(EDGAR Online via COMTEX) -- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management's discussion and analysis ("MD&A") contains "forward-looking statements" as defined in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words "believe," "expect," "anticipate," "plan," "intend," "foresee," "should," "would," "could," "may," "estimate," "outlook" and similar expressions, including the negative thereof. The absence of these words, however, does not mean that the statements are not forward-looking. These forward-looking statements are based on our current expectations, beliefs and assumptions concerning future developments and business conditions and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.
All of our forward-looking statements involve risks and uncertainties (some of which are significant or beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause actual results to differ materially from those contemplated in the forward-looking statements include those set forth in Part II, Item 1A, "Risk Factors" and elsewhere in this MD&A. We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except to the extent required by law.
Unless stated otherwise or the context otherwise requires, references to the terms "Company," "Maxar," "we," "us," and "our" refer collectively to Maxar Technologies Inc. and its consolidated subsidiaries.
We are a leading provider of solutions in Earth Intelligence and Space Infrastructure. We help government and commercial customers to monitor, understand and navigate the changing planet; deliver global broadband communications; and explore and advance the use of space. Our approach combines decades of deep mission understanding and a proven commercial and defense foundation to deliver our services with speed, scale and cost effectiveness. Our 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 ended December 31, 2019, are substantially unchanged.
Acquisition of Vricon
On June 23, 2020, we announced our intent to exercise our call option to take full ownership of 3D data and analytics firm Vricon, Inc., ("Vricon Acquisition") for approximately $140 million, or approximately $117 million net of estimated cash at closing. To fund the transaction, we issued $150 million in aggregate principal amount of new senior secured notes, discussed below. The call option was exercised on June 25, 2020, and the Vricon Acquisition closed on July 1, 2020.
Vricon is a global leader in satellite-derived 3D data for defense and intelligence markets, with software and products that enhance 3D mapping, Earth intelligence data, military simulation and training and precision-guided munitions. The company was formed as a joint venture between Maxar and Saab in 2015 to combine patented Saab IP with our commercial satellite imagery to build highly accurate, immersive 3D products at scale.
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Sale of senior secured notes and repurchase of debt
On June 25, 2020, we issued $150 million aggregate principal amount of 7.54% senior secured notes due 2027 ("2027 Notes"). The 2027 Notes were offered and sold in the United States pursuant to Rule 144A and outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended. The 2027 Notes have an interest rate of 7.54% per annum and were issued at a price equal to 98.25% of their face value. Proceeds from the 2027 Notes are expected to be used for general corporate purposes, including to finance the Vricon Acquisition.
Separately, on June 25, 2020, we repurchased, in a privately negotiated transaction, $150 million aggregate principal amount of our 9.75% Senior Secured Notes due 2023 ("2023 Notes"). The 2023 Notes were repurchased ("2023 Notes Repurchase") at approximately 112.45% of the principal amount on June 25, 2020.
We evaluated the terms of the 2027 Notes and 2023 Notes Repurchase and concluded that both transactions are to be accounted for as a debt modification.
During the three months ended June 30, 2020, we also repaid $511 million of borrowings under Term Loan B using proceeds from the MDA Transaction.
Completion of the sale of MDA
On April 8, 2020, we completed the previously announced sale by Maxar and Maxar Technologies Holdings Inc., a Delaware corporation and a wholly-owned subsidiary of Maxar ("Maxar Holdings" and, together with Maxar, the "Sellers"), of the MDA Business ("MDA Business") pursuant to the Stock Purchase Agreement dated as of December 29, 2019 (as amended from time to time, the "MDA Agreement") between the Sellers and Neptune Acquisition Inc., a corporation existing under the laws of the Province of British Columbia and an affiliate of Northern Private Capital Ltd. for an aggregate purchase price of $729 million (C$1.0 billion) ("MDA Transaction") subject to customary purchase price adjustments set forth therein, including for working capital, cash and debt and as otherwise set forth in the MDA Agreement.
Ukrainian customer lawsuit resolution
On March 31, 2020, an arbitral tribunal issued a final decision in favor of the Company related to claims asserted against us by a Ukrainian customer, dismissing the customer's claims in their entirety. As previously disclosed in our SEC filings, we entered into an agreement with the Ukrainian customer in 2010 to provide a communication satellite system. In 2014, following the annexation of Crimea by the Russian Federation, we declared force majeure with respect to the program and subsequently terminated the contract. In July 2018, the Ukrainian customer issued a statement of claim in the arbitration it had commenced against us, challenging our right to terminate for force majeure and seeking to recover approximately $227 million. Following a hearing on the merits in December 2019, the arbitral tribunal dismissed the customer's claims, and awarded us costs and attorney's fees. See Note 16, "Commitments and contingencies" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, "Financial Information" for further details.
COVID-19 operational posture and current impact
We have activated our standing pandemic crisis response plan to protect the health and safety of our team members, families, customers and communities while continuing to meet our commitments to customers. Our mitigation strategies cover employee preparation, travel, security, supply chain, virtual work, facility preparation and communications.
All our locations are currently operational through a combination of work from home and limited personnel working on-site for essential operations, though in some cases capacity utilization and productivity are below normalized levels. As aerospace manufacturing, communications and defense are federal critical infrastructure sectors, we are allowed to keep some of our workforce on-site to maintain critical operations. And in doing so, we continue to diligently follow safety protocols including social distancing, alternating shifts, temperature checks, deep cleaning and isolation strategies for essential personnel working at our sites.
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The near and long-term impacts of the current pandemic on the cost and schedule of the numerous programs in our existing backlog and the timing of new awards remains uncertain. We are observing stress in our supplier base in and outside the U.S. and we 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 current estimates at completion on our satellite manufacturing contracts assume, among other things, that current combination of work from home and limited personnel working on-site for essential operations remains in effect through December 2020.
Our results of operations for the three and six months ended June 30, 2020, include the current estimated impact of COVID-19. We had COVID-19 related estimated total costs at completion ("EAC") growth of $6 million and $24 million within the Space Infrastructure segment for the three and six months ended June 30, 2020, which negatively impacted earnings for the same periods. The changes in the EACs are due to increases in estimated program costs associated with the COVID-19 operating posture and the estimated impact of certain items such as supplier delays and increased labor hours along with actuals realized during the three and six months ended June 30, 2020. These costs are considered incremental and separable from normal operations.
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. With our announcement of the MDA Transaction on December 30, 2019, and the subsequent closing of the MDA Transaction on April 8, 2020, the MDA segment has been classified within Income from discontinued operations, net of tax in the Unaudited Condensed Consolidated Statements of Operations and is no longer considered a reportable segment. All prior-period amounts have been adjusted to reflect the reportable segment change.
In the Earth Intelligence segment, we are a global leader in high resolution space-based optical and radar 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 a 110-petabyte historical 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 are U.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 the U.S. government, but we also support intelligence requirements for other U.S. allied governments, global development organizations and commercial customers.
In the Space Infrastructure segment, we are a leading provider of space infrastructure. We design, build, integrate and test solutions for space-based communications satellites, 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, and we are successfully partnering with the U.S.
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government in new space opportunities. Our principal customers in the Space Infrastructure segment are commercial satellite operators and government agencies worldwide.
As discussed above, in connection with the MDA Transaction, the financial results of MDA were classified as discontinued operations for all periods presented in this Quarterly Report on Form 10-Q and it is no longer considered a reportable segment. The MDA Business developed and delivered advanced surveillance and intelligence solutions, defense and maritime systems, radar geospatial imagery, space robotics, satellite antennas and communication subsystems. Subsequent to the MDA Transaction, MDA continues to be a supplier of certain components and subsystems to us.
RESULTS OF OPERATIONS Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change ($ millions) Revenues: Product $ 157 $ 144 $ 13 9 % $ 264 $ 310 $ (46) (15) % Service 282 268 14 5 556 533 23 4 Total revenues 439 412 27 7 820 843 (23) (3) Costs and expenses: Product costs, excluding depreciation and amortization 144 141 3 2 289 312 (23) (7) Service costs, excluding depreciation and amortization 87 103 (16) (16) 180 195 (15) (8) Selling, general and administrative 79 66 13 20 147 151 (4) (3) Depreciation and amortization 89 96 (7) (7) 179 191 (12) (6) Impairment loss - - - * 14 - 14 * Satellite insurance recovery - (183) 183 (100) - (183) 183 (100) Operating income 40 189 (149) (79) 11 177 (166) (94) Interest expense, net 48 49 (1) (2) 97 98 (1) (1) Other (income) expense, net (4) (2) (2) 100 (7) 3 (10) * (Loss) income before taxes (4) 142 (146) (103) (79) 76 (155) * Income tax (benefit) expense (2) 1 (3) * - 2 (2) (100) Equity in (income) loss from joint ventures, net of tax (2) 2 (4) (200) (1) 3 (4) (133) Income (loss) from continuing operations - 139 (139) (100) (78) 71 (149) * Discontinued operations: Income from operations of discontinued operations, net of tax 2 9 (7) (78) 32 20 12 60 Gain on disposal of discontinued operations, net of tax 304 - 304 * 304 - 304 * Income from discontinued operations, net of tax 306 9 297 * 336 20 316 * Net income $ 306 $ 148 $ 158 107 % $ 258 $ 91 $ 167 184 %
* Not meaningful.
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Product and service revenues
Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change ($ millions) Product revenues $ 157 $ 144 $ 13 9 % $ 264 $ 310 $ (46) (15) % Service revenues 282 268 14 5 556 533 23 4 Total revenues $ 439 $ 412 $ 27 7 % $ 820 $ 843 $ (23) (3) %
Total revenues increased to $439 million from $412 million, or by $27 million, for the three months ended June 30, 2020, compared to the same period of 2019. The increase was primarily driven by a $15 million increase in the Earth Intelligence segment and a $3 million increase in the Space Infrastructure segment.
Total revenues decreased to $820 million from $843 million, or by $23 million, for the six months ended June 30, 2020, compared to the same period of 2019. The decrease was primarily driven by a $75 million decrease in the Space Infrastructure segment which was partially offset by a $32 million increase in the Earth Intelligence segment.
Further discussion of the drivers behind changes in revenues is included within the "Results by Segment" section below.
See Note 11, "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 June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change ($ millions) Product costs, excluding depreciation and amortization $ 144 $ 141 $ 3 2 % $ 289 $ 312 $ (23) (7) % Service costs, excluding depreciation and amortization 87 103 (16) (16) 180 195 (15) (8) Total costs $ 231 $ 244 $ (13) (5) % $ 469 $ 507 $ (38) (7) %
Total costs of product and services decreased to $231 million from $244 million, or by $13 million, for the three months ended June 30, 2020, compared to the same period of 2019. The decrease in costs was equally driven by decreases in costs within our Space Infrastructure and Earth Intelligence segments.
Total costs of product and services decreased to $469 million from $507 million, or by $38 million, for the six months ended June 30, 2020, compared to the same period of 2019. The decrease in costs was primarily driven by decreases within our Space Infrastructure.
Selling, general and administrative
Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change ($ millions) Selling, general and administrative $ 79 $ 66 $ 13 20 % $ 147 $ 151 $ (4) (3) %
Selling, general and administrative costs increased to $79 million from $66 million, or by $13 million, for the three months ended June 30, 2020, compared to the same period of 2019. The increase is primarily due to an $8 million increase in stock-based compensation expense as well as increases in labor related expenses, professional fees and satellite insurance premiums.
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Selling, general and administrative costs decreased to $147 million from $151 million, or by $4 million, for the six months ended June 30, 2020, compared to the same period of 2019. The decrease is primarily due to an $11 million decrease in restructuring costs, a $3 million decrease in transformation costs, a $3 million decrease in severance costs related to the previous CEO and a $2 million decrease in transaction and integration related costs. These decreases were partially offset by an $11 million increase in stock-based compensation expense and a $3 million increase in satellite insurance premiums.
Depreciation and amortization
Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change ($ millions) Property, plant and equipment $ 23 $ 28 $ (5) (18) % $ 47 $ 56 $ (9) (16) % Intangible assets 66 68 (2) (3) 132 135 (3) (2) Depreciation and amortization expense $ 89 $ 96 $ (7) (7) % $ 179 $ 191 $ (12) (6) %
Depreciation and amortization expense decreased to $89 million from $96 million, or by $7 million, for the three months ended June 30, 2020, compared to the same period of 2019. Depreciation and amortization expense decreased to $179 million from $191 million, or by $12 million, for the six months ended June 30, 2020, compared to the same period of 2019. The decreases in both periods were primarily driven by a decrease in depreciation expense related to asset retirements made in the second half of 2019 and in the first quarter of 2020, the extension of the useful life of a satellite in the fourth quarter of 2019, and the sale of our owned properties in Palo Alto in December 2019.
Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change
* Not meaningful.
There were no impairment losses recorded for the three months ended June 30, 2020 and 2019. For the six months ended June 30, 2020, the impairment loss of $14 million related to our orbital receivables. This impairment loss was primarily due to a decrease in credit ratings associated with our largest orbital customer. We did not recognize any orbital impairments during the six months ended June 30, 2019.
Satellite insurance recovery
During the three months ended June 30, 2019, we received insurance recoveries of $183 million related to the loss of WorldView-4 satellite. There were no insurance recoveries during the three or six months ended June 30, 2020.
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Interest expense, net
Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change ($ millions) Interest expense: Interest on long-term debt $ 55 $ 48 $ 7 15 % $ 109 $ 93 $ 16 17 % Interest expense on advance payments from customers 1 1 4 (3) (75) 3 9 (6) (67) Interest on orbital securitization liability 2 2 - * 3 4 (1) (25) Capitalized interest (10) (5) (5) 100 (18) (8) (10) 125 Interest expense, net $ 48 $ 49 $ (1) (2) % $ 97 $ 98 $ (1) (1) %
Under the EnhancedView Contract, we received advanced payments from the U.S. government during the construction phase of the WorldView-1 satellite, which was more than one year before capacity was made available to them. The effect of imputing interest on these advanced payments is to increase contract 1 liabilities with an offsetting charge to interest expense. As capacity is provided to the customer, revenue is recognized and the contract liabilities balance decreases. The contract liability balance associated with the EnhancedView Contract is expected to be recognized as revenue through August 31, 2020.
Interest expense, net decreased to $48 million from $49 million, or by $1 million, for the three months ended June 30, 2020, compared to the same period 2019. The decrease was primarily due to an increase in capitalized interest of $5 million related to the building of our WorldView-Legion constellation and a $3 million decrease in interest on advance payments from customers. The decreases were partially offset by an increase in interest on long-term debt of $7 million primarily due to the expensing of unamortized debt issuance costs related to the repayment of borrowings under Term Loan B.
Interest expense, net decreased to $97 million from $98 million, or by $1 million, for the six months ended June 30, 2020, compared to the same period 2019. The decrease was primarily due to an increase in capitalized interest of $10 million related to the building of our WorldView-Legion constellation and a $6 million decrease in interest on advance payments from customers. The decreases were partially offset by an increase in interest on long-term debt of $16 million primarily due to higher interest rates.
Other (income) expense, net
Three Months Ended June 30, $ % Six Months Ended June 30, $ % 2020 2019 Change Change 2020 2019 Change Change
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Aug 05, 2020
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