Maxar Technologies Inc.
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good afternoon. My name is Naomi and I will be your conference operator today. At this time, I would like to welcome everyone to MacDonald Dettwiler and Associates, Limited, 2015 Fourth Quarter Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. We would like to remind you that part of today's discussion, including responses to various questions, may contain forward-looking statements which represent the Company's estimates, future plans, objectives and expected performance as of 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 cause actual results to differ materially from the forward-looking information. You are referred to the advisory regarding forward-looking statements contained in the fourth quarter and year-end earnings news release and in the Company's most recent Management’s Discussion and Analysis and Annual Information Form, both of which are available on the Company's Web site or SEDAR. I will now turn the call over to Mr. Dan Friedmann. Please go ahead.

[Dan Friedmann:]

Thank you. Good afternoon, ladies and gentlemen and thank you for joining us today for MDA's fourth quarter and year-end 2015 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I will discuss some of the key business events that have taken place since our last call, Anil will review our financial results for the fourth quarter and the year-end 2015, and then we will open the line to answer your questions. In the communications sector, the Company won three communication satellites, Telstar 19 VANTAGE, a communications satellite for the Telesat one of the world’s top satellite operators, Telstar 19 VANTAGE will have two high throughput payloads to serve the growing markets in Latin America, the North Atlantic Ocean, the Caribbean and North Canada. Telstar 18 VANTAGE, a multi-mission satellite for Telesat, Telstar 18 VANTAGE will provide broadcast telecom and private network services in the Asia-Pacific region. TELKOM-4 a communications satellite for the largest telecommunications network provider in Indonesia, TELKOM-4 will be used for television, telephone and network services in Indonesia, India and South East Asia. Bidding activity in the commercial satellite sector continues at a high level for both traditional, geostationary communication solutions and less traditional communication solutions. Since last report, EUTELSAT 65 West A was completed and is in final preparation for launch. This satellite was built for Eutelsat one of the world’s leading satellite operators with a fleet of 39 satellites and will provide broadcast and broadband services in Brazil and across Latin America. In Canada, our Montreal operations signed four contracts to provide multiple communication sub-systems with a total contract value estimated at $40 million. One of the contracts included 96 sub-systems. The contracts were awarded by Telus, Orbital, Boeing and Lockheed. In the surveillance and intelligence sector, the Company was awarded a contract to build six satellites for an advanced constellation of low earth orbit satellites for earth imaging. Our manufacturing facility dedicated to small satellite production is currently completing 13 other satellites. The company also signed a contract with DigitalGlobe to upgrade multiple international ground stations to enable them to receive and process imagery and data directly from WorldView-4 satellite in addition to DigitalGlobe’s existing satellite constellation well before were launched later this year has significant customer commitments and will offer high resolution. The upgrades will also allow customers to receive and process near real time data from RADARSAT-2 MDAs Synthetic Aperture Radar Satellite providing an integrated source of optical and radar image capabilities to the market. The company also signed a contract amendment with Canada's Department of National Defense to provide upgrades to ground systems supporting the radar surveillance systems developed by MDA and used in Canada intelligence and surveillance reconnaissance aircraft. In the robotic area the company was selected by NASA to develop on-orbit robotic satellite assembly technology. Backed by the robotics expertise and heritage of MDA, SSL will partner with NASA researchers to develop systems that will benefit both government and commercial spacecraft. Satellites assembled on-orbit using our integrated robotics capability will be capable of higher performance than satellites that can be launched today. Two contracts amendments totaling $8 million over signed with a Canadian Space Agency to provide for on-going support and procurement of long lead items for a new camera systems for the mobile servicing systems which support a variety of operations ranging from re-supply, maintenance and servicing tasks that are critical to the ongoing operation of the international space station. Moving on to the services sector in the surveillance and intelligence, the company booked multiple contracts with undisclosed customers in the oil and gas sector for RADARSAT-2 surface movement monitoring products and services. The company also booked over $10 million of geospatial information contracts with undisclosed customers within the United States. On a more strategic note, we move forward with our activities to become a more diversified and multinational company, and we made the following progress in the United States towards establishing the company as a supplier to both the U.S. government and the many new commercial space players. In the civil space market, we are now working with several NASA centers on a variety of exploration missions. Our selection by NASA just proportion Jet Propulsion Laboratory for the Psyche [ph] mission opportunity, it's the first time the company has been the primary industrial partner for a NASA exploration mission. Our extensive flight heritage allows more science-per-mission dollar. We're already developing partnerships for other exploration missions both in the U.S. and internationally. Our unique robotics capability is now integrated in to SSL and we're working closely with NASA and DARPA on developing robotics to enable partial assembly of satellites in-orbit, through NASA's Tipping Point program and DARPA's Dragonfly program we are developing a ground demonstration of a capability to install antennae in-orbit with a potential for a later flight demonstration. This unique application allow satellite to bypass limitations imposed by the physical size of launch vehicles and has great potential for our commercial satellite business as well as the U.S. government agencies. We're also working with DARPA on our unique payload orbital delivery concept to deliver smaller space to orbit in at base line in the initial launch of 2017. U.S. government opportunities usually follow a well-defined procurement process and our participation in the early stages of potential programs positions us well for a larger contracts and wider participation in the future. In the commercial space of market, construction of the skybox satellite has gone well. With a majority schedule for launching 2016. Our dedicated small satellite production facility is fully functioning and we've won a contract to provide six earth observation satellites. We are currently negotiating a contract to supply a demonstration space cut for a new large LEO customer and there are also several more LEO projects under pursuits. Our further significant potential market area in the United States is a U.S. military and intelligence agencies. We are working hard on having the appropriate structure to perform this work and have some material biz in this area active today. That concludes MDA's operational highlights since last report. I will now ask Anil to report on our financial results. Anil?

[Anil Wirasekara:]

Thank you, Dan. Good afternoon and welcome, everyone. As always, we appreciate your time and interest in MDA. We continue to achieve solid quarterly operating results as we have done over the past several years. Operating earnings for the fourth quarter was $55 million or $1.51 per share. And for the full year operating earnings were $221 million or $6.08 per share. We ended December with a healthy order backlog of $2.9 billion up from $2.5 million as of the end of September. In 2015, we won new orders of five communication satellite. The amount that we report as order backlog includes only the value of firm funded orders. We do not include the value of unexercised contract options and unfunded purchase commitments such as the indefinite delivery, indefinite quantity contracts that we signed in the fourth quarter. Our bookings activities have largely kept pace with the burn rate, considering that our backlog at the end of 2014 was $3.1 billion and we recognized over $2 billion in revenue over the past year. The strengthening of the U.S. dollar in 2015 had a favorable impact on revenues and to a much lesser extent on operating EBITDA and earnings as any foreign exchange gains were offset by significant expenses denominated in U.S. dollars including fixed costs, interests and amortization in addition to un-hedged purchase commitments. On the balance sheet a strong U.S. dollar contributor to a higher reported amount in many of our assets and liability accounts most notably orbital receivables, inventories, goodwill, long-term debt and pension obligations. Looking at our fourth quarter result with comparisons year-over-year. Consolidated revenues this quarter were $544 million, on par with the same period last year. Operating EBITDA increased to $95 million compared to $87 million for the fourth quarter of last year driven by higher contributions from our Surveillance and Intelligence business. Operating earnings $55 million or $1.51 per share compared to $54 million or a $1.49 per share for the fourth quarter of last year. I once again remind everyone that operating EBITDA and operating earnings are non-GAAP financial measures and a reconciliation to net GAAP earnings is provided in our latest MD&A. Fourth quarter net earnings and IFRS was $6 million compared to a loss of $36 million in the same period of last year. As you may recall, the results of the fourth quarter of last year included certain charges related to a final litigation settlement. Now let’s review our full year 2015 results in more detail with comparison to last year. Consolidated revenues 2015 were $2.1 billion consistent with last year. The Communication segment accounted for 71% of our consolidated revenues of $1.5 billion and the Surveillance and Intelligence segment accounted for 29% or $609 million. Revenues by segment in 2015 were more or less comparable with that of last year. Operating EBITDA for 2015 was $377 million, an increase of 8% compared to $346 million for the prior year. The increase reflected a number of factors including the mix of operating activities and contract awards as well as the amounts research cost expense and investment tax credits recognized. The Communication segment contributed operating EBITDA of $210 million, the Surveillance and Intelligence contributed operating EBITDA of $167 million. The operating earnings for 2015 increased by 6% to $221 million or $6.80 per share compared to $208 million or $5.76 per share for last year. During the year, we incurred cost of approximately $16 million is the initial research phase of a very key satellite research program. Such research costs were expensed for accounting purposes. The program is now successfully moved on to the development phase where costs are being capitalized. We funded high levels of development activities and invested in more technology and software in 2015 compared to previous years. We are committed to our R&D programs as such activities are fundamental to growth and maintaining our technology leadership positions particularly in the communication satellites industry. We also incurred a non-cash foreign exchange loss of $7 million on unhedged cash purchase commitments related to the RCN [ph] launch. Net earnings on the IFRS for 2015 was $142 million, up from $47 million last year. Income tax purposes for accounting in 2015 was $44 million representing an effective tax rate of 23%. On a net cash basis we paid income tax of $4 million in 2015. With respect to our financial condition we generated a $135 million in 2015 from operating activities after changes in working capital. This is compared to operating cash flows of $78 million for the prior year. Our operating cash flows can vary significantly from period to period given our portfolio of large construction programs. We will continue to invest in working capital as it is a critical to manage these lead times in the construction activities and growing our business in a competitive environment. Operating cash flows were also impacted last year by certain unusual items that we have excluded from operating earnings. Excluding these items, cash flows from operations for 2015 were $193 million compared to $169 million for 2014. In financing activities we paid dividend of $54 million in 2015, representing dividends of $1.48 per share compared to $1.30 per share for last year. We efficiently fund our cash flow requirements with the syndicated credit facility. Total long-term debt net of cash balances at the year-end was $945 million, a significant portion of the increased over the 12 month is attributed foreign currency translation as most of our debt is denominated in U.S. dollars. Our net debt to bank EBITDA ratio at the end of the year was 2.3

[Dan Friedmann:]

Thanks, Anil. Anil and I, are now ready to answer your questions. Naomi, could you please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

[Thanos Moschopoulos:]

Thank you. Dan, you mentioned that bidding activity remain strong in the communication sector and just wondering given all the recent macro uncertainty, given some of the challenges in the high yields debt market, have you seen any impact as far as the potential decision timeframes from your customers or are those factors not really influencing their decisions?

[Dan Friedmann:]

We talked last quarter about the bidding activity and the way we count out of the 17 satellites last year, 11 were awarded in the fourth quarter, that has already been three awards in the first quarter of this year and the quarter is not over. We are seeing normal year this year. Economics in general are always impacting some business plans and helping other business plans but no we're not seeing any adverse effect from that, we're still trying to clear up the [indiscernible] situation from last year that's not completed cleared up yet. Of course SpaceX is flying again, so things seem to be returning to normal.

[Thanos Moschopoulos:]

That's good to hear. You mentioned that your inspection with several potential LEO project, so is that primarily on the communication sides, U.S. observation side or is it mix of the two?

[Dan Friedmann:]

It's mix of the two.

[Thanos Moschopoulos:]

And primarily with well-established players or more focused from emerging players that might get us some financing in place?

[Dan Friedmann:]

Both, we -- there are well established players and many players that have money they may not be in this business yet, that we are bidding and that are of course our top priority. There is emerging players that have partial funding that we try to pursue all of them and then of course there is others that don’t have funding yet and were a little bit selective there.

[Thanos Moschopoulos:]

And maybe just one last one, as you look out over the next year or two, you outlined several growth sectors, which of the parts of your business do you think might first have the most opportunity for growth in the next year or two?

[Dan Friedmann:]

We continue to see our major growth related to our multinational strategy and 80% of that strategy is United States access and that’s why I gave the year-end review and at the end of my speech and I outlined I think four or five areas there. We have growth in our normal businesses but it's small. The big growth for the Company is going to come from the United States and that’s our fundamental business plan.

[Operator:]

Thank you. Your next question comes from Deepak from GMP Securities. Please go ahead.

[Deepak Kaushal:]

Just on that last comment Dan, the growth coming out of the U.S. I think at the time when you guys acquired SSL, correct me if I am wrong. But I think you said your pipeline of opportunity was about $1 billion. What’s the pipeline look like today for the U.S. market?

[Dan Friedmann:]

When we acquired SSL we had no pipeline in the U.S. government, it was zero. We might have had $1 billion in SSL I don’t know, but we had no pipeline, we had no access from Canada and SSL was out of the U.S. market. Today our pipeline is around $2 billion almost as big as the rest.

[Deepak Kaushal:]

And then I assume that’s qualified pipeline where you see there is a big opportunity that you can bid on or expect to bid on in the near-term?

[Dan Friedmann:]

The way I define pipeline in these calls are outstanding bids. I don’t give you my whole pipeline my whole final, that’s a big number. So it's bids that have been submitted or programs for which we have won the first phase and I discussed lots of them in my speech at the end, where there is a second phase and we continue on to the second phase as that goes forward, the full pipeline is larger.

[Deepak Kaushal:]

And is there any color you can give us in terms of the split amongst the key top agencies like NASA, DARPA U.S. Air Force?

[Dan Friedmann:]

No.

[Deepak Kaushal:]

You mentioned on the military intelligence side that you’re trying to set up a structure and that you’ve bid on some opportunities. Can you perhaps offer some more color on the structure that you’re looking at, are there any challenges you see and what’s the timing of checking off that box in advance of some of your bids?

[Dan Friedmann:]

Yes, our goal for this year is that our U.S. facilities be cleared to do work for the government in the same facility as we do in the commercial work, that’s what gives us a competitive edge versus somewhere else, which is what we have to do now. If we want to do that and work now, we have to do it in a proxy company or a special security company. So, we are working with the U.S. government so that our SSL plant be cleared and we can process the government work through that plant and we are working to a third quarter schedule and when we’ve done that we’ll talk about it, I think it's premature right now to discuss the details. But we have a well-developed plan, it's my top priorities, it's being worked on regularly.

[Deepak Kaushal:]

And just I know you can’t talk about details. But is there a onetime cost associated with that or would that be absorbed presumably with a contract?

[Dan Friedmann:]

No, there is no significant no material cost related to that.

[Deepak Kaushal:]

And just speaking of cost Anil, you mentioned $16 million that you spent on the R&D phases of some early work and that you’re going to do some more development work over the next year. Do you guys have a budget number for that that we could expect to see capitalized?

[Anil Wirasekara:]

Yes, it would in the $20 million, $30 million range for this year, but it just depends on certain gating milestones. So if all the milestones are achieved and everything is done, yes then it will be around that amount.

[Deepak Kaushal:]

And is this a two years to go, or one year to go, or 18 months to go project?

[Anil Wirasekara:]

So it's fully completed at two years, but it has earlier deliverables.

[Deepak Kaushal:]

And then the last question from me if I may, any other color you can give us on securitizing the orbital receivables, if I am not mistaking they are about $430 million on the bar sheet?

[Dan Friedmann:]

We are looking in about $200 million range which we have no interest in doing fraud.

[Deepak Kaushal:]

Okay.

[Dan Friedmann:]

I am positive about $200 million we have spent a fair amount of time trying to put the right structure in place, this is something that many people have tried to do for many-many years and have not been successful in getting it done. So, we are hopeful that we can create some liquidity I mean it seems a wasteful to keep such a huge amount on your balance sheet untapped. So we're working hard to try and see whether we can do this in a cost effective and economical way.

[Deepak Kaushal:]

Okay and that 200 million would go straight to paying off debt?

[Anil Wirasekara:]

Pardon?

[Deepak Kaushal:]

Would go straight to paying off debt, is my understanding.

[Anil Wirasekara:]

Initially sure, I mean the day we get it. Unless there is nice M&A opportunity we will certainly pay off debt but the objective is to provide us with more capacity to grow our business.

[Deepak Kaushal:]

Okay and then in the absence of that what should we expect in terms of debt repayment over the next year?

[Anil Wirasekara:]

We've always said that, we'd like to have a leverage at about 2.5 times and that's what our long-term goals would be

[Deepak Kaushal:]

Okay, that's helpful.

[Operator:]

Thank you. Your next question comes from Steve from RBC Capital Markets. Please go ahead.

[Steve Arthur:]

Just a couple of quick follow up questions. First on the LEO satellite opportunities, you talked lot about the pipeline of new things coming in, wondering about just the progress and how things are advancing with some of the current customers? Skybox, sounds like that first phase is close to wrapping, is the future opportunities there, where do things stand with OneWeb and the fix satellite [indiscernible] signed few weeks ago, I guess, how does that progress and can that grow over time?

[Dan Friedmann:]

Yes, so our first batch of Skybox satellites are completing this year 2016 and I think, I can't remember the plans are to launch eight of them and called the others back and that program is going very well, the customer is very happy, we're very happy with our performance on it and we basically stood up our whole facility for doing LEO's and as we talked about we booked another six and we have several outstanding bids today most of these are the beginnings of larger conservations. And of course since we won Skybox it was bought by Google, so I don't know about their plans, originally we're talking about much -- many more satellites, the couple of bids, the one we're negotiating right now it's a single satellite, but it's a demonstration satellite that can be become a conservation in that case -- communications related. So not big stuff in the short-term but people have planned these constellations. OneWeb is a different story where we're not doing the satellite we're participating in the pay load and since our last call, we're now participating heavily on the ground segment for that's out of the Canadian operation and related to SSL and that's going well, that work is going well.

[Steve Arthur:]

Okay and I guess, secondly with respect to U.S. business and NASA contract you signed in December was for on-orbit satellite assembly, it sounds very intriguing. Can you just elaborate a little bit more on the nature of that work, the scope of it, how long that carries on?

[Dan Friedmann:]

It's a multi-phase situation, what we signed up for was a ground demonstration and it relates to taking a satellite with a few pieces not in the right place attached to it and then putting those pieces together in-orbit which would have a significant impact to our commercial business, we've already proposed high throughput satellites that would have the antennas attached in-orbit rather on the ground and you can basically fit about 30% more capacity in the same rocket and that way. So, it's all based on our existing technology, we know how to do this and we're now doing a ground demo, hopefully that succeeds NASA will fund the flight demo which would be in order of magnitude more money and we're dong similar work for DARPA and that they may merged or may not merged but -- that's all very exciting situation. We've never been able to capture anything like that from outside of the U.S. so now we're doing from inside the U.S.

[Steve Arthur:]

And final one, I know, you mentioned the dilution impact of the share-based compensation changes, any sense of the order of magnitude of that are we talking about a large change other than diluted share account or at EPS level?

[Anil Wirasekara:]

At the EPS level, we're looking at around $0.10 per share for the year, so about $0.02 to $0.03 a quarter, that's what they would but we would expect. So not huge, but certainly material and this will be only on the fully diluted shares, not other ways.

[Steve Arthur:]

So not back of the line, nothing at EBITDA level?

[Anil Wirasekara:]

No, nothing at -- none of these will impact to EBITDA level, mostly on the EPS level.

[Steve Arthur:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from Paul from Scotia Bank. Please go ahead.

[Paul Steep:]

Thanks. Dan, maybe worth going back over the geospatial business, it had a great year in '15, maybe talk a little bit about the outlook there and how you're thinking about that business as we enter '16?

[Dan Friedmann:]

Sure, first on the U.S. side ’15 was a bit rough for us, we had -- there was all kinds of government budget issues, ’16 is off to a way better start, our people are much more optimistic and have higher growth expectations. And of course we did win a large indefinite delivery indefinite quantity program that we’re now receiving work on and we have a couple of more that are going to close in the first half of this year. So on that side, the outlook I think it's from our team is a bit more positive as the budgets are stable. We’re also introducing a bunch of new subscription product. We have introduced social media inputs together with our satellite imagery for a bunch of new intelligence products and that’s a very fast growing section of our business. On the Canadian geospatial side on radar, we continue to win business in the oil patch but of course it's down in general. However, we been getting a significant amount of business from the legal integration situation in Europe and we might have a significant material change in that this year depends on how things go. We can certainly provide what’s needed there, so there is that growth our [indiscernible] contract is providing good growth possibilities for us. So, overall we’re feeling good about geospatial going into ’16 better than ’15.

[Paul Steep:]

I guess the second one from me would be around your U.S. growth initiatives. How should we think about the level of investment required? Obviously, it's going to vary based on what the win rate here, but if you’re just thinking about investing into pursuit on these deals and maybe development of new product. What’s that level look like in ’16, is it materially higher or different than maybe what we’ve seen in the past couple of years, or just reallocation?

[Dan Friedmann:]

Our biggest investment is in business development and it is now a significant enterprise our business development costs there are about a quarter of what they ask for example in our commercial geo business up from almost nothing when we bought it to sell. Our costs are increasing a little bit although as we win all of this work, it's getting self-funded. I mean that’s a material business today all the addition of all these studies, many tens of millions of dollars business and it generates margin. So, although we’re putting more money into business development we are getting more bottom line from the business and the net cost is not going up for the Company. Beyond that, last year we put the capital in for a small satellite facility, we’re spending capital for our space robotics facilities in the U.S. But the technology, we have it. We have a lot of technology in the Company that we are trying to capitalize in this area. So it's not a big thing, it’s a business development but it comes with revenue.

[Paul Steep:]

Last one from me would be on the UAV side. It's been a while since we revisited it, I know you were still hunting deals last we talked any progress on that front?

[Dan Friedmann:]

The fundamental thing in our business is that if you do not have a domestic customers you don’t have customers. So once Canada pulled out of UAV we’re stuck, we just can’t go forward. So our whole focus is to get other government customers. So we’re working the UAVs in Australia and in the U.S. we don’t have a chance. And we’re working of course all the other programs in the U.S. and then we’ll generate export from that.

[Paul Steep:]

Anil just on the securitization, rough time line I know you’re working hard to get it done. Is mid year’s affairs, thought?

[Anil Wirasekara:]

Yes, I mean hope for the first quarter, but you can never say.

[Operator:]

Thank you. Your next question comes from Stephanie from CIBC. Please go ahead.

[Stephanie Price:]

Can we go back to the OneWeb the partnership and I know it's been discussed already, but I just wanted to understand a bit more about timeline for the construction of the satellites and the funding that they’re expecting.

[Dan Friedmann:]

You have to ask OneWeb, I am not authorized to speak on their behalf, I can only tell you that we’re working on the program.

[Stephanie Price:]

And then maybe we could talk about RCM and how that contract is progressing?

[Dan Friedmann:]

Very well, we’ve completed major sections of RCM, we’ve retired biggest chunks of risk. We have a couple of subcontractor subsystems that are running late, but we’re still within our prime contractor days by and large. And it has gone very smoothly, great team on that.

[Stephanie Price:]

And then on the enterprise improvement initiatives, I was just wondering if you could give us an update on that, and if we should expect any additional cost in 2016?

[Dan Friedmann:]

Sure. We continue to work very hard on that. We had an original program that is by and large completed in ’16, although there is still some work that goes into ’17 and then at the last quarter of last year ongoing this year we initiated another delta project with another set of consultants looking at other aspects of costs and that goes on efficiencies and that goes forward throughout this year and yes, we're incurring costs on those programs but we're incurring more savings and we continue to work on that in order to try and deal with the euro situation

[Operator:]

Thank you. Your next question is a follow up question from Deepak from GMP Securities. Please go ahead.

[Deepak Kaushal:]

Dan, on the international growth strategy, you said earlier 80% of it is U.S. I was wondering if you could maybe shed some light on the 20% that's non U.S. what are you seeing in terms of changes in that opportunities that you talk about Brazil in the past or India, how are those opportunities changing or anything new coming up in the pipeline?

[Dan Friedmann:]

Sure, I think the main areas we've discussed in the past have been Russia where we used to have a significant business that business was shut down due to export permits, we couldn't get from Canada, that situations seems to be changing with a new government. So, we're little bit encouraged but its early days and hopefully we can go back into that market instead of just handing it to the French. Brazil is challenged, let's put it in that way, we're not seeing much activity. India is fabulous, is moving full speed ahead, they have procurement ongoing right now. And we're very active, we have a full half day [ph] we leave on it tomorrow and the new governments good, they need satellite, they can build them fast enough in the country and so I think that's a good opportunity and new to us, or to this level of engagement in Turkey, we won number of contracts in Turkey last year and they have procurement live as we speak right now for two satellites and so that's an emerging area for us and of course the UK has gone back into the space business after a long time of being out of it and there's some opportunity there for us. But they pale in comparison to the U.S. Nonetheless we of course pursue them.

[Deepak Kaushal:]

Okay. Any comments on the Middle East, I know that there's recent announcement with two new goal on some LEO satellites over there, what opportunity are you seeing in the Middle East if any?

[Dan Friedmann:]

There communication satellite opportunities as they've been in the past, the announcement that you are referring there's an opportunity we're of course -- on the groundside, we're in all that because the specialty set that they're going to use to digital growth ground segment and either of the two partners can build satellites completely on their own. So, perhaps there will be procurement there, I don't know, we're investigating. And there are other government based procurements going on, but in comparison to the activities just in Silicon Valley, let along the rest of the U.S. is still smaller than them.

[Deepak Kaushal:]

Okay and 80/20 rule is that fair to apply that to the pipeline of opportunity as well on a 20% or in other words can you give us a sense of the pipeline?

[Dan Friedmann:]

No, not completely because sometimes you know, if you have a OneWeb, I don’t know where you count that, that's in the pipeline, if you have more advanced constellation then that's going to getting funded and that's skews it, I haven't looked at the percentages but probably close to 80/20.

[Operator:]

Thank you. Your next question is comes from Steven from Raymond James. Please go ahead.

[Steven Li:]

Thank you. Dan, for [indiscernible] what was the revenue contribution in Houston and do you expect to stay more or less at run rate for 2016? Thanks.

[Dan Friedmann:]

The revenue contribution for 2015 was a little north of 100 million and I think for 2016, it's going to be a little south of 100 million. So, it could be $20 million to $25 million a quarter in 2016. So, it still valid substantial amount of backlog in that program.

[Steven Li:]

Great, thanks.

[Operator:]

Thank you. We have a follow up question from Thanos from BMO Capital Markets. Please go ahead.

[Thanos Moschopoulos:]

Just a couple for Anil. Anil, what was the RADARSAT launch liability loss in Q4, related FX?

[Anil Wirasekara:]

Interest for the whole year, which was about 7 million

[Thanos Moschopoulos:]

7 million, okay. But you have to give --.

[Anil Wirasekara:]

Q4 was the smallest, right, we -- the currency movement was the smallest in Q4, most of it was earlier on, so it was a year-end issue more than a Q4 issue.

[Thanos Moschopoulos:]

Okay, that seems that the S&I margins were pretty good stronger this quarter, any color, do you want to add?

[Anil Wirasekara:]

No, I mean, once again it is not possible to look at these margins on a quarter by quarter basis, it was fairly consistent, we had a fairly strong S&I year because we had a lot of flow through the quarter because we have to flow troughs that went through, what from a margin standpoint, it was pretty consistent with some of the other quarters.

[Thanos Moschopoulos:]

And one last one as far as the tax rate, what tax rate should we expect for 2016?

[Dan Friedmann:]

On an operating earnings standpoint it would be phenomenal mid to high teens from a GAAP perspective on an IFRS perspective it should be in the high 20s.

[Operator:]

Thank you. Your next question comes from Andrew from Cormark Securities. Please go ahead.

[Andrew McGee:]

I just wanted to quickly touch on your M&A initiative. I know last quarter you discussed how you sign an influx in organic work and I’ve kind of sidelined discussions. The first question is, is that back on? And the second would be if you could give any comments on the landscape, whether you’re seeing deals at the smaller end or the higher end? Thanks.

[Dan Friedmann:]

We’re still seeing significant organic and we’re really at the key point we had a plan when we bought it to still and it's coming happening, it's happening now. So we’re very focused on that. Almost all the M&A we have seen is in the United States partly because that’s where the companies are and partly because that’s where our focus is. And the ones we have reviewed all have a government components that require proper security arrangement. And we have decided to work through our security arrangements as I discussed earlier on in the meeting and get those in place before proceeding, otherwise it's just too hard. And we have seen everything from just reviewed one that 20 million in revenue to 1 billion in revenues. So, there is lots of difference, but we need to have our security things sorted out so that we can coexist without big walls.

[Anil Wirasekara:]

Just to add to what Dan said, basically in order to pursue these aggressively and actively and be a credible bidder we have to be qualified, we have to be qualified to be able to execute government work. If a target even has 10% or 20% defense work or classified government work then it becomes really hard for us to pursue those M&A opportunities because we have to put different structures in the place in order to manage those. So what we are trying to do now is to make sure we have the proper organizational structure where we can participate in these M&A activities and opportunities and just put them into the Company and run them as if we are an U.S. Company from the eyes of the government.

[Andrew McGee:]

So as you lay your foundation and build out your U.S. government side, do you have a time line on potentially how far that could defer any M&A? Would it be six months or a year?

[Anil Wirasekara:]

What we have said is that we expect to have the organization and everything in place by the fourth quarter of this year, so once that is done, yes, we will be in a better position to be able to pursue these M&A opportunities more vigorously than we are today.

[Dan Friedmann:]

Certainly the larger ones.

[Operator:]

Thank you. There are no further questions at this time. Please proceed.

[Dan Friedmann:]

Thank you everyone for dialing in and your questions. And we look forward to updating you I guess it's only in a couple of months for Q1. Thank you and good evening.

[Operator:]

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.