 1, 2022 throughAugust 31, 2023 ). This contract may be replaced by other contracting vehicles prior to the exercise of existing contract options. Unfunded contracts options primarily decreased as a result of the execution of option periods associated with the EnhancedView Contract and the Global Enhanced GEOINT Delivery program, which increased total backlog.
LIQUIDITY & CAPITAL RESOURCES
Our sources of liquidity include cash provided by operations, access to existing
credit facilities, collection or securitization of orbital receivables and, when
available and efficient, access to the capital markets. We generally maintain
limited cash on hand and use available cash to pay down borrowings on our
Syndicated Credit Facility (as defined below). Our primary short-term cash
requirements are to fund working capital, including requirements on long-term
construction contracts (including our geostationary satellite contracts), fixed
overhead costs, and to fund increased capital expenditures, including the
construction of our WorldView Legion satellites. Working capital requirements
can vary significantly from period to period, particularly as a result of the
timing of receipts and disbursements related to long-term construction
contracts.
Our medium-term to long-term cash requirements are to service and repay debt and
make investments, including in facilities, equipment, technologies, and research
and development for growth initiatives. These capital investments include
investments to replace the capability or capacity of satellites which have or
will go out of service in the future.
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Over the near-term to medium-term, it is also possible that our customers may fully or partially fund the construction of additional Legion satellites. Cash is also used to pay dividends and finance other long-term strategic business initiatives. Our first maturity of long-term debt is in the fourth quarter of 2023 and relates to the 2023 Notes and Revolving Credit Facility. We had a significant partial debt redemption of the 2023 Notes in the first quarter of 2021 using proceeds from our Offering. OnMarch 26, 2021 , we redeemed$350 million aggregate principal amount of our 2023 Notes using a portion of the net proceeds from the Offering. We have significant purchase obligations in the normal course of business for goods and services, under agreements with defined terms as to quantity, price and timing of delivery. Purchase obligations represent open purchase orders and other commitments for the purchase or construction of property, plant and equipment or intangible assets, operational commitments related to remote ground terminals, or with subcontractors on long-term construction contracts that we have with customers in the normal course of business. We also have short and long-term requirements to fund our pension plans within the Space Infrastructure segment. Funding requirements under applicable laws and regulations are a major consideration in making contributions to our pension plans. Failure to satisfy the minimum funding thresholds with respect to appropriate laws and regulations could result in restrictions on our ability to amend the plans or make benefit payments. With respect to our qualified pension plan, we intend to contribute annually not less than the required minimum funding thresholds. InDecember 2020 , we prefunded$16 million related to our qualified pension plan. Due to theDecember 2020 prefunding, there are no required contributions for our qualified pension plan for the year endingDecember 31, 2021 . In addition, the American Rescue Plan Act of 2021 includes provisions for pension funding relief in future periods. We intend to take advantage of these provisions and anticipate lower required contributions for our qualified pension plan in the upcoming fiscal years. Our ability to fund our cash needs will depend, in part, on our ability to generate cash in the future, which depends on our future financial results. Our future results are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our control. Our future access to, and the availability of credit on acceptable terms and conditions is impacted by many factors, including capital market liquidity and overall economic conditions. We believe that our cash from operating activities generated from continuing operations during the year, together with available borrowings under our Revolving Credit Facility, will be adequate for the next twelve months to meet our anticipated uses of cash flow, including working capital, capital expenditure, debt service costs, dividend and other commitments. While we intend to reduce debt over time using cash provided by operations, we may also seek to meet long-term debt obligations, if necessary, by obtaining capital from a variety of additional sources or by refinancing existing obligations. These sources include public or private capital markets, bank financings, proceeds from dispositions or other third-party sources. Summary of cash flows Nine Months Ended September 30, 2021 2020 ($ millions) Cash provided by operating activities - continuing operations $ 186 $ 181 Cash used in operating activities - discontinued operations (1) (49) Cash provided by operating activities 185 132 Cash used in investing activities - continuing operations (156) (322) Cash provided by investing activities - discontinued operations - 723 Cash (used in) provided by investing activities (156) 401 Cash used in financing activities - continuing operations (24) (550) Cash used in financing activities - discontinued operations - (24) Cash used in financing activities (24) (574) Effect of foreign exchange on cash, cash equivalents and restricted cash - (5) Cash, cash equivalents, and restricted cash, beginning of year 31 110 Cash, cash equivalents, and restricted cash, end of period $
36 $ 64
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Operating activities
Cash flows from operating activities can vary significantly from period to period as a result of our working capital requirements, given our portfolio of large construction programs and the timing of milestone receipts and payments with customers and suppliers in the ordinary course of business. Investment in working capital is also necessary to build our business and manage lead times in construction activities. We expect working capital account balances to continue to vary from period to period. We fund our working capital requirements with the Revolving Credit Facility (as defined below) as needed. Cash provided by operating activities from continuing operations increased to$186 million from$181 million , or by$5 million , for the nine months endedSeptember 30, 2021 compared to the corresponding period in 2020. This change was primarily driven by a decrease of$39 million in interest cash payments and an increase in tax refunds received of$11 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, partially offset by unfavorable changes in working capital for the period endedSeptember 30, 2021 , compared to the same period in 2020. The unfavorable changes in working capital were primarily driven by an increase in trade receivables from the recognition of revenue from a commercial customer and the timing of payments made on outstanding payables for the nine months endedSeptember 30, 2021 , compared
to the same period in 2020. Investing activities Cash used in investing activities from continuing operations decreased to$156 million from$322 million , or by$166 million , for the nine months endedSeptember 30, 2021 compared to the corresponding period in 2020. The primary investing activities included expenditures on property, plant and equipment of$84 million and$158 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and investments in intangible assets primarily related to internally developed software of$72 million and$66 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Property, plant and equipment expenditures for the nine months endedSeptember 30, 2021 and 2020 primarily related to the construction of our WorldView Legion satellites. During the nine months endedSeptember 30, 2020 , we used cash of$118 million , net of cash received, to acquire the remaining interest in Vricon. Cash used in investing activities for the nine months endedSeptember 30, 2020 was partially offset by a return of capital from discontinued operations of$20 million .
Financing activities
Cash used in financing activities from continuing operations decreased to$24 million from$550 million , or by$526 million , for the nine months endedSeptember 30, 2021 compared to the corresponding period in 2020. During the nine months endedSeptember 30, 2021 , cash used in financing activities from continuing operations included the partial redemption of the 2023 Notes of$384 million including approximately$34 million related to the early redemption, settlement of the securitization liability of$9 million and repayments of long-term debt of$7 million . These payments were partially offset by net proceeds from the issuance of common stock of$380 million . During the nine months endedSeptember 30, 2020 , cash used in financing activities from continuing operations included debt repayments of$523 million , a repurchase of the 2023 Notes of$169 million and settlement of the securitization liability of$7 million . These payments were partially offset by net proceeds from the issuance of the 2027 Notes of$147 million . 42 Table of Contents Long-term debt
The following table summarizes our long-term debt:
September 30, December 31,
2021 2020
($ millions)
Syndicated Credit Facility:
Term Loan B $ 1,444 $ 1,444
2023 Notes 500 850
2027 Notes 150 150
Deferred financing 27 32Debt discount and issuance costs (42)
(57)
Obligations under finance leases and other 3
3
Total long-term debt $ 2,082 $ 2,422
As of
Syndicated Credit Facility As ofSeptember 30, 2021 , the senior secured syndicated credit facility (the "Syndicated Credit Facility") is composed of: (i) a senior secured first lien revolving credit facility in an aggregate capacity of up to$500 million maturing inDecember 2023 ("Revolving Credit Facility") and (ii) a senior secured first lien term B facility in an original aggregate principal amount of$2.0 billion maturing inOctober 2024 ("Term Loan B"). The Revolving Credit Facility includes an aggregate$200 million sub limit under which letters of credit can be issued. As ofSeptember 30, 2021 andDecember 31, 2020 , we had$28 million and$31 million , respectively, of issued and undrawn letters of credit outstanding under the Revolving Credit Facility.
Senior Secured Notes due 2023
InDecember 2019 , we issued$1.0 billion in aggregate principal amount of 9.75% Senior Secured Noted due 2023 (2023 Notes") in a private placement to institutional buyers. The 2023 Notes were issued at a price of 98% and are recorded as long-term debt in our consolidated financial statements. The 2023 Notes bear interest at the rate of 9.75% per year, payable semi-annually in cash in arrears, for which interest payments commenced inJune 2020 . The 2023 Notes are guaranteed on a senior secured basis by each of the Company's existing and future subsidiaries that guarantee the Syndicated Credit Facility.
Senior Secured Notes due 2027
InJune 2020 , we issued$150 million in aggregate principal amount of 7.54% Senior Secured Notes due 2027 ("2027 Notes") in a private placement to institutional buyers. The 2027 Notes were issued at a price of 98.25% and are recorded as long-term debt in our consolidated financial statements. The 2027 Notes bear interest at the rate of 7.54% per year, payable semi-annually in cash in arrears, for which interest payments commenced inDecember 2020 . The 2027 Notes are guaranteed on a senior secured basis by each of the Company's existing and future subsidiaries that guarantee the Syndicated Credit Facility and the 2023 Notes.
Leaseback Deferred Financing
InDecember 2019 , we completed the sale and subsequent leaseback of our owned properties inPalo Alto, California for proceeds of$291 million . We determined that the leaseback terms were off-market. In accordance with Accounting Standards Codification 842 - Leases, we accounted for the excess of the leaseback payments over the present value of market rental payments as additional financing, separate from the lease liability. This resulted in recognition of a deferred financing liability of$33 million which is repayable over the 10-year leaseback term. 43 Table of Contents
See Note 9, "Long-term debt and interest expense, net" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, "Financial Information" in this Quarterly Report on Form 10-Q for further details on our long-term debt.
Securitization liability We have in place, a revolving securitization facility agreement with an international financial institution. Under the terms of the Syndicated Credit Facility, we may offer to sell eligible orbital receivables from time to time with terms of seven years or less, discounted to face value using prevailing market rates. There were no sales of eligible receivables executed in the three and nine months endedSeptember 30, 2021 or 2020. The orbital receivables that were securitized remain on our balance sheet because the accounting criteria for surrendering control of the orbital receivables were not met. The net proceeds received have been recognized as a securitization liability that has been subsequently measured at amortized cost using the effective interest rate method. The securitized orbital receivables and the securitization liability are being drawn down as payments are received from customers and passed on to the international financial institution. We continue to recognize orbital interest revenue on the orbital receivables that are subject to the securitization transactions and recognize interest expense to accrete the securitization liability.
Interest rate swaps
InApril 2021 ,$500 million of our interest rate swaps matured. OnJune 15, 2021 , we entered into interest rate swaps at a notional value of$500 million . In total, an aggregate amount of$1.0 billion of our variable rate long-term debt is fixed at an average rate of 1.43% (excluding the margin specified in the Syndicated Credit Facility). In bothApril 2022 andJune 2023 , we will have interest rate swap maturities of$500 million .
Off-balance sheet arrangements
As ofSeptember 30, 2021 , we had no outstanding foreign exchange sales contracts. As ofSeptember 30, 2021 , we had certain letters of credit guaranteed by the Syndicated Credit Facility, while indemnified by us. Such arrangements are not expected to have a material effect on our liquidity or capital resources, financial position or results of operations. We use, from time to time, derivative financial instruments to manage existing foreign currency exposures. We consider the management of financial risks to be an important part of our overall corporate risk management policy. Foreign exchange forward contracts are used to hedge our exposure to currency risk on sales, purchases, cash, net investments and loans denominated in a currency other than the functional currency of our domestic and foreign operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There were no material changes to our critical accounting policies, estimates or
judgments, that occurred in the period covered by this report from those
discussed in our Annual Report on Form 10-K for the year ended
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, "Summary of Significant Accounting Policies" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, "Financial Information" in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
NON-GAAP FINANCIAL MEASURES
In addition to results reported in accordance with
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We define EBITDA as earnings before interest, taxes, depreciation and
amortization, Adjusted EBITDA as EBITDA adjusted for certain items affecting the
comparability of our ongoing operating results as specified in the calculation
and Adjusted EBITDA margin as Adjusted EBITDA divided by revenue. Certain items
affecting the comparability of our ongoing operating results between periods
include restructuring, impairments, satellite insurance recovery, gain (loss) on
sale of assets, CEO severance and transaction and integration related expense.
Transaction and integration related expense includes costs associated with
de-leveraging activities, acquisitions and dispositions and the integration of
acquisitions. Management believes that exclusion of these items assists in
providing a more complete understanding of our underlying results and trends,
and management uses these measures along with the corresponding U.S. GAAP
financial measures to manage our business, evaluate our performance compared to
prior periods and the marketplace, and to establish operational goals. Adjusted
EBITDA is a measure being used as a key element of our incentive compensation
plan. The Syndicated Credit Facility also uses Adjusted EBITDA in the
determination of our debt leverage covenant ratio. The definition of Adjusted
EBITDA in the Syndicated Credit Facility includes a more comprehensive set of
adjustments that may result in a different calculation therein.
We believe that these non-GAAP measures, when read in conjunction with our U.S.
GAAP results, provide useful information to investors by facilitating the
comparability of our ongoing operating results over the periods presented, the
ability to identify trends in our underlying business, and the comparison of our
operating results against analyst financial models and operating results of
other public companies.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms
under U.S. GAAP and may not be defined similarly by other companies. EBITDA and
Adjusted EBITDA should not be considered alternatives to net (loss) income as
indications of financial performance or as alternate to cash flows from
operations as measures of liquidity. EBITDA and Adjusted EBITDA have limitations
as an analytical tool and should not be considered in isolation or as a
substitute for our results reported under U.S. GAAP.
The table below reconciles our net income to EBITDA and Adjusted EBITDA for the
three and nine months ended
Nine Months Ended
Three Months Ended September 30, September 30,
2021 2020 2021 2020
($ millions)
Net income (loss) $ 14 $ 85 $ (25) $ 343
Income tax benefit - (22) (10) (22)
Interest expense, net 25 36 127 133
Interest income (1) (2) (2) (3)
Depreciation and amortization 74 95 221 274
EBITDA $ 112 $ 192 $ 311 $ 725
Income from discontinued operations,
net of tax - (1) - (337)
Transaction and integration related
expense 1 2 1 6
Impairment loss - - - 14
Reduction of gain on sale leaseback - 4 - 4
Gain on remeasurement of Vricon equity
interest - (85) - (85)
Total Adjusted EBITDA $ 113 $ 112 $ 312 $ 327
Adjusted EBITDA:
Earth Intelligence 124 128 362 407
Space Infrastructure 14 12 29 (16)
Intersegment eliminations (5) (7) (17) (21)
Corporate and other expenses (20) (21) (62) (43)
Total Adjusted EBITDA $ 113 $ 112 $ 312 $ 327
Net income (loss) margin 3.2 % 19.5 % (1.9) % 27.3 %
Total Adjusted EBITDA margin 25.9 % 25.7 % 24.0 % 26.0 %
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