MacDonald, Dettwiler and Associates' (MDDWF) CEO Howard Lance on Q2 2016 Results - Earnings Call Transcript

| About: MacDonald, Dettwiler (MDDWF)

MacDonald, Dettwiler and Associates Ltd. (OTCPK:MDDWF) Q2 2016 Earnings Conference Call July 28, 2016 5:30 PM ET

Executives

Howard Lee Lance - President and CEO

Anil Wirasekara - EVP and CFO

Analysts

Thanos Moschopoulos - BMO Capital Markets

Steve Arthur - RBC Capital Markets

Stephanie Price - CIBC World Markets

Paul Steep - Scotia Capital

Deepak Kaushal - GMP Securities

Matthew - AidennLair Capital Management

Robert Peters - Credit Suisse Securities

Steven Li - Raymond James

Tim - TD Securities

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 MDA's Q2 2016 Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

We would like to remind you that part of today's 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 second 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 Web-site or SEDAR.

I would now like to turn the call over to Mr. Howard Lance. Please go ahead.

Howard Lee Lance

Thank you very much and good afternoon, ladies and gentlemen, and thank you for joining us today for MDA's second quarter 2016 conference call. With me is our Chief Financial Officer, Anil Wirasekara. It's been two months since I joined MDA as CEO. I've visited all of our primary locations, met with employees, customers and advisors, and then quickly getting up to speed on the business.

Our Company has a strong and diverse technology foundation, a robust pipeline of opportunities and excellent customer relationships, all the required ingredients to drive future growth. As I told many of you when we met in Toronto during my second week, my near-term priorities continue to be focused on securing new business in the opportunity funnel, completing implementation of the U.S. market access plan including building out the leadership team, and executing current programs that are underway across the Company.

I'll begin our call today by discussing some of the key business events that have taken place since our first quarter call, and then turn it over to Anil who will review our financial results for the second quarter. And after that, of course we'll open the line to answer your questions.

Beginning with the Communications sector, I'm very pleased to report the Company signed contracts for three new geostationary communication satellites since our last call. Intelsat 39 is a high-powered communication satellite ordered by Intelsat, one of the world's largest satellite fleet operators. This satellite is designed to provide broadcast services to Africa, Europe, the Middle East and Asia.

And today we announced a new contract with SiriusXM Radio for SXM-7 and SXM-8, two high-powered communications satellites. As you know, SiriusXM Radio is the world's largest radio company by revenue. These next-generation satellites will help ensure continuous and reliable delivery of SiriusXM audio content and data services to over 30 million subscribers across North America.

Since our last report, four geostationary satellites from SSL were successfully launched and are performing on orbit as planned, and two additional satellites have been delivered for lunch. [Two of the] [ph] [indiscernible] satellites are for Sky Perfect JSAT, the leading satellite operator in Japan with a fleet of 16 satellites. JCSAT-14 was launched in May and is helping meet the growing demand for telecommunications infrastructure across the Asia-Pacific region. And on July 13, we announced a second satellite, which shipped to Cape Canaveral, Florida where it is expected to be launched next month.

In June, we had two satellite launch on a single launch vehicle from the base in French Guiana. These included BRIsat, the first dedicated satellite for a bank which we built for Bank Rakyat Indonesia, and EchoStar XVIII, designed and built for DISH Network, which provides direct-to-home television service across the U.S. Both of these satellites are currently in the process of our standard on-orbit testing before they would go into active service.

Intelsat 31 was also launched in June. This very large and powerful satellite was built for Intelsat to enhance television service in North America. And Intelsat 36 is now at the European Spaceport launch base in French Guiana. It was built for Intelsat and will provide media and content distribution services in Africa and South Asia. Clearly, SSL's history of market leadership and high performance and reliability continues to be reinforced with every new satellite launch.

Geostationary satellite bid activity continues to be very strong, consistent with our last call, led by requests for both replacement satellites and new high-throughput satellites. SSL is the leader in HTS flight heritage and we continue to invest actively in R&D to introduce innovative new bus payload and solar panel designs.

The 2016 industry outlook appears to be on track for a fairly typical year at this point with nine geo year-to-date awards by our count, and four of those coming to SSL. But as always, it remains difficult to precisely predict the timing of future bookings due to changes in customer schedules and financing considerations.

The Company's Montreal operations signed a major contract in the quarter with OneWeb Satellites to develop and manufacture 3,600 communication antenna subsystems for integration on 900 satellites for the OneWeb Low Earth Orbit Constellation.

This work follows Montreal's successful delivery of antenna subsystems to other LEO satellite constellations, namely O3b and Iridium next-generation, and will further improve our position as the leading merchant supplier of low-cost, high-performance antennas now in high volume. These scale economies will also serve to leverage and improve our competitiveness on our lower volume product lines for geo customers.

During the quarter, our Montreal team also signed a contract with Boeing to provide a communication subsystem to be installed on a Boeing 702MP satellite platform.

Turning to the Surveillance and Intelligence sector, the Company signed a new contract during the quarter to deliver a broad-area global maritime and Arctic surveillance solution to the Canada Department of National Defence. It's called Polar Epsilon 2. We have a strong heritage in maritime surveillance solutions. In 2011, the Company successfully delivered the original Polar Epsilon Mission to the DND, a maritime surveillance system based on the MDA RADARSAT-2 satellite. The Company has subsequently been providing in-service operational support for both the East and West Coast ground systems delivered under the Polar Epsilon project.

The new Polar Epsilon 2 RAMP systems will have the capability to receive and exploit information from the new RADARSAT Constellation Mission satellites, currently being built by MDA for the Canadian Space Agency. Polar Epsilon 2 will provide the Department of National Defense with near-real-time vessel information across millions of square kilometers within minutes of imaging. This will enable the DND to cost-effectively detect and track maritime traffic over great distances and to, more importantly, identify suspicious traffic which warrants further investigation using ship and airborne platforms.

The ability to detect suspicious vessels will be further enhanced by utilizing the Automatic Identification System receivers being flown on these new satellites. But the Polar Epsilon 2 system will also be able to identify so-called 'dark' targets, those who are not transmitting AIS signals as required by international maritime law, but who can be seen using the Synthetic Aperture Radar imagery. We believe that such near-real-time ship detection will also be of interest to Canada's close allies who face similar challenges and potential threats, and offer future opportunity to MDA.

As you know, MDA has a strong and long-standing partnership across numerous Canadian government agencies. During the quarter, MDA was awarded a contribution agreement under Canada's Innovation, Science and Economic Development program. MDA will coordinate a team of Canadian partners, both in the industry and academia, to develop new and innovative technologies for space communications and space surveillance. This funding is further evidence of the Canadian government's commitment to innovation and to MDA, and its recognition of the strategic importance of the space industry to Canada's future economic development.

One of the research projects include the demonstration of onboard processing technologies that can provide even more enhanced performance and actionable intelligence for ship detection and other applications. It will also include continued work to demonstrate advances in high-speed electronics, which will enable next-generation space-based radar and enhanced communications applications. And finally, there will be further demonstrations of how exploitation algorithms can be used to extract information from huge archives of remote-sensing data when applying emerging cloud computing technologies.

The Company also continues to support its high-precision flight path safety system developed for the U.S. Air Force under an IDIQ contract announced in June 2015. Authorization to-date now totals $17 million under this contract. We booked over $4 million additional work this quarter with other aviation customers to further enhance their capabilities, including the automated charting of departure and arrival flight paths sourced from the customer's aeronautical database.

In the robotics area, the Company signed multiple contracts with the Canadian Space Agency to assess robotics solutions and advanced innovative sensor and guidance navigation and control technologies for future space exploration missions. The Company also received a contract amendment in the quarter to extend our ongoing robotic operations support for the Mobile Servicing System on the International Space Station.

During the quarter, we received an important award for a $20 million contract from DARPA, the U.S. Department of Defense Advanced Research Programs Agency. This is to design and manufacture robotic arm flight hardware for its Robotic Servicing of Geosynchronous Satellites program or RSGS. We are working closely with U.S. Naval Research Laboratory, who is managing the robotic arm contract for the RSGS program. The work includes two complete robotic arm systems and builds upon previous contracts announced in 2012 and 2013. Total contract value awarded now stands at over $40 million and could grow further if all additional program options are exercised.

In the services business in the Surveillance and Intelligence sector, the Company signed a contract with the European Maritime Safety Agency to provide RADARSAT-2 information to support the agency's focus on maritime safety, law enforcement, border security, fisheries control and marine pollution monitoring. This contract represents a significant strategic expansion of our maritime surveillance services that the Company is providing to the European market. These services also support increased European efforts to manage and respond to the migrant prices.

Company was also awarded a follow-on contract by the U.S. National Geospatial-Intelligence Agency to provide information that allows monitoring the effects of climate change, detecting urban sprawl, deforestation and wetlands loss. In addition, the Company booked over $13 million of geospatial information services contracts with undisclosed customers within United States.

The process to position the Company to more aggressively pursue U.S. Government and new commercial space business is proceeding as planned. The new U.S. holding company structure is now registered and in place and we have begun to build an experienced leadership team based in the U.S. During the quarter, we filed with U.S. government to complete the process related to mitigation of MDA's foreign ownership, control or influence on the new U.S. holding company and its operations.

The process appears to be on track for completion in the next few months, although of course there can be no guarantee in this regard. Once complete, we will be able to obtain the necessary facility and personnel security clearances and be in a position to fully execute our broader growth strategy in particular to bid and execute a much wider range of U.S. Government and commercial contracts.

That concludes my report. I'll now ask Anil to report on the financial results.

Anil Wirasekara

Thank you, Howard. Good afternoon and welcome everyone. As always, we appreciate you joining us today. I'm pleased once again to report a steady quarterly operating results. For the second quarter, we achieved operating earnings of $57 million or $1.57 per share. We also achieved operating EBITDA of $96 million on consolidated revenues of $503 million.

We ended the quarter with order backlog of $2.5 billion, which remains consistent with the balance at the end of March this year. As Howard discussed earlier, we just announced a satellite construction contract with SiriusXM to provide two high-powered communications satellites. As this contract was signed after quarter end, the values are not included in the order backlog as of the end of June. The amount that we report as order backlog includes only value of firm funded orders. We do not include the value of unexercised contract options and unfunded purchase commitments under indefinite delivery/indefinite quantity contracts.

Now let's review our second quarter results with comparisons year-over-year. Consolidated revenues for the quarter were $503 million, compared with $524 million for the second quarter of last year. Although the number of active satellite programs was consistent with the prior period, there were fewer satellites at a higher revenue generating stage of the program lifecycle as compared to a year ago.

Operating EBITDA this quarter was up slightly to $96 million, resulting in overall margins of 19% compared to 18% for the second quarter last year. Operating EBITDA from the Communications segment increased to $56 million with margins rising to 16%, which reflected a recovery of bad debt on a satellite construction contract. The Surveillance and Intelligence segment contributed operating EBITDA of $40 million and margins of 29%, consistent with the second quarter of last year.

Second-quarter operating earnings were $57 million or $1.57 per share, which was consistent with the same period last year. I remind everyone that operating EBITDA and operating earnings are non-GAAP financial measures and reconciliation to net earnings is provided in our latest MD&A.

Second-quarter net earnings under IFRS were $25 million, down from $44 million for the same period last year. Net earnings this quarter were impacted by the inclusion of a large non-operational non-recurring expense that affected in particular the comparability of financial results to the prior period.

Pursuant to the terms of his 1999 employment contract with the Company, a final payment was made to the former CEO of $18.3 million. $15.3 million of this amount was in settlement of share-based compensation.

Now let's review our year-to-date results with comparison to the prior year. For the first six months of 2016, consolidated revenues was $1.1 billion, consistent with the same period last year. The Communications segment accounted for 72% of consolidated revenues or $765 million, and the Surveillance and Intelligence segment accounted for the other 28% or $300 million.

Year-to-date operating EBITDA increased by 3% to $194 million, resulting in overall margins of 18%. The increase was driven by higher contribution from the Communications segment which provided an operating EBITDA of $160 million and margins of 17%. The Surveillance and Intelligence segment contributed $78 million to operating EBITDA with margins of 26%.

Year-to-date operating earnings were $113 million, or $3.10 per share. These results are on par with prior years. The effective income tax rate on operating earnings was 14%, consistent with 2015. We expect the income rate for the full year to remain in the mid-teens.

Year-to-date net earnings were $66 million, compared to $82 million for the prior year. The decrease, as previously indicated, was largely due to the inclusion of the large non-operational non-recurring expense and the recognition in the first quarter of enterprise improvement costs in 2016.

Now let's look at our cash flows for the second quarter. We generated cash inflows from operating activities of $80 million this quarter. This compares to cash outflow of $94 million in the previous second quarter. The timing and magnitude of working capital changes will always have an impact on cash flows from operating activities, given our portfolio of large construction programs. We will continue to invest in working capital as it is critical to managing lead times in construction activities and growing our business and investing in new technologies in a competitive environment.

In investing activities, we made purchases of $11 million in plant and equipment. We also capitalized $19 million in technology and software, a large part of which is related to the development cost on the digital payload program and other key satellite research programs.

In finance activities, we paid dividend of $13 million at the end of June, representing quarterly dividends of $0.57 per common share. We have also declared a quarterly dividend of $0.37 payable at the end of September. Our discussions with third parties about securitizing a portion of the orbital receivables are proceeding well and we expect to close the transaction in the third quarter.

Turning our attention to the financial condition of the Company, we efficiently fund our cash flow requirements with our syndicated credit facility. At the end of June, total long-term debt net of cash balances was $909 million and our net bank debt to EBITDA ratio increased to 2.7x net debt to bank EBITDA, slightly higher than our target 2.5 due to some one-time non-recurring expenses. Our covenant requirement is 3.5. The unused capacity of our credit facility together with cash flows from operations provides us with adequate room to operate effectively and pursue growth and investment strategies.

To recap, we posted steady results in Q2 despite continuing challenges in the business environment. We achieved operating EBITDA of $96 million and operating earnings of $57 million or $1.57 per share. Our strong order backlog provides us with good long-term revenue visibility. We remain optimistic about our opportunities in the U.S. Government market as we continue to make substantive progress in our U.S. access plan. We also continue to make a strong headway in the commercial low Earth orbit satellite market with key strategic bookings during the quarter. We are in a good financial position with our borrowing capacity and ready access to capital markets. We have the financial capability to continue to deploy a balanced growth strategy to position the Company for long-term success.

That concludes my discussion. I will hand it back to Howard.

Howard Lee Lance

Thank you, Anil. Operator, we're now ready to take questions from those who are online, so please open the line.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Thanos from BMO Capital Markets. Thanos, please go ahead.

Thanos Moschopoulos

Howard, just with regards to the security clearances, I think on the last call we talked about maybe a Q3 timeframe as far as those coming through. Is that still the expectation or is it taking a little longer than expected?

Howard Lee Lance

No, I think certainly when I addressed the analysts and shareholders back in I guess it was late May, we said September. I think we're still on track for that. You just need to realize that it's not within our control, and so it may slip from that date. But we've got no feedback other than positive feedback and are taking all the steps that have been agreed. So we're just going to have to keep working the process, but we don't expect any major delays.

Thanos Moschopoulos

Okay, that makes sense. And I think I may have asked you this last time we met, but now that you've been in your role for a little longer, once you do get the clearances, any sense in terms of the timing for maybe some contract wins to come through, should it be maybe a slow steady ramp over time, could there be some sizable opportunities near-term, or is that just still really hard to determine at this stage?

Howard Lee Lance

What I would expect in the near term is the continued progress we've had on orders and contract programs with customers like NASA and DARPA where those clearances have not been required. As you know, the procurement timeline for most U.S. Government programs is multiple years between the RFI, the RFP, the intimate contract award and then execution. So what we're seeing now in contract awards is because of ground that has been laid over the past couple of years.

So I would expect, once we do get access to dealing with a much larger portion of the U.S. Department of Defense and intelligence agencies, that we'll see a similar flow of RFIs, RFPs and ultimately wins and revenue. It's not possible at this point for me to be very precise about the slope of that growth curve because we don't really have current access and understanding of which programs might be in the funnel, which ones we would be most qualified for.

I think I'll have more information on this let's say over the next six months after we get into detailed reviews, and of course we're starting to hire people to be part of our Government Systems business unit in the U.S. who have these clearances, have experience in the market, and so as we bring them on board, they will bring along a deeper wider knowledge of what is going on out there in the market in terms of opportunities and where our various capabilities can fit those.

Thanos Moschopoulos

That's very helpful. And maybe, just if I may, on the commercial side, on the last call Dan had talked about a strong level of customer interest in large 1 terabit type satellites. And so I'm just curious, as you look at your funnel of opportunities on the geo side, is there any trend towards the average project size increasing, or when you average it all out, has it been kind of more consistent in size as it has been historically?

Howard Lee Lance

I'm not sure I know what the average power or size rating would be for the satellites, let's say, we won over 2015 and 2016. I think I can say in terms of giving some color on that that there is a high level of interest in high-throughput satellites. A material amount of our bids and RFIs are related to that technology. Certainly not all of them are related to so-called 1 terabit kinds of bandwidth technology, but as you know, SSL has been a leader in high-throughput satellite technology dating back some 10 years and we have a lot of flight heritage, and a large number of customers are interested in understanding what our capabilities are in general with those kinds of satellites. But we also have a number of bids and RFIs in the pipeline that are related to smaller power, more moderately sized satellites as well. So it's really about fit for purpose based on what the customer is looking at, whether it's a replacement for an existing satellite or a new satellite they are wanting to procure for a specific purpose.

Thanos Moschopoulos

Great. Thanks, Howard. I'll pass the line.

Operator

Your next question comes from Steve from RBC Capital Markets. Steve, please go ahead.

Steve Arthur

First, just one follow-up on the U.S. access programs, probably for Anil, I'm just thinking that these probably don't come for free. So I'm wondering if you could just comment on the level of spending that this has required so far in legal fees and others and is all that being absorbed in SG&A? And then secondly and probably more importantly, looking ahead, what kind of additional expenses are we looking at in terms of the executive additions, the new corporate structure, or any other items?

Anil Wirasekara

Okay, so as of today, all the expenses related to our U.S. access program has been expenses of [indiscernible] expense and forms part of our SG&A. It's not immaterial, but as of today, I wouldn't say it's in the tens of millions, it's in the single-digit millions. But it's a fairly big number and growing, but we look at this as in normal course of business and we have just written it off into our SG&A. With respect to go forward, maybe you'd like to take that question, Howard?

Howard Lee Lance

Sure, Steve. I think we'll have a more definitive answer for you in a quarter or two. We'll be starting our work on our 2017 business plan, and of course we'll be building into those requirements primarily related to people to field the kind of Government Systems team that we need, and business development and advanced technology experts, to be able to bid and win new programs. We do have some of these resources already in place as part of the team that we have working on our current pursuits with NASA, with DARPA.

So it's not totally additive, but we do expect that we'll be adding an investment in 2017 to pursue this business, and it's likely that that investment will not immediately generate payback within its first couple of quarters. It's going to take a while. But we'll be able to better quantify I think the magnitude of this. Again, to Anil's point, I don't expect it's tens of millions, but we believe and are ready to make the investment. We believe the return on that investment is absolutely going to be there for the Company.

Steve Arthur

Very helpful. We'll follow up with that in a quarter or two. Then I guess second, just a bit more generally, Howard, we spoke with you and you're on this job now at MDA for a couple of weeks, you've now been in the position for a couple of months, just wondering if you can discuss some of your findings a little bit further, any unexpected opportunities that you're seeing or challenges that you're facing, and how do you see the priorities for the balance of the year?

Howard Lee Lance

I haven't uncovered anything that I would find surprising. Certainly as I'm learning about the business, I'm seeing things with the level of granularity that I didn't have when I met with all of you at week two, and it's still going to take me a long time to understand the granularity that Dan did. Certainly it's a very dynamic time. I think that's both a challenge and an opportunity. Lots of technology opportunities to build on. I've been very pleased with what I've seen across the Company in terms of our core capabilities, our abilities to leverage off of the technology we have.

The one thing that we're going to be working on is additional effort on the strategic planning side as to where else we could apply the technologies we have. I think there are many, many opportunities to take technologies that we are competent at, such as robotics as an example, a leader in space robotics, and why couldn't we apply those more actively and effectively in terrestrial operations activities.

So that would be an example of taking government funded R&D and capabilities and putting those across into the commercial world. I think the Company has a lot of unexploited opportunities in that area, but it's too early days I think to put any hard and fast numbers on it. But right after we begin or finalize our work on 2017 operating plan, we're going to be kicking off an internal strategic planning project aimed at effectively looking across all of our markets and thinking about how we're deploying resources, how we're deploying capital and which are the best bets we want to make for future growth in the Company.

Steve Arthur

Thank you. Another more detailed one. The Communications margins were quite high in the quarter. Anil, I think you said that there was a recovery of bad debt in there. Can you comment on just how much that was, and then looking ahead, are we more reasonable to expect these margins to stay in that more typical 12% to 14% range?

Anil Wirasekara

That should be the assumption that there is nothing substantial that has changed with respect to margin. Yes, we had a one-time pickup, but we had written off these in the previous quarter, so it's kind of offset what has happened in the previous quarter. Going forward, 12% to 13% should be the kind of run rate of what we have in the Communications business.

Steve Arthur

And just final one, I was a little surprised at the magnitude of the settlement with Dan Friedmann. I understand it was a management contract set 17 years ago and much has changed with the Company since then obviously. Just two questions to clarify. Is that payment complete now or is there more to come? And then secondly, are there other management contracts out there with other executives where we may see some obligations in the future?

Howard Lee Lance

The payment is complete, and no, there are no other contracts that would even remotely approach the magnitude of this particular contract in terms of severance obligations.

Steve Arthur

Okay. Thanks very much.

Operator

Your next question comes from Stephanie from CIBC. Stephanie, please go ahead.

Stephanie Price

Could you talk a bit about your geo sat outlook for the rest of the year?

Howard Lee Lance

Specifically to SSL or to the industry more broadly?

Stephanie Price

Specifically, industry more broadly and SSL specifically I guess.

Howard Lee Lance

I wish I had a crystal ball to accurately predict both of those things, but as I've gotten onboard here, history would suggest that no one really has the ability to do that. We are slightly past the halfway point. There have been nine awards. We've won four of those now with the two SiriusXM awards announced today. That seems to suggest that the year is shaping up to be fairly typical, which most people in the industry talk about in terms of 20 geo satellite awards. Whether we'll get to 20 or end up at something slightly less or slightly more than that remains to be seen.

There are so many factors here relative to individual customer schedules and the financing which is increasingly a major factor. So beyond that, I wouldn't want to speculate a specific number. We like our momentum, we like how we're doing. Whether we can maintain our 44% share throughout the 12 months, that would certainly be above where we've traditionally been.

So again, I wouldn't want to guide you to think that's likely, but I like where we are. We certainly should be at or above our historical market share position and I do like the level of activity in the funnel. It remains very strong, as it was on the previous call. But to be more specific would suggest that I know more than I really do about the specific timing of these projects. They move from quarter to quarter, sometimes they move out, sometimes they move in, it's just very hard to predict.

Stephanie Price

Okay, thanks. And then on the LEO satellites, could you then update on the OneWeb ramp-up for the antennas and also on the pipeline for LEO satellites?

Howard Lee Lance

I don't have anything specifically on the ramp-up. I can tell you there is a schedule that has an initial launch of a certain relatively small number of satellites. I don't recall that precise number. And that is to prove out the capability of the satellites as well as prove out the capability of the supply chain, the ground systems and all of that. Once that's done, then things ramp-up pretty quickly to get up to the total of 900 expected LEO satellites in the constellation.

So I think things are going pretty well there. We are very pleased with our relationship with OneWeb. We're very pleased to be their partner on the antenna subsystems and there are other opportunities for us to partner with them on additional components and we are actively pursuing that.

In terms of other LEO constellations, I think it's fair to say that there are a number of companies who are out there considering different business plans around LEO constellations, both for communications as well as Earth observation. We won a pilot satellite for example with Telesat, who is one of the companies that's looking at that. We won a satellite with an undisclosed customer that is doing the same thing. And I can tell you that certainly we are in discussions with RFIs and RFPs with other companies. But beyond that, it's difficult to say the timing of the ramp-up of all of these constellations, how many of them will ultimately be successful, both in getting funding, which I would say is probably the number one challenge because many of these are new business models.

But I think the good news from my seat is that we are the company that every one of them calls as one of their first calls to talk about our capabilities, either in satellites or at a minimum in electronic subsystems, payloads or antennas. So, I think we are participating in all of the procurements and winning more than our fair share. But this is a market I think that will continue to evolve and one that we're certainly going to watch closely to try and take advantage of every opportunity.

Stephanie Price

Great. Thank you very much.

Operator

Your next question comes from Paul from Scotia Capital. Paul, please go ahead.

Paul Steep

Howard, are the senior changes in the organization now done and in place? In the U.S. obviously you've got the other level of hiring to do, but is that complete or are you still planning to sort of finish it out by the end of this quarter hopefully?

Howard Lee Lance

The latter. I've made a couple of announcements, but a couple of more to come. Most of the organization is in place. We moved the Canadian and U.S. operations under the holding company. The moves we are making here are related primarily to accomplish two things. One is to make sure we're in full compliance with the U.S. market plan, but some of it is to also establish some centralized control so that we can gain more leverage from synergies between the Canadian companies and the U.S. companies. Those synergies have not been fully realized in my view over my first couple of months. So I want to make sure that we capitalize on technology sharing, we capitalize on our scale and procurement, we capitalize on all of the assets that MDA has around the world.

In addition, we are beginning to ramp-up on the recruiting and the hiring side as it relates to specifically what I'm calling the SSL Government Systems business. So this will be the business unit that will focus on U.S. Government procurements and we're certainly not finished with that. I think we'll make great progress by the end of the quarter we are in, and certainly by the end of this calendar year, I would hope to have all of the senior positions filled, and more importantly, filled with experienced people with a track record and with the knowledge that will allow them to hit the ground running and contribute to the Company and its growth. So, I want to make sure that we get the right people with the right skill set, and if that takes me an extra quarter, I'm going to take that time.

Paul Steep

Fair enough. I guess related to that actually, we all know [indiscernible] is just fantastic, the technology is great, you're going to have an experienced team, how should we think about go-to-market in that U.S. market for Government Systems for the first maybe two years? Are you going to be primarily a sub to other people's bidding in a key consortium or do you think there are actually opportunities there where you'll be able to be the prime on major programs?

Howard Lee Lance

I'm sure there are opportunities for us to prime, but we won't have an issue at all in partnering with other contractors as a sub. I think that the faster contribution of revenue will likely come from a combination, getting on teams as a sub for programs already awarded as well as technology studies which will allow us to prove to some of the customers we're not correctly dealing with that we are absolutely in a position to be a partner of choice.

Paul Steep

Great. Last one for me, just quickly, Polar Epsilon has been out there a very long time, you've now got a project underway, what's the timeline look like, Howard, to sort of move that through to the next phase, because obviously the ultimate deployment could be significant?

Howard Lee Lance

Polar Epsilon 2 is really going to focus on data from the RADARSAT Constellation Mission, which we are currently in production on. The launch on those satellites I believe is 2018. So we have a bit of work to do to get all of the processing systems in place to make full use of that data for the maritime and Arctic surveillance as soon as it's launched. We certainly hope that there will be follow-on investments not only in constellations but that other potential users of this data will contract with us to put in the same kind of ground processing systems for them that we're putting in initially for the Government of Canada.

So, I do think it's important because this is really a core competency of our Company. We have a long heritage in ground data processing and we do that both in Canada as well as we do it within our proxy company for U.S. Government customers in the U.S. So I do believe this is a core competence that we can leverage and grow going forward.

Once we put the new U.S. access plan in place, the proxy Board will go away over time and we'll then be able to have much closer collaboration for technology and go-to-market synergies between the capabilities in Canada and the capabilities in the U.S. So, having been in that business before when I was at Harris in a little different way, but I understand the market and I'm excited about the possibilities in that area for us to grow.

Paul Steep

Perfect. Thank you very much.

Operator

Your next question comes from Deepak from GMP Securities. Deepak, please go ahead.

Deepak Kaushal

Thanks for taking my questions, Howard and Anil. I've got a couple of follow-up questions to some earlier questions, and then a new one. Just going back to the geo sat comments, geo sat market comments that you made around high bidding activity and unpredictable timing given customer specific issues, we've heard some commentary from some operators recently on overcapacity, CapEx constraints and falling pricing. Do you see these comments in the context of Company specific issues or are you seeing a broader trend here impacting the industry?

Howard Lee Lance

Again, I'm two months in but let me take a shot at trying to answer your question. I think the bottom line is there is lots of factors and that's why it's a little confusing and tough to parse out some of these elements. On the downside, Deepak, I would say there are absolutely issues with some customers that are specific to their individual situations based on their unique competitive or geographic market dynamics. In addition, I think everyone acknowledges there is broad-based price pressure in some of the end markets as new capacities come online. Very often, there are very few markets where supply and demand are always perfectly aligned and it does tend to ebb and flow.

The real question is what you believe about the longer-term demand drivers. On the upside, from my standpoint, first of all there is always a steady replacement satellite market order flow, and that's there year in and year out providing a base for our Company.

Second, our customers absolutely tell us there continues to be increasing demand for video distribution services. Much of the world is still not fully converted from standard-definition to high-definition broadcast content and technology, much less to the latest 4K resolution. And on top of that, as I think about it, you've got channel expansion which also continues. The providers of content are still fine-tuning their content through new and augmented channels to reach new consumer segments. And each market is so different, it drives a lot of unique demand market-by-market on a geographic basis. So that's kind of the video side.

On the broadband side, content delivery is expected by most forecasts out there to grow in excess of 20% compound growth rate for the next decade. Most people tend to focus on the U.S. market, which is perhaps a little more well-saturated, a little more mature, but the rest of the world still doesn't have access adequately to video content, data services.

So I think there is lot of reasons to be positive in the long run, but there certainly are reasons to be cautious in the short run, and that's why our guidance, best that we can see is this looks like a typical year. Last year was a little below a typical year in terms of industry orders. The year before that was a runaway train on the positive side.

So, clearly the demand year-over-year is from time to time lumpy and hard to predict. We still feel positive about the long-term views but are cautious, and so we're not sitting here predicting a double-digit growth rate over the next five years in traditional geo communication satellites. Having said that, I feel positive about our ability to win business, our ability to execute especially in the higher powered high-throughput area, and I think that's bearing itself out. Three of our four orders this year are clearly for very high-powered satellites, right in our sweet spot and right in our flight heritage area.

Deepak Kaushal

Okay, that's very helpful. I appreciate all the detailed thoughts on that market. Moving on from that, you mentioned the global markets outside of the U.S. What can you tell us about what you're seeing in terms of opportunities in various international markets? I know that a couple of years ago emerging markets were a focus and some were doing better than others. What are you seeing out there, Howard, and how should we think about the opportunities and where they might be?

Howard Lee Lance

So you're talking about opportunities for us outside of selling to international geo customers, you're talking about kind of more broadly the rest of our portfolio?

Deepak Kaushal

Right, correct.

Howard Lee Lance

So I think there is a lot of upside. I would characterize our progress to date as getting started; not a criticism but I think the reality. The challenge is that some of the international markets where we've been focused, let's say Brazil, tended to look great a couple of years ago, it doesn't look very attractive today. Some of the other markets like Russia, we would put in that same category. So, the challenge with doing an emerging market strategy is, which markets are you going to pick and do they turn out to be the right ones.

So one of the things on my near-term agenda is a complete global review market-by-market based on what we know, what we're doing and what bets are we going to make to go after that. So, while on the one hand you might say we're not making a lot of progress to date, the way I look at it is, there's a lot of upside opportunity and we're certainly going to pursue that.

Deepak Kaushal

Okay, that's great. I guess we'll have to stay tuned. I appreciate the time to answer my questions and I'll pass the line.

Operator

Your next question comes from Matthew from AidennLair Capital Management. Matthew, please go ahead.

Matthew

Just to start off with one technical question and then to follow up on some of the other questions that have been asked on the market…

Anil Wirasekara

Can you speak a little louder please?

Matthew

Just on the bad debt recovery that you mentioned.

Howard Lee Lance

I'm sorry. Go ahead please.

Matthew

Just on the bad debt recovery that you mentioned, using your midpoint of the EBITDA margins that you gave, it seemed to be about a $10 million number. Is that in the correct ballpark?

Anil Wirasekara

No, it's much lower than that. What you should take is that our run rate for the rest of this year and for most part of 2017 is going to be what we have done previously, which is in the 12% and 13% range. That's where we are. This was an anomaly this quarter. We had a bad debt that we had written off in pieces in the previous few quarters that we were able to recover and we just wrote it back. The run rate hasn't changed. Our margin run rate in the Communications business will be in the 12% to 13% range, and it will fluctuate on a quarterly basis.

Howard Lee Lance

[Indiscernible] to answer that, in any given quarter, you have drivers of revenue on percent completion but you also have different drivers sometimes on the profit side in terms of the mix of what we happen to be really creating in revenue that quarter as well as release of reserves as we reduce risk on various programs. So, it's going to be a little lumpy from quarter to quarter and we would encourage you to kind of look through that to the longer-term trend lines.

Matthew

Okay. And then just following up on the questions on the market, can you just talk about the impact of ExIm Bank financing a new one, particularly an addition, where their currency is affecting your bidding ability or competitiveness at all?

Howard Lee Lance

First of all, we would love to have ExIm Bank back in the game to give our customers more opportunities and to be able to help doing the financing. So I don't think so. We've had tremendous negative impact because we have the benefit of having a great relationship with Economic Development Canada. The EDC has been a tremendous partner with us and with our customers in helping to finance a large number of projects and we see that as an ongoing positive. So ExIm Bank would just augment that from that standpoint.

In terms of exchange rates, it's not getting in the way of us bidding. It might be getting in the way of providing ongoing pressure from a standpoint of our competitiveness with a largely U.S. dollar sourced cost base against Europe competitors who are largely Euro-based cost. But we've been mitigating that, as you see in the results, pretty effectively through continuous focus on improvement and efficiency in our operations, taking appropriate costs out, not on a one-time basis but really building it into the culture of our Company. So I've been very impressed with our team and their ability to innovate, not just on technology to deliver to customers, but on the technology of producing high-powered high-complexity satellites.

Matthew

Great. Thank you very much.

Anil Wirasekara

Could you please say what company you represent? I couldn't get the name.

Matthew

AidennLair.

Anil Wirasekara

Thank you.

Operator

Your next question comes from Rob from Credit Suisse. Rob, please go ahead.

Robert Peters

Howard, just looking at the awards in the quarter and over the last kind of six months, we've seen a little bit of a pickup in Canada, and for the longest time under the conservative regime, it seemed like there was a shift away from investing in space. I'm just wondering if from your seat, under the new liberal government, have you seen potentially a change in tone or in respect to how they look at space?

Howard Lee Lance

I have been very encouraged by the initial meetings that we've had with the government. The commitment that appears to be there for innovation within Canada for the economic benefit of lots of industries, but the recognition that space technology is in fact one of the most important markets indigenous to Canada and one that needs to continue to be supportive. So I'm encouraged. Obviously, we have to do our part. We have to deliver the RCM program on time, on budget. I'm very pleased with the team's performance in that area. We are certainly recognized as the preeminent space robotics company.

And so I am cautiously optimistic that even with all of the economic pressures that governments around the world have, that we will see appropriate investments in Canada in space for the benefit of MDA and other suppliers. We are certainly going to do our part to prove that those investments pay off and that they also lead to commercialization of a lot of these technologies for the benefit of the economy in Canada.

Robert Peters

Great. Thank you very much. And maybe to follow up on that, in terms of RCM, I was just wondering, I think if I remember correctly, the original kind of mission called for the potential for an expansion of the constellation due to additional two satellites. I was just wondering if there was, you guys had any thoughts on that. And then I know, if we were to go back probably about a year ago, you guys were talking about getting access to the data in a similar way to what you have with RADARSAT-2. I was just wondering, is there any update on that as well.

Howard Lee Lance

Nothing concrete to report other than, yes, the RCM original constellation did envision two groups of three, or a total of six satellites. That's what will provide the greatest revisit time to any given target and the most persistence over a given target. And so we are certainly continuing to work with our customer to promote the benefits of continued investment. And similarly, in terms of acquiring data rights on the next constellation, we fully expect to have access to data and to be able to continue to grow in providing that data to many commercial customers around the globe.

Robert Peters

Fantastic. And one last one, a two-parter for me to just about that one, Anil, would it be possible if you could give the breakdown of the backlog between Communications and S&I? I know that's my standard question. And then maybe secondly, looking at the Sirius awards this quarter, given that it looks like they are 2019 and 2020 launch date, would we expect those to be in the factory right away?

Anil Wirasekara

So on the backlog, you can just take it as 70-30, pretty consistent with our revenue break between Surveillance and Communications. With respect to Sirius satellite, we'll start a little bit early engineering work this year, not a significant amount. Most of the ramp-up would be in 2017 and 2018 on that contract.

Robert Peters

Perfect. Thank you very much.

Operator

Your next question comes from Steven from Raymond James. Steven, please go ahead.

Steven Li

Just a couple of questions for me. The revenue coming from Canada in the first two quarters this year is double year-over-year. Can you remind me which contract or contracts is driving that?

Anil Wirasekara

The contract that drives most of the revenue from Canada would be RCM and the Telesat contract. So we got two satellites that we won last year, late last year, on Telesat. So they are burning pretty much at its peak. So that's a lot of revenue from Canada. [And there's also some] [ph] space station contracts that we do out of Brampton as well, and Polar Epsilon out of Richmond.

Steven Li

Okay, so there are a few contracts there. And the Telesat, the duration, so is it – I mean, would you expect those to wind down next year?

Anil Wirasekara

I beg your pardon, the Telesat, what was that?

Steven Li

The Telesat or the RCM for the revenue contribution from Canada, would you expect those to come down?

Anil Wirasekara

No, I would say RCM will have a good revenue burn next year, I mean not as large as this year but certainly substantial revenue from RCM next year. And yes, we'll have Telesat, both the Telesat contracts for most of next year as well.

Steven Li

Okay, great. And then the pace of capitalized R&D, I know it was about $20 million a quarter, are you near limitation on the digital payload or you expect to continue for some time?

Anil Wirasekara

We'll expect to continue at least for another couple of quarters of heavy burn at this level.

Steven Li

All right, great. Thank you.

Operator

Your next question comes from Tim from TD Securities. Tim, please go ahead.

Tim

I just want to explore a little further the challenges that you're talking about in terms of customer financing and what that's creating. Is this a change in the financing environment itself or is it really a result of a greater portion of the opportunities that you have and those that are not being converted to contracts at this point, is it because that a greater portion of those opportunities are residing with more credit challenged or startup companies relative to kind of what the profile of potential opportunities would have been say two or three years ago?

Anil Wirasekara

I think it's a combination of both. There are a lot of start-ups. OneWeb is a good example of a startup, and there are several others, mostly in the small sat LEO area that are looking for seed financing and venture capital financing, and that's certainly a challenge. And then in the normal geo market, there are emerging market operators who traditionally finance their satellites with ECAs, with export development agencies.

ExIm is closed for business and has been closed for business for the last six or seven months, at least new business, and that certainly has made it challenging for EDC and Coface to take on the additional burden of financing these. Now we are fortunate that we have EDC and we work very closely with EDC, but yes, I mean ExIm not being around certainly has delayed maybe one, maybe two programs, not a significant amount, but there is one or two programs that get pushed into the future because of the lack of financing.

When you look at the satellite, it's not only financing the satellite. You got to finance the launch, you got to finance the insurance of the launch, you got to finance the first nine months of operations. So a typical satellite, even though let's say it's $150 million for the satellite, when you add the launch and the insurance and the operations, you are looking at $400 million to $500 million financing. And generally what happens is that you have two or three of these ECAs all syndicating together to finance this, and when one goes out of the market, it becomes a little difficult for those entities that don't have well-capitalized balance sheet. That's basically what it is.

Tim

Okay, thank you. Then in terms of demand indicators, I mean RFPs, RFIs discussions, it sounds like everything suggests sort of a healthy demand backdrop and yet revenue is down 4% this quarter, it's flat year to date and it sounds like some of these orders and firming up these orders is challenging. Am I correct in interpreting this as the primary challenge to moving these opportunities forward, is it the financing environment or is there a hesitancy on customers in terms of just capital expenditures due to what's happening in their own customer environment and demand coming from their customers?

Howard Lee Lance

As I said earlier, Tim, I think it varies a lot based on individual customer situations, but there is certainly I believe an impact from financing. There would be more satellite awards if money was more readily available. Now, whether more money, and if it was readily available, would flow is dependent upon the business cases of the companies that want to buy the satellites and spend their capital.

So they are really intertwined and at this point I don't know how much of it is access to finance versus the business cases aren't closing or companies are leveraged at a point that even if the money was available, they would not get the financing. So I think it's a combination of both.

Again, our in the quarter revenue year-over-year was really timing. We do not expect revenue to be down for the year based on our current outlook and we expect this year to be shaping up consistent with the typical year in terms of geo orders, as I said.

Tim

Okay, thank you. Anil, I just wondered if you could provide any color on the significant drop in trade and other receivables in the quarter? Sequentially, it was fairly significant and generated a fair amount of cash for you.

Anil Wirasekara

We collected some big receivables that we had. RCM was one. We had a big RCM claim that – payment that we collected during the quarter. But looking at these large contract inflows and outflows on a quarterly basis does not depict any trend. The next quarter can be substantially different. So I wouldn't read anything to this.

As I said, we invest in working capital, we collect when we have to, and we book revenue on a percentage of completion basis, and that certainly impacts all the construction assets and construction liabilities as we call them on our balance sheet, and those will fluctuate.

Tim

Okay, thank you. And then just my final question, Howard, I'm just wondering if you could comment on any particular initiatives you're seeing at this point? Maybe it's early for you to pass judgment on this, but from competitors that may be aimed at making your push, and I'm sure your competitors are aware of what's on the drawing board, but any sort of initiatives there working on to kind of impede that push that you have or will have for more U.S. Government work?

Howard Lee Lance

I'm not aware of any of that. I'm sure we haven't gone totally unnoticed, but since we're not really in the game at this point, I think it would be too early to really see anything specifically. I believe that the U.S. Government broadly would like to do business with more commercial companies, that that is a desire of the Department of Defense and other agencies, and we just hope to have the opportunity to compete for business that's in our sweet spot. So again, we'll have I think a lot more to talk about during the next 6 to 12 months than I do today.

Tim

Okay. Thank you very much.

Howard Lee Lance

Operator, let's take one more call please.

Operator

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

Howard Lee Lance

Great. Thank you all very much for joining the call and we'll look forward to talking to 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.

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