MAXR Maxar

Jason Gursky Vice President of Investor Relations
Dan Jablonsky Chief Executive Officer
Biggs Porter Chief Financial Officer
Steven Li Raymond James
Audrey Preston Credit Suisse
Thanos Moschopoulos BMO Capital Markets
Stephanie Price CIBC
Tim James TD Securities
Richard Tse National Bank Financial
Call transcript

Good afternoon. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to Maxar Second Quarter 2019 Investor Conference Call. All lines have been placed to mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Jason Gursky, Vice President of Investor Relations, you may begin your conference.

Jason Gursky

Great. Good afternoon, and thanks, operator. Welcome to Maxar's second quarter 2019 earnings conference call. I'm joined by the company's Chief Executive Officer, Dan Jablonsky; and Chief Financial Officer, Biggs Porter. Both will make some opening remarks and after which we are going to open the line for your questions. We're shooting to wrap up the call in a little under an hour. And as such, we’re going to ask callers to limit themselves to one single-part question and one single-part follow up during the Q&A session.

Before we get started, I'd like to refer listeners to the accompanying slides for today's call, which can be found on the company's website in the Investors, Events & Presentations section of the site.

Finally, I would like to remind you that part of today's discussions including responses to various questions may contain forward-looking statements, which represent the company's estimates, future plans, objectives and expected performance at today's date. These statements are based on current assumptions that the company believes are reasonable, but are subject to a wide range of uncertainties and risks that could lead actual results to differ materially from the forward-looking information.

You are referred to the advisory regarding forward-looking statements contained in our quarterly earnings release, earnings call slide deck and the company's most recent MD&A section found in our Form 10-Q, which is available online under the company's SEDAR profile at, under the company's EDGAR profile at the or on the company's website at

With that, I'd like to turn the discussion over to Dan Jablonsky. Dan, go ahead.

Dan Jablonsky

Thanks, Jason, and good afternoon, everyone. I appreciate you joining us for a review of the second quarter.

Before I get started, I want to again thank Maxar's team members for their tireless effort over the past several months. The company's capabilities in space, infrastructure and earth intelligence are well aligned with the national defense strategy of the United States.

The priorities of our international defense and intelligence customers, the aspirations of our civil government customers and the pursuits of continuous innovation that we see from our commercial customers. At Maxar, we moved quickly to affect changes that better position us to help solve complex problem for our customers and to generate improved returns for our shareholders. And I want to thank all those who are helping to make this happen.

If you please turn to slide three of the accompanying presentation for the key highlights of the quarter. We generated $490 million in revenue and $129 million in adjusted EBITDA in Q2, with the EBITDA up sequentially from the first quarter. Biggs will go into further details during his portion of the call, but I feel this is a good outcome for the first half of the year and demonstrate the traction we're seeing in our efforts to position the company for sustained revenue, profit and cash flow growth.

Importantly, we garnered several key wins during the quarter across our businesses. I will go into these in a little more detail later, but suffice it to say we're doing some big things for the most demanding government and commercial customers out there. And we're proud that they have interested their critical missions to Maxar.

We also continued to make progress in all of our key initiatives for 2019, which include improving the health of our balance sheet, reengineering our Space Solutions business in Palo Alto positioning our MDA, imagery and services business for long-term growth and reducing our cost structure, while deploying our new operating model. And finally, here, I'd note that we maintained our outlook for 2019 and are getting greater visibility into our expectations for space solutions.

Please turn to slide four.

As you know, our top priority for the year has been to reduce our debt and leverage levels. And debt come down quarter-over-quarter as proceeds from the WorldView-4 insurance claim offset higher CapEx and some working capital headwinds driven by timing. That said our leverage ratio ticked up from Q1 as trailing 12-month adjusted EBITDA continue to come under pressure given higher levels of profitability in the first half of 2018.

Importantly though, our guidance for 2019 implies the second half of the year is likely to experience year-over-year adjusted EBITDA growth on a reported basis versus last year.

Finally, we also continue to drive alternatives to reduce overall debt and leverage levels.

As I suggested in the past, we are leaving no rock unturned and the team and I are working diligently on this initiative.

Please turn to slide 5.

Our efforts to reengineer the Space Solutions business continued this quarter and I'm pleased to announce that we had some success on the order front with NASA selecting Maxar for the power propulsion element of the Lunar Gateway program. This is obviously an important win for the company as our solution utilizes our 1300 class bus and it furthers Maxar's rich heritage in NASA's Lunar mission dating back to the Apollo program.

Importantly, we believe that propulsion, power and communications are key enablers for space exploration to any destination and this win should position us well for future opportunities. We're proud to be a part of this effort and are excited about the mission it represents.

As I've mentioned on prior calls, our near to medium term goal is to shape the space solutions talent base, so they can run a breakeven adjusted EBITDA with $500 million in annual revenue. And we think we can accomplish this with one to two 1300 class orders a year, along with a steady drumbeat of other civil, commercial and government work across our Legion class robotics offering. The PPE award represents one 1300 class order for the year.

So this is a good start on the plan.

We also recently defended the contract signed back in December of 2018 with Ovzon for a GEO Comsat utilizing our Legion class bus. This solution will provide versatile mobile broadband communication for small vehicles, aircraft and users on the move through a platform that offers a technology and performance benefits of a proven 1300 class satellite bus subsystems with a lower cost and smaller form factor. This is a good win for us as it demonstrates the flexibility of Legion class platform to serve across multiple mission sets in different orbits.

I’d also note that we won several other NASA and commercial contract that should be viewed as part of the steady of flow of needed work that I mentioned earlier. All this demonstrates our rich heritage is in tact and customers are interesting us with their critical missions.

Now turning to performance. Adjusted EBITDA improved sequentially quarter-on-quarter and ended with a profit. Biggs will go in to the details a bit later. We successfully launched Eutelsat 7 and shipped Intelsat 39 to the launch site and launched successfully earlier this afternoon. Once both are operational, Maxar will have 92 GEO Comsats on orbit more than any other model of communication satellite.

We also continue to reengineer the organization this quarter as we adjust to the level of work currently in backlog.

Turning briefly to the pipeline.

We continue to see a robust outlook in the classified and unclassified areas where we believe our capabilities are well-aligned with the national defense strategy of the Department of Defense here in The United States and with the spending priorities of allied nations. In commercial, we also have a steady pipeline of GEO and LEO satellite opportunities, which we are focused on converting to wins.

Lastly, we continue to see opportunity in the U.S. civil market and I'd point out that we recently announced plans to work with the West Virginia Robotic Technology Center in its proposal to build and fly dragonfly, an innovative robotic in-space assembly system.

In-space assembly has the potential to revolutionize the way satellites and other space infrastructure are built and launched by enabling highly dexterous capabilities for future space architectures and exploration missions. We're proposing to fly the first dragonfly system on NASA's Restore-L spacecraft that will demonstrate technologies for refueling the satellite in lower orbit.

As a reminder, Maxar is currently building the spacecraft bus for Restore-L, which is based on the 1300 class platform as well as two nimble robotic arms for the mission. Both of these programs are another example of how Maxar's capabilities map well to the priorities of our government customers and their evolving needs.

So to sum up on space solutions, while we have a long way to go, I feel good about the actions we've taken to improve cost and execution and about the tracks we've made this quarter on the order front.

Please turn to slide 6.

Our third party this year is positioning MDA for long-term growth on the heels of the recently completed RADARSAT Constellation Mission, which is creating revenue headwinds in 2019 and masking the low to mid single digit growth experienced in the first half of the year, across the rest of the business.

Importantly, during the quarter we signed a roughly $30 million contract with the Canadian government for flight ready repeaters that will be launched on the U.S. Air Forces GPS III satellites as well as several other government and commercial awards, which should begin to help fill in the gap left behind by RCM.

Turning to performance as expected, adjusted EBITDA declined year-over-year given the completion of the RCM satellites, which we successfully launched on our flight proven, SpaceX from Vandenberg Air Force Base in California with several dignitaries and attendance to watch this historic moment for the country of Canada.

Also during the quarter, the MDA manufactured Canadarm2, successfully completed the rendezvous and capture of SpaceX cargo capsule with Canadian astronaut, David Saint-Jacques in the driver seat from the International Space Station, marking the first time that the Canadian has performed such a maneuver.

MDA has a long history in space robotics and it currently has an annual support contract with Canadian Space Agency to assist with mission planning as well as the long-term maintenance of the robotic arm itself.

Finally, we began work this quarter on the requirements reconciliation phase of the Canadian Surface Combatant program with our partner, Lockheed Martin.

We are excited about the long-term prospects for this program and look forward to moving into the official design phase at some point next year.

On the pipeline front, the CFC's program production phase in the early part of the 2020s is clearly in front of us.

So too is the Canadarm3 program, where the Canadian government has pledged its support for NASA's Lunar Gateway and recently announced a procurement plan for the primary robotic arm on the mission.

And finally MDA continues to be active in the GEO and LEO markets through our components and ground station capabilities and space robotics through our rich heritage in this vertical. Combined we see a robust pipeline of opportunities ahead for MDA, which should allow for a return to growth next year as the full impact of the recently completed RCM program rolls off.

Please turn to slide 7.

Our fourth priority this year has been to position our Earth Intelligence Business in imagery and services for long-term growth and to make sure that we minimize the impact of the WorldView-4 loss.

We are making some good traction. The imagery business was awarded a steady contract by the NRO that will enable the U.S. government to gain a greater understanding of Maxar's current and future commercial imagery capabilities.

The one-year contract will support the NRO's effort to further research and assess the U.S. industrial basis ability to task, collect, process and deliver satellite imagery.

As a reminder, we have been a trusted partner of the U.S. government for nearly 20 years, delivering commercial capabilities with superior quality, cost, security and reliability.

This new study contract with the NRO coupled with our recent EnhancedView Follow-On agreement, demonstrates the U.S. government recognizes the value of procuring commercial satellite imagery both now and into the future. And it demonstrates the government's confidence in Maxar's current and future capabilities.

We are proud to support the U.S. government mission and look forward to continuing to work with the NRO as they increasingly adopt commercial imagery.

We continue to see strong signals from our customers, suggesting that demand likely goes beyond the capacity of our Legion constellation and that there is a significant opportunity for us in the future both domestically and internationally.

I also wanted to call attention to win at Vricon which is a joint venture we have with Saab that specializes in the production of 3D models using high-resolution imagery. The company was recently awarded a $95 million ceiling value contract for that one world terrain capability of the U.S. Army's common synthetic environment. When combined with the military's training management tool and training simulation software, Vricon solution will enable units and soldiers to conduct realistic, multi echelon, collective training anywhere in the world. This is a great example of the innovation being driven by the combination of high-resolution geospatial data, high-performance computing and powerful software.

In the International Defense and Intelligence market, we expanded our installed base this quarter, signing on yet another U.S. ally for our Rapid Access capabilities. And we signed a multi-year renewal with another ally marking the first time this customer is moved to a multi-year award versus a series of annual renewals. These wins demonstrate Maxar's readership not just with the U.S. government, but in the international marketplace as well.

And finally, in the commercial arena, we signed renewal contracts with both HERE and ESRI, which are awarding us with our 2019 America's most Innovative Supplier Award. Both signings demonstrate the continued value we bring in helping solve difficult problems and to enabling industry innovation. We're proud to be working with both companies and look forward to many more years of combined success.

Turning now to performance. The imagery business experienced sequential growth in both revenue and adjusted EBITDA. And as expected, we successfully put $10 million to $15 million of lost WorldView-4 revenue on contract using our other constellation assets.

This quarter was a little lighter for both revenue and adjusted EBITDA than we originally expected due to the timing of contract renewal, unrelated to the WorldView-4 transition. At this point, we expect that negotiation to create some catch up revenue and tailwind in the second half.

As such, we are maintaining our flat outlook for the year and expect the back half to experience sequential growth.

Importantly, our SecureWatch and EarthWatch products continue to see traction with the customer count now over 50 and 100 respectively for these products. That's up nicely quarter-over-quarter.

As a reminder, our imagery business is capacity constrained with total Legion constellation is on orbit, so continued success with our cloud-based and analytical products is going to be ported over the next couple of years.

In the services business, we continue to execute on our growing backlog and we have begun work on our recent U.S. Air Force award. Availability of cleared personal remains an issue particularly in the D.C. Metro area which is gaining our growth a bit. That said, we are working hard to address this issue and look forward to fully converting our backlog to revenue over the coming quarters and years.

With regard to pipeline, we continue to see good things with the U.S. government, both in the classified and unclassified domains.

As I mentioned earlier, when speaking about space solutions, our capabilities are well aligned with our U.S. government customer and we expect this to be a growth factor for us over time.

In the IDI market, we're also seeing solid demand indicators across all regions of the world and across the entire breadth of our portfolio.

In fact, we had some success this quarter in selling legacy Radiance, city box product and the legacy digital intelligence installed IDI base, providing a proof point on potential growth factors for our services business as it looks to expand internationally with the defense and intelligence customers over the next several years.

In commercial, we continue to see persistent demand and expect near term growth drivers to be focused on our cloud and analytical products, particularly for change detection focus capabilities. The long-term growth will benefit from the Legion constellation coming online.

Please turn to Slide 8, the fifth priority we've be discussing since the beginning of the year is our efforts to reduce the company's cost structure and deploy our new operating model.

We continue to make progress on all fronts and are on target of the $60 million a year and $70 million run rate cost takeouts that we spoke about on our May earnings call.

We also continued to track the original merger synergy target of $60 million to $120 million run rate by the end of the fourth quarter of 2019.

So, that's good news.

We're also is a good traction with deployment of the new operating model.

Our product teams are working across the company now. And our global field operations team is building and executing on our robust pipeline.

We've also began to rollout our marketing and positioning of the One Maxar brand and our finance and operations staffs are continuing our consolidation and streamlining efforts.

As a reminder, we expect this initiative to save money, improve our time to market with new products and services, and improve collaboration across the organizations, all of which are beginning to unlock growth synergies and improve team member engagement.

Please turn to slide 9, I want to come back now to our longer term objectives.

As a reminder, we are positioning the company for topline growth by focusing on large and growing markets. We see a particularly robust opportunity set here in the U.S. where of our capabilities and space infrastructure and earth intelligence are well-aligned with the national defense strategy that emphasizes investment in space resiliency, C4 ISR, and autonomous systems.

We are also positioning the company for profit growth by reducing our cost structure and placing more emphasis on the product of our capabilities.

We are moving to a more capital efficient model through lower cost of new satellite capacity and higher mix of data-driven products, the combination of which we expect will drive higher returns on invested capital over time.

And lastly, we are committed to delevering and reducing debt levels.

As we said here before, we're evaluating all alternatives and are committed to the CapEx holiday in front of us.

And now before I hand the call over to Biggs, I want to remind investors of our upcoming Special Shareholders Meeting set for this fall which will be seeking approval for the tax benefit preservation plan that our Board of Directors adopted during the second quarter. This plan is put in place to protect a significant asset of the company for nearly $1 billion in U.S. federal net loss and R&D tax credit carryforwards. I encourage all investors to just carefully read all the materials related to this plan and consider ahead of the meeting.

With that, I'd like to hand the call over to for the review of the financials. Biggs?

Biggs Porter

Thanks Dan. Please turn to Slide 10 where we present year-over-year comparisons for Q2 and year-to-date. Total company revenues declined 15% year-over-year in the quarter as the imagery segment was negatively impacted by the loss of WorldView-4 and Space Systems saw lower volumes in Geo and RCM program. These declines were partially offset by the services business which experienced solid growth in the heels of recent wins.

Adjusted consolidated EBITDA margin increased 330 basis points year-over-year, driven by margin improvement in Space Systems segment. Corporate and other expenses that higher year-over-year, driven in part by retention cost at Space solutions that I discussed before, we're recognizing corporate and other expense in order to provide a better sense of the underlying profit trends at the segment level. These retention costs are being incurred to stabilize the workforce after the strategic shifts of the last year. We believe it is having the desired effect.

New wins in the Space Solutions are likewise having a very positive effect on the Workforce.

GAAP EPS was $2.45 versus a loss of $0.70 in the first quarter of 2018, driven largely by the gain recognized on the WorldView-4 insurance claim.

12 million impairment recorded by MDAs investment and one of that are partially offsetting effect on bottom line, net income and EPS. Year-to-date, revenues declined 13%, driven by lower volume in Imagery in Space Systems. And partly offset by growth in services.

Adjusted EBITDA margins were largely unchanged from the first half, as lower margins in the imagery segment were offset by gains in services and Space Systems.

First half EPS is $1.46 versus a loss of $0.44 last year, driven largely by the insurance recovery that was booked in Q2.

Please turn to side 11. Imagery segment revenues for both the quarter and year-to-date, declined 5% year-over-year driven by declines in our International Defense and Intelligence market, given the loss of WorldView-4.

As well as a lay in our contract renewal within existing customer, that Dan spoke about earlier.

Our U.S. government business experienced growth, as we continue to execute on recent contract wins. Adjusted EBITDA margins for the segment declined year-over-year, given the reduction in revenue, but were up quarter-over-quarter, for the first quarter of 2019, given recent efforts to reduce cost.

Please turn to slide 12. Space Systems experienced a 22%, year-over-year revenue decline in Q2, primarily driven by the expected wind down of work, on a multi-year RCM project as well as lower revenues on our Palo Alto factory. These decreases were in part offset by increased activity on WorldView Legion.

Year-to-date, Space Systems revenues declined 15%, driven largely by GEO and RCM offset by Legion, while adjusted EBITDA margins have expanded modestly. Adjusted EBITDA margins for the quarter in Space Systems, improved 700 basis points from the year-ago, driven by improvement in space solutions, our legacy SSL business.

These items in part, where in part, offset by lower margins at MDA given the expected decline in RCM activity. Pulling one level deeper in the space solutions, our legacy SSL business we posted $181 million in revenue and $7 million in adjusted EBITDA this quarter, which is an improvement on the modest loss in Q1. Cost growth in certain programs in space solutions were offset by the recovery of reserve, on a previously completed project.

Please turn to slide 13.

Our Services business posted a 12% increase in revenue this quarter, versus the second quarter of 2018, driven by recent wins and program expansion on existing contracts across the intelligence community and DoD.

Adjusted EBITDA margins declined however, by roughly 100 basis points year-over-year, given a change in lease expense, which decreased adjusted EBITDA by roughly $2 million in the quarter. Without those expense margins would have been up year-over-year in the quarter.

Please note that this change will result in an additional $2 million of this expense, in the second half of the year. This business experienced another solid bookings quarter, with total book-to-bill for the segment exceeding one.

Year-to-date revenues are up 4% year-over-year on the recent wins. And margins expanded in part of driven by the recognition of a loss from the sale of a divestiture, in the first half of 2018.

Please turn to slide 14. The company generated $117 million in operating cash flow this quarter, driven by the $183 million in proceeds, from our insurance claim associated with the loss of WorldView-4. Changes in working capital given the timing in milestone payments and other collections are the primary other variables in cash flow for the quarter.

We expect very strong performance on that front in the second half.

On a year-to-date basis, the company has generated $59 million in operating cash flow and spent $127 million on CapEx and intangibles. Overall, our cash flow for the first half is consistent with our internal planning.

Please keep in mind, several items that affected the first half of the year as you think about the second. To begin, Q1 of 2019 included the doubling up of interest that added $42 million of cash outflow in the quarter, relative to the norm.

We will only have one quarters worth of interest payments for the rest of the year.

We also had $17 million outflows in the first quarter related to previously settled legal matters.

We have seasonally high cash outflows in Q1 for the payment of year-end liability buildups, whereas the fourth quarter is typically seasonally positive, and there are other positive influences on our second half of cash flow, I will talk about in a minute.

During the quarter, we invested $34 million in CapEx and developed intangibles, which is down quarter-over-quarter.

As I'll discuss later, our CapEx guidance is unchanged for the year, and accordingly there is a sizable step-up in spend in the second half. Of note, space solutions/SSL consumed $44 million of consolidated operating cash flow in the quarter, and $82 million year-to-date.

As a reminder, we expect the timing of milestone payments associated with several projects in opening backlog to be a headwind this year. But in the second half, we expect to receive positive cash inflow on new projects.

We are carefully watching the performance of this business, including the stability of personnel project estimates and developmental elements of existing programs. We still have a way to go to achieve our objectives for the business, but are encouraged by recent wins and breakeven performance in the first half.

Please turn to slide 15. We finished the quarter with consolidated net debt of roughly $3.1 billion, down quarter-over-quarter.

Our bank defined leverage ratio ended the quarter at approximately 4.7, up roughly two-tenths of from Q1 as trailing 12-month adjusted EBITDA continue to come under pressure given higher levels of profitability in the first half of 2018, relative to the second half.

Importantly, though our guidance for 2019 implies the second half of the year is likely to experience year-over-year adjusted EBITDA growth on a reported basis versus last year. We remain well within our covenants. We had roughly $596 million of liquidity at the end of the quarter via a combination of cash on hand in our revolver and we have no maturities until October 2020.

Going forward, we remain focused on delevering and reducing our debt levels.

As Dan mentioned in his remarks, we are tracking all alternatives to do so, and we will be sure to provide updates for our investors when appropriate.

We continue to expect to increase cash generation in future years from expansion in adjusted EBITDA and lower CapEx as our investment in loyalty Legion constellation will continue for two more years after, which we will be in a position to have much better free cash flow to delever.

We also continue to understand, what our alternatives are to refinance our near-term maturities.

However, our current actions are focused on delevering first. We do recognize that we need to move along the path to removing uncertainty in this regard.

Please turn to slide 16.

Turning to guidance. No major changes to our outlook for imagery services and MDA. I'm going to add guidance for space solutions of over, so I'm going to make sure in my comments that you can now track all the pieces to get to the consolidated number.

Imagery is expected to be roughly flat year-over-year from our revenue and adjusted EBITDA perspective implying half-on-half growth in the second half of the year.

We expect this growth to be driven largely by the transition of WorldView-4 revenue to earth satellite assets understanding that a lever renewal that Dan spoke of earlier.

In services, we continue to expect low single-digit revenue growth.

However, margins will be negatively impacted by the roughly $4 million this year given higher lease expense, $2 million of which was recognized in Q2, suggesting full year margins are likely to be closer to 10%.

At MDA, we continue to expect to the low single-digit revenue decline and several hundred basis points of margin compression.

Taken together, no change to adjusted EBITDA for the Imagery services and MDA businesses, which we expect to exceed $550 million net of corporate expenses.

Also, this adjusted EBITDA guidance does not include the gain we reported on the WorldView-4 insurance claim this quarter. We're now providing little more granularity on space /SSL as we are halfway through the year and have some more visibility on the business, particularly after the recent wins that Dan mentioned earlier.

There are three pieces to this business' contributions to our projected consolidated adjusted EBITDA performance. These three are the adjusted EBITDA included in segment results, the retention expense included in corporate and other expense and inter-segment eliminations.

You might note that this retention is associated with our strategic corporate initiatives is included in our consolidated adjusted EBITDA.

We are leaving it to the users of our financial statements as to how they wish to treat this.

At this point, we expect the business to contribute roughly breakeven adjusted EBITDA to the Space Systems segment. Outside of space solution/SSL, we expect a $20 million in retention payments that will be recorded on the corporate and other expense line.

Additionally, we expect approximately $20 million inter-segment EBIDTA eliminations associated with space solutions.

So to summarize all the pieces of adjusted EBITDA guidance.

We continue to expect greater than $550 million in adjusted EBITDA from Imagery services and MDA net of corporate costs.

We expect space solutions to be breakeven before eliminations of approximately $20 million and retention payments of roughly $20 million.

So the back of the outlook suggest the greater than $550 million of adjusted EBITDA for Imagery services and MDA, plus a breakeven space solutions, plus the eliminations of fewer than $20 million and the retention payment of another $20 million, get you to something north of $510 million for the overall company. I hope that walk is helpful to listeners.

On operating cash flow, we continue to expect generation in the range of $350 million to $450 million this year, excluding space solutions/SSL related items. Please note this includes significant restructuring cash outflows due to reductions enforced and final integration costs from 2017 merger. These costs aggregate approximately $40 million, excluding space solutions/SSL and are exceeded by the in-year savings we expect. None of those costs to normalized operating cash flow would be higher.

Excluding Space Solutions, the first half operating cash flow was $141 million. Net of the insurance proceeds there was a use $42 million.

The second half is stronger on the basis of only one interest payments in the second half, an $80 million swing. Significant second half milestones and MDA a $50 million swing, no legal settlements in the second half like the first, a $70 million swing, earnings growth in normal seasonality. It was worth noting that MDA had virtually no milestone payments hits in the first half, but have several lined up for the second.

For space solutions, we expect operating cash consumption this year in the range of $100 million to $80 million, excluding the $20 million in retention payments.

As I've mentioned on prior calls, cash flow was a headwind in 2019, given the timing of milestone payments retention and cash restructuring charges.

However, the second half of this year could be breakeven positive depending upon how new award funding comes in. This is why it's a better foundation for next year win.

As I stated previously, we could see breakeven levels are better for the full year, if all goes well.

If you haven't induced it already from what I've said the second half is potentially very big for incoming advantage in milestone payments for space solutions and MDA with more than $100 million in the second half than the first.

For both businesses, the first half was a very light compared to what we see as normal at this point. In the aggregate, on a consolidated basis, we expect our full year cash from operations to be in the range of $230 million to $330 million.

Since, we have now given all the pieces we will expect to just start talking about this in the aggregate going forward.

If you are thinking about the future beyond 2019, in addition to normalizing for the insurance proceeds, keep in mind that our 2019 guidance includes up to $100 million space solutions, $20 million of retention and $40 million of restructuring related costs.

We also of course expect cash generating EBITDA growth in the future.

We continue to expect CapEx to be up year-over-year as we reach peak spending on the lesion program. This program remains on track for launch in early 2021, and CapEx levels of this project should decline as we move closer to that date.

We expect CapEx including space solutions for the year to be less than $375 million excluding capitalized interest of roughly $20 million.

We expect depreciation and amortization of roughly $405 million this year. Interest expense is expected to be approximately $200 million. And interest expenditures are expected to come in at roughly $185 million this year with approximately $20 million of that capitalized.

We are forecasting a roughly 0% effective tax rate, due to the benefits of our annual carryforwards and ITCs. The diluted share count should come in at roughly $61 million.

And as I discussed in the past, our credit agreement allows us effectively to convert our U.S. GAAP financials back to IFRS for the purposes of compliance with our covenants, which will generally lead to a higher level of adjusted EBITDA. Most notably, these are R&D expense and investment tax credits.

We also have the ability to add back several other items to the leverage calculations including stock compensation, which we now deduct from adjusted EBITDA and the expected benefits of restructuring efforts and cost savings. It is as already noted complicated and will vary based on the expenses embedded in our U.S. GAAP numbers.

So when we roll all the factors embedded in our guidance with these items, we expect our leverage ratio for the purposes of our debt covenants in the year well below six times.

So to summarize my comments. A solid start to the year relative to our expectations.

We are providing more visibility on the outlook for the year by initiating guidance for space solutions and we are focused on deleveraging.

And with that, I'd like to ask the operator to remind listeners how to queue up for questions and to open the line.


[Operator Instructions] Our first question comes from Steven Li from Raymond James. Please go ahead.

Steven Li

Thank you. Hi, guys.

Dan Jablonsky

Hi, Steve.

Steven Li

Just wanted to make sure I understood your outlook correctly.

So if I include SSL minus 100 cash flow, retention is another minus 20.

So at the midpoint, your 2019 cash flow from ops is should be around 280 and your year-to-date is 60.

So second half is going to be plus 220?

Biggs Porter


Second half very strong. I go back to my comment that milestones of loan are worth over $100 million relative to the first half.

Our two businesses that are milestone driven MDA and SSL were very light in the first half. MDA was exceptionally light. And I guess you might think of one of the causes there, easy to point to is the RCM program. It was the final delivery. The final milestone took place via the launch, but the milestone payments associated with that don't come in until the second half and that's worth about $20 million on its own.

So that's a big piece of the MDA swing, but there's quite a few others in there as well.

And then on SSL the new business alone is going to bring in milestone payments upfront.

So we looked at PPE this is what we talked about for a long time. Getting those new business wins is a big positive, so big positive for Space Systems in total with respect to generation. And there's also the timing differences in terms of seasonality that we have.

First quarter is a big outflow.

First quarter typically is positive to cash flows.

So if you looked at our history that's the case and that's certainly what we expect this year.

And then interest is another big factor in and of itself.

So in the first half we had three interest payments in the second half, we will only have one.

So that's an $80 million swing in total with only $40 million in the second half.

So again, the 100 I talked about and the 40 that's 140 of the 220 you're looking at. And then we have earnings growth we're expecting to generate cash and a number of other variables.

So hopefully, that hits the big piece of this to get you comfortable. It always get more granular from here, but those are the big swingers.

Steven Li

Okay. No. Good.

Dan Jablonsky

Historically, if we had a $70 million payment in the first half too, that doesn't recur again from litigation related items.

Steven Li

Okay. And Biggs, so -- and given how much CapEx is left in the second half, so your free cash flow could be close to neutral or maybe a slight small consumption, that's correct, for the second half?

Biggs Porter

Well, for the full year, I mean, you could do the math.

You talked about 280 in the midpoint and we're talking about 400, including capitalized interest of 375, excluding it to be better.

So for the full year, we're clearly talking about being a consumer of cash from a free cash flow standpoint.

However, as I also pointed out in the script, if you go forward after this year, there's lot of opportunity for us to generate a lot of cash going forward. All that stays intact.

Dan Jablonsky

Okay. Look at the fact that SSL is a big negative this year. And as I said, we have the opportunity to get it to breakeven on cash flow and for the full year next year and we're not going to be satisfied with that. We're going to drive that part of the cash flow after their SSL.

Steven Li


And so, if I look at the -- so your SSL range is very tight.

Your range for the rest of the business is like a $100 million in your guidance.

So I'm thinking why is the range so wide? It can't be the milestones, because those would be with SSL.

So what are the puts and takes there that could happen for that wide range?

Biggs Porter

Well, there is a range of milestone outcomes at MDA.


Steven Li

Okay. Yes.

Biggs Porter

I think, the number I've given you I think is a little conservative on that front in terms of what it could be.

So there's a range of possible positive outcomes there. From the standpoint of the Imagery business, we experienced timing differences in the past, positive or negative.

So those are our there. But the real -- so the bottom line here is, we gave a broad range for the whole business, we gave SSL.

It doesn't make sense to blow up the range by creating a big range for both of them.

So at the end of the day and I think, as I said, in the script, you put it all together and we gave the combined guidance of 230 to 330. And naturally the way we should look at it. We're trying to get away from parsing the pieces, because it's always challenges when you talk about ranges of individual elements. And then you get to the total and if you blow it all out, for every range of every individual items, you just get too big at the end of the day. Does that make sense?

Steven Li

Yes. No. That makes sense. Thank you. That’s very helpful. Thanks.

Biggs Porter

Thank you.


Our next question comes from Robert Spingarn from Credit Suisse.

Your line is open. Please go ahead.

Audrey Preston

Hi. It's Audrey Preston on for Rob Spingarn.

So I just wanted to dig into a little bit of your long-term outlook here, specifically on the power and propulsion element.

So according to the NASA selection document that was publicly released, you've been pretty significantly below the second lowest bidder.

So my question here is what gives you confidence that you can earn a positive return on this contract.

Dan Jablonsky

Hi. Audrey, thanks for the question. Well, first off, I'd just like to reiterate, we are very excited about the program, especially the Artemis program in general, putting in the first woman and the next man on the moon. It's really good to be back to our heritage with the Apollo program and it's a nice win for the company.

A couple of things about this. The bidding process on this that are different than the way the government has historically done business. This RFP asked for a solution to a problem, not for a product on a build to print basis. And left it up to each bidder to figure out how to solve that problem.

In our case we proposed our well proven 1,300 class bus and married that with our leading technology particularly in solar electric propulsion. And if you recall we just recently launched the Eutelsat satellite, which is a 100% all electric propulsion satellite.

And so what we're doing is we're building our proven heritage we have. We built something that we thought would solve the customer’s problem with proven technology and heritage that we're really good at and can predict pretty well.

And we are using our maturing technology and our commercial designs, we're able to significantly as noted in the sheet comment from where the other bids where I think that's why we got the sales force award. And we do expect this to be a profitable program.

Our internal analysis would indicate that's the case and we'll be holding our teams to that.

Audrey Preston

All right. Great. And then I'm trying to reconcile some of the workforce reductions and lower R&D spending in Space Systems with the retention initiatives and from the development contracts that you've gotten over the quarter, so if you could just touch on how you're thinking about those moving pieces and some puts and takes there? Thank you.

Dan Jablonsky

Yeah. Maybe I'll let Biggs go into a little more detail here, but a couple of things going on.

As we roll off milestones on certain programs, we have to get through those milestones, our retention payments for the workforce we need for some of the backlog is critical. But we've also -- so that's where some of the retention payment comes in.

But I'd say we're also shaping the workforce at Palo Alto at our historical legacy SSL operations to be what we want to be in the future that we're able to as Biggs noted breakeven at about $500 million of revenue, that's of course not going to be acceptable.

We expect to generate positive cash flow profitability from that. But first to stabilize and then second is build a solid business and grow from there. But some of -- what's going on is the workforce reductions are being tied to milestone payments, but you have to get through the milestone payments to be able to deliver on the customer programs.

Biggs Porter

And I think just to add this I think of it this way there are obviously has been a decline business base since we have a continually rightsize against the business base, which does trigger severance payments and on the other hand, we need to make sure that the people are retained for the work that we have and the work that we're going to have.

And so that means we have to have retention in place.

So it's just another way of saying what Dan I think just said.

So it is very logical if you seek a way through it to have both of those going on at the same time.

Audrey Preston

Sure. And then on the R&D point just again drilling down a little bit more on that. I mean, how are you reconciling cutting R&D expenditures here assuming that you have these new contracts that you're working on and also assuming that you’re remain committed to the GEO business overall?

Biggs Porter

I'm sorry the -- are you asking why we have such a significant reduction in R&D expenditures?

Audrey Preston


Biggs Porter

Okay. Well there are just two aspects of that. R&D used to be a capital expenditure and I would say maybe was the spending was a little more aggressive than it really needed to be.

As you go on the past versus now, we're looking at pretty hard and seriously and making sure that we only spend on what we really appropriate what we need to for the long-term prosperity of the business.

And in particular there was a lot of spending on digital channelizer in the past that when we evaluated last year, we didn't think we were ahead particularly the right direction on that, so we curtailed that spending. We've talked about the previously.

At this point in time, we think of opportunities for the technology make more through teaming with -- but I will point out that the Aselsan contract had a digital processor on it -- channelizer.

And so we are deploying that technology -- all the R&D expense of the past, but we will continue to monitor what is appropriate for the business as we go forward and make sure we spent what we need to, to make it a viable good long-term business, but certainly, we felt like we curtail from what we were spending in the past very safely.

Audrey Preston

All right. Thank you.


Our next question comes from Thanos Moschopoulos from BMO Capital Markets.

Your line is open, please go ahead.

Thanos Moschopoulos

Hi good afternoon. Dan could you update us on the construction of Legion and whether that's proceeding on time and budget versus the prior envelopes that you've guided for? Thank you.

Dan Jablonsky

Sure Thanos, thanks for the question. Legion program I'm pleased to report is on budget and on time.

We are -- we continue to stay within the budget parameters we've given to the team. We've made it through CDR this quarter, critical design review, and had a very successful set of meetings and multi-day reviews as we move into the built phase on the satellite.

We are actually bending metal and hardware is starting to show up and the vendor supply chain is coming along. I'd be delighted if I could say we were also pulling the timeline a little bit more to the left.

We are still not scheduled for Q1 2021 launch. Primarily that's being impacted right now by one or two vendors that have long lead-time items. If we can pull them to the left, we've got some more schedule margin than where we are in the rest of the program, but we got plenty of good scheduled margin right now from where we are from Q1 2021 launch.

Thanos Moschopoulos

Great. And then can you give us an update on in terms of what we're seeing on the commercial Geo markets? And I think you alluded to the pipeline some updates on the pipeline and any signs of improvement in recent months on both the prime side and then the subcontracting side for MDA?

Dan Jablonsky

Yes sure. And I think what I'd say is the market has seen several awards this year and very likely will be up year-over-year. We're seeing some strong positive trends, some recapitalization efforts getting started.

Some customers are letting us know that their capabilities have been outstripped by the demand in the marketplace. And if they had more assets on orbit right now, they'd be selling them out.

So, we're -- given now some of the programs we got in development were being pushed really hard to see how we can go faster and make sure we're keeping them through the milestone phases.

I'm cautiously optimistic. The market is -- and the overall Geo Comsat market is headed is much better direction. But as I said we're providing a nimble base so that with a mix of government and civil programs and also Geo Comsat awards, we provide a profitable cash flow generating piece of business in our space infrastructure group.

On the MDA and the component side, those go hand-in-hand and I think some of the recent announcements about the LEO constellations, the low-Earth orbit communications will be very good for MDA. They're expert in doing a lot of that.

And as people know they're building the antennas for the OneWeb constellation. Telesat LEO just had some nice announcements up in Canada about Canadian money coming in for that program and some guarantees on orbit data rates. And we expect a lot of the business would be done at MDA in Canada as well.

So, overall, we're pretty excited about the trend. Too early to get too excited, but things are heading in the right direction for us for good business.

Thanos Moschopoulos

Great. Thanks I'll pass the line.


Our next question is from Stephanie Price from CIBC.

Your line is open, please go ahead.

Stephanie Price

I was hoping if you could give us an update on deleveraging options. Obviously there’s been some news reports adjusting divestiture of MD&A Canada maybe on the table.

Just wondering if you could comment on these leveraging options here?

Dan Jablonsky

Thanks Stephanie. We're not going to speculate our media reports, but we do remain very focused on delevering. We're not going to put out specific plans at this point, but we do recognize the need to remove uncertainty on this front, and I guess I just say we have a very broad set of capabilities across portfolio in our intelligence and space infrastructure and remain committed to providing the best level we can for customers as we move into a delevering posture here.

Stephanie Price

Okay. And then on imagery, you mentioned a delay in signing a contract with an existing international customer.

Just when is the contract going to signed, if you can give us any more background there?

Dan Jablonsky

Sure. It has not been signed as of last time I checked my e-mail today. But what I could tell you -- we're typically -- we have some pretty sensitive defense and intelligence customers, we don't always name who they are. But I can tell you its a very long held customer and close ally of the United States in a strategically important part of the world.

They've gone through some changes in their procurement management very recently and that's lead to delays.

So our contract has been affected by that. We understand a number of others have as well. We remain confident we will normalize over time. But it's been a little frustrating on this and we expect to able to work through it though and headed down that path. I guess I would just note for everyone on the call that contract is an important driver of achieving our guidance for the year with that customer.

Stephanie Price

Okay, great. Thank you very much.


Our next question comes from Tim James from TD Securities.

Your line is open. Please go ahead.

Tim James

Thank you.

Just wondering if you could detail on the $12 million OneWeb related impairment, what does that relate to?

Biggs Porter

The company or MDA made an investment and OneWeb as a part of -- it’s participating in the overall program and is a supplier to OneWeb.

So it had a $25 million investment that we've carried on the books.

OneWeb is funded through private capital. They had a second round of funding, it was a down round of funding.

So we and everybody else that had investments in OneWeb had to evaluate whether or not that last funding round at lower value represented an impairment and if you look across the industry, you will see other people who had OneWeb investments similar to us impaired their investment this quarter and roughly speaking 50% is a reasonably in the range of what others did.

Tim James


Okay, okay. Thank you. My second question, I'm just wondering if you could talk a bit about the trajectory of CapEx. And I'm sure you don't want to get into specific numbers, but just the trajectory, the ramp in CapEx on WorldView Legion over the balance of 2019 and 2020.

I think you indicated CapEx will increase significantly in the second half. I assumed a lot of that’s because of WorldView Legion. What does it look like in 2020 as well? Do you kind of hit our run rate in the fourth quarter of 2019 and it stays at that level through 2020 or?

Biggs Porter

2019 -- on the second part of that question, 2019 is really the peak year for Legion and then it comes down.

We haven’t guided with explicit numbers but it definitely comes down in 2020.

So, you should look at even all of 2019, as a reasonable indication of run rate, but especially not the later half of the year where it doesn't ramp up some.

And the ramp up is our internal cost but it also there’s third party costs on the project and those are milestone driven.

So, they are not necessarily smoothly distributed through the year.

So, it's a matter of timing talking about milestones going our way. In this case, the milestones are going the other way in second half and also some ramp up in the project if it moved through the midpoint here but it definitely will come down next year.

Dan Jablonsky

I might just add to that you see it almost now rolled off in 2021 period, and we are very committed to maintaining the CapEx already we've talked about as well.

Tim James

Okay, great. Thank you very much.


And our last question comes from Richard Tse from National Bank Financial.

Your line is open. Please go ahead.

Richard Tse

Yes. Thank you. Biggs, I was wondering if you can elaborate on this MD&A the statements in the Space Systems segment. An increase in estimated cost to complete directly impacts revenue and other cost, the cost method.

Just maybe elaborate on that a little bit for me please?

Dan Jablonsky

Yes. And we've made that statement in the past. It's purely to help people understand how revenue falls off, not just from a lower level of volume but also from just the way accounting works on the percent complete method.

If you have an increase in cost and it lowers your expected profit rate, then your percent complete on cost to total cost, if you will goes down effectively all other things equal, and that causes your revenue number to go down, because your revenues based upon percent complete.

And if you want, Jason, I know can walk you through this, because it’s better if you kind of princely out the math, but it’s just a pure mathematical function of percent completed accounting, the top share can happen when you have cost reduction and your revenues go up and your percent complete goes up to the process just for the math

Richard Tse

And could you tell us like the amount that was attributed to that in the quarter?

Biggs Porter

On revenue, it's several million dollars, I can't remember the exact amount. But I think we said, by example we had the improvement or the associate with recovery of our reserve, which is basically drove the $7 million margin. But we also said that offset cost increases, of about the same amount.

And so that gives you an idea.

And cost increases meaning, EAC adjustments.

So that gives you an idea of somewhat, what that revenue affect was.

So those two things, kind of offset the both the EBITDA level, one of them affecting revenues and the other one affecting cost, not to be too complicated here.

Richard Tse


Biggs Porter

So it's hard to do on the phone.

Richard Tse

Okay. I appreciate it. Thank you.

Dan Jablonsky

Thank you, Operator.


And there …

Dan Jablonsky

Yeah, thank you, operator. We're through the queue here, at the hour mark.

So I think we are going to conclude. And thank everybody for participating in today's call. We'll be participating at the Jefferies Conference later this week. We'll be webcasting, at 8:00 o'clock in the morning on Thursday, for those that want to tune in for some more.

That's it for tonight. Thanks.


This concludes today's conference call.

You may now disconnect.