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Maxar Technologies Ltd. (MAXR)
Q2 2019 Earnings Call
Aug 06, 2019, 5:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to Maxar's second-quarter 2019 investor conference call. [Operator instructions] Jason Gursky, vice president of investor relations, you may begin your conference.

Jason Gursky -- Vice President of Investor Relations

Great. Good afternoon, add thanks, operator. Welcome to Maxar's second-quarter 2019 earnings conference call. I'm joined by the company's chief executive officer, Dan Jablonsky; and chief financial officer, Biggs Porter.

Both will make some opening remarks, after which, we are going to open the lines for your questions. We're shooting to wrap up the call a little under an hour. [Operator instructions] 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 investors events and presentations section of the site. Finally, I'd like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements, which represent the company's estimates, future plans, objectives and expected performance at today's date.

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

Dan Jablonsky -- Chief Executive Officer

Thanks, Jason, and good afternoon, everyone. I appreciate you joining us for a review of the second quarter. Before I get started, I want to, again, thanks, Maxar team members for their tireless effort over the past several months. The company's capabilities in space infrastructure and earth intelligence are well aligned with the national defense strategy of the United States.

The priorities of our international defense and intelligence customers, the aspirations of our civil government customers and the pursuits of continuous innovation that we see from our commercial customers. At Maxar, we moved quickly to affect changes that better position us to help solve complex problems for our customers and generate improved returns for our shareholders. And I want to thank all those who are helping to make this happen. If you please turn to Slide 3 of the accompanying presentation for the key highlights of the quarter.

We generated $490 million in revenue and $129 million in adjusted EBITDA in Q2 with the EBITDA up sequentially from the first quarter. Biggs will go into further details during his portion of the call, but I feel this is a good outcome for the first half of the year and demonstrate the traction we're seeing in our efforts to position the company for sustained revenue, profit and cash flow growth. Importantly, we garnered several key wins during the quarter across our businesses. I will go into these a little more detail later, but suffice it to say we are doing some big things for the most demanding government and commercial customers out there.

And we're proud that they have entrusted their critical missions to Maxar. We also continued to make progress on all of our key initiatives for 2019, which include improving the health of our balance sheet, reengineering our space solutions business in Palo Alto, positioning our MDA, imagery, and services businesses for long-term growth and reducing our cost structure, while deploying our new operating model. And finally, here I'd note that we maintained our outlook for 2019 and are giving greater visibility into our expectations for space solutions. Please turn to Slide 4.

As you know, our top priority for the year has been to reduce our debt and leverage levels. And debt did come down quarter over quarter as proceeds from the WorldView-4 insurance claim offset higher capex and some working capital headwinds driven by timing. That said, our leverage ratio ticked up from Q1 as trailing 12-month adjusted EBITDA continue to come under pressure given higher levels of profitability in the first half of 2018. Importantly, though, our guidance for 2019 implies the second half of the year is likely to experience year-over-year adjusted EBITDA growth on a reported basis, versus last year.

Finally, we also continue to drive on alternatives to reduce overall debt and leverage levels. As I've suggested in the past, we are leaving no rock unturned and the team and I are working diligently on this initiative. Please turn to Slide 5. Our efforts to reengineer the space solutions business continued this quarter and I'm pleased to announce that we had some success on the order front with NASA selecting Maxar for the power propulsion element of the Lunar Gateway program.

This is obviously an important win for the company as our solution utilizes our 1300 class bus and it furthers Maxar's rich heritage in NASA's lunar missions dating back to the Apollo program. Importantly, we believe that propulsion, power and communications are key enablers for space exploration to any destination and this win should position us well for future opportunities. We're proud to be a part of this effort and are excited about the mission it represents. As I've mentioned on prior calls, our near- to medium-term goal is to shape the space solutions talent base so they can run at breakeven adjusted EBITDA with $500 million in annual revenue.

And we think we can accomplish this with one to two 1300 class orders a year, along with a steady drumbeat of other civil, commercial and government work across our Legion class and robotics offering. The PPE award represents one 1300 class order for the year. So this is a good start on the plan. We also recently definitized a contract signed back in December of 2018 with Amazon for a GEO Comsat utilizing our Legion class bus.

The solution will provide versatile, mobile broadband communication for small vehicles, aircraft and users on the move through a platform that offers the technology and performance benefits of a proven 1300 class satellite bus subsystems with a lower cost and smaller form factor. This is a good win for us as it demonstrates the flexibility of Legion class platform to serve across multiple mission sets in different orbits. I'd also note that we won several other NASA and commercial contracts that should be viewed as part of the steady flow of needed work that I mentioned earlier. All this demonstrates our rich heritage is in tact and customers are entrusting us with their critical missions.Now turning to performance.

Adjusted EBITDA improved sequentially quarter on quarter and ended with a profit. Biggs will go into the details a bit later. We successfully launched EUTELSAT 7 and shipped Intelsat 39 to the launch site and launched successfully earlier this afternoon. Once both are operational, Maxar will have 92 GEO Comsats on orbit, more than any other model communication satellite.

We also continue to reengineer the organization this quarter as we adjust to the level work currently in backlog. Turning briefly to the pipeline. We continue to see a robust outlook in the classified and unclassified areas, where we believe our capabilities are well aligned with the national defense strategy of the Department of Defense here in The United States and with the spending priorities of allied nations. In commercial, we also have a steady pipeline of GEO and LEO satellite opportunities, which we are focused on converting to wins.

Lastly, we continue to see opportunity in the U.S. civil market and I'd point out that we recently announced plans to work with the West Virginia Robotic Technology Center in its proposal to build and fly Dragonfly, an innovative robotic in-space assembly system. In-space assembly has the potential to revolutionize the way satellites and other space infrastructure are built and launched, while enabling highly dexterous capabilities for future space architectures and exploration missions. We're proposing to fly the first Dragonfly system on NASA's Restore-L spacecraft that will demonstrate technologies for refueling the satellite in low earth orbit.

As a reminder, Maxar is currently building the spacecraft bus for Restore-L, which is based on the 1300 class platform as well as two nimble robotic arms for the mission. Both of these programs are another example of how Maxar's capabilities map well to the priorities of our government customers and their evolving needs. So to sum up on space solutions, while we have a long way to go up, I feel good about the actions we've taken to improve costs and execution and about the traction we've made this quarter on the order front. Please turn to Slide 6.

Our third priority this year is positioning MDA for long-term growth on the heels of the recently completed RADARSAT Constellation Mission, which is creating revenue headwinds in 2019 and masking the low to mid-single-digit growth experienced in the first half of the year across the rest of the business. Importantly, during the quarter, we signed a roughly $30 million contract with the Canadian government for flight-ready repeaters that will be launched on the U.S. Air Force's GPS three satellites as well as several other government and commercial awards, which should begin to help fill in the gap left behind by RCM. Turning to performance, as expected, adjusted EBITDA declined year over year given the completion of the RCM satellites, which we successfully launched on a flight-proven SpaceX rocket from Vandenberg Air Force Base in California with several dignitaries in attendance to watch this historic moment for the country of Canada.

Also during the quarter, the MDA-manufactured Canadarm2 successfully completed the rendezvous and capture of a SpaceX cargo capsule, with Canadian astronaut David Saint-Jacques in the driver seat from the International Space Station, marking the first time that a Canadian has performed such a maneuver. MDA has a long and storied history in space robotics and it currently has an annual support contract with the Canadian Space Agency to assist with mission planning as well as the long-term maintenance of the robotic arm itself. Finally, we began work this quarter on the requirements reconciliation phase of the Canadian Surface Combatant program with our partner Lockheed Martin. We are excited about the long-term prospects for this program and look forward to moving into the official design phase at some point next year.

On the pipeline front, the CFC's program production phase in the early part of the 2020s is clearly in front of us. So too is the Canadarm3 program where the Canadian government has pledged its support for NASA's Lunar Gateway and recently announced a procurement plan for the primary robotic arm on the mission. And finally, MDA continues to be active in the GEO and LEO markets through our components in ground stations capabilities, and in space robotics through our rich heritage in this vertical. Combined, we see a robust pipeline of opportunities ahead for MDA, which should allow for a return to growth next year as the full impact of the recently completed RCM program rolls off.

Please turn to Slide 7. Our fourth priority this year has been to position our earth intelligence business in imagery and services for long-term growth and to make sure that we minimize the impact of the WorldView-4 loss. We are making some good traction. The imagery business was awarded a study contract by the NRO that will enable the U.S.

government to gain a greater understanding of Maxar's current and future commercial imagery capabilities. The 1-year contract will support the NRO's effort to further research and assess the U.S. Industrial Base's ability to task, collect, process and deliver satellite imagery. As a reminder, we have been a trusted partner of the U.S.

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 enhanced view follow-on agreement demonstrates the U.S. government recognizes the value of procuring commercial satellite imagery both now and into the future. And it demonstrates the government's confidence in Maxar's current and future capabilities.

We are proud to support the U.S. government mission and look forward to continuing to work with the NRO as they increasingly adopt commercial imagery. We continue to see strong signals from our customers, suggesting that demand likely goes beyond the capacity of our Legion constellation and that there is a significant opportunity for us in the future both domestically and internationally. I also wanted to call attention to a win at Vricon, which is a joint venture we have with Saab, that specializes in the production of 3D models using high-resolution imagery.

The company was recently awarded a $95 million ceiling value contract for the One World Terrain capability of the U.S. Army's common synthetic environment. When combined with the military's training management tool and training simulation software, Vricon's solution will enable units and soldiers to conduct realistic, multi-echelon collective training anywhere in the world. This is a great example of the innovation being driven by the combination of high-resolution geospatial data, high-performance computing and powerful software.

In the international defense and intelligence market, we expanded our installed base this quarter, signing on yet another U.S. ally for our Rapid Access capabilities. And we signed a multi-year renewal with another ally, marking the first time this customer has moved to a multi-year award versus a series of annual renewals. These wins demonstrate Maxar's leadership not just with the U.S.

government, but in the international marketplace as well. And finally, 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 solve difficult problems and enabling industry innovation. We're proud to be working with both companies and look forward to many more years of combined success.

Turning now to performance. The imagery business experienced sequential growth in both revenue and adjusted EBITDA. And as expected, we successfully put $10 million to $15 million of lost WorldView-4 revenue on contract using our other constellation assets. This quarter was a little lighter for both revenue and adjusted EBITDA than we originally expected due to the timing of a contract renewal, unrelated to the WorldView-4 transition.

At this point, we expect that negotiation to create some catch up revenue and tailwind in the second half. As such, we are maintaining our flat outlook for the year and expect the back half to experience sequential growth. Importantly, our SecureWatch and EarthWatch products continue to see traction with the customer count now over 50 and 100, respectively, for these products. That's up nicely quarter over quarter.

As a reminder, our imagery business is capacity constrained until the Legion constellation is on orbit. So continued success with our cloud-based and analytical products is going to be important over the next couple of years. In the services business, we continue to execute on our growing backlog and we have begun work on our recent U.S. Air Force award.

Availability of cleared personnel remains an issue, particularly in the D.C. Metro area, which is gating our growth a bit. That said, we are working hard to address this issue and look forward to fully converting our backlog to revenue over the coming quarters and years. With regard to pipeline, we continue to see good things with the U.S.

government, both in the classified and unclassified domains. As I mentioned earlier, when speaking about space solutions, our capabilities are well aligned with our U.S. government customer and we expect this to be a growth factor for us over time. In the IDI market, we're also seeing solid demand indicators across all regions of the world and across the entire breadth of our portfolio.

In fact, we had some success this quarter in selling legacy Radiant's CityBox product and the legacy DigitalGlobe's installed IDI base, providing a proof point on potential growth vectors for our services business as it looks to expand internationally with defense and intelligence customers over the next several years. In commercial, we continue to see persistent demand and expect near term growth drivers to be focused on our cloud and analytical products particularly for change detection focus capabilities, while long-term growth will benefit from the Legion constellation coming online. Please turn to Slide 8. The fifth priority we've been discussing since the beginning of the year is our efforts to reduce the company's cost structure and deploy our new operating model.

We continue to make progress on all fronts and are on target for the $60 million in-year and $70 million run rate cost takeouts that we spoke about on our May earnings call. We also continued to track the original merger synergy target of $60 million to $120 million run rate by the end of the fourth quarter of 2019. So that's good news. We're also seeing good traction with deployment of the new operating model.

Our product teams are working across the company now. And our global field operations team is building and executing on our robust pipeline. We've also began to rollout our marketing and positioning of the One Maxar brand and our finance and operations staffs are continuing our consolidation and 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 9. I want to come back now to our longer-term objectives. As a reminder, we are positioning the company for top-line growth by focusing on large and growing markets. We see a particularly robust opportunity set here in the U.S., where our capabilities in space infrastructure and earth intelligence are well aligned with the national defense strategy that emphasizes investment in space resiliency, C4ISR and autonomous systems.

We are also positioning the company for profit growth by reducing our cost structure and placing more emphasis on the productization of our capabilities. We are moving to a more capital efficient model through lower cost of new satellite capacity and higher mix of data-driven products, the combination of which we expect will drive higher returns on invested capital over time. And lastly, we are committed to delevering and reducing debt levels. As we said here before, we're evaluating all alternatives and are committed to the capex holiday in front of us.

And now before I hand the call over to Biggs, I want to remind investors of our upcoming special shareholders meeting set for this fall, at which we'll be seeking approval for the tax benefit preservation plan that our board of directors adopted during the second quarter. This plan is put in place to protect a significant asset at the company: the nearly $1 billion in U.S. federal net loss and R&D tax credit carryforwards. I encourage all investors to just carefully read all the materials related to this plan and consider it ahead of the meeting.

With that, I'd like to hand the call over to Biggs for the review of the financials. Biggs?

Biggs Porter -- Chief Financial Officer

Thanks, Dan. Please turn to Slide 10 where we present year-over-year comparisons for Q2 and year to date. Total company revenues declined 15% year over year in the quarter as the imagery segment was negatively impacted by the loss of WorldView-4, and space systems saw lower volumes from GEO and the RCM program. These declines were partially offset by the services business, which experienced a solid growth on the heels of recent wins.

Adjusted consolidated EBITDA margin increased 330 basis points year over year driven by margin improvement in space systems. Corporate and other expenses were higher year over year, driven in part by retention cost in space solutions that I have discussed before; we're recognizing in corporate and other expense in order to provide a better sense of the underlying profit trends at the segment level. These retention costs are being incurred to stabilize the workforce after the strategic shifts of last year. We believe it is having the desired effect.

New wins in space solutions are likewise having a very positive effect on the workforce. GAAP EPS was $2.45 versus a loss of $0.70 in the first quarter of 2018 -- second quarter, driven largely by the gain recognized on the WorldView-4 insurance claim. $12 million impairment recorded on MDA's investment in OneWeb had a partially offsetting effect on bottom-line net income and EPS. Year to date, revenues declined 13% driven by lower volume in imagery and space systems and partly offset by growth in services.

Adjusted EBITDA margins were largely unchanged from the first half as lower margins in the imagery segment were offset by gains in services and space systems.First half EPS of $1.46 versus a loss of $0.44 last year driven largely by the insurance recovery that was booked in Q2. Please turn to Slide 11. imagery segment revenues for both the quarter and year to date declined 5% year over year driven by declines in our international defense and intelligence market given the loss of WorldView-4 as well as a delay in our contract renewal with an existing customer that Dan spoke of earlier. Our U.S.

government business experienced growth as we continue to execute on recent contract wins. Adjusted EBITDA margins for the segment declined year over year given the reduction in revenue, but were up quarter over quarter for the first quarter of 2019 given recent efforts to reduce cost. Please turn to Slide 12. space systems experienced a 22% year-over-year revenue decline in Q2 primarily driven by the expected wind down of work on a multi-year RCM project as well as lower revenues on our Palo Alto factory.

These decreases were in part offset by increased activity on WorldView Legion. Year to date, space systems revenues declined 15% driven largely by GEO and RCM offset by Legion, while adjusted EBITDA margins have expanded modestly. Adjusted EBITDA margins for the quarter in space systems improved 700 basis points from the year-ago driven by improvement in space solutions, our legacy SSL business. These items in part -- were in part offset by lower margins at MDA given the expected decline in RCM activity.

Plowing one level deeper into space solutions, our legacy SSL business, we posted $181 million in revenue and $7 million in adjusted EBITDA this quarter, which is an improvement on the modest loss in Q1. Cost growth in certain programs in space solutions were offset by the recovery of reserve on a previously completed project. Please turn to Slide 13. Our services business posted a 12% increase in revenue this quarter versus the second quarter of '18, driven by recent wins and program expansion on existing contracts across the intelligence community and DoD.

Adjusted EBITDA margins declined however by roughly 100 basis points year over year given a change in lease expense, which decreased adjusted EBITDA by roughly $2 million in the quarter. Without this expense, margins would have been up year over year in the quarter. Please note that this change will result in an additional $2 million of this expense in the second half of the year. This business experienced another solid bookings quarter with total book-to-bill for the segment exceeding one.

Year-to-date revenues are up 4% year over year on the recent wins and margins expanded, in part driven by the recognition of a loss from the sale of a divestiture in the first half of 2018. Please turn to Slide 14. The company generated $117 million in operating cash flow this quarter driven by the $183 million in proceeds from our insurance claim associated with the loss of WorldView-4. Changes in working capital given the timing of milestone payments and other collections are the primary other variable in cash flow for the quarter.

We expect very strong performance on that front in the second half. On a year-to-date basis, the company has generated $59 million in operating cash flow and spent $127 million on capex and intangibles. Overall, our cash flow for the first half is consistent with our internal planning. Please keep in mind several items that affected the first half of the year as you think about the second.

To begin, Q1 of 2019 included the doubling up of interest that added $42 million of cash outflow in the quarter relative to the norm. We will only have one quarter's worth of interest payments for the rest of the year. We also had $17 million in outflows in the first quarter related to previously settled legal matters. We have seasonally high cash outflows in Q1 for the payment of year-end liability buildups, whereas, the fourth quarter is typically seasonally positive and there are other positive influences on our second half cash flow I will talk about in a minute.

During the quarter, we invested $54 million in capex and developed intangibles, which is down quarter over quarter. As I'll discuss later, our capex guidance is unchanged for the year and accordingly, there is a sizable step up in spend in the second half. Of note, space solutions/SSL consumed $44 million of consolidated operating cash flow in the quarter and $82 million year to date. As a reminder, we expect the timing of milestone payments associated with several projects in opening backlog to be a headwind this year.

But in the second half, we expect to receive positive cash inflow on new projects. We are carefully watching the performance of this business, including the stability of personnel, project estimates and developmental elements of existing programs. We still have a way to go to achieve our objectives for the business, but are encouraged by recent wins and breakeven performance in the first half. Please turn to Slide 15.

We finished the quarter with consolidated net debt of roughly $3.1 billion, down quarter over quarter. Our bank defined leverage ratio ended the quarter at approximately 4.7, up roughly two-tenths of a turn from Q1 as trailing 12-month adjusted EBITDA continue to come under pressure given higher levels of profitability in the first half of 2018 relative to the second half. Importantly, though, our guidance for 2019 implies the second half of the year is likely to experience year-over-year adjusted EBITDA growth on a reported basis, versus last year. We remain well within our covenants.

We had roughly $596 million of liquidity at the end of the quarter via a combination of cash on hand and our revolver and we have no maturities until October 2020. Going forward, we remain focused on delevering and reducing our debt levels. As Dan mentioned in his remarks, we are tracking alternatives to do so and we will be sure to provide updates to our investors when appropriate. We continue to expect to increase cash generation in future years from expansion in adjusted EBITDA and lower capex as our investment in the royalty Legion constellation will continue for two more years, after which, we will be in a position to have much greater free cash flow to delever.

We also continue to understand what our alternatives are to refinance our near term maturities. However, our current actions are focused on delevering first. We do recognize that we need to move along the path to removing uncertainty in this regard. Please turn to Slide 16.

Turning to guidance. No major changes to our outlook for imagery, services, and MDA. I'm going to add guidance for space solutions however, so I'm going to make sure in my comments that you can now track all the pieces to get to the consolidated number. imagery is expected to be roughly flat year over year from a revenue and adjusted EBITDA perspective, implying half on half growth in the second half of the year.

We expect this growth to be driven largely by the transition of WorldView-4 revenue to earth satellite assets and the signing of the delayed renewal that Dan spoke of earlier. In services, we continue to expect low single digit revenue growth. However, margins will be negatively impacted by the roughly $4 million this year given higher lease expense, $2 million of which was recognized in Q2, suggesting full year margins are likely to be closer to 10%. At MDA, we continue to expect to the low single digit revenue decline and several hundred basis points of margin compression.

Taken together, no change to adjusted EBITDA for the imagery, services, and MDA businesses, which we expect to exceed $550 million net of corporate expenses. Also, this adjusted EBITDA guidance does not include the gain we recorded on the WorldView-4 insurance claim this quarter. We're now providing little more granularity on space solutions/SSL as we are halfway through the year and have some more visibility on the business, particularly after the recent wins that Dan mentioned earlier. There are three pieces to this business' contributions to our projected consolidated adjusted EBITDA performance.

These three are: The adjusted EBITDA included in segment results, the retention expense included in corporate and other expense, and intersegment eliminations. You might note that this retention associated with the strategic corporate initiatives is included in our consolidated adjusted EBITDA. We are leaving it to the users of our financial statement as to how they wish to treat this. At this point, we expect the business to contribute roughly breakeven adjusted EBITDA to the space systems segment.

Outside of space solution/SSL, we expect a $20 million in retention payments that will be recorded on the corporate and other expense line. Additionally, we expect approximately $20 million intersegment EBITDA eliminations associated with space solutions. So to summarize all the pieces of adjusted EBITDA guidance. We continue to expect greater than $550 million in adjusted EBITDA from imagery, services, and MDA net of corporate costs.

We expect space solutions to be breakeven before eliminations of approximately $20 million and retention payments of roughly $20 million. So the back-of-the-envelope math suggest greater than -- excuse me, that the greater than $550 million of adjusted EBITDA for imagery, services, and MDA, plus a breakeven space solutions, less the eliminations of fewer than $20 million and the retention payment of another $20 million get you to something north of $510 million for the overall company. I hope that walk is helpful to listeners. On operating cash flow, we continue to expect generation in the range of $350 million to $450 million this year, excluding space solutions/SSL-related items.

Please note this includes significant restructuring cash outflows due to reductions in force and final integration costs from the 2017 merger. These costs aggregate approximately $40 million, excluding space solutions/SSL and are exceeded by the in-year savings we expect. Net of those costs, the normalized operating cash flow would be higher. Excluding space solutions, the first half operating cash flow was $141 million.

Net of the insurance proceeds it was a use of $42 million. The second half is stronger on the basis of only one interest payments in the second half, an $80 million swing, significant second half milestones at MDA, a $50 million swing, no legal settlements in the second half like the first, a $17 million swing, earnings growth and normal seasonality. It was worth noting that MDA had virtually no milestone payments in the first half, but have several lined up for the second. For space solutions, we expect operating cash consumption this year in the range of $100 million to $80 million, excluding the $20 million in retention payments.

As I mentioned on prior calls, cash flow was a headwind in 2019 given the timing of milestone payments, retention and cash restructuring charges. However, the second half of this year could be breakeven positive depending upon how new award funding comes in. This lays a better foundation for next year, when, as I stated previously, we could see breakeven levels are better for the full year if all goes well. If you haven't deduced it already from what I said the second half is potentially very big for incoming advantage and milestone payments for space solutions and MDA with more than $100 million in the second half than the first.

For both businesses, the first half was very light compared to what we see as normal at this point. In the aggregate on a consolidated basis, we expect our full year cash from operations to be in the range of $230 million to $330 million. Since we have now given all the pieces, we will expect to just start talking about this in the aggregate going forward. If you are thinking about the future beyond 2019, in addition to normalizing for the insurance proceeds, keep in mind that our 2019 guidance includes up to $100 million use at space solutions, $20 million of retention and $40 million of restructuring-related costs.

We are also, of course, expect cash generating EBITDA growth in the future. We continue to expect capex to be up year over year as we reach peak spending on the Legion program. This program remains on track for launch in early 2021 and capex levels for this project should decline as we move closer to that date. We expect capex, including space solutions for the year to be less than $375 million, excluding capitalized interest of roughly $20 million.

We expect depreciation and amortization of roughly $405 million this year. Interest expense is expected to be approximately $200 million. And interest expenditures are expected to come in at roughly $185 million this year with approximately $20 million of that capitalized. We are forecasting a roughly 0% effective tax rate due to the benefits of our NOL carryforwards and ITCs.

The diluted share count should come in at roughly $61 million. And as I discussed in the past, our credit agreement allows us effectively to convert our U.S. GAAP financials back to IFRS for the purposes of compliance with our covenant, which will generally lead to a higher level of adjusted EBITDA. Most notably, these are R&D expense and investment tax credits.

We also have the ability to add back several other items to the leverage calculations, including stock compensation, which we now deduct from adjusted EBITDA and the expected benefits of restructuring efforts and cost savings. It is, as already noted, complicated and will vary based on the expenses embedded in our U.S. GAAP numbers. So when we roll all the factors embedded in our guidance with these items, we expect our leverage ratio for the purposes of our debt covenants in the year well below six times.

So to summarize my comments. A solid start to the year relative to our expectations. We are providing more visibility on the outlook for the year by initiating guidance for space solutions and we are focused on deleveraging. And with that, I'd like to ask the operator to remind listeners how to queue up for questions and to open the line.

Questions & Answers:


[Operator instructions] Our first question comes from Steven Li from Raymond James. Please go ahead.

Steven Li -- Raymond James -- Analyst

Thank you. Hey, guys.

Dan Jablonsky -- Chief Executive Officer

Hi, Steve.

Steven Li -- Raymond James -- Analyst

Just wanted to make sure I understood your outlook correctly. So if I include SSL minus $100 million cash flow, retention is another minus $20 million. So at the midpoint, your 2019 cash flow from ops is should be around $280 million and your year to date is $60 million. So second half is going to be plus $220 million?

Biggs Porter -- Chief Financial Officer

Yeah. The second half is very strong. I go back to my comment that milestones alone are worth over $100 million relative to the first half. Our two businesses that are milestone driven, MDA and SSL, were very light in the first half.

MDA was exceptionally light. And I guess, you might think of one of the causes there, easy to point to, is the RCM program. It was the final delivery, the final milestone took place via the launch, but the milestone payments associated with that don't come in until the second half and that's worth about $20 million on its own. So that's a big piece of the MDA swing, but there's quite a few others in there as well.

And then on SSL, the new business alone is going to bring in milestone payments upfront. So we looked at PPE and Ozon this is what we've talked about for a long time. Getting those new business wins is a big positive. So big positive for space systems in total with respect to generation.

And then there's also the timing differences in terms of seasonality that we have. First quarter is a big outflow. First quarter typically positive to cash flows. So if you looked at our history that is the case.

So that is certainly what we expect this year. And then, interest is another big factor in and of itself. So in the first half we had three interest payments, in the second half we will only have one. So that's an $80 million swing in total with only $40 million in the second half.

So again, add the $100 million I talked about and the $40 million, that's $140 million of the $220 million you're looking at. And then we have earnings growth, we're expecting to generate cash and a number of other variables. So hopefully, that hits the big pieces to get you comfortable. You can always get more granular from here, but those are the big swingers.

We had a $17 million payment in the first half too that doesn't recur again from litigation-related items.

Steven Li -- Raymond James -- Analyst

OK. And Biggs, so -- and given how much capex is left in the second half, so your free cash flow could be close to neutral or maybe a slight small consumption, that's correct for the second half?

Biggs Porter -- Chief Financial Officer

For the full year, I mean, you could do the math. You talked about $280 million in the midpoint and we're talking about $400 million, including capitalized interest at $375 million, excluding it to be -- to be better. So for the full year, we're clearly talking about being a consumer of cash from free cash flow standpoint. However, as I also pointed out in the script, if you dial forward after this year, there is a lot of opportunity for us to generate lot of cash going forward.

All that stays intact. Look at the fact that SSL is a big negative this year. And as I said, we have opportunity to get it to breakeven on cash flow for the full year next year and we're not going to be satisfied with that. We're going to drive positive cash flow after there at SSL.

Steven Li -- Raymond James -- Analyst

Right. And so if I look at -- so your SSL range is very tight. Your range for the rest of the business is like a $100 million in your guidance. So I'm thinking, why is the range so wide? It can't be the milestones because those would be with SSL.

So what are the puts and takes there that could happen for a wide range?

Biggs Porter -- Chief Financial Officer

Well, there is the -- there is a range of milestone outcomes at MDA. So I think the number I've given you I think is a little conservative on that front in terms of what it could be. So there is a range of possible positive outcomes there. From the standpoint of the imagery business, we experienced timing differences in the past, positive or negative.

So those are out there, but the rule, the bottom line here is we gave a broad range for the whole business, and we gave SSL. It doesn't make sense to blow up the range by creating a big range for both of them. So at the end of the day, and I think as I said in the script, you put it all together and we gave the combined guidance of $230 million to $330 million and that's really the way we should look at it. We are trying to get away from parsing the pieces because it is always challenging when you talk about ranges of individual elements and then you get to the total and if you blow it all out for every range, for every individual item, you just get too big at the end of the day.

Does that make sense?

Steven Li -- Raymond James -- Analyst

Yep. No, that make sense. Thank you. That's very helpful.


Biggs Porter -- Chief Financial Officer

Thank you.


Our next question comes from Robert Spingarn from Credit Suisse. Your line is open. Please go ahead.

Audrey Preston -- Credit Suisse -- Analyst

Hi, it's Audrey Preston on for Rob Spingarn. So I just wanted to dig into a little bit of your long-term outlook here, specifically on the power and propulsion element. So according to the NASA selection document that was publicly released, you've been pretty significantly below the second lowest bidder. So my question here is, what gives you confidence that you can earn a positive return on this contract?

Dan Jablonsky -- Chief Executive Officer

Hi, Audrey, thanks for the question. Well, first off, I'd just like to reiterate that we're very excited about the program, especially the Artemis program in general putting the first woman and the next man on the moon. It's really good to be back to our heritage with the Apollo program and it's a nice win for the company. A couple of things about this.

The bidding process on this that are different than the way the government has historically done business. This RFP asked for a solution to a problem, not for a product on a build-to-print basis. And left it up to each bidder to figure out how to solve that problem. In our case, we proposed our well proven 1300 class bus and married that with our leading technology, particularly in solar electric propulsion.

And if you recall, we just recently launched the Eutelsat satellite, which is a 100% all electric propulsion satellite. And so what we're doing is we're building on proven heritage we have. We built something that we thought would solve the customer's problem with proven technology and heritage that we're really good at and can predict pretty well. And we are using our maturing technology and our commercial designs, we are able to significantly as noted in the sheet, come in from where the other bid weren't and I think that's why we got the sole-source award here.

And we do expect this to be a profitable program, our internal analysis would indicate that is the case and we will be holding our teams to that.

Audrey Preston -- Credit Suisse -- Analyst

All right. Great. And then, I'm trying to reconcile some of the workforce reduction and lower R&D spending in space systems with the retention initiatives and some of the development contracts that you've gotten in the quarter, so if you could just touch on how you are thinking about those moving pieces and some puts and takes there? Thank you.

Dan Jablonsky -- Chief Executive Officer

Maybe I'll let Biggs go into a little more detail here, but a couple of things going on. As we roll off milestones in certain programs, we have to get through those milestones, so retention payments for the workforce we need for some of the backlog is critical. But we've also -- so that's where some of the retention payment comes in. But I'd say we're also shaping the workforce at Palo Alto at our historical legacy SSL operations to be what we want it to be in the future, that we're able to, as Biggs noted, breakeven at about $500 million of revenue, that's, of course, not going to be acceptable.

We expect to generate positive cash flow and profitability from that. But first to stabilize and second is to build a solid business and grow from there, but some of what is going on is the workforce reductions are being timed to milestone payments, but you have to get through the milestone payments to be able to deliver on the customer programs.

Biggs Porter -- Chief Financial Officer

Yeah, I'd say, just think of it this way, there are obviously has been a decline of business base and so we have to continuously rightsize against the business base, which does trigger severance payments, but on the other hand, we need to make sure that the people are retained for the work that we have and the work we're going to have. And so that means we have to have retention in place. So it's just another way of saying what Dan I think just said, so it is very logical, if you think your way through it, to have both of those going on at the same time.

Audrey Preston -- Credit Suisse -- Analyst

Sure. And then on the R&D point, again, drilling down a little bit more on that. I mean, how are you reconciling cutting R&D expenditures here assuming that you have these new contracts that you're working on and also assuming that you remain committed to the GEO business overall?

Biggs Porter -- Chief Financial Officer

I'm sorry, the -- are you asking why we have such a significant reduction in R&D expenditures?

Audrey Preston -- Credit Suisse -- Analyst


Biggs Porter -- Chief Financial Officer


Audrey Preston -- Credit Suisse -- Analyst


Biggs Porter -- Chief Financial Officer

Well, there are just two aspects of that. R&D used to be a capital expenditure and I would say maybe was the spending was a little more aggressive than it really needed to be as you go into the past, versus now we are looking at it pretty hard and seriously and making sure that we only spend on what we really -- is appropriate, what we need to for the long-term prosperity of the business. And in particular, there was a lot of spending on digital channelizer in the past that when we evaluated last year, we didn't think we were headed particularly in the right direction on that so we curtailed that spending. We talked about that previously.

At this point in time, we think our opportunities for that technology may come more through teaming. But I will point out that the Ozon contract has a digital process around it, channelizer. And so, we are deploying that technology without all the R&D expense of the past, but we will continue to monitor what is appropriate for the business as we go forward and make sure we spend what we need to, to make it a viable good long-term business. But certainly, we felt like we could curtail from what we were spending in the past very safely.

Audrey Preston -- Credit Suisse -- Analyst

All right. Thank you.


Our next question comes from Thanos Moschopoulos from BMO Capital Markets. Your line is open. Please go ahead.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good afternoon. Dan, could you update us on the construction of Legion and whether that's proceeding on time and budget versus the prior envelopes that you've guided for? Thank you.

Dan Jablonsky -- Chief Executive Officer

Sure, Thanos, thanks for the question. Legion program, I'm pleased to report is on budget and on time. We are -- we continue to stay within the budget parameters we've given to the team. We've made it through CDR this quarter, critical design review and had a very successful set of meetings and multi-day reviews as we move into the build phases on the satellite.

We are actually bending metal and hardware is starting to show up and the vendor supply chain is coming along. I'd be delighted if I could say we were also pulling the time line a little bit more to the left. We are still on schedule for Q1 '20/'21 launch. Primarily, that's being impacted right now by one or two vendors that are the long lead time items.

If we can pull them to the left, we've got some more schedule margin than where we are in the rest of the program, but we got plenty of good schedule margin right now from where we are for a Q1 '20/'21 launch.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. And then can you give us an update in terms of what you're seeing on the commercial GEO market? And I think you alluded to the pipeline, some opportunities in the pipeline, any signs of improvement in recent months on both the prime side and then the subcontracting side for MDA?

Dan Jablonsky -- Chief Executive Officer

Yeah, sure. And I think what I'd say is the market has seen several awards this year and very likely will be up year over year. We're seeing some strong positive trends, some recapitalization efforts getting started. Some customers are letting us know that their capabilities have been outstripped by the demand in the marketplace.

And if they had more assets on orbit right now, they'll be selling them out. So even on some of the programs we got in development are being pushed really hard to see how we can go faster and make sure we're keeping them through the milestone phases. I'm cautiously optimistic. The market and the overall GEO Comsat market is headed in a much better direction.

And as I said, we are providing a nimble enough base so that with a mix of government and civil programs and also GEO Comsat awards, we provide a profitable cash flow generating piece of business in our space infrastructure group. On the MDA and the competent side, those go hand-in-hand. And I think some of the recent announcements about the LEO constellations, the low earth orbit communications, will be very good for MDA. They're expert in doing a lot of that.

As people know, they're building the antennas for the OneWeb constellation. Telesat LEO just had some nice announcement up in Canada about Canadian money coming in for the program and some guarantees on orbit data rates. And we expect a lot of the business would be done at MDA in Canada as well. So overall, we're pretty excited about the trend, too early to get too excited, but things are heading in the right direction for us for good business.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Thanks. I'll pass the line.


Our next question is from Stephanie Price from CIBC. Your line is open. Please go ahead.

Stephanie Price -- CIBC -- Analyst

I was hoping if you could give us an update on the deleveraging options. Obviously there has been some news reports suggesting that divestiture of MDA Canada may be on the table. Just wondering if you can comment on kind of these deleveraging options here.

Dan Jablonsky -- Chief Executive Officer

Thanks, Stephanie. Well, we're not going to speculate on media reports, but we do remain very focused on delevering. We're not going to put out specific plans at this point, but we do recognize the need to remove uncertainty on this front, and I guess I'd just say we have a very broad set of capabilities across portfolio in earth intelligence and space infrastructure, and remain committed to providing the best level we can for customers as we move into a delevering posture here.

Stephanie Price -- CIBC -- Analyst

OK. And then on imagery, you mentioned a delay in signing a contract with an existing international customer. Just wondering if the contract's been signed and if you can give us any more background there.

Dan Jablonsky -- Chief Executive Officer

Sure. It has not been signed as of last time I checked my email today. But what I could tell you, we're typically -- we have some pretty sensitive defense and intelligence customers, we don't always name who they are, but I can tell you it's a very long-held customer and close ally of the United States in a strategically important part of the world. They've gone through some changes in their procurement management very recently and that's led to some delays.

So our contract has been affected by that. We understand a number of others have as well. We remain confident it will normalize over time. But it's been a little frustrating on this end and we expect to able to work through it though and headed down that path.

I guess I would just note for everyone on the call, that contract is an important driver of achieving our guidance for the year with that customer.

Stephanie Price -- CIBC -- Analyst

OK. Great. Thank you very much.


Our next question comes from Tim James from TD Securities. Your line is open. Please go ahead.

Tim James -- TD Securities -- Analyst

Thank you. Just wondering if you could detail at all the $12 million OneWeb-related impairment, what does that relate to?

Biggs Porter -- Chief Financial Officer

The company, or MDA, made an investment in OneWeb as a part of its basic participating in the overall program and is a supplier to OneWeb. So it had a $25 million investment that we've carried on the books. OneWeb is funded through private capital. They had a second round of funding, it was a down round of funding.

So we and everybody else who had investments in OneWeb had to evaluate whether or not that last funding round at lower value represented an impairment and if you look across industry, you will see other people who had OneWeb investments similar to us, impaired their investment this quarter, and roughly speaking I think 50% is reasonably in the range of what others did.

Tim James -- TD Securities -- Analyst

Right. OK. OK, thank you. My second question, I'm just wondering if you could talk a bit about the trajectory of capex.

And I'm sure you don't want to get into specific numbers, but just the trajectory, the ramp in capex on royalty Legion over the balance of 2019 and '20. I think you indicated capex will increase significantly in the second half. I assumed a lot of that is because of royalty Legion. What does it look like kind of in 2020 as well.

Do you kind of hit a run rate in the fourth quarter of '19 and it stays at that level through '20 or?

Biggs Porter -- Chief Financial Officer

No, 2019 -- on the second part of that question, 2019 is clearly the peak year for Legion and then it comes down. We haven't guided with explicit numbers but it definitely comes down in '20. So you shouldn't look at even all of '19 as a reasonable indication of run rate, but especially not the latter half of the year where it does ramp up some. And the ramp up is internal cost, but also there is third-party costs on the project and those are milestone driven.

So they are not necessarily smoothly distributed through the year. So it's a matter of timing. Talking about milestones going our way, in this case it's milestones going the other way in second halfand also some ramp up in the project as we move through the midpoint here, but it definitely will come down next year.

Dan Jablonsky -- Chief Executive Officer

I might just add to that that you see it almost all rolled off in 2021 period and we are very committed to maintaining the capex holiday we've talked about as well.

Tim James -- TD Securities -- Analyst

OK. Great. Thank you very much.


And our last question comes from Richard Tse from National Bank Financial. Your line is open. Please go ahead.

Richard Tse -- National Bank Financial -- Analyst

Yes, thank you. Biggs, I was wondering if you can elaborate on this MD&A, the statement in the space systems segment. An increase in estimated cost to complete directly impacts revenue and other costs, the cost method. Just maybe elaborate on that a little bit for me, please?

Biggs Porter -- Chief Financial Officer

Yes, we've made that statement in the past. It's purely to help people understand how revenue falls off, not just from a lower level of volume, but also from just the way accounting works on the percent complete method. If you have an increase in cost and it lowers your expected profit rate, then your percent complete on cost to total cost, if you will, goes down effectively, all other things equal, and that causes your revenue number to go down because your revenue is based upon percent complete. If you want, Jason I know can walk you through this, because it is better if you kind of pencil out the math, but it is just a pure mathematical function of percent complete accounting.

The opposite can happen when you have cost reduction and your revenues go up, because all of a sudden your percent complete goes up through the process, just from the math.

Richard Tse -- National Bank Financial -- Analyst

And could you tell us like the amount that was attributed to that in the quarter?

Biggs Porter -- Chief Financial Officer

On revenue, it's several million dollars. I can't remember the exact amount, but I think we said by example, we had the improvement or the associated with recovery of our reserve, which is basically what drove the $7 million margin, but we also said that offset cost increases of about the same amount and so that gives you an idea. And cost increases meaning EAC adjustments so that gives you an idea of what that revenue effect was. So those two things kind of offset at both -- at the EBITDA level, one of them affecting revenues, the other one affecting cost, not to be too complicated here.

Jason will help you with that. [Inaudible] It's probably a little hard to do on the phone.

Richard Tse -- National Bank Financial -- Analyst

OK. Appreciate it. Thank you.

Dan Jablonsky -- Chief Executive Officer

Thank you, operator. We're through the queue here at the hour mark so I think we are going to conclude. And thank everybody for participating in today's call. We'll be participating at the Jefferies Conference later this week.

We'll be webcasting at 8 o'clock in the morning on Thursday for those that want to tune in for some more. That's it for tonight. Thanks.


[Operator signoff]

Duration: 61 minutes

Call participants:

Jason Gursky -- Vice President of Investor Relations

Dan Jablonsky -- Chief Executive Officer

Biggs Porter -- Chief Financial Officer

Steven Li -- Raymond James -- Analyst

Audrey Preston -- Credit Suisse -- Analyst

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Stephanie Price -- CIBC -- Analyst

Tim James -- TD Securities -- Analyst

Richard Tse -- National Bank Financial -- Analyst

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