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.