MacDonald Dettwiler Announced Agreement to Acquire 100% of Loral Space and Communications Inc's Space Systems/Loral - Conference Call
Jun 27, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
LORL - Loral Space & Communications Inc
MacDonald Dettwiler Announced Agreement to Acquire 100% of Loral Space and Communications Inc's Space Systems/Loral - Conference Call
Jun 27, 2012 / 12:30PM GMT
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Corporate Participants
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* Dan Friedmann
MacDonald, Dettwiler and Associates Ltd. - President, CEO
* Anil Wirasekara
MacDonald, Dettwiler and Associates Ltd. - CFO
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Conference Call Participants
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* Steve Arthur
RBC Capital Markets - Analyst
* Thanos Moschopoulos
BMO Capital Markets - Analyst
* Scott Penner
TD Newcrest/Waterhouse Securities - Analyst
* Stephanie Price
CIBC World Markets - Analyst
* Paul Steep
Scotiabank - Analyst
* Sera Kim
GMP Securities/Griffiths McBurney - Analyst
* Steven Li
Raymond James & Associates - Analyst
* Nikhil Thadani
National Bank Financial - Analyst
* Catharine Sterritt
Scotia Capital - Analyst
* Naser Iqbal
Salman Partners, Inc. - Analyst
* Cabot Henderson
Hudson Bay Capital - Analyst
* Richard Tse
Cormark Securities - Analyst
* Blair Abernethy
Stifel Nicolaus & Company - Analyst
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Presentation
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Operator [1]
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My name is Sarah and I will be your conference operator today. At this time, I'd like to welcome everyone to the MacDonald, Dettwiler and Associates Ltd. announcement. (Operator Instructions).
A number of statements that will be made on this conference call constitute forward-looking statements and information within the meaning of applicable security laws which reflect the current view of MacDonald, Dettwiler and Associates Ltd., the Company, or MDA, with respect to future events and financial performance. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, would, could, should, expect, intend, estimate, anticipate, plan, foresee, believe, or continue, or the negatives of such terms or variations of them or similar terminology.
Such forward-looking statements are based on MDA's current expectations, estimates, projections, and assumptions made in light of its experience and perception of historical trends. Forward-looking statements are subject to risks and uncertainties, many of which are beyond MDA's controls and effects of which can be difficult to predict. MDA's actual results of operations could differ materially from historical results or current expectations.
With regard to MDA's proposed acquisition of Space Systems/Loral Inc., SS/L, there can be no assurance that MDA will realize the anticipated benefits or results due to a variety of factors. For specific risk factors pertaining to MDA's proposed acquisition of SS/L, please refer to the news release distributed yesterday, June 26, 2012, which also provides a specific disclaimer for forward-looking statements and information discussed on this conference call.
In addition, you refer to the risk factor distributed in MDA's most recent annual Management's Discussion and Analysis annual information form and other documents on file with the Canadian securities regulatory authorities, available at SEDAR, www.SEDAR.com, or www.MDACorporation.com.
All such factors should be considered carefully, as well as other uncertainties and potential events and the inherent uncertainty of forward-looking statements when making decisions with respect to MDA.
The forward-looking statements and information made on this conference call represent MDA's views only as of today's date. All such statements are made pursuant to the Safe Harbor provisions of applicable Canadian and US security laws. MDA disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than required by law, rule, and regulation. You should not place undue reliance on forward-looking statements.
Mr. Friedmann, you may begin your conference.
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [2]
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Thank you, Sarah. Good morning, ladies and gentlemen, and thank you for joining us on this call. With me is Anil Wirasekara, our Chief Financial Officer.
We have exciting news to talk to you about this morning. Last night, we announced that we will acquire Space Systems/Loral as part of a highly accretive transaction. This is a true game changer for MDA, one that meets many of our key strategic objectives in a single move.
I'm going to start today with a review of the transaction and the significant benefit we'll realize through this combination. Anil will review the financial aspects, and then we will open the line to answer your questions.
We will be using a PowerPoint presentation during our discussion. If you've not had a chance to access this presentation, please go to MDA's website, MDACorporation.com, and under the investor tab there should be a link provided for you to view the presentation.
As we announced in our press release last night, we have signed a definitive agreement to acquire 100% of Space Systems/Loral for $875 million. Space Systems/Loral, or SS/L, is a global leader in commercial communications satellites. Combined with our market-leading strength in essential information, this transaction transforms MDA into a unique global communication and information company with a strong commercial focus.
Post acquisition, more than two-thirds of our revenues will come from the commercial market. This compares with just under one-third currently.
This transaction also gives us critical mass in the United States, one of the world's largest markets for our capabilities. Importantly, the new business maintains and increases our focus on essential end-user needs, in this case by enabling Internet, mobile, broadcast, and other core communication services.
Keep in mind that the benefits of this transaction are not in the future. It will provide immediate benefit, including strong accretion for our shareholders.
Anil will provide more detail on that in just a few moments, but first, let me take a look at Space Systems/Loral.
SS/L is the world's leading supplier of commercial communication satellites. It has more geostationary satellite capability in orbit today than any other supplier and has delivered more than 240 satellites over its 50-year history. That makes SS/L not just the largest, but also one of the world's most experienced, providers of commercial communication infrastructure.
The company has been very successful in building a large international base of well-established customers, and these are strong relationships, evidenced by the fact that over 80% of SS/L's revenues come from repeat customers.
I want to emphasize that this company has a long, solid track record, and in 2011 it achieved about $1.1 billion in revenues, and as of March 31, it had a backlog of about $2 billion, giving us good visibility on future performance.
We're also pleased that SS/L's existing management team and employees will be working with us. Led by John Celli, the SS/L team has exceptional depth and expertise. Members of the management team have an average over 35 years of industry experience, including more than 22 at SS/L itself. They are an absolutely proven team.
Culturally, we're very compatible. Both companies are engineering-oriented, commercial, international, and generally work on a fixed-price basis.
At this point, I'd like to show you an existing SS/L video that tells you a little bit about the company, its products, and its competitive strengths, and then I will continue. Wendy, can you show?
(Technical difficulty). We're not using satellite technology, so there is a delay. (Technical difficulty)
(Video playing)
(Video ends)
Okay, I hope that gives you a little idea what they do. Many of you have been to our Montreal facility. You may recognize similar equipment and rooms.
Moving on to slide five, let's now take a look at SS/L's market and competitive position. Space Systems/Loral's business is fueled by some of today's most compelling consumer communication needs. Satellites enable the cost-efficient delivery of television, radio, Internet, voice communications, and communications on the move. Billions of people around the world depend on these services.
As demand for these services grow, the world needs more and higher-powered satellites to support them, particularly the types that SS/L specializes in. Currently, there are about 300 satellites in orbit, but more are needed as people in developing countries increase their use of communication devices and governments recognize the cost benefits of using commercial bandwidth for their own communication needs.
Keep in mind that this space infrastructure also needs to be regularly replaced as satellites have a typical lifespan of 15 years.
All of this underpins a very healthy market for commercial communication solutions, one that is largely detached from government spending decisions and fueled by essential consumer needs.
When you stop and consider the full range of end-user services that are supported by communication satellite infrastructure, you see why we view this as an essential communication business. In many parts of the world, including India, the Middle East, Eastern Europe, large parts of Asia, satellite is the only way that populations are able to access television, Internet, and communications. Even in countries like Canada and the US that have well-developed ground infrastructures, there is still a large demand for satellite-supported communications in mobile and remote applications, as well as TV.
SS/L has built very strong relationships with the companies that supply these services to the people around the world.
Looking at the graph on slide seven, you see that the world's top 22 operators account for the vast majority of satellites in orbit today. SS/L has existing relationships with 80% of these operators, companies like Intelsat, EchoStar, Sirius, Telesat, DirecTV, and in most cases these relationships span several years and often decades and involve many satellites.
This gives SS/L a powerful incumbency advantage when these customers procure new infrastructure. SS/L already understands the customer's technical and business needs and has established a track record of performance and trust with them.
The advantage becomes evident when you look at their market share. Among all the world's commercial communications satellites awards made between 2007 and 2012, MDA -- SS/L won more than any other competitor, about 30%. And the success rate was even higher in the high-powered segment of the market where SS/L won close to half of all the satellite contracts awarded. They are an established global market leader.
As we said at the outset, one of the compelling features of this transaction is that it establishes critical mass for us in the United States, a long-term goal for our Company. Not only will this give us access to the US market for SS/L's products, but it will also finally open the door for our traditional business in surveillance, intelligence, and robotics. As part of our new US business, we are gaining an exceptionally stable and experienced workforce. SS/L has made a significant investment in hiring and training the best engineers and technicians in the industry.
During our due diligence, we assessed the capabilities of SS/L people and facilities, evaluating not just their current set of products, but also their ability to diversify into new space applications. We found that the workforce has a large and established base of core capabilities required to design, build, test, and operate a wide variety of space missions. Over 2,700 of SS/L's 3,200 employees are space engineers and technicians, and they have the skill sets required to help us expand MDA's traditional business to new customers.
In addition, we are gaining an impressive physical facility with the addition of SS/L's huge campus in Palo Alto, California. This facility comprises over 1.3 million square feet and has everything required to produce diverse, complex, and large satellites and systems.
In summary, the combination of MDA and SS/L ultimately achieves three of our major strategic objectives in one step. We immediately become a leader in the global commercial communications market. We establish critical mass in the US, which will enable us to move business -- new businesses in this market. And thirdly, as we were during the products era, the majority of our revenues will be back to being from commercial customers rather than government sources.
Achieving these three objectives will obviously mean change and growth. MDA's revenues and earnings will become more diversified, especially geographically, and the majority of our revenues will be underpinned by essential societal needs.
However, other aspects of our business will remain the same. MDA and SS/L's heritage of innovation and operational excellence will not change. These are core strengths of both companies and part of what makes us a good cultural fit.
Our balance sheet and financial flexibility to undertake further organic and M&A growth remain strong. We will continue our focus on delivering value and service to our customer, and of course, our world-class operations in Canada will continue.
Essentially, we'll still be MDA, but larger, stronger, and much better positioned for future growth and success.
At this point, I'll turn the presentation over to Anil to talk about the transaction benefits and the financial results. Anil?
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Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [3]
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Thank you, Dan, and good morning, ladies and gentlemen. I will start by providing you with an overview of the transaction.
The purchase price, as stated in our press release, was $875 million for 100% of all the outstanding units of Space Systems/Loral. The transaction has been structured to include a tax step-up of approximately $120 million. This step-up allows MDA to amortize a substantial portion of the purchase price over approximately 15-year period, thus creating a very valuable tax asset or tax shield with a very high level of certainty that we have, on the net present value basis, estimated at $120 million.
Some of you may remember this is very similar to the tax asset that was created in our MSB transaction many years ago.
We will also, as a result of this transaction, acquire very significant real estate from -- that presently headquarters SS/L in Palo Alto. This real estate is valued at $101 million and is a separate part of the overall transaction.
We have financed this transaction with approximately $260 million of existing MDA cash we have on our balance sheet. We have entered into a land note from Loral Space & Communications, the parent company of SS/L, for $101 million, which we will pay over three years that has a coupon of 1%. And we will draw down approximately $500 million on a new credit facility of CAD1.1 billion that has been fully committed and underwritten by the Royal Bank of Canada.
The transaction, as Dan has mentioned previously, will be immediately accretive to our earnings per share.
The combined 2011 pro forma operating EBITDA of the two companies amount to CAD345 million. Our combined 2011 pro forma operating EPS has increased by about 60% to CAD5.94.
We continue to maintain a very prudent leverage and we've estimated that to be about 2.2 times EBITDA, a little less out of the gate, but once you factor in the land note and some other transaction-related expenses, we estimate at the highest level out of the gate to be 2.2 times, considering that our covenant targets are 3.5 times. The acquisition has a significant ROI and the ROIC significantly exceeds MDA's cost of capital.
The transaction requires regulatory approval, as does most transactions of this nature. We expect to close in Q3/Q4 2012, once we have received all the regulatory approvals.
Going to the next chart, which provides you with some idea as to how we looked at the business when we acquired it, and it provides the different components of the purchase price. So you can look at this either from left to right or from right to left, and we have a purchase price of $870 million,(Sic-see presentation slides) and then we have different value components that we have attributed to arriving at this purchase price.
As I've talked about earlier, we have a tax step-up which we have valued at $120 million. That's a very valuable asset that we have generated as part of this transaction, and the second component is what we call orbital incentives. This is a very interesting item that is quite common in the satellite business where the satellite provider -- in this case, SS/L -- participates in the success of the program or project or satellite that they are building.
The participation is generally up to about 10% to 15% of the contract value and is made over the construction period. This participation also includes a return, and this return is recovered over the orbit life of the satellite, which is generally 15 years.
This creates a very valuable and liquid asset on the balance sheet. As of 31 March, the balance-sheet data, the transaction, the risk-adjusted net present value of this participation or investment amounted to $337 million.
As part of the transaction, we also acquired the outstanding pension obligations of Space Systems/Loral. We had to value this liability, and the after-tax or the tax-effected book value of the pension liability as of 31 March 2012 amounted to $132 million.
When you add and subtract the different components, the value drivers, of our purchase price, we get to a business value of $550 million for this business.
On the next chart, we have put down some pro forma numbers that show the 2011 actual financials before and after giving effect of this transaction. On the revenue side, the status quo was CAD761 million of MDA revenue. On a pro forma basis, it's CAD1.857 billion.
The next thing we look at are operating EPS. The status quo was CAD3.69 per share, MDA's operating EPS for 2011. When we combine it with SS/L's operation, after giving adjustment to financing this transaction and after adjusting for the substantial issuer bid that we made in 2011 on the assumption that it was done at the beginning of the year, the pro forma EPS increases to CAD5.94, almost 60% -- or greater than 60% increase in our operating EPS.
Our operating EBITDA goes from CAD194 million to CAD345 million for 2011, and our backlog as of 31 December -- once again, these are 31 December numbers -- our backlog goes up from CAD805 million to CAD2.2 billion.
Going on to the next chart on the next page, we've tried to segment our revenues by both sector and geography. The total revenue -- on the left-hand side, the total revenue has been segmented by commercial communications, surveillance and intelligence, and advanced technology based on our status quo, our numbers as at 2011.
And on the right-hand side, there's the pro forma numbers after combining SS/L. And you can see the difference. The commercial communications have significantly increased and is about two-thirds or greater than the company from a fairly substantial part. It was about one-third previously and now it's about two-thirds. The surveillance and intelligence, which was the old heritage business of MDA, is still a fairly significant part, but now substantially smaller than our commercial communications business. And the advanced technology, which is kind of an R&D engine of the Company, still contributes a fairly significant amount.
When you segment our businesses before and after by geography, we still have an outstanding mix of geographical distribution of our revenues and our customers. The status quo for MD&A, we had significant business in Canada and the US, a big footprint in Europe, and a somewhat smaller footprint in Australasia and the Middle East.
Post-transaction, the geographical distribution is significantly more impressive with North America or the United States, really, becoming the largest component, followed closely by Europe, Canada, and Australasia and the Middle East. Canada still is a very significant component of our business, but we're more balanced today post the transaction than before.
Going on to our next chart, which is also an interesting way to look at the business of MDA pre- and post-transaction. On the left-hand side, pre-transaction, we have the status quo of our contracts. We try to segment this business by the value of our contracts. And if you see, the blue is contracts that are left at CAD50 million in revenue. And the gold has contracts that are greater than CAD50 million in revenue.
The status quo, that is MDA today, had almost two-thirds of our contracts less than CAD50 million and one-third of our contracts greater than CAD50 million. Post-transaction, the whole trend reverses where approximately CAD75 million of all contracts operated by MDA -- the combined business, is in excess of CAD50 million and about a third, or 20%, 25%, is less than CAD50 million, thus eliminating greater volatility in our annual revenues.
That's kind of the financial presentation that I have, and I will now hand it back to Dan to provide a summary.
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [4]
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Thanks, Anil.
In summary, we are excited about our plans to put SS/L and MDA together. We're bringing together two complementary market leaders to create a unique, a truly unique global communication and information company.
In the process, we are realizing our long-term objective of gaining a stronger presence in the United States market and significantly increasing our focus on the commercial market. Post-transaction, the majority of our revenues will come from commercial sources.
We believe the combination of SS/L's world-class commercial communications expertise and our own strength in essential information solutions will not only benefit existing customers, but will provide exciting new opportunities for growth. As Anil highlighted, the transaction is immediately accretive and provides an excellent return on capital employed. It also leaves us well positioned financially to pursue additional growth opportunities and M&A in our pipeline.
From every perspective, we believe this is the right move for MDA -- for our customers, for our employees, and for our shareholders. We are transforming the Company into a unique and major player in the global market and laying the groundwork for continued growth and success.
That ends our formal presentation, and I'll now ask Sarah to please open the line to answer your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Steve Arthur, RBC Capital Markets.
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Steve Arthur, RBC Capital Markets - Analyst [2]
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Yes, thank you very much. Dan, just wanted to follow up on a couple of your last comments there and trying to form a picture of these new businesses as they come together, looking ahead, both in terms of revenue and margins.
I guess first on revenue opportunities, if you look at the respective growth rates of MDA traditionally and SS/L, in the new business are you looking at something like the same order of magnitude in growth or are there cross-selling opportunities or other things that can take that growth rate potentially higher?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [3]
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Yes, of course, it can go higher because there are a number of synergies that are fundamentally all revenue and growth synergies.
They're in several levels. The two most important levels is, first, in the communications market. As you know, our particular growth at MDA in the last couple of years has been driven significantly by our success in the communications sector, which has grown to be a significant part of our Company.
Our strategy in that sector, as MDA, given that we were coming from a small beginning, has been to focus on what SS/L calls the captive market, that is those countries which have their own local prime contractors and are looking for pieces of the solution. Whereas SS/L, of course, focuses on the main commercial market where people are buying a turnkey solution. So we are complementary in the business that we are pursuing; however, MDA is still a small player in the captive market with very strong competitors and have already received e-mail from customers this morning about how much this strengthens our own capability in the communications market.
So, between the two of us, we're going to strengthen each other. MDA has much more systems expertise that will help SS/L also in that marketplace.
Separately from that, I think we're all aware that MDA's capabilities in our traditional robotics and surveillance and intelligence business have a very, very large demand in the United States, a demand that we have just not been able to access historically. We've done design work there, we've done work as part of international cooperation between Canada and the US, but fundamentally when the big programs go forward, we get sent home.
And we now have an incredible capability in the United States to pursue that business, which we believe is very large. Despite government funding, it's still a huge pool of money.
So those are the two major events that will drive revenue growth above and beyond both companies' baseline plan.
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Steve Arthur, RBC Capital Markets - Analyst [4]
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Okay, that was very helpful. I think you've answered this, but on the flip side in terms of margins, if we look at what SS/L's been doing over the past year, call it, is that a typical or an expected margin level going forward, or are there things you can do there to alter the margin levels?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [5]
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Well, you know, if you look at SS/L, you have to take the last few years and average them out, same with MDA.
We have businesses at MDA that have the same margins as the business SS/L has. We have business MD&A have larger margins. Some of our synergistic businesses that I just discussed will have better margins.
In the end, when you put the two companies together and you do it all, we will have double-digit margins. We will have probably the world-leading fixed-price space company in this sector. And this is an era where people want that kind of contracting. So we will be -- that's why I say we're going to be absolutely unique and a global company.
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Steve Arthur, RBC Capital Markets - Analyst [6]
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Final question, just in terms of the Loral customers, have you had a chance to speak with them yet and what are their perspectives? Are there any risks to them or are there opportunities within those customers, do you think, further?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [7]
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I personally had a chance to speak to some of the top customers yesterday evening. The transaction is well received.
People see that we're complementary. People see that MDA is in this business for the long term. People see that there's joint growth opportunities that will help the customer set because many of these customers want to have hosted payloads to reduce their costs. Many of those hosted payloads come from government customers. It's been very, very well received.
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Steve Arthur, RBC Capital Markets - Analyst [8]
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Great, thank you very much, and I'll pass the line. Congratulations.
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [9]
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Thank you.
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Operator [10]
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Thanos Moschopoulos, BMO Capital Markets.
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Thanos Moschopoulos, BMO Capital Markets - Analyst [11]
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Hi, good morning, and congratulations on the transaction.
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [12]
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Thank you.
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Thanos Moschopoulos, BMO Capital Markets - Analyst [13]
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Can you comment a bit further on the revenue outlook for Space Systems/Loral? So even in the absence of synergies, as I look at their business it seems that their backlog is up pretty strongly year over year, so would it be safe to assume that going forward we should expect similar revenue rate in 2011, if not stronger, as they deliver on that higher backlog?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [14]
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Absolutely. You know, this business has strong visibility. As we said, there are like 22 or so providers out there. Loral has existing relationships with 80% of them, has a targeted plan to get into the rest that we've reviewed.
These providers have long-term plans. About a third of procurements in any given year are replacement of infrastructure procurement, so those are pretty obvious. Everybody can predict when they die, those satellites die and they need to be replaced. And we have reviewed a very strong pipeline for the next couple of years with every opportunity having a name customer, a target satellite, a target use, and we have -- they have a strong pipeline. They had very good growth over a number of years, got to kind of a new level now, and they're poised for the next step up in 2014 and 2015, very good prospects.
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Thanos Moschopoulos, BMO Capital Markets - Analyst [15]
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Okay. And then, can you comment on potential cost synergies? Is there an opportunity to bring in some of the work that Space Systems had been subcontracted, for example, or any other obvious cost savings that you'd highlight?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [16]
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You know, this is fundamentally a revenue synergy story. There's nowhere where we can save costs. However, both companies put a fair amount of work outside, and we believe there'll be some of that kept inside now as a result of us being together, but it's a minor event compared to the real reason.
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Thanos Moschopoulos, BMO Capital Markets - Analyst [17]
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Okay. And can you comment on how you plan to manage the integration risk? Is the plan for the Space Systems management team to stay on board post the transaction?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [18]
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Absolutely. You know, this team is amazing, and a very strong team, and very committed to the business.
They love the business, just like us. We're culturally very compatible. We do things very similarly in terms of managing fixed-price contracts, managing the cost of schedule. Accounting-wise, we're almost identical. It's just like going home.
So there is no integration. You know, this company is coming along. It works today very well. It does things almost identically to the way we do them. We see totally eye to eye.
We will layer, of course, a synergy group on top to try and go after new business that neither of us is going after today, but other than that, it's going to be business as usual for both of us. And as you know, we have retained our complete products management team at MDA, so we have the capacity to handle a $1 billion-type acquisition within our existing corporate staff.
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Thanos Moschopoulos, BMO Capital Markets - Analyst [19]
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Great. Thanks, Dan. I'll pass the line.
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Operator [20]
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Scott Penner, TD Securities.
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Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [21]
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Thanks, guys. Can you just give a quick overview of any additional regulatory considerations that may be involved in closing this transaction?
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Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [22]
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I mean, you have the normal, standard regulatory issues that you've got to deal with in a transaction like this, Scott.
You've got to go through what they call CFIUS, which is the equivalent of our Investment Canada Review. You've got to go through some of the defense reviews, even though this business -- this company does not do any significant government work or classified work, 99% of it is commercial, but you still have to go through those reviews, and we'll work through the process diligently and methodically.
We've got to go through Hart-Scott-Rodino, so we've got to file competition bureau. Even though MDA does not have -- participate in this kind of business in the US, we've got to do that. So we've got to work those reviews over the next several weeks and participate in the process, and hopefully have this thing done in the next Q3/Q4 timeframe, as I had mentioned.
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Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [23]
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And what is the -- Dan, what do you expect -- you mentioned some of the growth synergies and some of the aspects of that. What is the timing on some of these? Is that -- immediately you can go out and bid and secure business in some of these areas you've been, for lack of a better word, shut out of, or is it going to take some time?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [24]
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Yes and yes to both. I mean, there is opportunities that are quite in front of us in the communication sector, for example.
I think I've mentioned in our quarterly call last time that MDA has been pursuing the US programs for on-orbit servicing. And we believe we're being successful in those, although there's been no official announcement yet, but we think we've got a good proposal in there. And traditionally what's happened is we win the design phase of those programs, but we do not win the construction phase because we are unable to carry it out in the US.
As I mentioned in my remarks, we have evaluated that we will so -- be able to do so, so if it's required after we win the design phase that the work be done in the US, we will be able to do so, and instead of then our technology and everything going to another company, it'll stay with us and we'll do that. That program is supposed to be awarded in the coming weeks.
We've now been told there's another RFP coming out in late summer. We know there's a NASA RFP coming out that we've been pursuing for a long time, so in those areas that we are already bidding, we are already acting with customers, the synergies are going to be fairly immediate.
In other areas where we have not been active because we simply could not bid unless we were in the States already at the bidding stage, it will take us longer to develop that, but we've already worked through the kinds of people and facilities that are required and the kinds of teams we have put together, and that's all there. Of course, we have to wait until things close to do all that, but we will be spending the next few months planning all that out in detail.
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Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [25]
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Sure. Anil, can you just help me with your adjusted EBITDA, your pro forma calculation for SS/L? I noticed the SS/L business looked like it printed $137 million in EBITDA last year and did $10 million for the first quarter, so I'm just trying to figure out how you got to $153 million?
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Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [26]
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There is -- as I said, there are two components. There is revenues or income that is generated by the business, and then there is income that is generated through the participation of their orbital incentives.
So the value of that for 2012, if you read through the Loral Communication financial statement, works out to $14 million, and as part of this transaction, we are buying back investment that they have made in those orbital incentives. So when you add the two together, it works out to $150 million-plus.
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Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [27]
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Okay. Is that -- is that $14 million -- when they gave guidance for 8% to 10% margins over 2012 and 2013, did they include that orbital incentive amount?
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Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [28]
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I had no idea. You have to ask them. I didn't provide that guidance, but I don't know how they calculated this.
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Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [29]
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Okay. All right, thanks. I'll pass the line.
------------------------------
Operator [30]
------------------------------
Stephanie Price, CIBC.
------------------------------
Stephanie Price, CIBC World Markets - Analyst [31]
------------------------------
Good morning, gentlemen. Congratulations on the acquisition.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [32]
------------------------------
Good morning. Thank you.
------------------------------
Stephanie Price, CIBC World Markets - Analyst [33]
------------------------------
Just going back to the earlier question about SS/L and Q1 margins that were very weak, can you give us a feel for what you think margins are going to be like in the near term? Is this an issue that's going to continue? I think there was a cost overrun on a project.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [34]
------------------------------
No, what you saw was a couple of one-time effects. If you look over their long-term history, their margins are pretty consistent, so if you look at the 2009, 2010, 2011 averages, that is good, and our margins going forward look very similar to the past.
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [35]
------------------------------
So if you'll read the commentary, Stephanie, you can see that there was some significant one-time events, both on the investment side, as well as on the R&D side, as well as some technical issues that they had to deal with on a satellite program (multiple speakers)
------------------------------
Stephanie Price, CIBC World Markets - Analyst [36]
------------------------------
Yes, I guess that was my question, the $12 million, whether that was going to be recurring or if they'd actually fixed the problem?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [37]
------------------------------
No, if you look at the history, if you look at the previous 20 quarters, you don't get it. So these things do happen in these kinds of businesses, and you have these anomalies that happen that need to get fixed. So this is an unusual item that they decided to take in the first quarter of 2012.
------------------------------
Stephanie Price, CIBC World Markets - Analyst [38]
------------------------------
Anil, can you talk a bit more about the tax rate that we should be expecting post the acquisition, just given these tax shields that you've been talking about?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [39]
------------------------------
Yes, so you know, the tax works two ways, so one from a consolidated P&L income statement standpoint. I think it's difficult to say exactly, but in the low 20s would be an appropriate number. That's what we are using in our modeling. 23%, 24% would be appropriate.
And on a cash flow basis -- on a cash tax basis, it will be in the low teens, so we estimate that the net effect of cash taxes would be in the 11% to 12% range.
------------------------------
Stephanie Price, CIBC World Markets - Analyst [40]
------------------------------
Okay, and just finally, on your antenna and some of your component business, do you think you're going to see some impact from the acquisition, just given that you're now competing with some of your clients in those businesses?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [41]
------------------------------
You know, that's always possible. Of course, we have been competing with our clients quite heavily in the last year and a half in some procurements.
We maintain a very clear separation today between the businesses and will do so in the future to protect client confidentiality, and we work very hard at our component and antenna business been available to everybody in the world, including SS/Loral in the past and in the future, and some of their competitors and some of our competitors.
So we hope that, as always proven to be the case in this market, we all recognize that we have very specific components that we all build that we buy from each other. We buy from our competitors. SS/L buys from their top competitor fixed components, which are at a third tier level and yet still create a unique and differentiated offering at the first tier level. So we have the right processes and we're going to manage to not have an impact, but it is a risk.
------------------------------
Operator [42]
------------------------------
Paul Steep, Scotiabank.
------------------------------
Paul Steep, Scotiabank - Analyst [43]
------------------------------
Great, thanks. Just one quick question. In terms of Loral, obviously there's existing agreements, but beyond this, I didn't hear any mention of it, is there a longer-term agreement in terms of Telesat [GUS] for the next generation of those satellites, that they would sort of by default go with SS/L as part of this agreement?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [44]
------------------------------
No, there is no -- you'd expect because both companies are owned by the same people that there would have been a big agreement, but no. They dealt with the thing in a good competitive business way, and Telesat procures from what they consider to be the right people, which has been SS/L and we hope will be SS/L in the future, but each one of those procurements is hard earned, and we plan to continue to earn them by doing hard work and give them good service.
------------------------------
Paul Steep, Scotiabank - Analyst [45]
------------------------------
Great. Congratulations. Thanks.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [46]
------------------------------
Thank you.
------------------------------
Operator [47]
------------------------------
Sera Kim, GMP Securities.
------------------------------
Sera Kim, GMP Securities/Griffiths McBurney - Analyst [48]
------------------------------
Hi, just a couple of questions [lefta]. Just referring back to the earlier question, so you mentioned that competing with customers could be a risk. I'm just wondering what is the trade-off of integrating your own components versus what you might lose if you're competing with your customers now? I'm just wondering if you can provide a little bit more color on that.
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [49]
------------------------------
Yes, nobody asked me about the upside. There's also upside. On balance, we think there's more upside than downside. So it's a net gain.
------------------------------
Sera Kim, GMP Securities/Griffiths McBurney - Analyst [50]
------------------------------
Okay, great, and just in terms of the credit facility, are you able to provide what the main terms are? What leverage ratio you have to maintain, EBITDA covenant, and like [bedspa] stuff, covenants?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [51]
------------------------------
Yes, I mean, the requirement is 3.5 times with the flexibility to go half a turn more if you're going to do an acquisition, so we've got plenty of space, plenty of room for growth. And as you know, we generate so much cash in this business. The free cash is very significant. So you know, we have the opportunity to pay this thing down very rapidly.
------------------------------
Operator [52]
------------------------------
Steven Li, Raymond James.
------------------------------
Steven Li, Raymond James & Associates - Analyst [53]
------------------------------
Great, thank you. Just a couple of questions. Dan, historically has the comsat market been impacted by the overall economic climate? Are you detecting any slowdown?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [54]
------------------------------
You know, there has been some impact, but it's usually pretty small. These are essential services, to a large degree, and even where they're not, people consider them that way.
The operators sometimes, if the lending markets are tough, might delay procurement six months, a year, but when you average it out over a number of years, you just don't notice an impact, including when there's been significant slowdown.
In terms of the current situation, we believe that both MDA and SS/L are kind of at a high point in terms of bids and procurements going on right now. It's as good as it's been.
------------------------------
Steven Li, Raymond James & Associates - Analyst [55]
------------------------------
Okay, great, and that backlog that gives you that short-term visibility, what the duration of that? Is about two years?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [56]
------------------------------
Yes, the typical -- as you know from MDA's business, a typical contract is two to three years, so there are contracts in the backlog, of course, that we're finishing next week, and there are contracts in the backlog that were booked this year that have another 2.5 years to run in both companies.
------------------------------
Steven Li, Raymond James & Associates - Analyst [57]
------------------------------
All right, and Anil, just a clarification on one of Scott's questions. In terms of the accounting going forward, the orbital receivables that you would be collecting, so it would be counted as EBITDA for the combined company?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [58]
------------------------------
There are two components, right, the orbital receivables coming to components. One component has already been recognized in revenue, so that will go -- flow right through the balance sheet.
You know, orbital receivables is all represented in cash. A significant component of the revenue associated with the orbital receivables or the orbital incentives has already been recognized, and that component will flow through the balance sheet. The unrecognized component will flow to the income statement, and yes, it will be, in our view, a component of revenue or component of income, and will be accounted accordingly.
------------------------------
Steven Li, Raymond James & Associates - Analyst [59]
------------------------------
Okay, and how much depreciation and how much amortization is coming over from SS/L?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [60]
------------------------------
As you know, when you do business combinations, you go to zero base. You know, you go to zero base all this.
Today, about half the amortization works out to approximately $35 million, $32 million to $35 million of depreciation and amortization a year. On top of that, we think that there will be another $15 million to $18 million of purchase price amortization as a result of this transaction, which is really goodwill amortization, and when I talk to you about the accretion and I talk to about the combined EPS number of $5.96, I believe, that includes all the purchase price amortization in there.
You know, we haven't pro forma'd that out because it's a little uncertain right now. We have sat down with our accountants and estimated what the goodwill will be as -- that will be generated as a result of this transaction and how much that amortization will be, and we have booked that as a component, as a pro forma adjustment in the number. So it includes that. It doesn't exclude that.
------------------------------
Steven Li, Raymond James & Associates - Analyst [61]
------------------------------
All right. Great, guys. Thanks a lot.
------------------------------
Operator [62]
------------------------------
Nikhil Thadani, National Bank.
------------------------------
Nikhil Thadani, National Bank Financial - Analyst [63]
------------------------------
Great, thanks, guys. I was wondering if you could comment about the combined pipeline for SS/L and MDA. I believe SS/L won about three orders in Q1. You won the one order the Sunday gone by, so what does the combined pipeline look like? Are we still looking like about half a dozen soft payloads out there that you're working on right now or is it significantly larger?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [64]
------------------------------
Well, there's our pipeline, which I've mentioned a half a dozen. Of the half a dozen in our pipeline, you saw a very key win for us in Israel this week.
Of course, that creates another pipeline because that was Amos-6, and there is Amos-7 and so on going forward. And we're now well positioned for that.
In terms of the rest of our opportunities, we have lost one that was the lowest probability one in the pipeline, and then there's several other opportunities in our pipeline going forward as we spoke of before. Those are all, as I mentioned before, like kind of captive countries where they're buying locally with a component or typically a payload coming from us.
That's completely separate from another pipeline which is where SS/L plays, and their pipeline is pages long, literally. This is a completely different scale of business than our business in communications. They are the top supplier. So their pipeline is pages long.
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Nikhil Thadani, National Bank Financial - Analyst [65]
------------------------------
Right. Okay, so given your capacity in Montreal and given SS/L's capacity, do you anticipate having to add capacity or any kind of CapEx to sort of keep up with demand because it sounded like SS/L was looking to step up CapEx through 2013 or does Montreal sort of absorb some of that going forward?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [66]
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As you know, we've just added significant capacity into Montreal and we're happy with that capacity in terms of what we foresee, including synergies.
SS/L themselves is in the midst of a step-up in terms of their production capacity, and yes, they do have an out-of-the-usual capital expenditure in the next 18 months and the last 12 months as they move to kind of a new revenue level in the 2014-2015 timeframe. So we don't anticipate adding new capacity because both MDA and SS/L now currently are adding capacity as we speak.
------------------------------
Nikhil Thadani, National Bank Financial - Analyst [67]
------------------------------
Okay, great. Thanks, I'll pass the line.
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Operator [68]
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[Andrew Rudkenai], Scotia Capital.
------------------------------
Catharine Sterritt, Scotia Capital - Analyst [69]
------------------------------
Yes, it's Catharine Sterritt of Scotia Capital. Just to go back to the orbital incentives, the $337 million net present value, is that entirely the amount that's on the balance sheet for the recognized receivables? And then, in addition to that, there was this flow into EBITDA for the unrecognized?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [70]
------------------------------
That's correct. And it's not really net present value; it's risk adjusted, so when you decide how much to put on your balance sheet in regard to not only net present value, the return, or the receivable, or the participation investment, you also have to adjust it for risk, and the risk is -- there are two types of risk.
One risk is the performance risk. You've got to determine, based on historical data, what the performance issues are and how much of this will be eliminated because of performance issues, and the second one is credit risk. So there is a very extensive calculation that goes that is reviewed by the auditors that have historical trends, and that's the value that is put on the balance sheet.
------------------------------
Catharine Sterritt, Scotia Capital - Analyst [71]
------------------------------
So can you give us some color, for 2011 what was the actual cash that flowed in on the orbital incentives for SS/L from both crystallizing the cash that -- the receivable on the balance sheet, as well as the EBITDA, because it sounds as if the cash flow is considerably higher?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [72]
------------------------------
For 2011, it was about $14 million that was unrecognized, and the recognized component, I believe, was in the $60 million to $70 million. But I have to clarify that and get back to you.
------------------------------
Operator [73]
------------------------------
Naser Iqbal, Salman Partners.
------------------------------
Naser Iqbal, Salman Partners, Inc. - Analyst [74]
------------------------------
Hi, congrats on the acquisition. I'll try and keep my questions short. This has been a long call. Dan, just when looking at the revenues by contract value, prior and pro forma, and now you're going to have more contracts in excess of 50. I guess previously it was in a difficult environment when you had contracts -- you had a business that was built on smaller contracts. In some ways that was more sustainable in a difficult environment. Do you think now that it slips over that it exposes some kind of volatility or risk?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [75]
------------------------------
No, that's why we put the graph there. We think this dramatically reduces our volatility.
I mean, if you look at our Company today, we get about half of our revenue from kind of a regular diet of things, lots of contracts ranging from very small to tens of millions, and then we get another chunk of the revenue coming from very, very few large contracts. And to the extent that one of those doesn't happen, it's a major event as we are witnessing today with the RCM situation, which is causing lots of issues for us everywhere, staffing, facilities, you name it.
Now all of a sudden, we'll have 20, 25 of those contracts around, and to the extent that one of them hiccups or one of them gets delayed, it's almost not going to be noticeable. So this has been another major strategic objective for us, more financially, that we can't have half of our earnings coming from two contracts, like we do today, basically a communications contract and one that's going away.
So we think this really stabilizes our Company. Now geographically, this issue is because the contracts are in different places. We still have the geographic issue, but in terms of what you will see as a combined financial result, this makes our Company much more stable than currently.
------------------------------
Naser Iqbal, Salman Partners, Inc. - Analyst [76]
------------------------------
That's great. And Anil, just maybe -- so understanding the interest cost on the debt that's going to come on will be $100 million in the, I guess, land -- whatever -- note, will that be at 1% or [500] is going to be at whatever normal interest rate?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [77]
------------------------------
That's correct.
------------------------------
Naser Iqbal, Salman Partners, Inc. - Analyst [78]
------------------------------
Okay, okay, so from a pro forma 2013, if you're modeling the tax rate, the 23% to 24% is -- for MDA, is a fair number?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [79]
------------------------------
You lost me. Can you repeat that, please?
------------------------------
Naser Iqbal, Salman Partners, Inc. - Analyst [80]
------------------------------
For MDA in 2013, assuming that this contract closes -- the acquisition closes this year, for 2013 MD&A, for the whole company, the tax rate is 23%, 24%?
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [81]
------------------------------
That's correct.
------------------------------
Naser Iqbal, Salman Partners, Inc. - Analyst [82]
------------------------------
Yes, okay. Great, thanks, and again, congratulations.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [83]
------------------------------
Thank you.
------------------------------
Operator [84]
------------------------------
Cabot Henderson, Hudson Bay Capital.
------------------------------
Cabot Henderson, Hudson Bay Capital - Analyst [85]
------------------------------
Thank you, and congratulations on the transaction. I was just calling because on the Loral press release, they talk about cash dividends being paid to Loral. How does that work in calculation for the transaction?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [86]
------------------------------
What I understand has happens is over the past several years, there has been -- SS/L has earned a significant amount of income, and this income has been trapped within SS/L and retained by SS/L.
And as a result of this transaction, the cash -- or the earnings of SS/L, the retained earnings of SS/L up to 31 March, will be dividend out to its parent. Its retained earnings up to that day. That's the amount.
------------------------------
Cabot Henderson, Hudson Bay Capital - Analyst [87]
------------------------------
So the $5.8 million that they estimate per month, that is effectively just the cash that is being earned at SS/L?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [88]
------------------------------
Well, that's a different thing. They had two -- one was the $112 million which was going to be dividended out as a result of the transaction, which is kind of cash that has been trapped in SS/L over the past several years. That will be dividended out.
Then you have the earnings of SS/L from signing the closing, and what we have arranged as part of this transaction is that we will split the money between SS/L and the parent going forward on a monthly basis. So if you take -- if you assume that this is going to close in six months' time, SS/L will have -- the parent will take half the earnings of the Company and the balance will be retained within SS/L as an equity pickup.
------------------------------
Cabot Henderson, Hudson Bay Capital - Analyst [89]
------------------------------
Okay, so -- and then, that is a fixed 50% split between?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [90]
------------------------------
It's close to it. It's 49.4% or 51.6%, it's close to 50%.
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [91]
------------------------------
It's in dollar amounts. It's in dollar amounts.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [92]
------------------------------
Because there are taxes involved, so you've got to factor in the taxes that go in.
------------------------------
Cabot Henderson, Hudson Bay Capital - Analyst [93]
------------------------------
Okay, thank you very much.
------------------------------
Operator [94]
------------------------------
Richard Tse, Cormark Securities.
------------------------------
Richard Tse, Cormark Securities - Analyst [95]
------------------------------
Yes, thanks. Dan, just wanted to get a bit of color on how this transaction came about. So were they in a process or did you guys pursue them? If you could just give us a bit of background on that, that would be great.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [96]
------------------------------
You know, in terms of what they were up to, I'm still not totally sure. You'll have to ask them, but it's been clear that they have been evaluating a number of strategic options, including spinning the company out.
It's pretty clear to us from our activity in the marketplace that there were other bidders that were trying to acquire the company, not just ourselves. So I think they had a kind of a sale process going on, they had a spinoff process going on, and eventually I guess they picked the best value for their shareholders, and the process got going in earnest over the last month or two.
In terms of MD&A, I have been to visit every significant US corporation to try and do a deal in the last two years, and this is one of them on the list.
------------------------------
Richard Tse, Cormark Securities - Analyst [97]
------------------------------
I guess related, so how long was the diligence period and to what extent did you have to go through all the contracts? Because, I think this was a question earlier and I was sort of reading through the last quarterly result for SS/L -- Loral, and they had a couple of contracts that are offside, like did you guys have a chance to vet through the big contracts and feel pretty comfortable on that, or where does that stand?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [98]
------------------------------
Yes, we've gone through redacted contracts, but by and large, they're contracts, and then we've gone back and confirmed the due diligence after we got an exclusive to look at more specifics.
We've gone through all the estimates to complete on their contracts, pored through with our world-class guys that we have in Montreal. We've gone through all -- all how that is accounted, all the risk budgets, all of those things. We have done our own analysis of what that backlog looks like in terms of risk and EACs and all those things, and we're satisfied with them.
------------------------------
Richard Tse, Cormark Securities - Analyst [99]
------------------------------
Okay, great. Thank you. Congratulations.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [100]
------------------------------
Thank you.
------------------------------
Anil Wirasekara, MacDonald, Dettwiler and Associates Ltd. - CFO [101]
------------------------------
Just to add to that, Richard, some of these write-offs or investments that they call was done with their knowledge. This was not something that came up; these were kind of -- some of these were like investments that they made in R&D and business development during the year.
------------------------------
Operator [102]
------------------------------
Scott Penner, TD Securities.
------------------------------
Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [103]
------------------------------
Thanks, pretty much all my questions were answered. Just one quick one, though, now that I think of it, Dan. Does this change any of your feelings around maybe staffing up or down in some of the businesses that you were restrained with with being a Canadian-only company?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [104]
------------------------------
No, it doesn't change that immediately, but of course we're now able to go after other businesses.
We still have to close the transaction. It will take a few months, but as we look forward in the next couple of years, we believe that the revenue synergies will mean higher staffing in the US and in Canada, but that is a couple of -- a year or so away until we start seeing those effects.
------------------------------
Scott Penner, TD Newcrest/Waterhouse Securities - Analyst [105]
------------------------------
Okay, appreciate it. Thanks.
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Operator [106]
------------------------------
Blair Abernethy, Stifel Nicolaus.
------------------------------
Blair Abernethy, Stifel Nicolaus & Company - Analyst [107]
------------------------------
Thanks and congratulations, guys. Just one quick question here. Dan, on the combined product portfolio as you look at it and you look to leverage some of your more unique technologies, is there -- in your mind, over time, is there a margin expansion opportunity for the SS/L business?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [108]
------------------------------
You know, there may or may not be. Our margin situation is so dependent on the amount of value added in any particular contract.
If you really look at our value-added margin on both companies, it's pretty similar. The question is, do you have a launch? Do you have a whole pile of passthroughs? That's what changes it a lot.
So I don't see -- I see lots of opportunities to add more value and to increase things, but to predict where that will go is very difficult. If we're able to succeed on a significant robotic bid in the United States and we do only the robot, well, that will be big margin expansion. If we do the whole mission, no, because we'll have to buy all kinds of components.
So, it's really going to be a mixing. We look at the thing as a return on investment, as a cash flow, rather than percentages in sales, and therefore we look at it as increased EPS for our invested dollar.
------------------------------
Blair Abernethy, Stifel Nicolaus & Company - Analyst [109]
------------------------------
Okay, great, and then just a follow-up to that, any positive or negative impacts on your supplier relationships?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [110]
------------------------------
We don't expect any negative impact. It should be neutral to positive.
------------------------------
Blair Abernethy, Stifel Nicolaus & Company - Analyst [111]
------------------------------
Okay, great.
------------------------------
Operator [112]
------------------------------
Sera Kim, GMP Securities.
------------------------------
Sera Kim, GMP Securities/Griffiths McBurney - Analyst [113]
------------------------------
Hi, just a couple of follow-up questions. Given that the integration is low and you've got flexibility in the balance sheet, what are your thoughts on additional acquisition? I know in the past you've talked about tuck-in type deals. What's your thoughts on that now?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [114]
------------------------------
We continue with the same thoughts. We have been working our pipeline for about a year and a half.
I mentioned that our pipeline was looking good at the last call. It still looks good. Of course, one of the big items moved luckily in the acquisition direction. We continue focused on trying to expand even more now, frankly, our surveillance and intelligence sector because we have a footprint in the United States. We have opportunities there.
And we also have opportunities in our service business, especially in the oil and gas area. And we continue to be active. We work very hard at getting a credit facility that you've seen, plus an extra accordion of [250] on top to maintain the flexibility to act as these opportunities come through. So we are active.
------------------------------
Sera Kim, GMP Securities/Griffiths McBurney - Analyst [115]
------------------------------
Great. Just last question, are all 3,200 employees at Space Systems/Loral staying and are there lockup agreements in place for the senior guys?
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [116]
------------------------------
Yes, I mean, Space Systems/Loral, like us, it goes up and down in employment all the time, but yes, there's nothing as a result of this transaction that's changing anything.
There are no lockup agreements with anybody out there or here. In the knowledge business, people are free to make their choice, and lockup agreements are just a license to print money at the wrong time, as you've seen in other companies. So we attract people because the work is great, because our customers are fantastic to work with, and the reaction -- I mean, I'm on my way to Loral to speak -- to SS/L to speak to all the employees later on today, but of course I've spoken at length with their senior management team.
They love their jobs, they want to keep doing that, they like the synergy with MDA, they've been there for a while. There's no reason for anybody to go anywhere. And we have participation on the value of the company, which is going to be new to them. So it should be positive for everybody.
------------------------------
Operator [117]
------------------------------
Nikhil Thadani, National Bank.
------------------------------
Nikhil Thadani, National Bank Financial - Analyst [118]
------------------------------
Just a quick housekeeping question, guys. Is there a break fee associated with the transaction?
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Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [119]
------------------------------
No.
------------------------------
Operator [120]
------------------------------
(Operator Instructions). There are no further questions queued up at this time.
------------------------------
Dan Friedmann, MacDonald, Dettwiler and Associates Ltd. - President, CEO [121]
------------------------------
Okay, thank you very much for listening to us at short notice, and at least for those in the West, early in the morning, and if you have any further questions we'll be around later on today. Anil will be here a little longer than I because I'm flying south, and I'll be back on Friday. Thank you.
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Operator [122]
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This concludes today's conference call. You may now disconnect.
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