Maxar Technologies Inc.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good afternoon. My name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to MacDonald, Dettwiler and Associates Limited 2014 Third 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 question-and-answer session. (Operator Instructions) Thank you. Welcome to MDA’s Third Quarter 2014 Conference Call. We 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 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 the actual results to differ materially from the forward-looking information. You are referred to the advisory regarding forward-looking statements contained in the third quarter 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 website or SEDAR. I’ll now turn the call over to Mr. Dan Friedmann. Please go ahead.

[Daniel Friedmann:]

Thank you, Joanna. Good afternoon, ladies and gentlemen. And thank you for joining us today for MDA’s third quarter 2014 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I will be discussing some of the key events that have taken place in the past few months. Anil will review our financial results for the third quarter. And then we'll open the line to answer your questions. In the communications sector the company signed contracts for three communication satellites, bringing the year-to-date bookings to eight. Intelsat 36 our communication satellite for Intelsat, the world’s leading provider of satellite services. The satellite is designed to provide media distribution and direct-to-home TV services in Africa and South Asia. BulgariaSat-1, a communication satellite to be built for an affiliate of a leading telecommunications company and the largest provider of pay-TV services in Bulgaria. The satellite will provide direct-to-home television service in the Balkan region. MDA’s fixed the customer with the full satellite financing including export credit financing from Export-Import Bank in the United States, and a satellite for an undisclosed customer. Bidding activity in the commercial satellite sector continues to be competitive and at a high level of activity. The company also completed the construction of four commercial communication satellites which were successfully launched and are performing post-launch maneuvers. AsiaSat 6, designed and built for a leading operator in Asia will provide broadcasting, telecommunications and broadband services across the Asia-Pacific region. AsiaSat 8, which will provide direct-to-home television services, data-broadcasting and telecommunication services in Asia and the Middle East. Optus 10, built for an Australian telecommunications service provider, will provide high quality consumer broadcast services and two-way voice and data communication services for Australia and New Zealand. Intelsat 30, built for Intelsat will provide distribution services for direct-TV Latin America, and South America, and the Caribbean. In Canada, our Montreal operations received a contract to provide Mitsubishi Electric Corporation with multiple communication subsystems for a telecommunication satellite. This award represents a further expansion into the sophisticated Japanese market and is a testament to our global leadership position in Ku- and Ka-band multi-beam solutions. The company was also selected by the European Space Agency for the development and construction of a Ka-band data relay terminal for use on the International Space Station. The terminal would enable higher, faster delivery of scientific data and high-definition video between the International Space Station and ground stations. In addition, the company was selected by Airbus Defence and Space and by Boeing to provide multiple communication subsystems. In the surveillance and intelligence sector, the Common Wealth of Australia awarded the company a contract amendment valued at $40 million to transition an unmanned aerial vehicle services to Australia following the completion of services in Afghanistan, and to continue the service domestically through December 2017, with options to extend the service for three additional years. The company has signed a contract with DigitalGlobe to provide a ground station solution for an international customer to receive and process inventory and data from all operational WorldView satellites. This is our first ground station solution to include WorldView-3, the first multi-payload, super-spectral high-resolution commercial satellite. The ground station is based on a multi-satellite architecture and is expandable to support additional satellites. Also in this area, the company was selected by the Canadian Space Agency for three research and development projects. The first project will evaluate our radar and optical images can be combined to detect and track ships more rapidly. The second project will pursue improving the solution for monitoring land ships and other geological hazards in pipeline corridors. And the third project is to demonstrate the added-value of RADARSAT-2 in monitoring of forest areas by providing information on forest changes and disturbances such as clear cuts and partial cuts. The company signed a contract and there is existing agreement with the U.S. Air Force to provide – to further enhance the flight path safety system that provides critical support to design of airport approach and departure flight paths. Moving onto the services business in the Surveillance and Intelligence sector, Geospatial Services signed two agreements with our Chinese partner, totaling $10 million; one agreement is for a 5-year provision of RADARSAT-2 information, and the second for a local ground receiving station. The RADARSAT information will be used to support a variety of applications from government and commercial uses in China, such as land use management, environmental monitoring, subsidence monitoring, disaster response, and maritime monitoring. The company was also awarded multiple contracts by several undisclosed customers in the oil exploration sector for RADARSAT-2 base monitoring services to detect and track the movement of oil on water through all weather conditions 24-hours a day, and in the oil and gas and mining sectors to detect surface movement. Finally, the company closed the acquisition of the Advanced Systems line of business from General Dynamics Advanced Information Systems, Inc., which we announced in July 2014, located near Detroit, Michigan, the business has approximately 170 employees and generates annual revenues of $40 million. The business has over 50 years of in-depth experience in the development and application of radar and other information sensors for the U.S. government. This unique capability will significantly strengthen the company's ability to pursue future surveillance systems and services opportunities in the U.S. market. That concludes MDA's operational highlights/report. I will now ask Anil to report on the third quarter. Anil?

[Anil Wirasekara:]

Thank you, Dan. Good afternoon, and welcome, everyone. We appreciate all of joining us today. I'm very pleased to report that, we continue our trend of achieving solid financial results. Year-over-year, third quarter consolidated revenues increased by 9% to $507 million, and operating earnings also increased by 9% to $51 million, or $1.41 per share. For the nine months ended September 30, 2014. Our results are impressive with consolidated revenues increasing by 16% to $1.6 billion, and operating earnings increased by 17% to $154 million, or $1.27 per share. We also ended September with a fully funded order backlog of $3 billion. Before going into our third quarter results in more detail, I want to highlight some significant business events that occur this quarter. First of all, Dan talked about the strategic acquisition of the Advanced Systems business line from General Dynamics. The acquisition was closed just after quarter end. We will include the results of this business in the Surveillance and Intelligence segment starting in the fourth quarter. We also very pleased to have settled all outstanding litigations with ViaSat, which benefits all parties involved. First went to a comprehensive settlement agreement all claims and counter claims redeemed to parties were dismissed. This settlement agreement also provides us with excess to a significant portfolio of related ViaSat patents. We have since moved forward fully dedicating our time and resources to helping our customers achieve that business goals and we are reaping the benefits with more business. We have agreed with Loral to go to arbitration in December 2014, to determine the final allocation of the settlement payment due to ViaSat. Earlier this year, we commenced an enterprise improvement initiative at our satellite manufacturing operation. This initiative is aimed at reducing overhead costs, increasing supply chain value, and improving overall production processes, in particular via automation and standardization. This initiative will also help ensure that we remain competitive and are well positioned in the evolving commercial communication satellite market. The implementation of this initiative will continue through 2015. During this quarter, we recognized costs of $16 million with respect to this initiative. Now, let me review our third quarter results with comparison year-over-year. Consolidated revenues this quarter increased to $507 million compared to $463 million for the same period last year. The increase reflected higher activity levels across both operating segments. In terms of revenue mix, the Communications segment contributed 74% of consolidated revenues, or $373 million, and the Surveillance and Intelligence segment contributed 26%, or $134 million. Operating EBITDA increased to $85 million compared to $80 million for the same period last year. Operating EBITDA as a percentage of revenues of 17% same as the third quarter a year ago. The Communications segment contributed operating EBITDA of $51 million, but solid margins of 14%. The Surveillance and Intelligence segment contributed EBITDA of $34 million and continued their steady margins at 26%. Operating earnings increased to $51 million, or $1.41 per share compared to $47 million, or $1.29 per share for the third quarter last year. I remind everybody that operating EBITDA, operating earnings are non-GAAP financial measures, and in our latest MD&A, you will find a reconciliation of these amounts to net earnings. Net earnings under IFRS this quarter included a number of special items, including the costs related to our enterprise improvement initiatives and legal fees related to the ViaSat litigation settlement. Giving effect to these and other items affecting comparability, net earnings for the third quarter 2014, was $21 million, or $0.60 per share. Now I will review our results on a year-to-date basis, but comparisons to the prior year. For nine months ended September 30, 2014, consolidated revenues increased to $1.6 billion compared to $1.3 billion of the same period last year. The increase reflected growth across both segments. Revenues on the Communications segment for the year-to-date increased to $1.1 billion from $1 billion, and revenues from our Surveillance and Intelligence segment for the year increased to $443 million from $341 million for the same period last year. Operating EBITDA for the year-to-date increased $261 million compared to $243 for the first nine months of 2013. Communications segment operating EBITDA of $131 million and have solid margins of 13%, the Surveillance and Intelligence segment contributed operating EBITDA of $122 million for the nine months and a healthy margin of 27%. For the nine months ended September 30, operating earnings increased to $154 million, or $4.27 per share, compared to $132 million, or $3.79 per share. We have estimated that the effective income tax rate and operating earnings for fiscal 2014 to be 19%. Now, let’s turn our attention to cash flows. We continue to generate significant cash flows from operations, which were primarily invested in working capital. The change in working capital for the nine months ended September 30, 2014, was due to a decrease in construction contract liabilities. As you may recall, during the second-half of 2013, we generated over $250 million of free cash flow after capital expenditures and debt service mainly from large advances received from customers. We are now growing down on those advances to fund work on those construction programs in 2014 also some of our more recent bookings have cash flows that are more neutral rather than front-end loaded. Investment in working capital has become integral to our business given our portfolio of long-term construction programs and commitments to make short-term obligations as well it is necessary for us to continue to invest in working capital to build our business and manage the lead times in construction activities. We are able to efficiently fund our working capital requirements with the existing revolving credit facility. We continue to deploy capital in a systematic and disciplined approach across a broad spectrum. In the first nine months of 2014 we invested $54 million in capital expenditure, a large part of which was used to increase the production capacity and upgrade the facilities at our satellite manufacturing operations. We also paid a dividend of $47 million in the first nine months of this year. Now, let me summarize. We continue to achieve solid financial results benefiting from a strong operational execution across a diversified earning space. In the third quarter, we generated consolidated revenues of $507 million, operating EBITDA of $85 million and operating earnings of $1.41 per share. Our order backlog of September 30 was $3 billion, which provides us with good long-term revenue, earnings and cash flow visibility. We continue to execute a balanced capital allocation strategy with dividends to our shareholders with investments in working capital and technology and infrastructure to support future growth. We also maintained ready access to capital markets to fund other acquisitions and extraordinary growth initiatives, and remain focused on enabling our customers to succeed and optimizing the value for our shareholders. In conclusion, we delivered a solid third quarter results under a challenging business and operational environment, while continuing to invest in the future. With that, I’ll hand it back to Dan.

[Daniel Friedmann:]

Thanks, Anil. Joanna, we’re now ready to take questions.

[Operator:]

Thank you. Your first question comes from Steve Arthur of RBC Capital Markets. Please go ahead.

[Steve Arthur:]

Great, thank you. Just a few follow-up questions, first on communications margins, so a good sequential improvement over Q2. I guess just a couple of questions related to that. One, can you talk about the near-term steps that you’ve already implemented and is that level sustainable around there in the near-term. And then I guess just more broadly on the longer-term efficiency improvements in Palo Alto. Any discussion on what the nature of the efforts are there or what the impact might be over the two years or three years as these things take hold?

[Daniel Friedmann:]

I think, Anil described what we’re trying to do. I don’t really want to go into any more details. This market is super competitive, but we’re fundamentally trying to produce things more efficiently, more quickly, at the same or improved quality, by standardizing a little bit more instead of making each satellite its own special baby. We’re trying to use more and more standardized component, that’s the main effort. And we’ve already implemented overhead reductions, which do not affect anything to do with manufacturing or sales or R&D, which are other functions, more in line with typical MDA levels. So that’s already been implemented and you’ve seen some of that reflected already in the last quarter. It’s a comprehensive extensive program aided by very professional world experts in all kinds of fields, specifically supply chain management, where we spend half our money that comes into the company. And it’s – we’re taking it very seriously and we’re trying to improve our efficiency. At this point all I can is we’re trying to keep up with the market pricing of the last few months, and I don’t know if we – in the long term going to be able to improve margins but we’re trying not to deteriorate them, while at the same time win more satellites.

[Steve Arthur:]

Okay. And so I guess just in the near-term then the 13.5% or 14% communication margin in Q3, there was nothing in there that was kind of unique in nature, one time in nature, that was just reflection of kind of the steps taken so far. So we should see that as kind of a base from here forward?

[Anil Wirasekara:]

Yes, Steve. I mean we are certainly happy that the performance from communication segment and that was nothing extraordinary there other than the extraordinary hard work put by everybody in that business. And, yes, we certainly hope to continue the trend going forward.

[Steve Arthur:]

Okay. I guess the other trend I want to ask you about was just communication satellite award, (inaudible), yesterday I believe it was, any further color on the level of pipeline activity there, any activity we might see across the industry to the balance of 2014 or into 2015?

[Daniel Friedmann:]

It continues to be very buoyant. You are in Paris. 2014 was looking good. It continues to look good. Our outlook for 2015 for the industry has improved, since the Paris conference. At the moment we’re seeing a very strong year in 2015 in terms of overall satellite orders in the industry. And we’re very busy.

[Steve Arthur:]

Just on the part of being busy, you did have strong order flow in the past couple of years, now I guess. With respect to capacity in Palo Alto, are you reaching capacity, are you able to support more, if you would win more in the coming months?

[Daniel Friedmann:]

Yes. We are able to support more. I made no secret that we’re trying to increase our capacity by double-digits and that new TVAC went operational few weeks ago. And the efficiency measures means that we will be able to increase our capacity without having more staff, and that’s the plan.

[Steve Arthur:]

Just one final one, just you talked briefly about the U.S. access and traction you’d been getting there including your acquisition, any comments on the nature of the pipeline there, if it’s been expanding further or faster over the past quarter, the nature of the programs you’re bidding there?

[Daniel Friedmann:]

Yes, that pipeline is very exciting. It has definitely expanded significantly in the last quarter. We’ve added many large opportunities or still trying to qualify them, but we’ve added large opportunities we’ve received a significant RFP in the last quarter and we received another RFP in the last week or so. And that is a very bright area for us with an expanding pipeline and we shifted significant investment and activity to it in the last four months, further investment activity to it.

[Steve Arthur:]

Okay. Thank you. I’ll pass the line for now.

[Operator:]

Thank you. Your next question comes from Thanos Moschopoulos of BMO. Please go ahead.

[Thanos Moschopoulos:]

Hi, good afternoon. Just to finish off on the communications business. Can you provide the metric as far as where you are currently in Palo Alto from a capacity utilization perspective?

[Anil Wirasekara:]

No, this is really competitive.

[Thanos Moschopoulos:]

Okay. Fair enough. Fair enough. It’s nice to say that you’re working on expanding it, seems clear.

[Anil Wirasekara:]

And to try book satellites, every minute…

[Thanos Moschopoulos:]

And then as far as the pricing environment would you say that – I mean it’s obviously very competitive. Has it gotten any worse over the past three to six months or is it sort of stabilized at a specific level in recent months, any color on that?

[Anil Wirasekara:]

Competition is very intense.

[Daniel Friedmann:]

Yes.

[Thanos Moschopoulos:]

Fair enough. All though. You’re obviously continuing to win your share which is good to see. And maybe on that topic, what would you attribute to your strong success rates and the strong bookings we see and what are some of the key factors driving that?

[Daniel Friedmann:]

I think we have a very good product. I think we are enhancing that product appropriately with time while maintaining the heritage and we’re trying to be a full stop shop for our customers. As you saw on Bulgaria financing was critical, financing is critical to the announcement just made. As you know we have senior person joined our staff six months or so ago. He is very busy trying to help with EDC and EXIM and so on, and I think that’s about all I can say.

[Thanos Moschopoulos:]

Okay. Fair enough. It seems like the tax rate was lower this quarter. Maybe, it’s too early for this question, but how should we think about the taxes as we head into 2015?

[Anil Wirasekara:]

19%, I mean, it’s between – it will fluctuate between 19% and – 18% and 22%, so 19%, 20% would be a good number. It just depends on how the earnings from different jurisdictions come in. We are forecasting 19% for 2015.

[Thanos Moschopoulos:]

Okay. That’s good. I’ll pass the line. Thank you.

[Operator:]

Thank you. Our next question comes from Paul Steep of Scotia Capital. Please go ahead.

[Paul Steep:]

Great. Thanks. I think you both given a good color on what’s changed in the pricing environment but I want to just go back to one comment Anil made about cash flow is being more neutral than historic. Obviously there is a bunch of elements in these contracts. It’s not just simply price and margin. Are there any other terms that are changing that’s immaterial? Is there sort of a fundamental shift happening or do you think this is sort of a transitory issue just with regards to a handful of contracts over a period of time?

[Anil Wirasekara:]

Schedule, I think, schedule is becoming more sensitive.

[Daniel Friedmann:]

Yes, I mean…

[Anil Wirasekara:]

People – full services Dan talked about, people come to you with the full – and you’re going to have to provide a full service operation from manufacturing to procuring the launch, to launching to on-orbit operations et cetera.

[Daniel Friedmann:]

But, changes in the cash flow are not so much related to our communications business.

[Anil Wirasekara:]

Yes.

[Daniel Friedmann:]

As the government business has gone down, they have – those contracts have different cash flow.

[Paul Steep:]

Okay. That helps.

[Daniel Friedmann:]

A mix, more of a mix than any change in a particular area.

[Paul Steep:]

Good. Thank you. I guess, on UAV business, it’s been a while since we talked about it. It was a good solid win in Australia. What’s the outlook like there, Dan, in terms of building or continuing to expand that business? I know it’s sort of quieted for a while. Has it started to pick up again?

[Daniel Friedmann:]

Yes, things are looking better. Our standard model is to try and win something at home because that’s the only way you can have credibility in the world market in defense market. Unfortunately Canada pulled out of the UAV business, which is kind of unique, most of the other countries continued on. We made the decision to relocate to Australia and at that business and we’re reaping the benefits of that, with now basically steady customer for many years to come. And we have a couple of live RFPs again, as we steadied ourselves out. So we’re hoping that we can grow from here.

[Paul Steep:]

Great. And then just one – I know it’s very small but the BC contract, the win around the land systems that seems very familiar to the past, does that preclude anything, or is that sort of a one-off deal that you took because you got the expertise and you’ll see where it evolves? How should we think about that one?

[Daniel Friedmann:]

No, it doesn’t preclude anything. It’s an area we had gone in, in parallel to our products business. And we have pursued for a long time. There are several other opportunities in Canada and worldwide. And we are pursuing them. It’s right down our expertise. It’s very closely tied into our geospatial business. Of course, we’re not going to do the products type business but we are free to do the systems business. It’s a systems job. And yeah, it had been a little quite, because once again we got to win something at home before we have credibility abroad. BC Land Titles is well renowned world class operation. Everybody checks what they do and if you’re a supplier to them, you’re somebody. So they made that – their timing was now and we luckily won that after a lot of hard work and we’re definitely planning to export it. We have several bids on the go right now.

[Paul Steep:]

Perfect. Thanks, guys.

[Operator:]

Thank you. Your next question comes from Richard Tse of Cormark Securities. Please go ahead.

[Richard Tse:]

Yes, thank you. So I’m just wondering about the General Dynamics business. I think you talked about the $40 million run rate for revenue. Can you talk a little bit about how much the contribution was in the core? I know it was small. And also, I guess, give us a sense of the margin profile for that business?

[Anil Wirasekara:]

So this core, it was nothing because we closed after the quarter, but this is a U.S. government system’s business. So it’s regular U.S. government system’s margin. That’s what you’re going to get. Dan talked about the strategic value of having this business with the rest of our portfolio. That what makes this that much more exciting.

[Richard Tse:]

Okay. And just sort of backing off on this competition question that’s been out there, you guys see this as a structural change in the market that’s going to last for some time and if so outside of these cost initiatives is there any way you can sort of compete maybe differently? I don’t know whether products are different but is there anything at your disposal other than cost?

[Daniel Friedmann:]

I think in General it’s always been a competitive market. What’s different right now is that the institutional government market is down, so people that are dependent on that market are more eager to win commercial business. We’re mostly a commercial company. We’re trying to get into the institutional markets or counter-trend. And so because of that it is competitive. Yes, we don’t want to – we’d like to increase our differentiation in the product and in all the surrounding things around the product. I already mentioned some of those and we’ve seen wins as a result of that. And we have an aggressive product development plan in the next couple of years and we spent a fair amount of money in investing and increasing our capacity until now with the completion of the TVAC. We’re now switching our investment into – much more into product improvement and differentiation. And we’ll talk about that in the future after it’s ready, not before, but we certainly plan to continue to press forward and all that.

[Richard Tse:]

Okay. And then, I guess, the related question on competition, I think I’ve been reading lately that the Lockheed is making a step up in terms of this market. Is that something that’s in the realm of your sort of competitive peers, like what they would operate in? Meaning, would they be more competitive as well here?

[Daniel Friedmann:]

They’ve been bidding over the last year and not everywhere but in some places and yeah, they’d be very aggressive like everybody else.

[Richard Tse:]

Okay. And just one last one, in regards to acquisitions, can you give us a bit of sense as to how active you are in that front? And that’s my last question. Thanks.

[Daniel Friedmann:]

Okay. We’re singularly focused on organic growth. We have a very good communications business that got possibilities in its existing markets. It got possibilities in the government market. It got possibilities in new entrants. We are moving very aggressively to enter the markets that were in Canada and the United States like robotics and now earth observation. That’s all organic. And at the same time we are suffering a little bit of a lack of business in the Canadian side. So we really have to focus on saving that technology and saving those people by getting into these international markets, not just United States which is our main focus but we made significant progress in Brazil and India recently, and Europe. So that’s our singular focus. We are not looking for another big acquisition, although we – something comes up we’ll react but we’re not looking for it. We are looking to make this fundamental transformation of the company from a Canadian centered company to a multinational company, from a company that invested 90%-plus of its R&D and capital in Canada to one that’s over two-thirds outside of Canada today, and to really make the transition to a market that’s two to three times the market we played in the past. That’s the only way we can grow. And that’s our singular focus right now. Some of that requires acquisitions. We did a robotics acquisition in United States which is very small but instrumental many years ago. It’s been sold and there’s a sale, and it’s been instrumental in bidding these things. We are concerned that Canada will not continue in the radar area, just like we were concerned years ago about robotics and we were right unfortunately. So we now acquired the preeminent in terms of expertise radar company in the United States. And that’s an insurance policy and an expansion policy. Now we’re going to move aggressively on that. So you might see more tuck-ins. You will see more tuck-ins but for the foreseeable future we’re singularly focused on becoming a multinational company organically.

[Anil Wirasekara:]

…Or predominantly organic.

[Richard Tse:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Naser Iqbal of Salman Partners. Please go ahead.

[Naser Iqbal:]

Thanks for taking my question. Dan, just wanted to maybe understand better your comment than in terms of – you said that your outlook for the industry in 2015 is better than before but maybe reconcile that with maybe some of your comments on the competitive, on the pricing pressure. Is it that the – your outlook is, do you think the outlook is better, because just better order flow, or is it the U.S. market improving, just any color there is helpful.

[Anil Wirasekara:]

I was – I think, I was the answering the question in terms of procurements in the industry, it looks healthy for the foreseeable future. And all the other factors relate to our ability to win those procurements and other competition that that's to address separately, but we are seeing our customers being active at the moment.

[Naser Iqbal:]

Right. And I think in the last conference call, it was the first time that you mentioned that the U.S. market was actually improving. I mean, has that trend continued and do you think that, we are in the path to the – a normal U.S. market, or things just about the same as they went in last quarter?

[Anil Wirasekara:]

In terms of the government market, it’s actually gone back into budget problems. But when you have a minuscule non-registering share or something, the fact that it’s going up and down, and it’s not a huge effect, we are trying to enter a multi, multi, multibillion market. We are doing $40 million of revenue this year from zero two years ago, trying to do $60 million or $70 million next year. And we are looking at procurements in the hundreds of millions. And so for us, sure, it would be nice if it was growing. But it doesn’t materially affect our ability to go after big things as long as their programs moving forward on the RFPs. And those were slow last year, they are still slow, but there certainly are some and we can pursue them. And, of course, this is also our commercial market, which we never anticipated when we bought SSL, there is a strong, currently a strong space-related commercial market primarily focused on Silicon Valley, we are perfectly located for the Skybox like opportunities and that’s a whole funnel, that’s developed in the last six to eight months, that’s exciting.

[Naser Iqbal:]

Okay, that’s great. In terms of – I think in the last call, you talked about the pipeline being in excess of $2 billion, but it sounds like with these new RFPs you’ve got that, I mean, are we looking at something in excess of $2.5 billion, I mean, and I understand if you can't answer for a competitive reasons, but is there any like quantification of the magnitude of the robust pipeline?

[Anil Wirasekara:]

Well, first of all let’s clarify things. The famous number you are quoting is a – is not a pipeline, it’s from the bids made in the commercial communication sector. That number has declined in the last quarter. There has been a record number of awards, and that number has declined. However, there are number of bids we are working on as we speak, and I think it will recover backup the way we've been quoting it as not a total pipeline, but as the number of firm fixed price bids outstanding. So that number has also declined. Then there is a pipeline behind that, which are not from bids yet. There is a U.S. government pipeline, which I mentioned earlier has been growing, I don’t have a good way to quantify it for you, because a lot of it is in the opportunities stage, and we are trying to qualify better and, of course, is a new market for us. So the fact that I make a firm fixed price bid is, may or may not be meaningful, in that I have no track record of winning. So whereas in communications, we know, we will make a firm fixed price bid we typically win about a third. So it’s not such a meaningful number to provide right now, so I don’t want to do that except to tell you that the quality and quantity of that has increased. And then to become complete in the Canadian side of things, which is a significant part of our existing business, the pipeline is weak, and especially with the situation at the Canadian Space Agency. But overall, when you take all of those things into account and other International opportunities, we have a bright outlook for the company.

[Naser Iqbal:]

Okay. And just – I think on the previous calls you’ve mentioned that India and Brazil were exciting markets. I guess compared to the prior quarters that seems now that the U.S. market is back in focus, there are great opportunities, or is one market now more better than the other?

[Daniel Friedmann:]

We are trying to make progress in all of them, but the U.S. market is simply enormous, it doesn’t compare to anything else, anywhere else in the world. It’s bigger than everything else put together and then some. So obviously you get our attention and we have now more staff in the U.S. than any other country, and more facilities in the U.S., so obviously, we are focused on that. And but we are trying to move in all of the other ones, Brazil slowed down for a while. They finally reelected the government on the weekend, hopefully, things will pick back up. India has been steadily, but surely progressing in all areas as you see on the news I'm sure. And the new government there is more open, so I think that bodes well. We are just – it’s not a quarter-by-quarter thing, I don’t have it quarter-by-quarter barometer.

[Naser Iqbal:]

Okay, that’s helpful. And then just two quick questions, Anil, on the – I guess, the changes in working capital this year was about down $170 million or so, just maybe over the next four quarters, do you think the cash flows are still going to fund the changes in working capital, or do you expect some reversal from…

[Anil Wirasekara:]

I mean, I think that will be a small reversal starting in the fourth quarter of this year. And towards the latter part of next year, we would see a fairly more – a more significant reversal as the – all the programs move over, the newer programs, the newer cash flows coming in. We are now caught in a transition period, and that’s where we are today.

[Naser Iqbal:]

Okay, great. And just my final question and I understand it for competitive reasons you can't answer it, but yes, in terms of the initiatives you have underway – the initiative program, will the improvement in the margins and pro forma, will that be primarily passed on to the customers, or will you use some of that to increase margins?

[Daniel Friedmann:]

As already been passed on.

[Naser Iqbal:]

Okay, great. Thank you very much for taking my questions.

[Operator:]

Thank you. The next question comes from Doug Taylor of TD Securities. Please go ahead.

[Doug Taylor:]

Thanks, good evening. The Surveillance and Intelligence business pulled back a little bit this quarter, can we talk a little bit about what some of the puts and takes are there, maybe what RCM was in the quarter and the Geospatial business as well?

[Daniel Friedmann:]

Yes, I mean the Geospatial business quarter-over-quarter was pretty flat – quarter-over-quarter was pretty flat. And RCM, when you compare it to the last quarter, it was down a fair amount, and that’s what drives that that business. Once again it’s really hard to look at huge program like RCM on a quarter-by-quarter, but I would say, these things can change quite materially up and down. So that’s basically what flows as a on the Surveillance and Intelligence business.

[Doug Taylor:]

Okay. And just a follow up on the UAV business, your existing business with Australia is about $15 a quarter, am I correct?"

[Anil Wirasekara:]

About $15 million a year, yes.

[Doug Taylor:]

Yes, $15 million a year. And so that’s, I mean, with the new contract signed that will decline to about $10 million to $15 million a year, as am I reading that right?

[Anil Wirasekara:]

Yes, about a third.

[Doug Taylor:]

Okay.

[Anil Wirasekara:]

Now, that – the scenario here is that, when they are not deployed their home at this temple, the reason to be at home is to be ready to deploy. So at any time as I said deployment of temple will go up, meaning, the number of hours and therefore the revenue. So this is the base kind of at home and piece contract.

[Doug Taylor:]

Okay. We didn’t touch on the – your existing business with the Ukrainian satellite in the Russian market, but is it fair to assume has there been any change there for the last quarter?

[Daniel Friedmann:]

Well, there is two separate things. The Ukrainian satellite continues in force majeure, although we have now completed the satellite and it’s in storage. And we are trying to resolve the force majeure, but there has been no substantive progress. Our work has virtually stopped since the satellite is now complete and we just need to resolve that issue, so we can finish the project. And if we don’t resolve then the project doesn’t finish. Russia is a separate issue. We – our AM5 satellite is up, they are performing very well. Our AM6 satellite was launched this past week, our payload has been tested and things have deployed and everything is functioning correctly. The satellite won't get to its proper orbit for a while, so we can do the final test until that point, but so far everything is work just fine – just, I didn’t include that in my speech, because I just got a – that was about one minute before this phone call, I just got to lunch this week.

[Doug Taylor:]

But that market as it stands right now, is still effectively close to you?

[Anil Wirasekara:]

Yes.

[Daniel Friedmann:]

Close for business, yes.

[Doug Taylor:]

Okay. Last question from me for Anil, are you talk about the enterprise improvement cost of $15.6 million. I think you said that you’re expecting more to come or are you over the hump of those or should that declining from here, or do you expect it to increase from here quarter like…?

[Anil Wirasekara:]

Quarter-to-quarter, we expect it to decline from here, but exactly how the rest of it will come in one quarter or two quarters or three quarters, it’s something we don’t know this is working exactly work in progress.

[Daniel Friedmann:]

It’s also volume dependent.

[Doug Taylor:]

Yes.

[Daniel Friedmann:]

All our planning is in a certain volume assumption. If the volume is higher than we use – we don’t have as any many layoffs and we still say that in the amount, but if you do more satellite then you reemploy the resource.

[Doug Taylor:]

Okay. I mean, do you have an estimate now what the total expense given your existing run rate?

[Daniel Friedmann:]

What we have is what we provided for it, that’s what we know today. As I said, this is work in progress. We revaluated again in the end of the year and figured out, but there is any data costs to the amounts that we provided, and if that is then we will make another, we’ll take another charge, if there isn’t we’ll discontinue. But the program continues on into next year – way into next year.

[Doug Taylor:]

Okay. Maybe I have one more question. Now that you close to the General Dynamics business, are you able or have you provided what the acquisition cost was?

[Anil Wirasekara:]

No, I mean it was less than $1 million, so.

[Doug Taylor:]

Okay.

[Anil Wirasekara:]

The cost of the acquisition.

[Doug Taylor:]

Yes.

[Anil Wirasekara:]

Because of the transaction, our expense is related to the other capital outlay. Well, that we have to give confidential, because our customer didn’t wanted to be done, but it was not hugely material.

[Doug Taylor:]

All right. Fair enough. Thank you, gentlemen.

[Operator:]

Thank you. The next question comes from Deepak Kaushal of GMP Securities. Please go ahead.

[Deepak Kaushal:]

Hi, good evening. Thanks for taking my question. First one, just looking in the MD&A, I think, I see you mentioned in there about the special security agreement in the U.S. being seized, and tell me if I'm interpreted that correctly, and maybe something about the rationale behind that, and what's the status of this on biddings cost for to work in the U.S.? Thank you.

[Daniel Friedmann:]

Yes. So we have a number of commercial opportunities as we mentioned and we have a number of government opportunities, and then we have a more limited number of classified opportunities most of which is become clear, we should pursue as a subcontractor there and the prime contractor. And instead of keeping all the government stuff together under the SSA, which creates a whole part of barriers. We pulled it all out of there into a new group that goes after anything that’s non-traditional SSL business. And we transferred the classified or in the process of transferring the classified work into our proxy companies that are carrying an SSA company in addition to the proxy company. So the classified at the Cellworks [ph] gone into the proxy company, the facilities with that we have with new acquisition in Michigan allow us to do some of that work there. And between the better efficiency and the issues we were having maintaining that separate SSA for literally only a few million dollars of business, that’s what we ended up.

[Deepak Kaushal:]

Okay. So the proxy is – do you have now a separate proxy in Michigan versus your geospatial or?

[Daniel Friedmann:]

Not, same proxy, same proxy company.

[Deepak Kaushal:]

Okay. And does it preclude you from doing any construction contracts, which are...

[Daniel Friedmann:]

No. We wouldn’t – we don’t have the expertise there to do that construction contracts. But at the moment and for the foreseeable year or two, those classified contractor studies and demonstrations, which are best done from there. And it doesn’t in any way preclude that a company to give us an unclassified subcontract for a piece of the job. So a lot of these jobs you can buy a lot of it unclassified, but their main interface has to be classified and deal with the – that issue.

[Deepak Kaushal:]

Okay. Thanks for that and sort of helpful, I think, I kind of understand it. A follow-up question on the Skybox opportunity, I know that you have some sort of IP rights to the Skybox designs. What opportunity are you seeing for that type of design around the world, and how should we understand that kind of initiative in terms of size, timing, and general demand for this type of thing?

[Daniel Friedmann:]

So, I think – first of all, I think you need to put in the context of the whole thing. We are trying to go after the lower earth orbit marketplace in both communications and earth observation in the United States, which has not traditionally been a major area for SSL. The skybox initiative fits in there, provides us certain IP, we have other indigenous IP ourselves for a larger (inaudible). And we’re trying to build up our product line and capability to bid. We have today U.S. government classified opportunities for that. We have about four or five international opportunities to additional MDA like customers, and we have several U.S. commercial opportunities. We’re pursuing all of those – some of those used the Skybox technology. Some of those used other technology, but they are all LEO based communications or earth observation or both, sometimes both in one satellite opportunities. And that’s part of that building final that I spoke about and it’s just early too early to tell, but funnel is building.

[Deepak Kaushal:]

Okay. Thank you. What – it’s late evening, I think, I'll just leave it at two from myself. But I appreciate the opportunity to ask questions to you guys. Thanks again.

[Daniel Friedmann:]

Thanks.

[Anil Wirasekara:]

Thank you.

[Operator:]

Thank you. The next question comes from Robert Peters of Credit Suisse. Please go ahead.

[Robert Peters:]

Hi, thanks for taking my question, I think most of them have been answered, but just you were talking I believe, Dan, a little bit abo8ut the M&A outlook and kind of moving towards a more organic focus. I was just wondering, Dan, given that how should we look at kind of usage of cash flow going forward? I know, obviously you have to fund – you have to continue to fund working capital. But is there any kind of priority beyond that maybe looking to dividends or something along those lines?

[Daniel Friedmann:]

Yes. I mean as I mentioned in my statement earlier on, I mean, we would like to deploy our capital prudently and effectively. And we have a multitude of options available from dividend that we look at and we will look at very seriously coming in at year end. To investment in our significant organic opportunities that we have and a lot of these organic opportunities needs some upfront investment in R&D and marketing and business development and CapEx. We have to invest in working capital, so we will invest in a multitude of these things as we move forward with a 4% growth and return to our shareholders, that’s what we will do.

[Robert Peters:]

Perfect. Thank you very much. And then I guess the other thing was just on the Surveillance and Intelligence side of things, I was just wondering if you could talk about kind of the mix there and then just in terms of revenues and just how that kind of you may have had any impact on the margin in the quarter. It just look like you’ve taken a slight step down sequentially, so I just wanted to…?

[Daniel Friedmann:]

It is a slight step down sequentially. But if you look at it over the last seven quarters, it’s one of the better quarters that we’ve had. The last quarter was exceptionally good, because we had some big pass-through items that went on the RCM contract and every so often you have, you have these quarters, where you have an extraordinary amount of stuff, nothing fundamentally wrong, this business is good and solid, and we’ll continue with that run rate, there is nothing different about it.

[Robert Peters:]

Perfect. So you would expect it to be more in line on an annual basis?

[Anil Wirasekara:]

Oh, yes. I mean, it’s hard to take a program like RCM and break it up into three months that we accountants believe is the quarter.

[Robert Peters:]

Fair enough. Thank you very much. That’s all from me.

[Daniel Friedmann:]

Thank you.

[Operator:]

Thank you. The next question comes from Ralph Garcea of Global Maxfin. Please go ahead.

[Ralph Garcea:]

Thanks for taking my question. Just two quick ones, on the CapEx side, I mean, where do you see the CapEx, I guess, going into 2015 and 2016? And then in blue sky scenario, I mean, initially on Skybox you guys were talking sort of 10, 20 satellites a year. Not a Google’s home at the end of the year and you've got this huge pipeline on the Skybox side. What happens if you start getting orders in the hundreds and then how will you handle that from a capacity perspective? Thanks.

[Daniel Friedmann:]

Well, let’s talk about the second one first. I’m not sure we were ever talking 10 to 20 a year, we talk 10 to 20 for overall for Skybox. There are 12 and hopefully they’ll go to more than that. And said we had a building pipeline for LEO opportunities and most of them are single satellites, not constellations. There is no way to look at our pipeline of hundreds. So in short, we don’t have a – we wish we had a capacity problem, but we don’t have a capacity problem.

[Anil Wirasekara:]

If hundreds are there, we’ll make sure the capacity is there. Okay.

[Daniel Friedmann:]

Yes, we’ll have enough warning.

[Anil Wirasekara:]

We’ll have enough warning but…

[Ralph Garcea:]

And then just given the…

[Anil Wirasekara:]

It would be pretty close to what we have this year in the $70 million, $80 million, consolidated and we talk CapEx, we talk global investment in capital and infrastructure and R&D and product development and everything. That would be a kind of investment.

[Ralph Garcea:]

Okay. Thank you.

[Anil Wirasekara:]

Thank you.

[Operator:]

Your next question comes from Steven Li of Raymond James. Please go ahead.

[Steven Li:]

Thank you for taking my questions. Just a couple of quick ones, following up on the surveillance, so the RCM revenue has declined sequentially, if it’s few points from the revenues, should the margin have gone up?

[Anil Wirasekara:]

Not necessarily, not necessarily at all. I mean, we make – sometimes we make margin on – or we – look, revenue and margin is two completely different things. Revenue will recognize on a percentage of completion basis and margin will recognize more on an earned value basis. So just because revenues goes up and down it does not necessarily always reflect in the margin. So that’s one issue. Secondly, we do recognize margin on flow-throughs definitely, especially if you’re going to do it on an earned value basis.

[Steven Li:]

And so there were no other moving parts in that surveillance segments, okay.

[Anil Wirasekara:]

It’s pretty much all RCM related.

[Steven Li:]

All right. And then just the enterprise improvement, that $60 million, is that a reserve we took on the balance sheet or is it cash cost already recognized?

[Anil Wirasekara:]

Mostly on the balance sheet, about a third would be cash. The balance would be, yeah, balance would be balance sheet.

[Steven Li:]

Okay. Great, thanks.

[Operator:]

(Operator Instructions) There are no further questions at this time. You may proceed.

[Daniel Friedmann:]

Thank you. Well, thank you, everyone, for listening and for your good questions. Sorry to keep you late, and happy trick-or-treating. Update you next quarter.

[Operator:]

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