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Executives

Dan Friedmann - President and Chief Executive Officer

Anil Wirasekara - Chief Financial Officer

Analysts

Thanos Moschopoulos - BMO Capital Markets

Steve Arthur - RBC Capital Markets

Nikhil Thadani - National Bank Financial

Steven Li - Raymond James

Deepak Kaushal - GMP Securities

Doug Young - TD Securities

Naser Iqbal - Salman Partners

Peter Rakobowchuk - Canadian Press

Richard Tse - Cormark Securities

MacDonald, Dettwiler & Associates Ltd. (OTCPK:MDDWF) Q4 2013 Earnings Conference Call February 25, 2014 5:30 PM ET

Operator

Good evening. My name is Leone and I will be your conference operator today. At this time, I would like to welcome everyone to the MacDonald, Dettwiler and Associates Limited 2013 Fourth Quarter Results Conference Call and Webcast. (Operator Instructions)

I would like to remind you that part of today's discussions, including responses to various questions may contain forward-looking statements, which represent the company's estimates, future plans, objectives and expected performance 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 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 conference over to Mr. Dan Friedmann. Please go ahead.

Dan Friedmann

Good afternoon, ladies and gentlemen, and thank you for joining us today for MDA's fourth quarter and year-end 2013 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 the year-end. And then we'll open the line for your questions.

In the Communications sector, the company signed a contract for AsiaSat 9 communications satellite to be built for a leading satellite operator in Asia. AsiaSat 9 will be used for television broadcast, private network services and broadband services across the Asia-Pacific. This is the company's fifth satellite award from AsiaSat, two of which are scheduled for launch later this year.

Bidding activity in the commercial satellite sector continues at a high level. The business pipeline is strong. And although a few awards were delayed from late last year, more satellite purchasers' decisions are expected over the next few months.

In multi-mission satellite built by the company for Asia Broadcast Satellite, ABS 2 was launched and is successfully performing post-launch maneuvers according to plan. ABS 2 is a highly sophisticated multi-mission satellite designed to provide multiple services across Asia, Russia, Africa and the Middle East, including direct-to-home television, cable television distribution, private network services and telecommunications.

The US government awarded the company the next phase of the development to implement NASA Laser Communications Relay Demonstration program at a hosted payload on a commercial communications satellite built by SSL. By hosting this payload on a commercial satellite, the Laser Communications Demonstration will be tested to help advance the use of optical communication technology in space. In addition, the company provided propulsion system for NASA's Lunar Atmosphere Dust Environment Explorer spacecraft is performing well as the mission is currently orbiting the moon.

In Canada, our Montreal operations received three contracts to provide communication satellite sub-systems to key industry suppliers. The work on these contracts had been started and the authorization to proceed announced last September. The collective value of the contracts is approximately $22 million. Also in this area, a contract was signed to provide OHP from Germany with satellite communications electronics that will be integrated into a system of telecommunication satellites in geostationary orbit that will relay information between low Earth orbit satellites and ground stations to support response activities following natural disasters.

The company also signed a technology development contract with a Canadian Space Agency to advance development of deployable ultra-high frequency antennas used for satellite communications.

A large communications payload built by the company's Montreal operation for Russia's Express AM-5 satellite was successfully launched late last year. This satellite will provide general broadcast and broadband service and also mobile communications to the Russian government authorities. This satellite is currently in transfer orbit and will reach its final orbit in March, at which point, the company will begin the routine acceptance process for the payload.

In the Surveillance & Intelligence sector, the company was awarded a contract by Skybox Imaging to deliver a constellation of 13 advanced lower orbit satellites for Earth imaging. This small yet powerful satellite, each less than half a cubic meter in size, will capture sub-meter color imagery and high-definition video. Once the full constellation has been launched, it will be capable of imaging any chosen point on Earth a few times per day. This contract award from Skybox represents a strategic milestone for MDA, as it provides tangible evidence that MDA and SSL working together can penetrate new markets.

As part of the agreement, Skybox granted us an exclusive license to the design. This provides us with a unique capability to address the growing demand for small satellites and related services with significantly more MDA value added than we've had in the past.

Continuing with the Surveillance & Intelligence sector, the company was contracted by the Commonwealth of Australia to extend MDA's unmanned aerial vehicle surveillance service in Afghanistan until the middle of 2014. MDA has been supporting the Australian forces in Afghanistan since 2010 by providing critically important real-time intelligence surveillance and reconnaissance information directly to ground commanders.

The company signed a contract under Indefinite Delivery/Indefinite Quantity agreement with US Air Force to continue operational support and to further enhance the flight path safety system that provides critical support to the design of airport approach and departure flight paths.

The Sapphire space surveillance satellite developed by MDA for Canada's Department of National Defence has completed its commissioning and is now fully operational as a contributing sensor the US space surveillance network.

In the robotics area, the US Department Defense Advanced Research Projects Agency, DARPA, authorized the company to proceed with a development of a payload orbital delivery system for the Phoenix mission. This system is an innovative and cost effective solution to rapidly deliver small self-contained payloads to geostationary Earth orbit using surplus capacity on regularly launch communications satellites.

Also in this area, the company has been awarded multiple strategic technology development contracts for the Canadian Space Agency. These contracts are expected to advance technologies which enable more ambitious applications of robotic systems in space such as robotics for spacecraft servicing and robotics for planetary exploration.

Finally, the company was awarded a contract by the US Naval Research Laboratory to provide a portable satellite ground receiving station together with a number of operators and analysts. This demonstration program, which is part of a coalition tactical awareness and response program in the United States will deliver daily real-time RADARSAT-2 based information directly into the US Navy's open ocean surveillance systems.

Moving on to the services business in the Surveillance & Intelligence sector, the company booked multiple contracts from commercial companies to provide critical surface deformation information at and in the vicinity of their mines. Also, three contracts from commercial companies to provide oil monitoring services to support offshore exploration and production activities and contracts extending the provision of RADARSAT-2 imagery capabilities to three ground stations opened by company headquartered in France that provides satellite services to government industry and the scientific community.

In addition, an agreement was signed a European Space Agency to provide RADARSAT-2 information to user groups under ESA's third-party mission programs. The RADARSAT information will be used to perform research and develop applications for services such as ice monitoring and disaster management.

That concludes MDA's operational highlights/report. I will now ask Anil to report on our financial results. Anil?

Anil Wirasekara

Thank you, Dan. Good afternoon and welcome everyone. As always, we appreciate your time and interest in our company. MDA continues to deliver solid operating results as we have done earlier. In the fourth quarter, we achieved operating earnings of $48 million or $1.34 per share. And for the full year, operating earnings reached $180 million or $5.13 per share. We also ended the year with a fully funded order backlog of $3 billion.

As SSL was acquired in November 2012, the comparison of our fourth quarter results year-over-year would not be meaningful. Accordingly, we compare the fourth quarter 2014 results with our preceding third quarter. We are very pleased to report that our revenues, operating EBITDA and operating earnings all increased sequentially in the fourth quarter. Consolidated revenues for the fourth quarter increased to $477 million compared to $463 million in the preceding quarter. We are particularly pleased with the performance of our geospatial service business as increasing international sales of RADARSAT-2 information helped offset the impact of the US government shutdown in October and the seasonal slowdown in December.

For the fourth quarter, operating EBITDA increased to $82 million and operating earnings increased to $48 million or $1.34 per share. These amounts are compared to operating EBITDA of $80 million and operating earnings of $47 million or $1.29 per share for the third quarter.

Net earnings under IFRS this quarter were $25 million or $70 per share. I remind everybody that operating EBITDA, operating earnings are non-GAAP financial measures. The reconciliation of these non-GAAP financial measures is provided in our most recent MD&A.

Turning our attention to the financial and operating results for the full year 2014, consolidated revenues of $1.8 billion, up from $880 million for 2012. The acquisition of SSL was the primary driver for this increase. For 2013, the Communications segment accounted for 73% of our consolidated revenues of $1.3 billion. The Surveillance & Intelligence segment accounted for 27% of our consolidated revenues or $484 million. Revenues from the Surveillance & Intelligence in 2013 were on part with last year, which is noteworthy, given the sales of the US space composites business at the end of 2012 had contributed approximately $28 million in revenue.

Operating EBITDA for 2013 increased to $325 million compared to $214 million for last year. In 2013, the Communications segment accounted for 56% of our operating EBITDA or $182 million. And the Surveillance & Intelligence segment accounted for the remaining 44% or $143 million. Overall, the mix of programs and activities resulted in a consolidated operating EBITDA margin of 18% for 2013, which was in line with our expectations for this year.

Operating earnings for 2013 increased to $180 million or $5.13 per share compared to $124 million or $3.91 per share for 2012. The increase in operating earnings per share takes into account the acquisition of SSL and the dilutive effect of the share offering completed in 2013.

The effective tax rate on operating earnings in 2013 was 19% compared to 28% for 2012. The decrease was largely driven by effective tax planning strategies, in particular the structure through which we used to acquire SSL enabled us to secure substantial future tax benefits that have significantly reduced our taxable income and thereby our cash tax obligations. For 2014, we expect the effective tax rate for operating earnings to remain in the 20% range.

Net earnings under IFRS this year was $105 million or $3 per share. It is worth noting that net earnings include among other things the impact of fair value adjustments on our share-based compensation and non-cash amortization of acquisition-related intangible assets that are not expected to be replaced.

We continue to generate strong cash flows from operations. In 2013, our business provided net cash of $152 million from operating activities after funding changes in operating capital. We used this cash to pay down our revolver loans, make dividend payment and make investments in R&D, capital equipment and infrastructure to support our future growth. The construction of our second thermal vacuum test chamber at SSL is progressing well and we expect that this will be completed soon.

Our order backlog at the year-end increased to $3 billion compared to $2.2 billion at the end of 2012. The increase reflects greater order intake for our turnkey satellites at the SSL post-acquisition and the contract for the build phase of the RCM program.

We have also taken significant steps over the past 12 months to further strengthen our balance sheet. Consistent with higher activity levels at SSL, total orbital receivables increased to $399 million at the end of 2013 compared to $345 million at the end of last year. Orbital receivables represent an important source of long-term recurring liquidity, which we use to fund current operations.

We ended 2013 with net debt of $546 million, a reduction of $277 million over the past 12 months. Correspondingly, we significantly reduced our net debt to bank EBITDA ratio to 2.2 as of the end of 2013 compared to 2.9 at the end of 2012. This leaves us with considerable room in our current credit facility to operate effectively and pursue our growth and investment strategies.

Our net pension liability at the end of 2013 was $101 million compared to $242 million at the end of last year. This is a decrease of $141 million year-over-year. We realized this significant reduction through the restructuring of the pension plans at SSL, actuarial gains and high actual returns and forecast on pension plan assets. We also expect to achieve ongoing reduction in both cash contribution and pension and post-retirement benefit expenses as a result of the restructured pension plan.

To recap, we had another successful year. We generated full year revenues of $1.8 billion, operating earnings of $5.13 per share, the operating cash flows of $152 million. We also maintained a very healthy operating margin throughout 2013. Our order backlog at the end of 2013 was $3 billion on strong booking activity during the year. We're excited about the volumes of bids and proposal spending and are optimistic about the range of opportunities in our pipeline. We are in good financial position. We now have significant borrowing capacity under our credit facility and ready access to capital markets on an as required basis to finance future growth.

Combined with our strong cash flows from operation, we have the flexibility and options to pursue and execute our growth initiatives and drive shareholder value. That concludes my discussion. I will hand it back to Dan. Dan?

Dan Friedmann

Thanks, Anil. Anil and I are now ready to respond to your questions. Leone, can you please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Thanos from BMO Capital Markets.

Thanos Moschopoulos - BMO Capital Markets

Dan, you mentioned that bidding activity remains strong in the year, satellite business. And so how do you think about 2014, would you expect industry award activity to be comparable to what we saw last year or is it a bit early to make that call?

Dan Friedmann

Based on what we see today, it could be higher than last year, definitely about the same or higher.

Thanos Moschopoulos - BMO Capital Markets

And so is it sort of the same theme where a lot of that opportunities coming from sort of customers in the emerging regions?

Dan Friedmann

Definitely. The vast majority of our pipeline is from second and third-tier operators, not the top tier operators.

Thanos Moschopoulos - BMO Capital Markets

And then a question for Anil. As we look at margins for the Communications segment, I guess we have two moving parts. On the one hand, you're ramping up and so you'll have better capacity utilization. On either hand, I guess the margins are lower in the initial phase in some of these contracts. So net-net, when we think about margins in 2014, what should the margin profile look like in the Communications business?

Anil Wirasekara

I don't think you can look at margins on one segment and not the other. We have multiple product lines and there are times when certain of those product lines, the margins are soft and there are times when the others are strong. Overall on a consolidated basis, we don't see any material change, either up or down, in our margins between 2013 and 2014. Needless to say, right now, the margins in the Communications business is a little soft, but that is offset by stronger margins in our other lines of business. That's one.

And secondly, it just depends. In any particular quarter, the amount of flow-through stuff that passes through and most of that is in our Communications business, so there is a little more volatility in the margins on that business when you look at it in that context. But on a consolidated basis, we don't see any change to our margins year-over-year.

Thanos Moschopoulos - BMO Capital Markets

The Skybox deal was interesting, since that was, I guess, the first time we saw SSL win LEO project in quite some time. And so should the takeaway here be that SSL is going to place more focus on some of these LEO opportunities? And if so, how should we think about the market opportunity that may represent the company?

Dan Friedmann

Well, as we've said, one of the key criteria on objectives in the SSL acquisition was to be able to expand SSL into a number of businesses that MDA has been in and we've so far been quite successful in robotics and now with Skybox on the surveillance side, so that we could bid primarily in the US. In the case of the Skybox situation, that sets us in a good position to bid US government surveillance jobs, but also because we now have the content of the [ph] bus, which we've never had in our product line. It leaves the Canadian operations with a better offering in this area, also to our international customers. So both from perspective, it's very positive.

But overall, we are trying to grow at this to be able to do the full scope of our surveillance and intelligence business that we don't today do in the States. And you can see from my remarks that a lot of our business was booked in the States recently.

Operator

Your next question comes from Steve from RBC Capital Markets.

Steve Arthur - RBC Capital Markets

I guess just following upon a couple of those points, just looking at the pipeline a bit more specifically, the PCW contract bids were due a few weeks ago, I believe it was. Any thoughts on the opportunity there and the likely timeline for the Canadian government in pursuing this?

Dan Friedmann

First of all, we always talk about the dollar figure of bids outstanding and when I normally talk about our pipeline, that relates to firm fixed price bids that we have out there that are going forward to contract. PCW is not one of those. The government only asked for a request for information. We provided of course technical and financial information. But it is a request for information. At this point there is, to my knowledge, no approved program budget or procurement.

The Canadian budget, which was released a week or two ago, had a line item that pushed all the fence procurement out. So to the best of our knowledge, we don't expect to see action in the next 12 months on that.

Steve Arthur - RBC Capital Markets

I guess just in a similar way in the Canadian space policy framework was also released a few weeks ago, lots of MDA programs were discussed in there, but not a lot of funding news. Was there anything in there that you would comment on, any new or expanded opportunities for MDA?

Dan Friedmann

I think the key thing is that for the longest time, Canada had a very enlightened set of space policies and priorities and we lost our way for a while. This new document, which is basically priorities and strategy document, no money, goes back to the tried and true Canadian approach, which builds MDA and SPAR and the Canadian aerospace industry. So we're very pleased with the priorities. The second priority is to support industry. That's what it used to be way back. We lost our way on that.

But there has been no new funding. There has been no new program starts. And other than small R&D events, things are very quiet. And again, there is no money in the last budget.

Steve Arthur - RBC Capital Markets

2013 was a very big year for MDA, as you absorbed SSL, looks like that's been quite successful and the balance sheet is strengthening. I guess when you look at over the next three, four, five years, how do you see MDA evolving? Clearly we expect the current businesses on build on the current basis. But how aggressively would you contemplate for the step function changes building or buying new products, new business lines to complement where you are today?

Dan Friedmann

I think we're going to be quite aggressive. We have our plan to be a top player in Communications and Surveillance & Intelligence. We have our plan to aggressively go after the US market. I know it's quiet right now. But if you look at the government assets, they have to be replaced. So they're taking a little CapEx holiday in the government right now. But in terms of our essential type of business has to come back, maybe not in '14, maybe in '15, maybe in '16, but it's coming back. We've got to ready for that. We still have lots of work to do to be ready for that to build up our resume. And some of that requires M&A activity. And as we discussed at the Investor Day, we're still aggressively expanding into places like Brazil and India and need to do some work there.

And we've had a very successful approach in the Surveillance & Intelligence. So it's combining both being in the equipment, our systems business and being in the service business, sometimes those complementing each other. They key award we had with the US for affordable ground station to do a demonstration this past couple of months is an example of that where we are both doing the hardware and the service. And if that goes into operation, that will be a very significant program for us.

So we are looking at whether those kind of strategies can be used also in the Communications side, but it's early days for that. And that would be M&A activity related also.

Operator

Your next question comes from Nikhil from National Bank Financial.

Nikhil Thadani - National Bank Financial

Dan and Anil, could you maybe talk a little bit more about the SSL facility in Palo Alto and thermal vacuum chamber? Specifically, could that lead to a cost improvement in 2015 as that facility is completed?

Dan Friedmann

I think the key thing about the thermal vacuum chamber is that right now we have to send out a few satellites a year somewhere else. That costs us money and it costs us schedule and it's not comfortable to our customers. So our main objective is to be able to keep those in-house at this facility. And of course if we're able to book more satellites than in the past, we would then still go outside. So it just increases the throughput.

But that is just kind of the visible part of the situation. We are doing a number of other capital projects in the facility, a number of productivity improvements focused on cost reduction per satellite, focus on schedule reduction per satellite. We're doing a number of aggressive R&D programs to improve our offering. We're looking heavily at our manufacturing processes. And we're working around the clock, trying to deal with the margin pressure from the market by reducing cost and improving quality enough by reducing bottomline.

And there are several projects that are short term and long term in that over the next couple of years, the thermal vac being the most obvious difficult one. But that's just one of them.

Nikhil Thadani - National Bank Financial

And most of the CapEx for that has been incurred, right?

Dan Friedmann

Yes, we're almost done on that one. But we've got a number of other projects we got approved in the last months on CapEx.

Anil Wirasekara

It's not only CapEx. It's CapEx and R&D and process improvements and a whole lot of things that have good long-term benefit.

Nikhil Thadani - National Bank Financial

And to the extent that you can, could you maybe give us some more color on your growth plans in terms of organic versus M&A? What would be sort of some verticals or some segments that might be interesting from an acquisition standpoint? Just what you're thinking at a high level over there?

Dan Friedmann

I think I've said everything I can about M&A. The tell with M&A is you have lots of plans, but you need actionable acquisitions that are decent priced. So I can't really say more than I already said until we find something that consummates. On the organic side, I said in a previous question, we're focused on our two markets, we're focused on the geographic, the US expansion and some of the other countries like Brazil and so on. And that's our focus. And you can see from the kinds of programs that we're booking there, they're a little bit different.

And of course, we're very focused on geospatial. The US geospatial side has been quiet from the point of view that the government wasn't making any final decisions until weeks ago. But we have stepped that up, as we discussed in the past. And we have submitted bids prime instead of subcontractors and there's at least one very large bid that's due to be decided on in the next couple of months, delayed from last year because of the shutdown. So we're pushing very hard on the geospatial side also.

Nikhil Thadani - National Bank Financial

No changes to the RCM build ramp in 2014, I assume?

Dan Friedmann

No, RCM is ramped. We are already at the peak labor. Of course, the non-labor does its thing and there's still more coming. But the team has finished ramping up last year. And we are basically started and running at full speed.

Operator

Your next question comes from Steven from Raymond James.

Steven Li - Raymond James

A couple of housekeeping first. Anil, it looks like you restated your operating EBITDA higher, doesn't match what was reported in prior quarters. What is the difference there? It looks like it's a few million dollars.

Anil Wirasekara

Yeah, it is. If you look in our financials, it is the interest component on the pension. So we had to restate that on the pension contributions. On the pension contributions, there's the interest of a couple of million dollars that go into, which was previously recorded as cost of sales that is now recorded as interest expense, which is how it should be and all the new accounting rules.

Steven Li - Raymond James

And so the interest expense we saw in Q4, the $10.5 million, so that's the quarterly number for next year, so $42 million for the year?

Anil Wirasekara

Yeah. But it will keep coming down. The interest expense in the financial statement is interest on long-term debt, interest on servicing pension cost, imputed interest on a variety of other items, right? So some of this will be pretty standard throughout the year like the interest on servicing pension cost. I don't think that there is going to be huge fluctuations in that. But certainly the interest expense with respect to long-term debt will keep reducing quarter-over-quarter.

Steven Li - Raymond James

And just one question on the unmanned surveillance extension. What does it imply for revenues in that segment? I think originally we were thinking it might decline to zero. What happens with the extension, Anil?

Anil Wirasekara

The current run rate is about $15 million a quarter, so about $60 million for the year. And that's consistent between 2012 and '13 and we're not really sure '14 how long it's going to be. But that's the current run rate.

Dan Friedmann

So right now, we have an extension through the middle of the year. Obviously people are going back home from Afghanistan and there is a possibility and we're working hard on that to continue at a reduced level and stay in that service business. So we're pursuing that.

And in parallel with that, that's how we begun into this business on the heels of the Afghanistan quick deployment need. But I think you saw a few months ago, we booked equipment sales to the Canadian forces for small UAVs and we have several other bids outstanding on the equipment side also.

Steven Li - Raymond James

Dan, you mentioned earlier RCM is at its peak labor. What kind of contribution do you get from RCM at that peak labor?

Anil Wirasekara

On a revenue basis, we expect to do about $30 million a quarter on RCM. But it could go to $25 million, could go to $40 million depending on the flow-through that go through, right? But if you want to take an average run rate over the next two years, it will be like $30 million a quarter.

Operator

Your next question comes from Deepak Kaushal from GMP Securities.

Deepak Kaushal - GMP Securities

On RCM, I guess I understand that the margins will flow through Surveillance & Intelligence. And that by my math I guess I came in at 33% last quarter. What do you see the impact on the Surveillance and Intelligence margins, Anil, going forward as RCM and equipment starts to flow through that line item?

Dan Friedmann

Basically, we have lost some of the margins from the UAV service, which is higher margin. And we've gained some of the RCM margin, which is lower margin. And we've got other service business. So again, like Anil spoke, the consolidated thing washes out more or less. But even I can't track all these different bids.

Anil Wirasekara

Yeah, you can't track these leave alone on a program-by-program basis, you can't do it on a quarterly basis. So you got a portfolio of programs within different product lines and there are puts and calls. And as I said, certain times there are certain sectors that are soft in the margins and certain sectors that are strong. And we got to be able to put all these together and come up with a consolidated margin.

Deepak Kaushal - GMP Securities

So despite the fact that RCM is a big part of the backlog for Surveillance & Intelligence, that shouldn't impact necessarily margins in the near term?

Anil Wirasekara

Not next year.

Dan Friedmann

We did just shy of $100 million in RCM in 2013, right? So we're only growing by about 20% from '13 to '14.

Deepak Kaushal - GMP Securities

It seems like in countries like Brazil and Russia, it's almost a step forward and then two steps back. I know that the Europeans have been quite aggressive in Brazil and Russia in the commercial market. I'm just wondering what steps you guys are thinking of taking to boost your competitiveness in the international markets now that you have SSL under your belt? You're still considered a Canadian company out there on a global scale. What are your plans there? What are your idea to how can you kind of change the momentum there?

Dan Friedmann

First of all on the commercial side of things, we won a big commercial procurement in Brazil last year. It was the government procurement that we lost to the French. And in Russia, we've had a hard time with the Europeans. We're working hard on meeting the local country needs who are coming from behind, because we have not been heavily into the communications business. But we're working to build the alliances and the staff in country to be able to meet the in-country needs of these government procurements and industrial policies of these countries. And that's going to take time.

But in particular in Brazil, there are several very large surveillance and intelligence programs that I'll be happy to announce and are moving forward. And it's a very large market and we have to go after it.

Deepak Kaushal - GMP Securities

And so partnerships in places like Brazil or joint ventures, would they require initial capital outlays or you're kind of anticipating those types of things, or you're going to extend your M&A radar into companies in those types of countries?

Dan Friedmann

All of the above. Some things you can do by M&A, but you'll still eventually need to be majority Brazilian in that particular case for the defense procurements. So you still need to then JV. So when you feet on the street and capability on the street to do that work locally, but we also need control locally, the same issues we had in the States.

Deepak Kaushal - GMP Securities

There has been some activity, I guess, in consolidation amongst the commercial side on operators. What's your view on further consolidation in that industry and what regions in the world that might occur and how do you think this might impact that business over the next several years?

Dan Friedmann

Yeah, I think there's going to continue to be acquisitions and consolidation in the industry. There are the first tier players are looking for business opportunities to grow by second-tier players, as happened with Eutelsat buying SATMEX. But there could also be second tier people buying other second tier people to try and grow into the first tier. So there is a couple of companies in play right now. And we expect to see further consolidation at the same time, though there are new players are emerging. So I don't think the total number of players is going down. From our perspective, we have a long track record with several key players to the extent that those are the players that are buying things is more profitable for us, because they trust our satellites and our capability. But I'm not the expert in all those puts and takes.

Deepak Kaushal - GMP Securities

And do you see that impact CapEx, general trends towards consolidation or is the demand the ultimate driver?

Dan Friedmann

No, in the end, the CapEx is dictated by you and me, the guys using the stuff.

Anil Wirasekara

We deferred a couple of quarters this way or that way, because they are putting outlay on M&A. But overall, the CapEx is going to come.

Dan Friedmann

Depending on usage.

Operator

Your next question comes from Doug from TD Securities.

Doug Young - TD Securities

Doug on for Scott Penner here. Just wanted to touch on the Skybox deal a little bit more. Is there any other additional color you can provide with respect to how much revenue is associated with this deal or how much capacity to say is up? Is it meaningful in that respect?

Dan Friedmann

Yes, it's a meaningful contract for us and strategically and technology and in revenue is many times of millions. And this is just one piece of it. They're planning to put a constellation that's twice as large. And in this particular piece, we obtain certain work scope, not all of their work scope. So yes, it's meaningful.

Young - TD Securities

You've previously talked about seven to 10 average size satellites being as sort of the target in the given year to reach desired capacity or factory utilization, given some of your CapEx. And this contract, is that still the same target in the upcoming year?

Dan Friedmann

Yes, that hasn't changed. And I don't think you can mix the Skybox cubic meter, less than cubic meter satellite with the monsters that we build for communications in terms of capacity. They'll be built in a little room on the side. It's a different play. You have to separate those two businesses. Now within our US facility, we have Communications facility and then we have our growing robotics facility and a growing now Surveillance & Intelligence. But there's not so much of absorption from the small satellites of the big CapEx and the big room and all that good stuff.

Doug Young - TD Securities

So again on the capacity utilization, given the way you've kind of stubbed 2013 and perhaps it goes back to 2012 and a slow year there, I mean are you going to be under-utilized in the coming year?

Dan Friedmann

The fact that we booked seven satellites in 2013, we had six bookings and one ATP. That ATP has been extended through the end of this year. So it's effectively a booking for us, ensuring we have the hope of showing in backlog now. And we're comfortable at this stage, but due to the low volume the year before, we still need to book a number of another good seven satellites this year. And we need to book some in the next few months. And so it just depends on how fast people buy and who they purchase from.

Doug Young - TD Securities

Anil, on the adjustments to your EBITDA in prior quarter with the pension, does that fall into one segment specifically, Communications or Surveillance & Intelligence?

Anil Wirasekara

It's mostly to do with SSL, right? So it's mostly in the Communications side. It works to about $2.5 million a quarter I think. The pensions are about SSL and Montreal. So most of it, 90% of it would go into Comms and the other would go into the Surveillance & Intellilgence.

Doug Young - TD Securities

Anil, any comment on projects around the working capital movement in the coming quarter? I know you had a pretty large build in construction contract liabilities in this quarter.

Anil Wirasekara

Yeah, these things will kind of even out over the life of these programs right now especially on some of the communications stuff. Payments are more back-end loaded. As you know, we had some fairly favorable milestone payments on the Ukrainian contract. It's now kind of working the other way where we've got big receivables on that despite the fact that we are still significantly cash flow positive and we don't see that kind of changing to the rest of the year. So we're building up inventory. We're investing in R&D. So all that will suck up a little bit of working capital, nothing to get alarmed about. But that's kind of where the business is trending right now.

Operator

Your next question comes from Naser from Salman Partners.

Naser Iqbal - Salman Partners

Dan, just following from the third quarter call, as it relates to the US government and the US environment, now with the US government, the debt ceiling was passed, do you think your margin in the fourth quarter were a lot better than prior quarters? How would you characterize the pricing environment and the contract awards environment today as of maybe couple of weeks ago?

Dan Friedmann

The situation in the US is that basically everything is shut down quite significantly. Then the whole thing got itself fixed up, as you've commented, although they effectively implemented the sequester law in terms of there was a budget. Nonetheless people can move money around between pods. And the government is just now coming back to life in terms of awarding things that we had bid middle and early last year. So we're starting to see awards and in particular we're awaiting for one major decision.

However, new program starts have still not happened. So we're going to see a crop of awards of things that we bid that are moving, but the new stuff is very slow at getting going.

Naser Iqbal - Salman Partners

Right. In terms of, I guess, the pricing pressure you talked about in the second and third quarter of last year, I mean has that situation improved a little bit or it's still that everyone is pricing aggressively?

Dan Friedmann

Well, I'm not sure we talked about pricing pressure in the US government. In the US government, it's quite controlled through rates and audits and things like that. So it's not like a commercial situation. We don't see any significant changes in the US government. The commercial sector is a whole other story. But in the US government sector, we're not seeing any margin changes.

Naser Iqbal - Salman Partners

In terms of the M&A pipeline, I think in the year, some of the markets have recovered there. Have you seen any change in the pricing in terms of any targets, in terms of pricing becoming more reasonable or the evaluations moving out in either direction?

Dan Friedmann

I don't think we're the right people to ask, because we look at very few to talk about trends in the market. And we get to price, so even fewer than those. So I have maybe two or three points.

Anil Wirasekara

Also, ours are pretty specific, right? We are very specific to a particular niche and a particular industry. So I don't think that we can discuss or talk about trends at any level of credibility.

Naser Iqbal - Salman Partners

Dan, if we had to look at your opportunities for this year in terms of where you're focusing your energies and maybe split the bucket between US market and the emerging markets, would you say your energies are maybe like 50-50, or is it 60-40 in any particular direction?

Dan Friedmann

No, most of the energy is in the export market. As I said, the US government new program starts are not there. So most of the energy is international.

Operator

Your next question comes from Peter from Canadian Press.

Peter Rakobowchuk - Canadian Press

This is for Mr. Friedmann. I just wanted to focus a bit more on the PCW. I think you said that the project itself might be pushed back based on the last budget. And my understanding was there was supposed to be an operation by 2017, but from what you said, you see some delays in the project?

Dan Friedmann

No, I didn't say the project would be pushed back.

Peter Rakobowchuk - Canadian Press

Don't expect to see any action?

Dan Friedmann

Right. To my knowledge, the government just asked for request for information. We're not aware of a budget or a program approved to treasury board or an IRP. So we were asked for general information, so they could do some planning and so on. And we've provided that information. We know that the government has to do several months of work based on that information. And we also are aware of the budget that was just presented had a specific item that defense spending was being pushed out. I can't remember the exact quote in the budget. So we're not expecting anything eminent on that at all.

Peter Rakobowchuk - Canadian Press

I think you mentioned in passing the year aggressively going after the US market. I was just wondering does this have any impact on your employees either in Canada or the US, are you doing any lay-offs at Richmond or up in Canada to sort of synergize the two companies?

Dan Friedmann

No, there's no situation like that. The synergies are all revenue synergies. So to the extent that we book more business, wherever we book more business, it always has a positive impact in Canada, even one we book in the US, because some of the work flows back to Canada. In terms of whether we do lay-offs at any particular time, that just depends on our general volume in each facility and what's going on.

Peter Rakobowchuk - Canadian Press

And how is it looking up here in Canada, north of the border?

Dan Friedmann

It's looking fine. We have been hiring. We continue to hire at a very fast rate in Montreal. And the rest of our facilities are effectively stable.

Peter Rakobowchuk - Canadian Press

Have you increased at all in California, your staff there?

Friedmann

No, it's been stable.

Operator

Your next question comes from Richard from Cormark Securities.

Richard Tse - Cormark Securities

Anil or Dan, just wondering how you guys balance your cash flow stream and how you're going to use that money towards dividends or the pay down of debt or essentially acquisitions here? I'm just trying to get a feel for how you prioritize those things.

Anil Wirasekara

It just depends on the cycle, right? Previously, at the beginning of last year, our priority was to pay down our debt, because the debt was at slightly an uncomfortable level. We're now at a very comfortable level. And the priority right now is growth. As Dan talked about, we're aggressively looking at growing our business. And that's where we would like to deploy our cash. So we will look at it from time to time. We will reevaluate all our options and alternatives in about six months' time and decide what we're going to do in the short term and what we're going to do in the long term.

So right now, our focus is primarily on growth, both organic growth as well as M&A growth. And that's where we would like to deploy our cash. Sometimes, we have to deploy our cash in working capital, because not only is it required for us to book our business, it provides us with a better return and paying down our debt. So sometimes this is deliberate where we go and deploy it in working capital on a short-term basis.

Richard Tse - Cormark Securities

And if you look at acquisitions per se, do you guys have targeted a return on invested capital that you could share with us, or is it more along the lines that you have to make a strategic acquisition, the return on invested capital is not that important?

Anil Wirasekara

Well, return on invested capital is very important, but we are strategic buyers. We are not financial buyers. We don't say, look, we got to make this threshold and we have to be strategic or non-strategic that we're going buy it. Our first primary criteria evaluating an M&A opportunity is the strategic merit. Once we have gone through that, then we look at the financials and make sure that the financials meet certain criteria. But the strategic rationale is very important in trying to get the door opened.

Dan Friedmann

We have to achieve both. We don't go out and buy something that is strategic, but a bad return. And we're not going to buy something at a good return that's not strategic. We have to do both.

Richard Tse - Cormark Securities

It sounds like you guys are making a lot of headway with some of these second and third tier operators. Is you bid pipeline versus what it was if you add the two bid pipelines on both companies came together about a year back, order of magnitude, how much would it be bigger?

Dan Friedmann

Well, the two companies added together?

Richard Tse - Cormark Securities

Yeah, like if you were to add the bookings pipeline way back when you guys put these companies together versus what it is today, has it grown meaningfully? I'm just trying to get a sense of the momentum these two companies are coming together here.

Dan Friedmann

Well, I think you have to look at three separate things. In the Communications side, our bid pipeline today is still around $2 billion and it was about $1.9 billion at the last call. So there's been some puts and takes, but it's about that. And that has grown over the last year. In the Surveillance & Intelligence, our bid pipeline went down, because we booked RCM and we don't come everybody at the beginning of last year, but it's trying to build up nicely now with other programs that we're looking at.

And then of course we're trying to create a whole new bid pipeline of synergies of the two companies in the US government sector and other areas like the Skybox contract. That pipeline is still soft as we try to qualify those, but it's going to be a whole new billion-plus pipeline hopefully one day as we work through it. So still too early to add them all together, because they're different quality. Our original pipelines are solid pipelines. The new pipeline and the intersection is still being qualified and rigorized.

Operator

Mr. Friedmann, there is no more questions at this time. Please proceed.

Dan Friedmann

Well, thank you, everyone, for your very good questions. And we look forward to updating you again in a couple of months. Thank you very much for attending.

Operator

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

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