Maxar Technologies Inc.
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Operator:]

Good afternoon. My name is Leonie and I will be your conference operator today. At this time, I would like to welcome everyone to MacDonald, Dettwiler and Associates Limited 2014 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 question-and-answer session. [Operator Instructions] Thank you. Welcome to MDA’s Q4 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 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 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 would now like to turn the call over to Dan Friedmann. Please go ahead.

[Dan Friedmann:]

Thank you, Leonie. Good afternoon ladies and gentlemen and thank you for joining us today for MDA’s fourth quarter and year end 2014 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I will be discussing some of the key business events that have taken place in the past few months. Anil will review our financial results for the fourth quarter and year end. And then we'll open the line to answer your questions. In the communications sector, the company signed a contract for Amazonas 5, a multi-mission satellite to be built for Spanish satellite operator HISPASAT. The satellite will be used for broadband services, television broadcasting, corporate networks and other telecommunication applications in South and Central America and Mexico. The contract brought the 2014 bookings total to 9 geo-stationary satellites. At our last earnings call, the company had just signed a contract for a communications satellite for an undisclosed customer. The satellite is for Indonesian satellite operator PSN and will be used for voice and data communications, broadband internet, video distribution throughout the Indonesian archipelago. Bidding activity in the commercial satellite sector continues to be very competitive and at a high level of activity. During 2014, the company made not only a concentrated effort to pursue its traditional market of established operators but also to penetrate procurements from newer operators from emerging economies with some notable successes. This effort continues in 2015. The company completed construction of a satellite design and built for DirecTV. This digital broadcast satellite will provide ultra-high definition television and as a new consumer services. It was designed with a very advanced beam forming network to provide service across all of the U.S. including Alaska, Hawaii and Puerto Rico. The satellite was successfully launched and was handed over to the customer. The company also completed construction of a satellite for a Norwegian satellite operator. The satellite is designed for maritime industry and will provide broadband coverage over the North Sea, the Norwegian Sea, the Red Sea, the Baltic Sea and the Mediterranean. It would also provide broadcast services in Central and Eastern Europe. The satellite is being readied for launch. In Canada, our Montreal operation had just announced a contract value in excess of $29 million with Aselsan, Turkey’s leading space and defence company to provide a Ka-band payload equipment for a communication satellite. This award is in addition to the existing contract announced in April 2014 for the provision of the X-band communication hosted payload solution. The satellite will provide government and communication services once launched in 2020. This work furthers our strategy to work with domestic industry in key countries to help meet the country’s growing demand for communications as well as earth observation. Our Montreal operations also received an authorization to proceed for an undisclosed customer to provide a multi-beam antenna sub-system for a broadband communications satellite. In addition, it received a contract with Boeing Company for the provision of communication antenna sub-systems to be installed on the Boeing satellite platform. In the surveillance and intelligence sector, the company signed contracts to modernize the US Air Force’s five Eagle Vision mobile ground stations. Once upgraded, these systems will be able to receive and process imagery from RADARSAT-2 and RapidEye satellites both built by MDA, enhancing the ability of the US Air Force to provide near real-time in-theatre access to essential image information. The Canadian Space Agency awarded the company multiple research and development contracts to expand capability in the areas like high-throughput satellite antenna technologies, space to ground communications and increasing satellite on-board processing capacity. The agency also awarded a contract amendment to extend funding for ongoing support of a mobile servicing system on the International Space Station through March 2016. The mobile servicing system is comprised of a three robotic systems built by MDA for the space station. Canada has committed to fund the International Space Station program through 2020. While the Canadian Space Agency continues to award small R&D support contracts and activities to plan for future space programs and for participation in future international missions have reached a very low level of activity. Moving on to the services business in surveillance and intelligence sector. The company was awarded a contract by the US National Geospatial Intelligence Agency to provide information that allows for monitoring coastal expansion and identification of new facilities and construction. By overlying satellite imaging from multiple dates, the sophisticated solution identifies changes that persist regardless of seasonal or weather effects. The company also received contracts from several customers in the oil and gas sector for RADARSAT-2 based monitoring service to detect and track offshore oil on water and to monitor land movement near production reservoirs. A number of contracts were also awarded from government customers for maritime surveillance information such as vessel detection and mapping ice. On a more strategic note, we move forward with that activities to become a more diversified and multi-national company and we’ve made the following progress over 2014. In our primary target area, the United States, we expanded the scope of our business development effort

[Anil Wirasekara:]

Thank you, Dan. Good afternoon and welcome everyone. As always, we appreciate your time and interest in our company. I'm pleased to report that MDA continues to perform at a very high level, delivering strong operating results for both the fourth quarter and the full-year 2014. During the year we achieved several key financial milestones that not only allowed us to deliver strong operating results but also placed us in a good position to pursue many new future growth opportunities. As such, I am very pleased to announce that MDA has increased the dividend rate for 2015 by 14% to $1.48 per share and we’ll begin to pay dividends quarterly instead of semi-annually. A quarterly dividend of $0.57 per share is payable on the 31st of March 2015 to shareholders of record at the close of business on March 16, 2015. Now let me give you some highlights of our full year’s financial results. Consolidated revenues increased by 15% to $2.1 billion. Operating earnings -- EBITDA increased by 7% to $348 million and operating earnings increased 16% to $208 million or $5.76 per share. We ended 2014 with total funded order backlog of $3.1 billion compared to $3 billion as of the end of last year. In 2014, we booked record high orders of 9 communications satellites in addition to the contract with Skybox, now Google, to provide 13 earth observation satellites. Let us now take a closer look at our fourth quarter results. Consolidated revenues for the fourth quarter of 2014 was $547 million. This represents a 15% increase over the fourth quarter of 2013 and an 8% increase over the previous third quarter. This increase reflects higher activity levels in both our operating segments. Year-over-year fourth quarter operating EBITDA increased 7% to $88 million and operating earnings increased 12% to $54 million, or $1.49 per share. I remind everyone that operating EBITDA and operating earnings are non-GAAP financial measures and in our latest MD&A you will find a reconciliation to net earnings. During the fourth quarter, our businesses generated strong cash flow from operating activities of $105 million. This helped close the year with net cash inflows from operations of $78 million and this is after funding changes in working capital, the enterprise improvement initiative at SSL, the ViaSat settlement and the investment in new business development activities. We use cash to pay dividends, to invest in R&D, capital equipment, acquisitions and infrastructure to support our future growth. The second thermal vacuum test chamber at SSL was completed during the year and is now operating well. Now I will review our financial results for the full year. For 2014 consolidated revenue is above the $2 billion mark for the first time in our history, rising to $2.1 billion from $1.8 billion for 2013. Solid performance from our surveillance and intelligence segment with 25% year-over-year growth was one of the primary drivers for this increase. For 2014, the communications segment accounted for 71% of consolidated revenues, or $1.5 billion. The surveillance and intelligence segment accounted for 29% of consolidated revenues or $605 million. Operating EBITDA for 2014 increased to $348 million compared to $325 million for last year. The communications segment accounted for 54% of our operating EBITDA or $187 million and the surveillance and intelligence segment accounted for the remaining 46% or $161 million. The overall mix of programs and activities resulted in consolidated operating EBITDA margin of 17% for 2014, which was in line with our expectations for this year. Operating earnings for 2014 increased to $208 million or $5.76 per share compared to $180 million or $5.13 per share for the last year. The effective rate of tax on operating activities in 2014 was 18% compared to 19% for 2013. The decrease was largely driven by effective tax planning strategies, in particular the structure through which we used to acquire and finance SSL in 2012 enabled us to secure substantial future tax benefits and have significantly reduced our taxable income and thereby our cash tax obligations. For 2015, we expect the effective tax rate for operating earnings to be in the very low 20% range. Our net earnings under IFRS in 2014 were impacted by the inclusion and variability of certain large non-operational items that affected the comparability of our financial results to prior periods. We settled our legal dispute with Loral and ViaSat and in the fourth quarter we recorded a considerable accounting charge to fully reflect our share of the settlement agreement. We incurred costs related to the enterprise improvement initiatives at SSL, with benefits expected to be realized through increased efficiency. Also, we incurred unrealized losses related to share-based compensation awards and on certain foreign exchange exposures that are either unhedged as they are long term, or not subject to hedge accounting. Including unusual and non-recurring items, net earnings for 2014 was $47 million. Let me now go over our financial position. Consistent with higher activity levels at SSL, total orbital receivable increased to $470 million at the end of 2014 compared to $399 million a year ago. The gross contractual of cash inflows or cash flows to be received relating to orbital receivables at year-end amounted to $905 million and represents an important source of long-term recurring liquidity which we use to fund operations. Long-term debt net of cash balances was $757 million. A large portion of the increase to long-term debt was attributed to foreign exchange translation as most of our debt is denominated in US dollars. Our net debt to bank EBITDA ratio was 2.5 at the end of 2014. This leaves us with considerable room in our credit facility to operate effectively and pursue our growth and investment strategies. Net pension liability at the end of the year was $185 million. Higher than expected returns on pension plan assets for 2014 was offset by negative actuarial adjustments relating to market based discount rate and other assumptions. I would like to give some color on the impact of foreign policy fluctuations on our operations. The strengthening of the US dollar overall doesn't necessarily reflect well on our financial results. While our US operations account for a significant portion of our consolidated revenues and profits, they also have certain unhedged long term orbital receivables denominated in euros, which would have to be marked to market at period end, resulting in unrealized losses. And as for our Canadian operations where we hedge the significant majority of US dollar procurement commitments, certain long-term procurement commitments that are not hedged and the strengthening of the US dollar will negatively impact profit margins. These conditions together with other expenses denominated in US dollars, particularly interest expense on long-term debt could potentially offset any bottom line gains realized on the translation of the results of our US operations to Canadian dollars. To recap some highlights for the quarter and full year. We had yet another successful year in 2014 and in the fourth quarter we achieved consolidated revenues of $547 million and operating earnings of $1.49 per share and generated strong operating cash flow of $105 million. For the full year, we achieved record revenues of $2.1 billion and operating earnings increased 16% to $208 million or $5.76 per share. Despite a very challenging business environment, we maintained solid operating EBITDA margins throughout 2014 on sound program execution across a diversified earnings base. Our order backlog at the end of December was $3.1 billion on strong booking activity during the year. We are excited about the volume of bids and proposal spending and are optimistic about the range of opportunities in our pipeline. We ended the year with a very stable financial position, have significant unused borrowing capacity under our syndicated credit facility and ready access to capital markets on an as required basis to finance future growth. Combined with our strong backlog and expected cash flow from operations, we have the flexibility and the options to pursue and execute our growth initiatives and continue to drive shareholder value. That concludes my discussion and I will hand it back to Dan.

[Dan Friedmann:]

Thanks, Anil. Leonie, we are now ready to take questions please.

[Operator:]

[Operator Instructions] Your first question comes from Steve from RBC Capital.

[Steve Arthur:]

So just a couple of questions. First, just wondering if you could offer just a little more color on this pipeline, some of the competitive dynamics you’re seeing out there and how do you see this year shaping up in terms of industry volumes? There has also been a few awards so far this year that went to others. So just any comment on those and any of those you might have expected to win?

[Dan Friedmann:]

Sure. First of all, in terms of the industry overall, we had a very strong year last year. We are seeing a very strong year this year. There has been about six decisions already, not all has been reported, I think only four have been reported, unfortunately we lost all six. But it's off to a strong start. We are seeing that this year should be a strong or stronger than last year, that’s on geo. There is obviously a lot of LEO activity also. So the industry is growing well. The competitive situation has not changed appreciably, it’s still very strong. What has changed for us, of course, as you know our main competitor is in euro currency and we’re in US currency. So we’ve had a change in our competitive position with respect to European companies. Our pipeline is strong, it’s just under $1.9 billion after you take out -- that’s for bids out there – after you take out those six awards. And yes, we had hoped to win 2 of those 6; we did not. Hopefully we will make up for it next quarter.

[Steve Arthur:]

And just bigger pictures, wouldn’t mind elaborating little bit more in some of those LEO opportunities, if you could, and some bigger picture industry dynamics, in addition to the big communication satellites, there has been a lot of discussion and momentum seeing with some of the emerging start-ups, companies like OneWeb, SpaceX taking – looking at building large constellations of smaller satellites. Wondering how you think about those, whether that’s a threat to some of your traditional business and/or if it's a large opportunity for you to work with and supply some of those providers?

[Dan Friedmann:]

In terms of the traditional business, we have to realize that satellite communications is single-digit market share of the overall communication problem the world. The geo satellite communication, so as large than exciting is at least for us, it’s still a small portion of the overall pie. Our view is that these LEO initiatives, at least the ones we can read about in some detail, are by and large non-competitive with the geo world and most of them are going to create a new markets and/or take some of the terrestrial traffic away. So we see it as a net increase to our market in the sense that we are in space and not in terrestrial. So that's very exciting for us. And we are of course taking those very seriously. We’ll be positioning ourselves for over a year at SSL to be ready to do this in both earth observation but communication also, major initiative and for those companies that are out to procure, we’re bidding, not everybody's out to procure someone to build in house but there's some very exciting procurements underway as we speak. And we’re taking it very seriously.

[Steve Arthur:]

Is there any sense in order of magnitude of that, in that, if the geo satellites are $1.9 billion pipeline, I think you said, is this a material number on the small sats relative to that?

[Dan Friedmann:]

Yes.

[Steve Arthur:]

You want to quantify it in any way?

[Dan Friedmann:]

Not yet. Next quarter.

[Operator:]

Thank you. Your next question comes from Scott from TD Securities.

[Scott Penner:]

I will just ask about the satellites that are being built right now in the factory. The margin profile of those – is that consistent with what you saw last year or is there – what we’re getting out, just given the pricing environment over the last year, is there likely to be any additional margin downside?

[Dan Friedmann:]

Well, when we book satellites, they’ve gone a percentage completion so that there is no surprise there. We have worked our efficiency improvement program to try to maintain our margins. So although the bid price has been declining over time and continues to do so, we have been taking cost out of the factory. And we’re trying to manage that as well as we can at least on an annual basis so that things continue on, and that’s the plan. Our efficiency improvement program is on track. We are passing those discounts unfortunately all to the marketplace, not for ourselves but we are trying to maintain our margins.

[Scott Penner:]

And just as a quick one, that efficiency program, how much cash is left to go out to pay for them, some of those initiatives and what’s the timeline for that?

[Anil Wirasekara:]

Right now, Scott, it’s about $6 million or $7 million left to pay and I think it will be done over the next couple of quarters, mostly next quarter Q1. So it’s not a huge amount but it’s still there.

[Scott Penner:]

And just, Anil, if you could just sort of make some comments on just the overall working capital profile, more than anything else of the business, there’s been pretty – the two years that you’ve owned SSL, there has been pretty significant working capital outflows for the year, both years, and now you’ve termed the business not to be that intensive over time. So I am just hoping you can just kind of give some insight as to what’s going on there?

[Anil Wirasekara:]

Yes, I mean the things are pretty violent quarter over quarter. I mean you saw this fourth quarter we generated a huge amount of money and some quarters this all goes out lot of it in the form of un-invoiced accounts receivable there, and milestones get – payment milestones just get pushed back and you have completed the percentage of completion, it’s not reflected in receivables because if you noted our receivables are fabulous, we got 90% of our receivables all within 30 days of 45 days, so our receivables are fine. These are all un-invoiced accounts receivables, so we’ve got to finance a lot of that stuff, we finance, now we’re financing and allotting to inventory. We are starting early to cut schedule down. We are purchasing procurement bulk parts to take advantage of discounts. So yes, I mean working capital in this business or the investment in working capital in this business is going to be fairly significant and we've concluded that it certainly is a good deployment of our capital. On a managed basis, we think that this is an area that we need to finance and we need to invest in working capital. So you're going to see these big fluctuations quarter over quarter.

[Scott Penner:]

Just one last one, Dan, and that is just to the areas of potential new business for MDA, on the LEO side but also things like any notion of satellite servicing and hosted payloads, there is a bunch of things going on in the industry. What do you think over the next – well, let’s say over the next year or two, has the most potential for you?

[Dan Friedmann:]

I think I tried to cover it on our speech. We are a company that has a very broad capability in Canada but we cannot access the US market, the Brazilian, the Indian market from Canada. So our fundamental process is to get ourselves in that position to access that market and that market is many times larger than our existing market if we can get to it. But it is our traditional market, it’s communications, it’s earth observation, it’s robotics and it’s LEO and geo and that’s what we’re going after. There is new things like hosted payloads and so on. Those are small compared to our ability to access markets that have existed for a while that we have not had access to.

[Operator:]

Thank you. Your next question comes from Thanos from BMO Capital Markets.

[Thanos Moschopoulos:]

Dan, if you could provide some more color in terms of what you're seeing in the earth observation business, I guess with the growth profile looking like on the geo-spatial side, maybe elaborate on the Brazilian opportunity and maybe provide and update us as far as RCM.

[Dan Friedmann:]

Sure. So I think we need to kind of break the whole earth observation thing into pieces. Let's start with the services. We have a service company in the US and a service company in Canada. Our services business in Canada based on RADARSAT did well in 2014, it’s projected to do well in 2015. And it has been fueled by oil and gas, that’s slowing down right now but we’re seeing significant activity in maritime. So we’re still optimistic that despite oil prices we will keep tracking along. In the US, we had a fairly slow year last year because procurements just did not move. That has changed in January alone, we had a record bookings which of course we can't disclose because it’s classified. But the US market is returning, we didn’t lose any shares, it’s just that the awards got delayed through a whole pile of government issues. So we’re seeing a stronger year this year for geospatial in general. On the system side, on earth observation we have to keep in mind that a very very significant part of our activity has traditionally come from the Canadian space agency and as I mentioned in my speech we don't see any Canadian space programs in the foreseeable future. And so we have that decline which is not just an issue of activity but it's also an issue of capability, we will not be able to maintain our capability in Canada. We’re trying to maintain it in the company but in Canada there’s basically no space program going forward in any of these areas. So we’re going to see that decline and our reaction to that of course has been to try to deploy that capability in the States and in Brazil and so on. And as I mentioned in my speech we have a number of opportunities there, they are complex, the timing is not super clear. Over the long term I am sure they’re going to be very good but exactly how they play out over the next two years it's hard to predict at this stage.

[Thanos Moschopoulos:]

And then maybe expanding on the US government market, you said you’re starting to see some procurements come through on earth observation. Would that hold true in terms of either parts of your business such as in robotics and elsewhere?

[Dan Friedmann:]

Yes. We’ve had some pretty good activity in the US at the level of millions and in one case tens of millions in robotics and we have outstanding bids that are higher than that today. So in that sense we've unfortunately cut back in Canada to less than half of what we used to be in robotics but we do have significant opportunities now in the US after spending in the last two years trying to grow those. That's what’s most advanced because we started there first and to move forward. On the earth observation side in the US, it's fairly new for us. We started with Skybox and we have several bids out there right now of the large funnel I spoke about, of about probably 200 or so or 200 million or so of earth observation related. So that's moving along.

[Thanos Moschopoulos:]

And maybe just one last one for Anil. Following on Scott’s question on working capital, how should we think about working capital in the next couple of quarters or is that really hard to predict?

[Anil Wirasekara:]

I think the next couple of quarters you can see kind of a reversal of what happened in this quarter, that's pretty typical. We had a good quarter, in the fourth quarter and the first quarter, it will be a lot of outflows going out. We have some big procurements that we have to do for the nine satellites we won last year. So I think that will be a reversal in the first half of this year and a big pickup in the second half of this year. We expect to finish ‘15 on a very favorable note but the it'll be very lumpy.

[Operator:]

Thank you. Your next question comes from Paul from Scotia Capital.

[Paul Steep:]

Dan, maybe just talk about the multinational aspect, you started to I guess more clearly delineated last quarter and then you expanded on it today. What do you think the targeted be for mix in the business, maybe 3 to 5 years out in terms of where you’d like to see the source of business coming from?

[Dan Friedmann:]

Geographically you mean?

[Paul Steep:]

Geographically, yes, I think you’ve highlighted I think the mix of the business well but if we think geo wise, and I guess the corollary to that is, do you need to invest or go there into these markets ahead of that or do you think you can do it similarly to heaps where it was sort of a joint process in terms of buying and expanding into new markets?

[Dan Friedmann:]

So our main targets are of course the US and the majority will come from there because we've got a big headstart in the US with SSL and pre-SSL, we had other companies and now the latest acquisition. And yes, you have to make investments in business development fairly significant but they are not material in the sense of the overall company performance. And we have to make investments in either acquisitions or setting up joint ventures with partners. In the US we’ve done it through acquisition. It's clear that in Brazil and India we will do it through joint ventures with partners and those joint ventures are made through acquisitions as we go forward. We as always try to find things so that we don't get too far ahead of ourselves but you can’t go after very large programs with one guy in a hotel room. So you do really have to go forward, obviously with established partners, we can delay some of that but we will have to make acquisition investments and transfer people and so on as we go forward in those opportunities. The good news is that there are large opportunities. So it's very hard to invest in small opportunities but large opportunities to eventually pay off and become fairly stable over time.

[Paul Steep:]

I guess the next one is Anil. Has there been any change in thinking just in terms of the target leverage levels applied in the business? I know for the last year or two, the focus has been debt reduction. Is there a signal we should take away from some of the dividend bump today in terms of how the board and management is thinking about leverage in the business?

[Anil Wirasekara:]

Yeah, we have done some pretty extensive planning and calculations and we believe that for us to have the most efficient cost of capital, we need to have – we need to be able to maintain our debt to EBITDA in the 2.5% range, 2.5 times debt to EBITDA. That, if you are able to do that, that will provide us with the most efficient cost of capital. There will be times when we will possibly go a little bit above that and there will be times when we will go a little bit below that. But if you can maintain in that level that would be ideal. That’s kind of where we are.

[Paul Steep:]

And then the last one is just a quick housekeeping one for you as well. CapEx in terms of what we’re thinking in terms – and actually it might be useful to even think about it in terms of maintenance versus growth CapEx within the businesses, if you can do it at that way, if not just the total would be fantastic?

[Anil Wirasekara:]

All right. You can look at it in different ways. Total CapEx is, we’ll work out over $100 million and that you have to break it down into two components. One is CapEx in plant and equipment and tools and things like that we do, that’s about $70 million to $75 million, and CapEx and investment in new technologies, lot of software, lot of other things that we have to do. Lot of product development work that needs to get done. So that works out to about $20 million to $25 million. So that’s the total CapEx, investment in CapEx is about $100 million.

[Operator:]

Thank you. Your next question comes from Naser from Salman Partners.

[Naser Iqbal:]

Just maybe wanted to drill a little bit into the efficiency project. Do you think that’s going to be finished by the end of this year or do you think you will carry over into ’16 and beyond? Just maybe some color around that.

[Dan Friedmann:]

Sure. I think what we have to realize is that companies are always trying to improve their efficiency and we were trying to do that at SSL before we started this project but this project is order of magnitude above a normal kind of efficiency improvement program, it's a massive program and it will carry on into mid 2016, as planned today and changing the way we do things. However as part of this very large initiative, we’ve implemented systems and the cultures is frankly changing such that our maintenance program that will continue after this will be significantly higher level of activity than anything in the past. So the short answer is that the big projects go through first half of 2016 and we don't stop them but we will bring the tempo down because we are caught up with things in the past but we will keep going.

[Naser Iqbal:]

Right. I guess that was going to be my follow-up, that maybe it's going to be a perpetual kind of date, just given what your comments is about the industry. Dan, just following up on your comments in Brazil and India, in terms of making local investments, would that be an OpEx or a CapEx point of investment? And are we talking in like the tens of millions or 50 million or more, just any some kind of sense to what kind of -- even if it’s a local acquisition like what kind of magnitude you're thinking about?

[Dan Friedmann:]

Well, in terms of activity and just operational activity, we’re talking single-digit millions until we get to the point where we’re one of two in a competition or until we get to be one of one and some of these contracts take nine months to negotiate, at which point that ramps up to double digits. In terms of acquisitions at this stage, I don't have a good number but they aren’t very large things to buy, so it’d be in the tens.

[Naser Iqbal:]

And just maybe, Anil, on the fourth quarter itself, just if we look at the first three quarters and then the fourth quarter, it looked like gross profit and gross margins in the fourth quarter had a really good bump. Is that correct and maybe what caused that?

[Anil Wirasekara:]

I would say we had really good bump, I mean in the fourth quarter, especially in our surveillance and intelligence business. We took a fairly large mark-to-market non-cash foreign exchange loss that certainly depressed our margins. So our total fourth quarter margins I think in surveillance and intelligence was about 24% or 25% whereas the normal trend is around 27%, 28%. So that we took a bit of a hit. But that’s once again, it’s not an operational hit, it’s a non-cash hit and it’s something that we had to do. We’ve taken this small hit, everything got caught up in the fourth quarter because there was such a big change in the Canadian dollar. We had - write-down became much much larger but on the on the communications side, we’ve managed to maintain our market despite the challenging business environment. We’ve managed to maintain our margins which was really good. And year-over-year on our geospatial business combined, Canada, US geospatial business, which is a big margin driver for us, it was – the growth was very modest, like it was relatively flat year-over-year. We expect a much better year in 2015, that’s certainly impacted margins as well. So background on the margins for the year.

[Operator:]

Thank you. Your next question comes from Deepak from GMP Securities.

[Deepak Kaushal:]

I’ve just got a couple of follow-ups and maybe a big picture question. First, Dan, you mentioned you walk away or you mentioned that there were some of the geospatial business that you didn’t win, the six awards, do you have one any of those? Or did you walk away from some of the deals or can you characterize any of the reasons why – was it currency, was it pricing, was it technology related?

[Dan Friedmann:]

You’re about to communications, not geospatial?

[Deepak Kaushal:]

Sorry, I mean the geo stationary communications –

[Dan Friedmann:]

I don't want to get into details but rest assured we don't walk away from anything, we fight to the end and we live or we die at the end. We died this time.

[Deepak Kaushal:]

Okay. So it is not the case where the pricing was pressured so much that they would be below at threshold –

[Dan Friedmann:]

But I call that losing.

[Deepak Kaushal:]

So message received. Another question on the accounting. Am I to understand that when you’re booking a new award, you will book it and you will recognize it on a potential completion basis at your normal 70% or whatever it is margins? And there's a risk that if the performance improvement plan and the internal cost reduction plan doesn’t come through that this could pressure write-down down the road or –

[Dan Friedmann:]

No, our accounting doesn’t allow that. We book the business at whatever margin it is which is lower than the number you mentioned. And we have a plan to make it better and when it's proven beyond the shadow of a doubt, a huge committee of engineers and managers that their margin has improved, and then we take that.

[Anil Wirasekara:]

We don’t. You can’t pre-maturely recognize margins, that would be suicidal.

[Deepak Kaushal:]

No, that’s great. But it’s great to know that, that’s not the case. And the upside comes as you bring this improvement back in the business.

[Dan Friedmann:]

Yes, but you have to realize that you have old backlog in the factory at what today looks like fantastic margin and new backlog in the factory at poor margin, and it’s a mixture. So we’re going to improve our cost base but we’re also going to lose old projects that have good margin and the plan is to manage all that processes.

[Deepak Kaushal:]

Okay and so are you willing to give a target range then for the next year or – in the past you’ve given a range of 15% to 18%?

[Anil Wirasekara:]

As we said, we don't see today any deterioration in our margin. We will strive to maintain our margin levels.

[Deepak Kaushal:]

And you mentioned Dan –

[Dan Friedmann:]

Just to clarify that – that’s with a qualifier of the euro, Canadian, US problem which is not – was not in our plans for cost savings – to cost saves, the difference in the euro and the US, we have to work on that.

[Anil Wirasekara:]

Every year you have different challenges and this is a new challenge that came our way where we have a weak euro and a strong US dollar and we compete against that, so something we need to take into account and find a way to work our way through those.

[Deepak Kaushal:]

You mentioned the challenges that you are facing in the Canadian business with Canadian Space Agency. I know that you're executing right now on RADARSAT Constellation Mission. Can you quantify the size of that drawdown and how much you have to replace to interpret a great RADARSAT Constellation as it comes off?

[Dan Friedmann:]

It's not just RADARSAT Constellation, now we’ve also basically lost the robotics business other than maintenance work. So we used to do on average about $200 million of business for the Canadian Space Agency and some business with D&D in space. And the moment that is in the process of disappearing, we’re going to do a little over 100 this year. So we were down to about half of what we were two years ago and then it keeps growing down from there because there's nothing in the plan. There's no plan. So that in a sense has to be replaced. The problem is I can’t replace it in Canada, because there is no other customer in Canada .So I have facilities, I have people, I have technology, I have processes and we have to downsize that in Canada while maintaining the total capability in the company primarily in the US unless something changes. So it’s the big challenge for us this year. This is what’s pre-occupying my time, as basically we have lost our indigenous customer.

[Deepak Kaushal:]

Okay and with changes in ITAR, are you able to transfer more work from the US county to Canadian?

[Dan Friedmann:]

Well, there is no issue of taking anything from here to there. So we’re only taking from there to here. So it’s never been an issue.

[Deepak Kaushal:]

Have the ITAR rules relaxed for some of the communications satellite –

[Dan Friedmann:]

It doesn’t affect this problem.

[Deepak Kaushal:]

Last question if I may, I don't think it’s a time of thinking for that. You mentioned the big pipeline of opportunities in US, Brazil, India. When you look at this pipeline and as you’re building it relative to the past pipelines of opportunities to build through the years in MDA, is this a normal size or is this material enough to accelerate your growth rate beyond your normal target range of 10% to 15% annually?

[Dan Friedmann:]

Our growth plan has been to do a good job on geo-communications to maintain our surveillance business, including Canada and then to layer on top of that this new opportunity of moving our capability into our multinationals, including the US to generate the growth of the company at the levels that we have in the past. So two of three of those things are on track. Our geo side is on track, are moving stuff over to grow outside is arguably ahead of track. But we have a big hole being generated back here and here's what our capability is. And it's only – you can only move it so fast. So that’s back to our big challenge.

[Operator:]

Thank you. Your next question comes from Robert from Credit Suisse.

[Robert Peters:]

And just maybe a larger picture question here, on the geo side of things I think you mentioned that there was $1.9 billion in opportunities right now in the marketplace that you guys were bidding on. I was just wondering, when you guys think about what is driving that demand right now, I know you just launched the satellite or you just completed the satellite for DirecTV, that’s doing the ultra HD. So I was just wondering are you seeing larger satellites coming in or is it more smaller communications satellites in terms of the bids out there in the market?

[Dan Friedmann:]

Last year we saw more shift to more small satellites and many of the wins we had were smaller satellites, that was one of the big – we’ve placed ourselves in our position to win the smaller satellites. This year it’s mixed, maybe longer term we’re seeing larger satellites again, it's hard to tell. The projects move around quite a bit. When I talk 1.9 billion, that’s bids that are out the door today. The pipeline is way bigger than that and it’s quite uncertain that we always have satellites in the pipeline that never happened. Every year we bid on satellites that actually never happened because the business plans don’t close or what have you. So it is always hard to tell but I can't predict for you the size of satellites. It depends which business plans work out and where people go.

[Robert Peters:]

I guess what if – if I could kind of maybe draw back to that, are you guys still then targeting the 7 to 10 satellites per year or do you think that's kind of your goal for this year?

[Dan Friedmann:]

That’s our target but we’re off to a bit of a slow start.

[Robert Peters:]

And if I just could have a quick question for Anil. I saw in your annual report you guys did bring -- put the backlog broken down between communications and S&I. I am wondering, do you have the numbers there or it’s just kind of roughly around two thirds, one third?

[Anil Wirasekara:]

It’s about 2.3 million on the comm side or 2.5 million on the comm side and about 850 million or a little bit more than that on the surveillance side. It’s pretty solid backlog on both sides, well over a year’s revenues.

[Operator:]

Thank you. Your next question comes from Stephanie from CIBC.

[Stephanie Price:]

I just have a couple of questions here. On the RCM project, could you give us a bit of an update on where you are in the build cycle and how we should think about that project?

[Dan Friedmann:]

Sure. We’re quite far advanced into the manufacturing of the satellites. We've retired a fair amount of risks. The big activity at MDA is in Montreal where we’re building all the smarts of the satellites, what's called the payload and most of that manufacturing work will be done this year. And that is half of our facility Montreal. And in terms of the ground segment which is a big activity in Richmond, that is just ramping up now so that continues well into next year. And our major subcontractor is quite the way along their work, reaching a major milestone in the next few weeks, which will be publicized. So it's – we’re basically on schedule. We’ve had our challenges but we’re basically on schedule and bulk of the manufacturing will be done in ‘15 and then we'll go into a much lower staff level integration and test phase before the completion.

[Stephanie Price:]

And then on the Advanced Systems acquisition, can you give us a bit of an update on whether it’s operating to your plan and how you think about that business going forward?

[Dan Friedmann:]

Sure. I mean we just started but we’re on -- financially we’re on target. Our forecast for this year is more or less what we thought of at the same of acquisition. We have spent a fair amount of time interacting with them now and we have new opportunities that are synergies between our two companies but they are in the millions. But by and large we just reviewed actually that this morning at our board, by and large it’s all on track.

[Operator:]

Thank you. Your next question comes from Richard from Cormark Securities.

[Richard Tse:]

I just had one question. Dan, just wondering over the years, has the criteria for awards changed in any way, like has pricing become a bigger factor in terms of winning these deals? Just want a bit of perspective on that.

[Dan Friedmann:]

By and large pricing has always been a really big deal in both the government business and the commercial business. But I think what has changed is that the people that allowed to compete us, the entry requirements have been relaxed a little bit. People are taking more risk now with their suppliers, newer suppliers or supplier for newer technology in an effort I think to bring the costs down than they used to. So that we have to adjust to but price has always been a big issue and I don't recall anytime being able to win with a price that's more than a single-digit percent higher than the competition. You can win at a higher price and we do on a regular basis but at single-digit percent it’s not been significant. End of Q&A

[Operator:]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Dan Friedmann:]

Okay. Thank you, Leonie. Thank you everyone for listening to us and your good questions. And we look forward to updating you next quarter.

[Operator:]

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