The Company recognizes deferred revenue and non-cash EBITDA in its Imagery segment due to the terms in its EnhancedView contract with the U.S. Government and imputed interest on advance payments made. The EnhancedView contract provides $300 million of annual cash funding. However, imagery provided to the U.S. Government under the contract has increased over the years, due to added collection capacity from new satellites and additional services. In the contract's early years (before the acquisition of DigitalGlobe by the Company), payments received exceeded the accounting revenue recognition, with the excess amount placed on the balance sheet as deferred revenue (contract liability). In the contract's current years, accounting revenue recognition is greater than payments received, drawing down the balance sheet deferred revenue (contract liability).
In addition, the U.S. Government provided advance payments to finance a portion of the WorldView 1 satellite construction costs. Company policy under IFRS imputes interest on advance payments received from customers that contain a financing element and recognizes deferred revenue and non-cash earnings. The effect of this accounting policy is to increase deferred revenue (contract liability) with an offsetting charge to finance expense. Annually, the deferred revenue (contract liability) balance is drawn down with an offsetting charge to financing expense.
On a pro-forma (as if DigitalGlobe had been combined with the Company since January 1, 2017) basis for 2017, total revenue recognized from deferred revenue related to the EnhancedView contract and imputed interest accounting policies was approximately $120 million included in the Imagery segment results. This was partially offset by $35 million in financing expenses in 2017, and an expected $28 million impact is expected in 2018. The Company consistently disclosed this non-cash deferred revenue in its Registration Statement on Form F-4 in connection with the DigitalGlobe transaction and provided an EBITDA to unlevered cash flows bridge at its March 2018 Investor Days. ASC 606 under GAAP requires the same accounting treatment, as a result of which there will be no impact when the Company converts from IFRS. The deferred revenue is being amortized over the term of the current EnhancedView contract. The Company expects to enter into new customer contracts whose terms may also include future deferred revenue components.
Balance sheet and depreciation adjustments for on-orbit assets made as part of the DigitalGlobe transaction were completed in adherence to IFRS accounting rules. In a business combination, all assets, liabilities and contingent liabilities acquired or assumed are recorded at their fair market values at the date of acquisition. The Company used independent third-party specialists to calculate fair value of its assets using current replacement costs and their remaining useful life. This valuation process resulted in $1.57 billion in net book value of on-orbit assets on the DigitalGlobe balance sheet being written down to $569 million fair market value on the Company's balance sheet at the time of the transaction closing. The valuation was driven by a significant reduction in current replacement cost estimates. The WorldView 1 and WorldView 2 satellites had combined original costs of $936 million. This compares with estimated WorldView Legion Block 1 replacement costs of approximately $600 million. WorldView 3 and WorldView 4 had combined original costs of $1.5 billion. This compares with estimated WorldView Legion Block 2 replacement costs of approximately $400-$500 million. The Company's balance sheet depreciation of current on-orbit assets now more closely matches the future expected capital expenditures for the replacement satellites. The significant improvements in capital efficiency from the Company's WorldView Legion constellation will help provide the next leg of growth in the Company's imagery business at much lower levels of cash capital expenditures and at a much higher ROIC than previous on-orbit investments.
Management compensation incentives are aligned with the interests of all shareholders and tied to financial performance. The Company's short-term incentive program rewards management for achievement of financial targets established annually by the Board of Directors. Beginning in 2018, a metric for cash flow was established in addition to revenue and adjusted EBITDA metrics, appropriately recognizing the increased debt and leverage resulting from the DigitalGlobe transaction. Beginning in 2019, at least 50% of the Company's long-term incentive program awards for senior executives will include performance-based equity metrics.
Management and director share ownership is increasing. The Company has implemented stock ownership guidelines to promote a focus on long-term growth and align the interests of the Company's executive officers and directors with those of its shareholders. Certain minimum ownership levels of shares must be achieved over a five-year period following appointment. Insider share ownership declined between 2011 and 2016, as long-serving Canadian management and directors retired as part of the Company's U.S. Access Plan strategy. Beginning in 2017, management and director share ownership sharply increased, as reported in the Company's Annual Information Form, as a result of personal investments made to acquire Company shares on the open market, and from new equity program awards.
Mr. Lance, the Company's President & Chief Executive Officer, purchased an additional 23,725 shares for his personal account between August 3, 2018 and August 10, 2018. In its 2018 Management Proxy Circular, the Company disclosed that Mr. Lance owned 603,144 shares as of that date. His holdings included 101,639 shares owned outright in his personal account and as RSUs, with an associated value at-risk of $4,535,132 as of March 20, 2018 using the closing price on the TSX, converted into U.S. dollars. The Proxy Circular mistakenly included 501,505 SARs and LTIP Units in its calculation of the valuation of at-risk holdings.
Maxar will continue to transparently communicate with the market. The Company remains focused on enhancing shareholder value by executing on its strategic initiatives to deliver continued growth in Imagery and Services, return to growth in Space Systems, deliver revenue and cost synergies and improve free cash flow with a priority to pay down debt.
Forward-Looking Statements
Certain statements and other information included in this press release constitute "forward-looking information" or "forward-looking statements" (collectively, "forward-looking statements") under applicable securities laws. Statements including words such as "may", "will", "could", "should", "would", "plan", "potential", "intend", "anticipate", "believe", "estimate" or "expect" and other words, terms and phrases of similar meaning are forward-looking statements. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. Such forward-looking statements include, but are not limited to, statements as to managements' expectations with respect to: guidance for revenue, cash flow from operations and full-year adjusted EPS outlook, of Maxar Technologies Ltd. (the "Company"); and other statements that are not historical facts.
Forward-looking statements in this press release are based on certain key expectations and assumptions made by the Company, including expectations and assumptions concerning: market and general economic conditions; planned synergies, capital efficiencies and cost-savings; applicable tax laws; and the availability and cost of labor, services and materials. Although management of the Company believes that the expectations and assumptions on which such forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct.
Forward-looking statements are subject to various risks and uncertainties which could cause actual results to differ materially from the anticipated results or expectations expressed in this press release. Some of the key risks and uncertainties include, but are not limited to: changes in government priorities, mandates, policies, funding levels, contracts and regulations, including the loss or reduction in scope of any of the Company's primary contracts, or decisions by customers not to exercise renewal options; inherent risks of performance on firm fixed price construction contracts and termination of contracts by customers for convenience; decrease in demand for the Company's products and services; failure to maintain technological advances and offer new products to retain customers and market position; potential for product liability or the occurrence of defects in products or systems and resulting loss of revenue and harm to the Company's reputation; increased competition that may reduce the Company's market share or cause the Company to lower its prices; changes in political or economic conditions, including fluctuations in the value of foreign currencies, interest rates, energy and commodity prices, trade laws and the effects of governmental initiatives to manage economic conditions; the Company's ability to recruit, hire or retain key employees or a highly skilled and diverse workforce; potential for work stoppages; failure to obtain or maintain required regulatory approvals and licenses; failure to comply with environmental regulations; and changes in Canadian or foreign law or regulation that may limit the Company's ability to distribute its products and services. As a result of the foregoing, readers should not place undue reliance on the forward-looking statements contained in this press release.
