Maxar Technologies, Inc. (MAXR.CA) Q4 2019 Earnings Call

Corrected Transcript

02-Mar-2020 Maxar Technologies, Inc. (MAXR.CA) Q4 2019 Earnings Call

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020

CORPORATE PARTICIPANTS

Jason Gursky Biggs C. Porter Vice President-Investor Relations, Maxar Technologies, Inc. Chief Financial Officer & Executive Vice President, Maxar Technologies, Inc. Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc......

OTHER PARTICIPANTS

Ben Arnstein Tim James Vice President, JPMorgan Securities LLC Analyst, TD Securities, Inc. Scott Mikus Analyst, Credit Suisse Securities (USA) LLC ......

MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Maxar Technologies Fourth Quarter and Full-Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jason Gursky, Vice President of Investor Relations. Thank you. Please go ahead...... Jason Gursky Vice President-Investor Relations, Maxar Technologies, Inc. Great. Good afternoon and thanks, operator. Welcome to Maxar's fourth quarter and full-year 2019 earnings conference call. I'm joined today by the company's Chief Executive Officer, Dan Jablonsky; and Chief Financial Officer, Biggs Porter. Both will make some opening remarks, after which, we're going to open up the line for your questions.

We're shooting to wrap up the call in about an hour, and as such, we're going to ask callers to limit themselves to one single-part question and one single-part follow-up during the Q&A session. Before we get started, I'd like to refer listeners to the accompanying slides for today's call, which can be found on the company's website, maxar.com, in the Investor Events & Presentations section of our site.

Finally, I would like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements, which represents the company's estimates, future plans, objectives, and expected performance at 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 lead actual results to differ materially from the forward-looking information.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020

You are referred to the advisory regarding forward-looking statements contained in our quarterly earnings release, the earnings call slide deck, and the company's most recent MD&A section found in our Form 10-K, which is available online under the company's SEDAR profile at sedar.com, under the company's EDGAR profile at sec.gov, or on the company's website at maxar.com.

With that, I'd like to turn the discussion over to Dan Jablonsky. Dan, go ahead...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. Thanks, Jason, and good afternoon, everyone. Please turn to slide 3 of the accompanying presentation. I appreciate you joining us for a review of our fourth quarter and full-year 2019 results, as well as an update on our outlook for the company. 2019 was quite the year, one that started with the failure of WorldView-4 and then culminated with the announced divestiture of MDA.

In between, we garnered several key wins across Earth Intelligence and Space Infrastructure, with both government and commercial customers. We engaged in the sale leaseback of our manufacturing facility in California and we issued a $1 billion bond to refinance nearer-term maturities. I'm pleased with our results and with the progress we've made.

We generated roughly $1.7 billion in revenue and $416 million in adjusted EBITDA in 2019 after adjusting out the results from MDA, which we have moved to discontinued operations given the announcement to divest our Canadian subsidiary. On an apples-to-apples basis to our results for the first three quarters of the year, which included the MDA business, our EBITDA performance was substantially in line with expectations.

Biggs will go into further detail during his portion of the call, but I feel this is a good outcome given the start we had of the year and these results demonstrate the traction we're seeing in our efforts to position the company for sustained revenue, profit and cash flow growth going forward.

Of note, we were roughly breakeven on free cash flow during the year, including MDA versus the midpoint of our guidance that called for the consumption of $80 million, driven by a keen focus on cash management. Backlog decreased from $2.1 billion to $1.6 billion and included $450 million in expected burn-off from the EnhancedView Follow-On contract and $100 million from the failure of WorldView-4. Absent this burn-off, backlog actually increased modestly and we ended the year with a book-to-bill of a little over 1 for the total company. Importantly, our Space Infrastructure business posted a book-to-bill of 1.08 times.

Biggs will go into the details of our 2020 guidance later, but I thought I would highlight upfront that we expect revenues to be roughly flat year-over-year and adjusted EBITDA to fall in the range between $400 million and $440 million, which, at the midpoint, suggests modest growth. Importantly, though, this outlook includes a $40 million step-down in deferred revenue and EBITDA from the EnhancedView program, thus pointing to growth for both metrics on a cash basis this year.

I'd also like to provide a few comments on the president's recently released budget for fiscal year 2021. In a nutshell, space was well-supported both through the proposed 12% increase for NASA and the mixed shift in DoD spending toward the Space Force and related programs. This is an encouraging outcome for both our existing and pipeline programs, and suggests to me that the US government is likely to be a growth vector for us in the years to come.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 Please turn to slide 4. As you know, our top priority for the year was to reduce debt and leverage levels, and we ended the year with a flurry of activity. Back in October, we announced the sale and lease back of a facility in Palo Alto and then, in December, we announced the MDA divestiture. We are pleased with the de-levering nature of these transactions and finally, we priced the $1 billion bond during the quarter that better aligns our cash flow streams with future maturities, while providing us a track record in the market, all key strategic moves that I believe better enable us to take advantage of the growth opportunities in front of us.

Please turn to slide 5. I know we provided quite a bit of detail in the press release announcing the MDA transaction back in December, but I thought it might be worthwhile to recap again today and to provide some thoughts on how the divestiture will affect our positioning and strategy going forward. To begin, the sales price is CAD 1 billion. Northern Private Capital, a Canadian entity, is the buyer. They appreciate the long-term value of this franchise and the strategic nature of it to the Canadian government. The assets being sold include MDA Canada, MDA UK, the RADARSAT-2 program and a small team down in Houston that supports the operations of Canadarm.

Importantly, the sale does not include our US-based Pasadena robotics business, which supports the multitude of programs with NASA, including the work we are doing on Mars rover and the Restore-L program. Maxar will be retaining our rich heritage in cutting-edge space robotics. As far as RADARSAT-2 is concerned, Maxar will retain the relationship with the US government and will act as a reseller of data in certain other markets as well.

Also importantly, Maxar will retain MDA as a key supplier going forward and Maxar will be MDA's largest customer out of the gate. At this point, we expect the transaction to close sometime over the spring or early summer, as we are well-underway in our efforts to garner the required regulatory approvals with only the CFIUS process here in the US remaining.

Please turn to slide 6. Our core strategy and customer alignment do not change because of the transaction. As you can see in this chart, Maxar is losing very little in the way of capabilities and franchise programs. And we'll certainly be looking to partner with MDA and others when we sense market opportunity.

I think the clear takeaway is that our capabilities and opportunity sets will remain diverse. And we look forward to focusing our efforts squarely on growing the company with the US government, allied nations and commercial customers.

Please flip to slide 7, as we recap our other 2019 priorities. We made significant progress in 2019 with the reengineering of Space Infrastructure, which is the legacy SSL business. To begin, the name change for this segment, throughout all of our products and services and in all of our interactions with customers, we are now branded as Maxar. We believe Space Infrastructure, for this part of Maxar's business, better reflects what we do for our customers, given that we are providing flexible space hardware and software architectures across multiple mission sets, including communications, remote sensing, robotics, power and propulsion, all in multiple orbits including LEO, GEO, lunar and deep space.

This name better embodies our strategy going forward as well, which is focused on diversifying this business into the civil space and US national and defense intelligence areas. During the year, we made several announcements that provide positive proof points that this strategy has momentum, including the Power Propulsion Element and TEMPO awards both with NASA.

And more recently, we announced that we'll be working with the agency to expand the mission of the Restore-L program by attaching two more robotic arms to the spacecraft originally designed for a refueling mission in Low

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 Earth Orbit. With these additional robotic arms, we'll be demonstrating on-orbit assembly, a capability that is likely to solve multiple mission needs for both civil and national security customers in the future. For those keeping score, this program is called SPIDER.

The other one listed here, SAMPLR, is an award to provide a complete robotic system for a lunar lander that will be used to explore the moon by acquiring samples of its surface. So, all in, a pretty good start to moving this business away from its historic single-threaded focus on the GEO Comsat market.

As far as GEO orders are concerned, we did announce two during the year, one that will utilize our 1300-class bus and the other utilizing the Legion architecture. 2019 ended as an up year for the industry, off what we hope was a trough in 2018. We're not in the business of forecasting industry volumes, but analysts are suggesting 2020 is likely to see flat to modest volume growth from 2019, and we have solid pipeline coverage that we expect will provide us with solid business on our reengineered footprint.

We still have more work ahead of us. We are moving in a positive direction. And once this transformation is complete, we expect less cyclicality and more predictable financial outcomes from this segment. On the performance side of things, we made some progress with EBITDA up $58 million year-over-year. Biggs will go into more detail later.

Please turn to slide 8. Our third priority was positioning MD&A for long-term growth following the recently completed RADARSAT Constellation Mission, which created revenue and adjusted EBITDA headwinds in 2019. Importantly, we won several awards during the year that better positioned the business for growth over the next several years. Year-over-year financial performance was negatively affected by the roll-off of the RCM program, which launched this past summer and is successfully performing its on-orbit mission requirements. Please note, of course, that MDA subsidiary is now a part of discontinued operations in our financial statements given the contract we announced in December to divest the business.

Please turn to slide 9. Our fourth priority was to position our Earth Intelligence business, which historically we split into Imagery and Services for long-term growth and to make sure that we minimize the impact of the WorldView-4 satellite loss. We made good progress. To begin, we posted 2.5% revenue growth despite the WorldView-4 loss, driven by recent contract awards with our government customers and our ability to replace some of the lost WorldView-4 revenue by using other constellation assets. We also experienced solid adjusted EBITDA growth driven largely by the cost actions we took at the beginning of the year and growth in JV income, the source of which I will describe in a moment.

On the business development side of things, we were awarded a four-year contract with the NGA for a Global Enhanced Geospatial Delivery service, putting this revenue stream on firm footing well into the future and ensuring that the 300,000-plus users inside DoD continue to have access to this important platform.

We were also awarded a study contract by the NRO that will enable the US government to gain a better understanding of Maxar's current and future commercial imagery capabilities. The one-year contract will support the NRO's efforts to further research and assess the US industrial base's ability to task, collect, process, and deliver satellite imagery.

As a reminder, we have been a trusted partner of the US government for nearly 20 years, delivering commercial capabilities with superior quality, cost, security and reliability. This new study contract with the NRO, coupled with our recent EnhancedView follow-on agreement, demonstrates that the US government recognizes the value of procuring commercial satellite imagery both now and into the future. And it demonstrates the government's

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 confidence in Maxar's current and future capabilities. We are proud to support the US government mission and look forward to continuing to work with the NRO as they increasingly adopt commercial imagery.

Our Vricon joint venture with Saab, which I mentioned a moment ago and that specializes in the production of 3D models using high-resolution imagery, was awarded a $95 million ceiling contract for the One World Terrain capability of the US Army's Common Synthetic Environment. When combined with the military's training management tool and training simulation software, Vricon solution will enable units and soldiers to conduct realistic, multi-echelon collective training anywhere in the world. This is a great example of innovation being driven by the combination of high-resolution geospatial data, high-performance computing, and powerful software. We are very excited about the growth trajectory of Vricon and the potential uses of – cases of 3D imagery across multiple verticals both inside and outside of national security applications.

Importantly, we have a call option on the JV, which is exercisable on the first halves of both this year and 2021. We also brought several additional countries into the installed base of our offerings this year, including the Netherlands, who we recently announced will begin using SecureWatch.

And finally, of note in the commercial arena, we signed renewal contracts with both HERE and ESRI, with HERE awarding us with their 2019 America's Most Innovative Supplier Award. Both signings demonstrate the continued value we bring in helping to solve difficult problems, and to enabling industry innovation. We are proud to be working with both companies and look forward to many more years of combined success.

Turning to Legion, at this point, the program is on track with its $600 million budget and is set to start launching in early 2021. As I mentioned on our third quarter call, we expect customer benefits from the constellation to include regularly refreshed coverage of the Earth, as well as accurate mapping, monitoring and analytics at scale. Additionally, it will capture best-in-class image resolution that will allow for accurate and current models of the Earth in high-resolution 3D, a capability that we believe will have many applications across our customer set in the future.

We continue to see strong signals from our customers, suggesting that, if anything, demand likely goes beyond the capacity of our Legion constellation, and that there's a significant opportunity for us in the future with our government and commercial customers both domestically and internationally.

Please turn to slide 10. We made progress in our efforts to reshape and restructure the business in 2019 and we're seeing good traction with the deployment of the new operating model, showing up with customers as [ph] One Maxar has (00:13:01) had a powerful marketing impact. Our product teams continue to work across the company and our global field operations team is building and executing on a robust pipeline. Our finance and operations staffs are continuing their consolidation of streamlining efforts.

As a reminder, we expect this initiative to save money, improve our time to market with new products and services, and improve collaboration across the organization. All of which are beginning to unlock growth synergies and improve team member engagement.

Please turn to slide 11. Looking ahead to 2020, our priorities will not likely come as a surprise to those that have been following us over the past several quarters. We'll be focused on getting the MDA transaction closed that will reduce debt levels. We'll also be looking to deploy capital in a disciplined fashion and maintain the financial flexibility we'll need to fund the growth opportunities we see in front of us.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 In the Space Infrastructure business, we will be focused on executing well on our existing backlog, particularly the underperforming programs that have put pressure on financial results over the past couple of years. We will also continue to work our investments in power, propulsion, robotics, and modular spacecraft architectures, all key technologies that we believe will support the future and current missions of our government and commercial customers. And, of course, we are going to be laser-focused on our business development efforts in the civil and US defense and intelligence markets.

In Earth Intelligence, we'll be focused on completing the WorldView Legion constellation build and getting ready for launch, ramping up our sales and marketing efforts with the capacity this constellation will add to our existing operations and continue our investments in artificial intelligence and machine learning, analytics, platforms and products, all with an eye toward getting this business set up for sustained growth.

Please turn to slide 12. Before I hand the call over to Biggs, I'd like to revisit the framework we introduced back in the third quarter to help investors understand how we're thinking about the outlook in the near, medium and longer term for the company. The near term, including 2020, is about resetting and stabilizing our business after the order decline experienced in GEO Comsat market over the past several years, the loss of WorldView-4, and completing the build-out of our WorldView Legion constellation.

We've been laser-focused on re-engineering, execution, and business development to position the company for a return to growth in the medium term. [ph] No (00:14:53) I can't declare victory on that yet, I do believe we made tremendous progress in 2019.

Longer term, we expect to accelerate growth by deploying our new constellation assets in the Earth Intelligence segment, executing on our growing backlog in analytics and services, and reaping the rewards of our diversification efforts in Space Infrastructure.

With that, I'd like to turn the call over to Biggs for a review of the financials. Biggs? ...... Biggs C. Porter Chief Financial Officer & Executive Vice President, Maxar Technologies, Inc. Thanks, Dan. Before we begin to discuss the results for the year, I thought it'd be helpful to expand on a few key activities took place during the fourth quarter. First, we issued $1 billion in 2023 Notes and we closed on the sale of our Palo Alto real estate and leaseback – sale and leaseback transaction during December.

Net proceeds received from the real estate note transactions were used to repay all the borrowings that were outstanding at September 30, 2019 under our revolving credit facility and Term Loan A, as well as certain fees and expenses related to offering of the notes. This transaction also extended our maturities to better align with our forecasted cash flow stream.

Second, we entered into a definitive agreement to sell MDA for CAD 1 billion. We plan to use the proceeds from this sale, net of expenses and any reserve for contingencies, to reduce leverage and continue to improve our capital structure. The transaction included all MDA's Canadian businesses.

It's important to note that as a result of the sale, the results of MDA segment have been classified as discontinued operations in the financial statements for all periods presented. Also, we re-segmented the way we report our results. Throughout 2019, we implemented strategic initiatives to stabilize and position the company for growth. Part of this included taking a look at how we view our businesses, particularly in light of Dan's appointment as CEO of Maxar in January.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020

We solidified our view during the fourth quarter, which resulted in re-segmentation of our business units into three segments: Earth Intelligence, Space Infrastructure, and MDA. Our legacy Imagery and Services business, excluding the radar imagery business that was a part of the MDA transaction, are now included in what is called the Earth Intelligence segment. Our legacy Space System segment included the results of the historical SSL/Space Solutions business as well as MDA.

We have separated these out so that now the results of legacy SSL are reflected as a Space Infrastructure segment in continuing operations, while MDA and the radar imagery businesses are now included in discontinued operations.

Also included in discontinued operations are taxes and certain corporate costs, which align with MDA as a legal entity. It's worth noting that as a part of putting MDA in discontinued operations, it has now accounted for as if it were a totally separate enterprise. This means that former intersegment and intercompany eliminations related to MDA are no longer reflected in our consolidated financials.

Finally in 2018, our auditors flagged material weaknesses in our internal controls over financial reporting. This was largely attributable to the amount of change being managed in 2018, which was our first year under SOX requirements. We initiated a remediation plan during the year and are happy to report that these material weaknesses have been remediated and are reflected as such in our 10-K.

Please turn to slide 13, where we present year-over-year comparisons for Q4 and full-year 2019 results. Total company revenues declined 2% year-over-year in the quarter due to a decline in the Space Infrastructure segment, partially offset by an increase in Earth Intelligence. Adjusted consolidated EBITDA margin increased 770 basis points year-over-year, driven by higher margins in both segments, the detail of which I will go into in a moment.

Corporate and other expenses were higher year-over-year, driven primarily by the retention costs at Space Infrastructure that I have discussed in prior quarters. These retention costs were incurred to stabilize the workforce after strategic shifts over the last two years. We believe it has had the desired effect. The recent wins in Space Infrastructure also are having a very positive effect on the workforce.

There was also an increase in expense as a result of a shift of certain functional costs to corporate in conjunction with our refining of our segments. Some of these costs also shifted to Space Infrastructure with a corresponding reduction to Earth Intelligence.

GAAP EPS from continuing operations was $0.87 versus a loss of $8.18 in the fourth quarter of 2018, driven largely by the impairments taken in Q4 2018 related to the continued decline in the overall GEO Comsat business environment and a large drop in the stock price during Q4 2018, as well as the loss of WorldView-4 satellite.

For the full-year 2019, revenues declined 8%, driven by lower volumes in Space Infrastructure, in part offset by the growth in the Earth Intelligence segment. Adjusted EBITDA margins increased 380 basis points, driven by higher margins in both segments. EPS from continuing operations was $1.38 versus a loss of $15.03 last year, driven by the WorldView-4 insurance recovery booked in Q2 this year in addition to the gain on the sale and leaseback of the Palo Alto real estate transaction, while the loss last year was driven largely by the impairments described earlier.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 Please turn to slide 14. Earth Intelligence revenues increased 8% year-over-year in the quarter, primarily as a result of new contract awards and program expansion on existing contracts across the US government business, partially offset by the loss of WorldView-4 revenues. This growth is very strong when you consider the fact that the loss of WorldView-4 had a negative effect on revenue.

Adjusted EBITDA margins expanded to 850 basis points year-over-year in the quarter, primarily due to the growth of our Vricon JV and cost reduction efforts, partially offset by the loss of WorldView-4 revenues, which had higher margins. With regard to Vricon, we're seeing this entity now reached the point where significant awards are coming in and the product is maturing.

For the full-year 2019, Earth Intelligence revenues were up 2% primarily as a result of the items mentioned earlier. Adjusted EBITDA margins increased 180 basis points, also driven by the factors mentioned earlier in addition to a shift of certain functions to corporate.

Please turn to slide 15. Space Infrastructure revenues were down 13% year-over-year in Q4, driven primarily by the decline in GEO Comsat activity and EAC growth, partially offset by liquidated damage charge taken in 2018, which did not recur during 2019. Adjusted EBITDA margins increased 1,270 basis points, driven by the lower research and development spend, cost improvement as a result of restructuring efforts, and the 2018 incurred liquidated damages charge previously mentioned. This was partially offset by EAC growth during the quarter on certain projects in the higher allocations of corporate expense I referred to earlier.

For the full-year 2019, Space Infrastructure revenues declined 14%, driven largely by the factors mentioned previously. Adjusted EBITDA margins have increased 670 basis points also as a result of the factors mentioned earlier. The overall adjusted EBITDA loss of $17 million for 2019 is a [ph] marked (00:22:28) improvement over the loss of $75 million at the end of 2018. And while we are not yet where we expect this business to be, we continue to be encouraged by the progress this segment is making.

I want to pause here on Space Infrastructure to talk about how it has progressed despite some major headwinds. We've talked about the decline in revenues as it burns off legacy business and to the fact that there are contracts, which are underperforming. In the fourth quarter, we increased cost on one of these contracts, in large part due to cost growth passing through to Space Infrastructure from MDA that previously would've been eliminated. This included the conversion of the MDA subcontract effort to Space Infrastructure to a fixed price arrangement. All in, the detrimental effect in the quarter attributable to MDA was $6 million.

For the full year, the negative effects of MDA's cost growth flowing through to the bottom line of continuing operations was $20 million. By converting this to a fixed price arrangement, we compensated the MDA for taking risk but also significantly reduced our continuing operation risk going forward post divestiture.

Another supplier engaged in a cost-type development subcontract had similar overruns in 2019, but is now set to start delivering hardware which should reduce risk. Combined with some internal cost challenges that we worked our way through development efforts in early assembly, this one program had over $50 million of cost increases affecting Space Infrastructure segment earnings over the course of all four quarter of 2019, once again in part due to the separation of MDA, which is now treated as an independent company.

Individually each quarter, these cost increases are moderate. When you look at it from a full-year standpoint, they are worth noting. So, despite over $50 million in cost hitting the bottom line from this one program, Space Infrastructure only had a $17 million loss. Given the conversion of the MDA effort to fixed price and the maturing of the other subcontractors' work past the development phase, there's real opportunity for future improvement in

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 the Space Infrastructure's results. New contract wins continue to support the business base, combined with improved performance on new business, will be our other critical success indicators.

Please turn to slide 16, moving back to results. Quarter-over-quarter, net loss from discontinued operations, net of tax from the MDA settlement, was $10 million in Q4 2019 compared to a loss of $456 million in Q4 2018, primarily driven by goodwill impairment taken in this segment in Q4 2018. Also impacting these results was decline in volume in 2019, which decreased revenues and costs.

Net income from discontinued operations, net of tax from the MDA segment, was $26 million for the full-year 2019, compared to a net loss of $377 million in 2018, largely driven by the factors mentioned previously, in addition to the expected wind down of the RCM program and a $32 million reserve for contingency recorded in Q4 2019.

Please remember that discontinued operations includes taxes and certain corporate costs associated with MDA as legal entity and that these numbers are not directly comparable to what we've previously indicated the MDA's adjusted EBITDA was expected to be for 2019.

I will put this in more context in just a moment. Please turn to slide 17. This slide bridges our reported consolidated adjusted EBITDA for continuing operations to the way we've previously guided our results, which had included MDA as a continuing business. We're presenting this to you to give investors a full picture of 2019 adjusted EBITDA against the guidance given throughout the year.

There are various ways to look at this, but MDA's actual EBITDA was $81 million compared to $85 million in our guidance. The rest of the company was $416 million compared to $425 million in our guidance. The $9 million of below guidance performance from continuing operations is more than explained in the fourth quarter by the $6 million effect of higher share price on incentive comp expense and cost increases at Space Infrastructure related to MDA's subcontract work.

Please note this will be the last time we present this view of our business and from now on, we will give guidance and report just in our continuing operations under the new segmentation as previously described.

Please turn to slide 18. The company generated $175 million in operating cash flow this quarter and invested $115 million in CapEx and developed intangibles. For the full year, we generated $317 million operating cash flow and spent $321 million on CapEx and intangibles.

We outperformed the middle of our prior guidance on operating cash flow largely due to improved cash receipts on new business at Space Infrastructure, some of which accelerated in the 2019 and 2020. We spent less on CapEx in our prior guidance as a result of good discipline and the timing of expenditures, which also had some carryover to 2020.

Space Infrastructure generated $9 million of solid operating cash flow in the quarter and consumed $75 million for the full year as recent new award activity had a positive effect.

As a reminder, let me discuss cash interest payments in the fourth quarter 2019 and what that means going forward into 2020. Q1 of 2019 included the doubling up of interest that added $42 million of cash outflow in that quarter relative to the norm. We paid a full quarter's worth of cash interest in Q2 and Q3. We previously entered deferral feature on our debt where we do not have to pay interest in the fourth quarter, which led to the doubling up in Q1 of this year of 2019.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020

However, in connection with the refinancing in Q4, we repaid $12 million in accrued interest on the Term Loan A and revolver. Going forward, interest payments on 2023 Notes beginning June 2020 are payable semiannually. We will not have the deferral feature on these notes that we did previously and we'll pay interest in the fourth quarter of 2020 and going forward.

Please turn to slide 19. We finished the quarter with consolidated net debt of roughly $2.9 billion, down $220 million from Q3 as a result of our de-leveraging efforts during the quarter. Our bank-defined leverage ratio ended the quarter approximately 5.0, up roughly one-tenth of a turn from Q3 as trailing 12-month bank adjusted EBITDA declined due to the roll-off of add-backs allowed for under the credit agreement. Importantly, we remain well below our covenants. We had roughly $587 million of liquidity at the end of the quarter via combination of cash on hand and availability on our credit facility.

Please turn to slide 20. As mentioned earlier, we closed on our sale leaseback transaction on our Palo Alto manufacturing facility during the fourth quarter. We used the net proceeds to retire our 2020 maturities. We're happy with the execution of our de-levering strategy during the year. We plan to use the net proceeds received from the MDA sale once closed to pay down debt, which will bring down our current debt level significantly.

Looking to the future, we expect increased cash generation in future years from expansion in adjusted EBITDA and lower CapEx as our investment in the WorldView Legion constellation will continue for two more years, after which, we will be positioned to have much greater free cash flow to de-lever.

Please turn to slide 21. From a revenue perspective, we expect Earth Intelligence to be roughly flat year-over- year despite a $40 million headwind from the burn-off of deferred revenue in 2020. We also expect flattish revenue in Space Infrastructure in 2020, as we see the revenue declines in this segment beginning to abate after several years of decline given the awards we received in 2019. At this point, approximately 75% of Space Infrastructure's 2020 revenue is in backlog. We expect intercompany eliminations to be approximately $80 million as SI continues to work on the Legion program. Taken in total, we expect consolidated revenues to be roughly flat in 2020.

Moving on to adjusted EBITDA guidance. We expect Earth Intelligence margins to be between 47% to 49%, which are roughly flat when normalizing for the deferred revenue burn-off. We expect Space Infrastructure to be roughly breakeven. We expect intercompany eliminations to be approximately $25 million, and corporate and other expenses to be approximately $65 million. The expected decline in corporate and other expenses in 2020 is largely driven by the roll-off of the onetime retention cost in Space Infrastructure previously mentioned.

In total, we expect consolidated adjusted EBITDA to be between $400 million and $440 million in this year. We're [ph] now going to (00:31:22) keep in mind the stock comp expense, which is embedded at the segment level. As we saw during the fourth quarter of 2019, stock comp expense could fluctuate depending on the performance of our share price.

On operating cash flow, we expect the range of $150 million to $250 million, excluding transformation and restructuring costs, which we expect to be immaterial this year. We expect CapEx for the year to be in the range of $275 million to $300 million, excluding capitalized interest of roughly $40 million. Both 2020 operating cash flow and CapEx reflect the carryover effects of the favorable timing of the cash receipts and expenditures in 2019.

We expect depreciation and amortization roughly $335 million this year. Interest expense is expected to be in the range of $165 million to $185 million. Interest expenditures are expected to come in at roughly $210 million this

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 year, with approximately $40 million of that capitalized. We continue to forecast roughly 0% effective tax rate due to the benefits of our NOL carryforwards. Vesting of shares will increase our share count slightly to 62 million.

Please turn to slide 22. I'd like to revisit the discussion we had during our third quarter earnings call back in November of last year about how we see cash adjusted EBITDA and free cash flows playing out over the next several years, at least as we see it today. As you will recall, we suggested that we saw a path for $200 million in adjusted cash EBITDA growth and $500 million in free cash flow growth by the 2022-2023 time period, relative to 2019's guidance after normalizing for $120 million in deferred revenue and $183 million in insurance proceeds from the WorldView-4 loss.

We then went on to say at the time of the MDA transaction that we expected the outlook to come down by $50 million for both EBITDA and cash flow after the divestiture was complete. So, starting with the cash adjusted EBITDA in the left-hand column of this slide, we were expecting at the time of the third quarter call roughly $390 million in cash adjusted EBITDA, which was the $510 million in record guidance, less $120 million in deferred revenue.

To that, we added several items, most notably the growth in Earth Intelligence post the launch of Legion. That leads to roughly $540 million in cash adjusted EBITDA in that 2022-2023 timeframe after the MDA sale. The right column gets you to the same bottom line number in that timeframe but shows you how to get there when starting from our 2019 actual results from continuing operations.

We start with $300 million in cash adjusted EBITDA, which is the $416 million we reported, less $120 million in deferred revenue. To that, we are adding Legion-driven growth at Earth Intelligence and then a turn in profitability in Space Infrastructure. Importantly, we incurred $60 million in negative EACs in 2019, including the one program I discussed earlier that we do not expect to recur, as well as $25 million in retention costs that we don't expect to recur. We also expect to continue to see other growth across the company. When wrapped altogether, we continue to see $540 million in cash adjusted EBITDA in that 2022-2023 timeframe.

Please turn to slide 23. Turning now to see the free cash flow outlook, similar setup to the prior slide, with the left- hand column representing what we discussed on a third quarter call as well as the update we provided in the MDA divestiture announcement. Starting at the top, the midpoint of our cash flow guidance, excluding the $183 million in insurance proceeds, called for cash consumption of $260 million. From there, we guided to $500 million in cash flow growth driven by reduction in CapEx retention and restructuring payment as well as EBITDA growth across the business.

We then reduced that outlook by $50 million to account for the MDA transaction, which resulted in a $450 million cash swing by the time we get out to that 2022-2023 timeframe. All that gets you to $190 million in free cash flow.

Now, the right-hand column here gives you our current outlook building from 2019 actual results from continuing operations. And as you see, the end result is the same, $190 million in free cash at a 2022-2023 time period. We start with the $240 million in cash consumption, again normalized for the $183 million in insurance proceeds and add to that a decline in CapEx retention, restructuring and cash interest cost, as well as EBITDA growth from the business.

Importantly, this outlook has Space Infrastructure generating a modest amount of positive cash flow after consuming roughly $75 million in 2019. And finally, please note that we have set aside $70 million for negative working capital or other timing given the difficulty of projecting collections of payments that far out with any precision.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020

Wrapped together, we see $430 million in cash flow growth, which brings us to the same targeted total of $190 million of free cash flow in the 2022-2023 time period. As we have said before, we remain committed to the CapEx holiday and it would take something truly compelling to change that.

So, to summarize my comments, we have grown Earth Intelligence despite the loss of WorldView-4 and have positioned it for further growth. We've operated near breakeven in Space Infrastructure despite the challenges of the development program and are building a sound base for the future. We outperformed on cash flow and de- levering actions, and have a clear path to future leverage improvement.

With that, I'd like to ask the operator to remind listeners how to queue up for questions and to open up the line......

QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] Please stand by while we compile the Q&A roster. And your first question comes from Ben Arnstein from JPMorgan...... Ben Arnstein Vice President, JPMorgan Securities LLC Q Thanks and good afternoon, everyone...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Hey, good afternoon...... Biggs C. Porter Chief Financial Officer & Executive Vice President, Maxar Technologies, Inc. A Afternoon, Ben...... Ben Arnstein Vice President, JPMorgan Securities LLC Q Hey. Yeah. So, I appreciate all the kind of the detail around the kind of longer term, cash flow walk. I guess maybe a little bit more near-term thinking about 2021. What are some of the headwinds and tailwinds to think about, and can you be cash flow-positive next year? ...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A I think I'll turn that over to Biggs. Of course, we haven't given guidance out to 2021 yet, but Biggs may...... Biggs C. Porter Chief Financial Officer & Executive Vice President, Maxar Technologies, Inc. A Yeah. So, Dan says we're not going to give guidance out to 2021, but the answer to your question is certainly can be cash flow-positive. I think if you – you might put a perspective this way, we were better than what we had guided to in 2019 by about $80 million in free cash flow. And I said, largely, that was timing where we pull things

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 in from 2020. The middle of our range for 2020 is a negative $127 million, if you add that $80 million back, you'd be at a negative $47 million. So, the ability is certainly there to continue to drive that improvement going forward...... Ben Arnstein Vice President, JPMorgan Securities LLC Q Okay. Thanks. And then, you've got some of this growth, I guess, in Earth Intelligence that is outside of WorldView-4. Can you just kind of clarify where that is coming from? ...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Sure. So, I'm really excited about how the Earth Intelligence business has done. If you think about losing the satellite at the beginning of the year and having lost the $85-million-ish of revenue and pretty close to EBITDA on that, to get back to the modest growth has been a fantastic performance by the team. We're seeing that across all of our customer segments, US government, international defense and intelligence and commercial. And so, we picked up across all those. Some of it was capacity related on the other assets in the constellation. And it's a good job on teams getting that sold.

Some of it was related to some infrastructure investments we had with the US government as we move into our – what our new architecture and infrastructure will look like. And some of it was growth in the services component of the business as well. So, I guess pretty powerful against all those. But we're really looking forward, though, to getting the Legion constellation online to really see the growth accelerate in the business. And then, as we also noted, we had some growth in the fourth quarter related to the Vricon joint venture with Saab in the 3D offering they have...... Ben Arnstein Vice President, JPMorgan Securities LLC Q Great. Thank you......

Operator: Your next question comes from the line of Robert Spingarn from Credit Suisse. Your line is open...... Scott Mikus Analyst, Credit Suisse Securities (USA) LLC Q Hi. This is Scott Mikus for Robert Spingarn. The question I have is for WorldView Legion, are there any firm customer agreements in place or strong signs of interest? And as a follow-up, if there are some agreements in place, can you provide some color on how much is recapture from WorldView-4 and how much is from new customers? ...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Yes. So, we're in the final stages of getting the Legion constellation built. Start shipping towards the end of the year and then launching early in 2021. Until the constellation is on orbit and checked out, we won't be able to book revenue on it. So, that's more of a 2021 event in terms of revenue. We have seen very strong interest from customers. Sales and marketing teams are hard at work and the demand signals are really strong. What you should expect is that we'll make announcement over time as appropriate and as allowed for with some of our customers. As we've noted a few times, some of the defense and intelligence customers that we have aren't super excited about us announcing that they are in these constellations.

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 Scott Mikus Analyst, Credit Suisse Securities (USA) LLC Q Okay. Thank you...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Sure......

Operator: [Operator Instructions] The next question comes from Tim James from TD Securities...... Tim James Analyst, TD Securities, Inc. Q Thank you. Just wondering if you could expand in your comment, Dan, that you see demand potentially going beyond the capacity of WorldView Legion and I assume you're thinking longer term there, but I found that interesting. I'm just wondering if you could kind of provide some additional color around that...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Yeah. Sure, Tim. As we make the highest percentages of our revenue and profits, we oftentimes make those in very constrained areas of the world. And in some of those areas, we had been sold out on WorldView-4. And so, we're looking forward to getting the Legion constellation up. Now, we're really [ph] self-help (00:42:02) in those areas, so we're seeing over-demand in some areas there, and I guess that's what I'm referring to. We're still in the sort of beginning innings of getting out and fully marketing the constellation capacity and demand signals are very strong at this point, both on a worldwide basis but also some of those areas where we make most of our revenue and profit...... Tim James Analyst, TD Securities, Inc. Q So, if I can just clarify that to make sure I understand. So, what you mean is those high demand regions of the world, you're suggesting – once WorldView Legion capacity is up and available there, you're saying that the demand could exceed the capacity in those high-demand regions? ...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Certainly possible, and we'll be providing quite a bit more detail during the investor briefing on Wednesday as well. But, yeah, that's generally what we're seeing right now...... Tim James Analyst, TD Securities, Inc. Q Okay. Great. Thank you very much...... Daniel L. Jablonsky President, Chief Executive Officer & Director, Maxar Technologies, Inc. A Sure. Thanks, Tim......

Maxar Technologies, Inc. (MAXR.CA) Corrected Transcript Q4 2019 Earnings Call 02-Mar-2020 Operator: And at this time, there are no further questions. I will turn the call back over to the presenters...... Jason Gursky Vice President-Investor Relations, Maxar Technologies, Inc. Okay. Great. This is Jason. Thanks, everyone, for dialing in this afternoon. As Dan just mentioned, we are hosting an Investor Briefing on Wednesday out in Palo Alto that will be webcast from 11:00 AM to roughly 2:00 PM Eastern. For those of you that can't travel in, in person, we hope that you'll listen in on the webcast and I'm happy to answer more of your questions at the event and in the weeks ahead. Thanks for dialing in this afternoon......

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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