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Edited Transcript of MAXR.N earnings conference call or presentation 4-Nov-19 10:00pm GMT

Q3 2019 Maxar Technologies Inc Earnings Call

Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Maxar Technologies Inc earnings conference call or presentation Monday, November 4, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Biggs C. Porter

Maxar Technologies Inc. - CFO & Executive VP

* Daniel L. Jablonsky

Maxar Technologies Inc. - President, CEO & Director

* Jason Michael Gursky

Maxar Technologies Inc. - VP of IR

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Conference Call Participants

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* Benjamin Efrem Arnstein

JP Morgan Chase & Co, Research Division - Analyst

* Douglas Taylor

Canaccord Genuity Corp., Research Division - Director

* Jason Hahn

Principal Global Investors, LLC - Senior High Yield Analyst

* Michael McCaffery;Shenkman Capital;Analyst

* Richard Tse

National Bank Financial, Inc., Research Division - MD & Technology Analyst

* Steven Li

Raymond James Ltd., Research Division - SVP

* Thanos Moschopoulos

BMO Capital Markets Equity Research - VP & Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Maxar Technologies Q3 2019 Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Jason Gursky, Vice President of Investor Relations. Thank you. Please go ahead, sir.

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Jason Michael Gursky, Maxar Technologies Inc. - VP of IR [2]

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Great. Good afternoon, and thanks, operator. Welcome to Maxar's Third Quarter 2019 Earnings Conference Call. I'm joined today by the company's Chief Executive Officer, Dan Jablonsky; and Chief Financial Officer, Biggs Porter. Both will make some opening remarks, after which, we're going to open up the line for your questions.

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

Finally, I would like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements which represent the company's estimates, future plans, objectives and expected performance at today's date. These statements are based on current assumptions that the company believes are reasonable but are subject to a wide range of uncertainties and risks that could lead actual results to differ materially from the forward-looking information.

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

With that, I'd like to turn the discussion over to Dan Jablonsky. Dan, go ahead.

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [3]

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Thanks, Jason, and good afternoon, everyone. I appreciate you joining us for a review of our third quarter results and an update on the outlook for the company.

I'm pleased with the results that we were able to deliver this quarter and with the progress that we've been making throughout the year. Please turn to Slide 3 of the accompanying presentation for the key highlights of the quarter.

We generated $479 million in revenue and $128 million in adjusted EBITDA in Q3 with EBITDA up year-over-year from Q3 of 2018. Biggs will go into further detail during his portion of the call, but I feel this is a good outcome and demonstrates 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'll go into these in more detail a little later. But the headline is that we continue to play a key role for the most demanding government and commercial customers out there, and we're proud that they've entrusted their critical missions to Maxar.

We also continue to make progress on all our key initiatives for 2019, including a real estate transaction in Palo Alto that will be delevering in nature. And finally, I note that we're maintaining the key elements of our outlook for 2019.

Please turn to Slide 4. As you know, our top priority for the year has been to reduce our debt and leverage levels, and I'm pleased to announce that we have entered into a sale/leaseback agreement on our Palo Alto manufacturing facility, pending closing conditions. We expect a roughly $291 million in gross proceeds from this transaction to reduce debt levels and improve leverage metrics. The delevering from an economic perspective is expected to be in excess of $200 million. Importantly, the sale/leaseback arrangement will provide us with a stable way to manage current and future programs, even as we continue to reengineer the business. We plan to exit an office and light manufacturing building over the course of the next 2 years as part of this transaction and have entered into a 10-year lease on our primary manufacturing assembly integration and test facility.

We also announced the launch of a bond offering today to better align our maturity schedule with our expected cash flow streams. In the quarter, our debt levels remained flat from Q2 as cash flow was roughly breakeven. That said, our leverage ratio ticked up from Q2 on lower trailing 12-month bank-adjusted EBITDA.

Finally, we also continue to drive on alternatives to reduce overall debt and leverage levels. As I said in the past, we are leaving no rock unturned. And the team and I will continue to work 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 an award from NASA to host the agency's TEMPO payload on a commercial GEO Comsat. We were also awarded several civil, DoD and classified study contracts that should help shape future requirements for potential production contracts down the road.

And turning now to performance. Adjusted EBITDA improved year-over-year and ended the quarter just under breakeven. We also continue to reshape the organization and our footprint this quarter as we look to drive towards sustained profitability.

I'd like now to offer an update on the GEO Comsat market. Clearly, 2019 has been better with industry awards year-to-date higher than the entirety of 2018. We garnered an award with Ovson, who's planning to use our Legion class architecture and a digital payload in a geosynchronous orbit early in the year. And I am pleased to announce that we were recently awarded a GEO Comsat, utilizing our 1,300-class architecture with an undisclosed customer. We're still working through the contract details, and we'll be sure to provide more information when appropriate. Going forward, I'm confident that we will continue to book additional GEO Comsat orders over time as the market recovers.

Please turn to Slide 6. I'd like to provide an update on our current strategy for our space business. As you all know, Space Solutions has historically been largely single-threaded to the commercial GEO Comsat market. This is no longer the case. We are aggressively pursuing opportunities in the civil market, both here in the U.S. and abroad, to expand beyond programs like Restore-L and Psyche, which are already in backlog. And we've had some good success of late with the PPE Artemis and TEMPO awards from NASA being good examples.

At this point, we continue to pursue other programs across NASA space exploration and earth science as well as programs with other agencies inside the U.S. and international governments, and we expect the civil market to be a source of growth for us going forward. But we are not stopping there.

In the future, we see ourselves playing an increasingly important role with national programs as 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. I think it's safe to say we're no longer single-threaded, which we expect will benefit the company by expanding addressable markets, increasing volumes and reducing cyclicality.

Please turn to Slide 7. Our third priority this year is positioning MDA for long-term growth, following the recently completed RADARSAT Constellation Mission, which is creating revenue and adjusted EBITDA headwinds in 2019. Importantly, during the quarter, we won a competitive award with Canadian government to design system requirements for robotic interfaces of Canadarm3. We also won a design contract with the Canadian Space Agency for a wildfire monitoring satellite, and Airbus awarded us a contract for advanced navigation antennas.

Turning to performance. As expected, revenue and adjusted EBITDA declined year-over-year, given the completion of the RCM satellites. As we move into future periods, we expect year-over-year comparables to become easier and for the business to return to growth.

On the pipeline front, the Canadian Surface Combatant's production phase in the early part of the 2020s is in front of us. So too is the Canadarm3 program, where we feel we are uniquely positioned, given our track record with the Canadarms on NASA's space shuttle and on the International Space Station. And finally, MDA continues to be active in the GEO and LEO markets through our components and ground stations capabilities, which brings me to an update on the Telesat LEO program.

We announced a partnership roughly 15 months ago to pursue this opportunity. However, we recently dissolved this structure in favor of a stand-alone pursuit, given the evolving procurement strategy of our customer. We view this as a positive outcome for Maxar, as it will allow us to bid on the areas where we feel we have competitive advantages across our capability set and manufacturing geographies. Combined, we see a robust pipeline of opportunities ahead for MDA that should allow for a return to growth over the medium term as the full impact of the recently completed RCM program rolls off.

Please turn to Slide 8. 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 satellite loss.

We continue to make good progress this quarter. The Imagery business was awarded a 4-year contract with the NGA for our global enhanced geospatial delivery service, putting this revenue stream on firm footing well into the future and ensuring the 300,000-plus users inside DoD continue to have access to this important platform. We also brought an additional country into the installed base of our rapid and direct access offering, marking the second win with a new allied nation this year.

In Services, we won a GEOINT Cloud Architecture contract with the U.S. Air Force and several classified awards. This marks yet another quarter of backlog growth for the segment, providing increased visibility on our outlook.

And turning to performance. We experienced year-over-year growth in revenue and adjusted EBITDA, driven by the signing of a previously delayed contract with an international government customer, the shift of lost WorldView-4 revenue to other constellation assets, increased U.S. government revenues in the Imagery business and the continued ramp in services as that segment executes on recent growth in backlog.

Please turn to Slide 9. I'd like to spend a few minutes diving a bit deeper into the growth outlook for our Earth Intelligence business. As we've discussed in the past, we are the market leader in the geospatial industry with robust capabilities in Imagery, Platforms, Products and Services. We are facing growing demand across our customer set, given the confluence of geopolitics, economic growth and rapid technology development, which allows our customers to extract increasing levels of insight from the data, products and services that we offer.

Slides 10 and 11 are here for reference and provide readers a snapshot of the breadth of current programs across our government and commercial customers. And Slide 12 provides a visual of legacy, current and planned constellation assets.

So let's turn to Slide 13 for a moment to discuss the WorldView Legion program, since that's going to be a major driver of our growth opportunity going forward. Legion will be a fleet of 6 high-performance satellites that are expected to dramatically expand Maxar's ability to revisit the most rapidly changing areas on Earth to better inform our customers' critical and time-sensitive decisions. In fact, once on orbit, our revisit rates will increase to more than 15 times per day over the highest demand areas, and Legion will more than triple our capacity to collect world-leading 30-centimeter imagery, which is what our customers need to perform their most important missions.

From a technical and financial perspective, each Legion satellite will be roughly 1/3 the mass of previous satellites, and the constellation will collect more than 3x as much capacity as WorldView-4. Importantly, this capacity increase is better matched to demand, so the usable increase in capacity is considerably more than 3x, and all this is being done at a much lower construction cost than WorldView-4. This combination of higher capacity and lower cost bodes well for improved capital efficiency for the company and expanding returns on invested capital over time.

At this point, the program is in line with its $600 million budget and is set to be launched starting in early 2021. Importantly, by having 6 satellites in the constellation, we believe we are increasing the resiliency of our operations and significantly lowering the cost of replacing any one satellite, including the possibility of having a spare satellite in inventory.

For further context, we estimate that the capacity of WorldView-4 could be replaced with only 2 Legion satellites. All of this is to suggest that the incremental cost of replacing future satellites and/or growing our capacity can be done in more bite-sized chunks and at an overall cost that is significantly lower than legacy constellation assets. Customer benefits that we expect will drive continued growing demand for our services include regularly refreshed coverage of the earth and accurate mapping, monitoring and analytics at scale.

Additionally, it will capture best-in-class image resolution that will allow for the modeling of the earth in high-resolution 3D, a capability that we believe will have many applications across our customer set in the future.

Slide 14 graphically shows a comparison of the cost of a Legion constellation compared to our legacy assets, demonstrating its capital efficiency.

And finally, Slide 15 provides a snapshot of the company's capability set across resolution, geolocation accuracy, revisit and capacity. Clearly, Maxar is well positioned in the market.

As a reminder, we've been a trusted partner of the U.S. government for nearly 20 years, delivering commercial capabilities with superior quality, cost, security and reliability. Our recent study contract with the NRO, coupled with our EnhancedView Follow-On contract, demonstrates that 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 and services. We continue to see strong signals from our customers, suggesting that, if anything, demand likely goes beyond the capacity of our Legion constellation and that there is a significant opportunity set for us in the future with our government and commercial customers, both domestically and internationally.

Please turn to Slide 16 to wrap up the discussion of our near-term priorities. We continue to make progress in our efforts to reshape and restructure the business, and we're seeing good traction with the deployment of the new operating model. Our product teams continue to work across the company, and our global field operations team is building and executing on our robust pipeline. We're also seeing good market reaction as we roll out our positioning of the One Maxar brand, and our finance and operations staffs are continuing their 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 17. Before I hand the call over to Biggs, I'd like to provide a quick framework to help investors understand how we're thinking about the outlook in the near-, medium- and longer-term for the company. 2019 has been about resetting and stabilizing our business after the order decline experienced in the GEO Comsat market over the past several years, the wind-down of the RCM program for the Canadian government this year and the announced loss of WorldView-4 at the beginning of 2019.

Clearly, we have experienced a confluence of tough events, but we have been laser-focused on reengineering, execution and business development to position the company for a return to growth in the medium term. And while I can't declare victory on that yet, I do believe we have made tremendous progress this year. Longer term, we expect to accelerate growth by deploying our new constellation assets in the Imagery segment, executing on our growing backlog in services, reaping the rewards of our diversification efforts at Space Systems and enjoying the results of some potential key wins at MDA.

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

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [4]

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Thanks, Dan. Please turn to Slide 18, where we present year-over-year comparisons for Q3 and year-to-date.

Total company revenues declined 6% year-over-year in the quarter due to lower GEO Comsat volumes and the RCM program wind-down in Space Systems. These declines were partially offset by growth in Services and Imagery, the details of which I will go into momentarily.

Adjusted consolidated EBITDA margin increased 610 basis points year-over-year, driven by Space Systems and Imagery, offset in part by Services. Corporate and other expenses were higher year-over-year, driven primarily by the retention cost in Space Solutions that I've discussed before and that we are recognizing in corporate and other expense 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 the last year. We believe it is having its desired effect. New wins in Space Solutions are likewise having a very positive effect on the workforce. These increases were partially offset by a decrease in SG&A and a decline in expenses related to a business dispute in 2018, which did not recur in 2019.

GAAP EPS was a loss of $0.44 versus a loss of $4.88 in the third quarter of 2018, driven largely by the impairment taken in Q3 2018 related to the decline in the overall GEO Comsat business environment. Year-to-date, revenues have declined 10%, driven by lower volumes in Imagery and Space Systems in part offset by growth in Services.

Adjusted EBITDA margins have increased 180 basis points, driven by Space Systems and Services, partially offset by Imagery. Year-to-date, EPS was a positive $1.02 versus a loss of $5.45 last year, driven by the WorldView-4 insurance recovery booked in Q2 of this year, while the loss last year was driven largely by the impairment described earlier.

Please turn to Slide 19. As expected, Imagery revenues increased 5% year-over-year in the quarter as we successfully signed a delayed contract renewal with an international customer and continue the transition of lost WorldView-4 revenue streams to other constellation assets. We also saw year-over-year growth in our U.S. government business as we continue to upgrade work on our infrastructure to better interoperate with our customer in the years to come.

Adjusted EBITDA margins expanded 220 basis points year-over-year on the higher revenue and positive mix in the quarter. On a year-to-date basis, revenues are down 2%, given the WorldView-4 loss but are tracking to roughly flat for the full year. Adjusted EBITDA margins are down roughly 80 basis points on lower revenue and a slightly less favorable mix.

Please turn to Slide 20. Space Systems revenues were down 16% year-over-year in Q3, driven primarily by the expected wind-down of work on the multiyear RCM project and the decline in GEO Comsat activity. Adjusted EBITDA margins increased 770 basis points as a result of lower development spend and lower headcount as a result of restructuring efforts. The third quarter of last year was also impacted by supplier issues and delays.

Year-to-date, Space Systems revenues have declined 15%, driven largely by the factors mentioned earlier, partially offset by an increase in revenues from Neptec, which was acquired in July of 2018. Adjusted EBITDA margins have increased 270 basis points, primarily as a result of the factors mentioned earlier, partially offset by an increase in estimated cost to complete on certain projects.

Space Solutions, the legacy SSL business, generated $167 million in revenue during the quarter and a small adjusted EBITDA loss, a marked improvement from the $31.5 million loss posted in the third quarter 2018, a quarter that was negatively impacted by EAC growth given supply chain issues and delays.

Performance in Space Solutions continue to be negatively impacted by EAC growth related to first-time work, which we are working diligently to complete. At this point, we continue to expect roughly breakeven adjusted EBITDA for the full year, excluding the retention payments being recognized in corporate expenses.

Please turn to Slide 21. Our Services business posted an 18% increase in revenue this quarter versus third quarter of '18, driven by growth from new contract awards and program expansion on existing contracts across the Intelligence Community and DoD.

Adjusted EBITDA margins declined, however, by roughly 220 basis points year-over-year, given a change in lease expense, which decreased adjusted EBITDA by roughly $1 million in the quarter versus the prior year period. Please note, this change will result in an additional $1 million of this expense year-over-year in the fourth quarter of this year.

Additionally, third quarter '18 margins were higher versus third quarter '19, given a lower level of subcontractor pass-through work performed last year. This business experienced another solid booking quarter with total book-to-bill for the segment exceeding 1x. Year-to-date, revenues are up 9% year-over-year on the recent wins, while margins have remained relatively consistent.

Please turn to Slide 22. The company generated $83 million in operating cash flow this quarter and invested $79 million in CapEx and developed intangibles. On a year-to-date basis, we've generated $142 million in operating cash flow and spent $206 million on CapEx and intangibles.

Space Solutions/SSL consumed $2 million of consolidated operating cash flow in the quarter and $84 million year-to-date as recent new award activity had a positive effect. As a reminder about cash activity in the fourth quarter, Q1 of 2019 included the doubling up of interest that added $42 million of cash outflow in that quarter relative to the norm. We paid additional cash interest in Q2 and Q3 but will not be doing so in Q4 as we have already paid a full year's worth.

Also, the fourth quarter is typically a seasonally positive quarter for the company when it comes to operating cash flow generation. And this quarter looks even more so given the expected milestone payments on major programs, almost all of which are already in backlog. This assumes, of course, that we don't have a government shutdown that affects us this year like it did last year. As I will detail later, our operating cash flow outlook for the full year remains unchained -- unchanged.

Please turn to Slide 23. We finished the quarter with consolidated net debt of roughly $3.1 billion, up slightly quarter-over-quarter. Our bank-defined leverage ratio ended the quarter at approximately 4.9x, up roughly 0.2 of a turn from Q2 as trailing 12 months bank-adjusted EBITDA declined due to the rolloff of addbacks allowed for -- under the credit agreement in prior quarters. Importantly, we remain well below our covenants.

We had roughly $588 million liquidity at the end of the quarter via a combination of cash on hand and availability on our credit facility. As Dan mentioned earlier, we recently engaged in a sale/leaseback transaction on our Palo Alto manufacturing facility.

Irrespective of refinancing activities, the gross proceeds of roughly $291 million are sufficient to retire our 2020 maturities. We will lease back 1 or 2 of our primary buildings, which contains office space and light manufacturing for 2 years. The leaseback term on our primary manufacturing integration and test space is for 10 years, which gives us plenty of runway to address our long-term manufacturing footprint in California. The lease amounts are in our 10-Q. Importantly, we expect the net effect of this transaction to reduce leverage by roughly 0.3 turns.

Going forward, we remain focused on delevering and debt reduction efforts and on better aligning our maturity schedule with our cash flow streams, including the bond offering announced earlier today. We continue to expect to increase cash generation in future years from expansion in adjusted EBITDA. The lower CapEx as our investment in the WorldView Legion Constellation will continue for 2 more years, after which, we would be positioned to have much greater free cash flow to delever.

Please turn to Slide 24. Turning to guidance. We continue to expect Imagery to be roughly flat year-over-year from a revenue and adjusted EBITDA perspective. In Services, we are now expecting solid mid- to high single-digit revenue growth, up from the low single-digit growth we're previously forecasting, driven by the new awards we won throughout the year. We continue to expect full year adjusted EBITDA margins of roughly 10%.

At MDA, we're now expecting a low-teen decline in revenue versus the low single-digit decline we previously expected, given delays in forecasted starts on new projects. We continue to expect a decline of several hundred basis points of margin compression. It is important to note that we expect the delays this year to be pushed into 2020, and that this business has recently booked some new wins, including the initial development work on Canadarm3.

Taken together, no change to adjusted EBITDA for the Imagery, Services and MDA businesses.

Moving on now to Space Solutions/SSL. We expected this segment to contribute roughly breakeven adjusted EBITDA to the Space Systems segment, pure retention payments and eliminations. Retention payments are now expected to be close to $25 million for the year. Offsetting this, below the adjusted EBITDA line, will be lower severance costs in 2019. Finally, we now expect roughly $30 million of intersegment adjusted EBITDA eliminations, which is about $10 million higher than the previous expectation, given the cadence and profit levels of intercompany activities now forecast.

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 but not including the $25 million in Space Solutions retention. We expect Space Solutions to be breakeven before eliminations of roughly $30 million and the retention payments of $25 million. So we expect enough upside on adjusted EBITDA from Imagery, Services and MDA plus the breakeven Space Solutions to offset the slightly higher eliminations of $30 million and the retention payments of another $25 million to keep us equal to or north of the $510 million for the overall company.

On operating cash flow, we continue to expect the range of $350 million to $450 million, excluding the $80 million to $100 million consumption at Space Solutions and the $20-plus million in retention payments. Taken together, this provides for operating cash flow on a consolidated basis in a range of $230 million to $330 million.

Please note that this includes significant restructuring cash outflows due to reductions in force and final integration cost from the 2017 merger. These costs aggregate up to $40 million and are exceeded by the in-year savings we expect. Net of those costs, the normalized operating cash flow would be higher.

For Space Solutions, as I've mentioned on prior calls, cash flow was a headwind in 2019, given the timing of milestone payments, retention and cash restructuring charges. But this has significantly turned around in the second half, as evidenced by third quarter cash used in Space Solutions of only a negative $2 million.

We expect CapEx for the year to be roughly $340 million, excluding capitalized interest of roughly $20 million. This is down about $35 million from our prior forecast, given the cadence of work being completed this year on WorldView Legion, recent reshaping efforts of Space Solutions and other fine-tuning. We will continue to evaluate how much of this rolls over into next year as opposed to a permanent reduction.

If you're 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 of Space Solutions, $20-plus million of retention and up to $40 million of restructuring-related costs. Once Legion is complete, we expect CapEx to fall to a more normalized range of $100 million to $150 million. We also expect to recoup the approximately $70 million of lost WorldView-4 revenue and to grow the company in other areas such that, over time, all in, we could see upwards of $200 million of adjusted EBITDA growth.

So sometime following, when we put WorldView Legion into operation, when you wrap all these things together, that is solving for the cash burn in Space Solutions, lower retention and restructuring costs, lower CapEx, and adjusted EBITDA growth, we see a path to up to a $500 million or more swing in free cash compared to 2019 guidance after normalizing for the insurance proceeds.

Now back to 2019 guidance. We expect depreciation and amortization of roughly $4 million and $5 million this year. Interest expense is expected to be approximately $195 million, down slightly due to interest rate swaps, debt levels and interest rates. And interest expenditures are expected to come in at roughly $185 million this year with approximately $20 million of that capitalized.

We continue to forecast a roughly 0% effective tax rate due to the benefits of our NOL carry-forwards and ITCs. We also continue to expect the diluted share count to come in at roughly 61 million.

And as I discussed in the past, our credit agreement allows us effectively to convert our GAAP financials back to IFRS for the purposes of compliance with our covenants, 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 through 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 purposes of debt covenants to end the year well below 6x.

Now I'd like to close out my comments by giving you a few thoughts on the debt refinancing activity we launched earlier today. The objective of the refinancing is to pay down the borrowings on our existing revolving credit line and retire our term Loan A indebtedness while extending the maturity of our credit line and reducing it to $500 million. While we're in marketing, I cannot give more specifics on the bonds, but I can talk to the bank credit amendment that we've entered into in support of that offering. The amendment would extend the maturity of our credit agreement by 2 years to 2023, conditional upon the success of the bond offering and the use of proceeds to pay down the current borrowings outstanding on the term Loan A and revolver.

You will see in our disclosures of the amendment in our third quarter 10-Q that, conditional on the success of the bond offering, covenants have been significantly expanded. These new covenants were set high by the banks, well above our current levels and expectations in order to give us and the prospective bondholders plenty of room, far more than we would have anticipated otherwise.

As I said earlier, our current bank leverage is at 4.9% relative to a covenant of 6%. The new covenant goes as high as almost 8x, 160% the current metric.

Another element of the amendment which is not conditional on the bond offering, provides clarity that the proceeds from the Palo Alto land sale can be used to retire our term Loan A debt as opposed to a pro rata paydown of our term loan debt. So with or without a bond transaction, we have a clear path taking care of the first term Loan A maturity.

So to summarize my comments. We continue to be encouraged by the growth in Imagery and Services. We've had success and continue to work diligently to win new projects and return to profitability in Space Systems, and we're focused on delevering and aligning our maturity schedule with our cash flow streams.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ben Arnstein with JPMorgan.

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Benjamin Efrem Arnstein, JP Morgan Chase & Co, Research Division - Analyst [2]

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So I guess, I kind of wanted to ask a little bit about the debt and the leverage situation. I appreciate that you can't talk too much about the offering right now, but if it is successful, you want to create a couple of years of breathing room here with your maturities now lining up in 2023 and 2024. And in addition to the kind of CapEx holiday, we're going to see -- preceding that, how should we think about your capacity to delever from here, including the Palo Alto sale?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [3]

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I'll ask Biggs to take the thrust of that. But I -- it's critical that the Palo Alto sale is a delevering event in and of itself. So that's good news for us.

And as you noted, the CapEx cycle for the Legion program right now is not ideally timed with our current maturity schedule. So moving that maturity out past when that program is done and the other things that Biggs talked about in terms of cash flow generation are pretty critical to us, moving to that time frame. But Biggs, do you want to give some more?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [4]

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Yes. So I think Dan covered it, but Legion program completes in '21. The first launch is targeted for the earlier part of the year. So the reduction in CapEx starts it in. All those factors I described as creating a $500 million swing aren't fully captured at '21, but they certainly head in that direction. And by -- you get to '22 and '23, they are pretty fully captured or if not fully captured by the time we get to '23. So that's a lot of cash generation to go pay down debt before we get to those maturities.

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [5]

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I think the other thing I'd note, Ben, is that, as I said in my remarks, we are still continuing to work alternatives to delever faster than that as well. We'll do the smart thing for shareowners, but we've got some other things in front of us possibly.

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Benjamin Efrem Arnstein, JP Morgan Chase & Co, Research Division - Analyst [6]

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Got it. And are there any contingencies, I guess, around that $500 million swing in cash for 2022, 2023 in terms of programs that you want to win? What kind of the follow-on for EnhancedView might look like?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [7]

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Well, at this point in time, there's nothing that we forecast. It is possible that we could add customer interest in more capability, but we think that would bring customer funding. So that's an upside, not a contingency. And from the standpoint of other items, I think the $500 million, if you do the math on everything I said, you actually get to a number bigger than $500 million. So that leaves room for something unforeseen. But at this point in time, there's nothing I'd point to as a contingency.

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Operator [8]

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Your next question comes from the line of Steven Li with Raymond James.

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Steven Li, Raymond James Ltd., Research Division - SVP [9]

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Yes. Can you hear me?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [10]

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Perfectly.

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Steven Li, Raymond James Ltd., Research Division - SVP [11]

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Okay. Just a clarification on the Palo Alto sales/leaseback. So the $290 million versus $200 million delevering, what's the difference between the 2 numbers?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [12]

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Between $291 million and $200 million. The $200 million is real economic delevering if you compare the total value of the proceeds to the economic value of the leaseback. And that economic value leaseback is a matter of perception as to what kind of discount rate you want to apply. We give you the lease numbers so you can go and determine what you think the fair value of that lease is, but it's the fair -- if you will, the economic delevering is more of the $200 million. But from a absolute cash inflow standpoint, the cash proceeds are closer to that $291 million, net of all the expenses.

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Steven Li, Raymond James Ltd., Research Division - SVP [13]

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Okay. That helps. And Dan, you mentioned there will be 6 satellites for Legion. I think I heard you say one could be a spare. What's the reason for the spare? Or is that for a potential Legion-X customer?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [14]

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So actually, the first part of the constellation that we'll launch will be the 6. We have had some interest in others funding additional capacity, something that Biggs just spoke to, whether we call that Legion-X or for some other government programs. We have had interest, and those would come with customer funding as well. So we -- 6 is the initial launches that we're planning on, and then there could be some additionals in the mix.

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [15]

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I just would also point out that we have made a decision at this point in time, in fact, to build a spare. We're saying that that's a possibility, and what makes it a possibility is, if you consider the fact, we had a $600 million program for 6 satellites. There's a big nonrecurring element in there. Then the incremental cost of one is low enough to where that possibility is out there, if we felt like that, that was the best way to create resilience in the future as a trade against also insurance costs. So the real point here is that, that is a significantly lower cost point than probably what anybody anticipated. And we have the opportunity then to go to approach of taking a spare or, over time, smoothing out the cost of replenishing our growing Legion fleet.

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Steven Li, Raymond James Ltd., Research Division - SVP [16]

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Okay. That makes sense. And then my last one is on the [diesel] structure on the Telesat bid. Do you have to start from scratch for bidding on parts of the contract? And what is the new expected timing for any award?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [17]

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No, we don't have to start from scratch. An awful lot of nonrecurring engineering work, customer-funded has been done at this point. A lot of studies work and proof points, well along in the process, continue to be very closely involved in discussions with the customer. Can't get out in front of their time line, but I think they've said they expect movement still in this calendar year.

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Operator [18]

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Your next question comes from the line of Doug Taylor with Canaccord.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [19]

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You've mentioned the lower cost per satellite asset for the WorldView Legion is sure to drive some economic benefits to your model through the cycle. As you mentioned, it does also speak to the potential for barriers to entry for new entrants. What can you tell us -- or remind us how you think about the other barriers to entry besides CapEx that Maxar and its model brings that helps keep the economic moat between you and competitors.

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [20]

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Thanks, Doug. And I guess just to kind of be clear, I mean the way we think about it is constant innovation and delivering better results both for our customers and returns on our business. And as long as we continue to do that, we think that, as a market leader, we'll continue to extend our lead.

This is -- the Legion class satellites are a very innovative design. We are looking forward to getting that constellation on orbit and delivering that level of enhanced quality and revisit and all of the other things that we have for our customers. And we've got lots of experience doing this, so almost 20 years history in this business, and we continue to, I think, advance our lead.

The other parts of that are not just the satellite constellation but what happens around it, the data handling, the platformization of it, the moving it into things like 3D models and the analytics that go with it. So from an end-to-end standpoint, all the way from building the satellites to flying the satellites, moving that data around the world at light speed and making analytics judgments off it in a useful way, that's how we think about our lead in the business.

Just kind of beyond the USG relationship that we've had for this long period of time, we've got over 12 installed international defense and intelligence customers, where that satellite data is going in directly into their ground stations. And we're up over 40 customers on the Secure Watch program on the International Defense and Intelligence front as well as the commercial customers that we've got.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [21]

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That's great color. Just for my follow-up, quickly. I just wanted to clarify the answer to a previous question, I believe it was Steven's, regarding the sale and leaseback transaction. So the $291 million is net of taxes or whatever the projected tax implications are from that transaction. Is that correct?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [22]

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The $291 million is a gross proceeds. There will be some amount of other expenses, taxes, brokerage fees, et cetera, deducted from it. But you're still likely north at $281 million or north of $280 million after backing those out.

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Operator [23]

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Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [24]

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Dan, as far as the GEO award that you announced, is that contingent on the customer getting financing, or is financing in place? And would you expect to be able to finalize the agreement in the current quarter?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [25]

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We do expect to finalize it this quarter. Teams are working very hard on finalizing the contract. We're not aware of any contingencies to it, but we have to get the contract done. But we'll be moving forward. We understand the customer has -- as they all do when they finally give you an award, tight time lines till you get the delivery. Otherwise, they wouldn't have made that capital investment decision. We're very excited about that award as well. Thanks for mentioning that, Thanos.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [26]

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Any other color you can provide on it or not at this stage?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [27]

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Not at this stage. We're holding that back until we get the final contract.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [28]

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Okay. And on the debt, you're repaying the revolver as part of the financing. Will you still have a full revolver available post the financing?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [29]

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Biggs can give more color here. But we're -- as part of this, we'll pay off the current revolver and then have a new $500 million revolver with 0 balance on it, would be the expectation.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [30]

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Okay. And then finally, in terms of the year-to-date GEO award activity that we're seeing out there, to what extent is that translating into potential work for MDA?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [31]

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It definitely translates into intercompany work for us with MDA. They have been -- the partnership between the legacy MDA and SSL units is well along established between antenna work, RF converters, other subcomponents as they are for the rest of the industry as a merchant supplier for them. So they continue to roll full steam ahead, and they're an important part for on -- as part of Maxar on these bids.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [32]

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Sorry, I meant in terms of the awards that have gone to others, is that -- some of that translating into work for MDA?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [33]

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Oh, I got you. Yes, absolutely, yes. Some of it has continued to come to MDA. And they continue to pick up work even when we don't win the full headline award on it.

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Operator [34]

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Your next question comes from the line of Richard Tse with National Bank Financial.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [35]

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Yes. One of your slides, I think, it was 6, you talked about opportunities beyond sort of the single-thread GEO side. So what would you think is the biggest opportunity from that perspective?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [36]

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I think the area is the one where we've already been winning quite a bit of business, which is the civil space side. So we already have in backlog the TEMPO award with NASA, the Psyche and Restore-L missions, both for robotics and on-orbit servicing and further asteroid space exploration and now the recent PPE Artemis win, built on legacy 1,300-class capabilities but repurposed for NASA civil missions. So we're very bullish on that.

We continue to look forward to the Canadian government's Canadarm3 time lines. As I think everybody on this call knows, NASA has moved the schedule up for the Artemis program from the 2028 to the 2024 time line, which means we've got to be launching the PPE in 2022, early 2022. And the -- for Canadarm to keep up with that, everybody's sort of in an accelerated format right now on what will become the Gateway program. So that's very exciting.

We're a little more nascent on the defense program side in the U.S. I would say we continue to enjoy strong support with the Canadian defense and space agencies. The RCM program, in fact, was a Canadian defense program. But on the U.S. front, we just became U.S. incorporated in January this year. And so we're moving our way in to the program phase on different aspects in it. As typical, it starts out with studies. And then as you win studies and improve your worth, you start to win other types of business. We hope that, that -- hope and expect, I guess, that, that moves into contracting and production phase at some point.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [37]

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Okay, that's helpful. And I just had a question on WorldView-4. Can you maybe give us a sense of how much revenue have you not been able to reconstitute to other satellites?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [38]

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Yes. So we -- when we launched the satellite, we announced that it had about $85 million of pretty high-margin revenue on it and that we expected to be able to move around $15 million of that revenue to other constellation assets. And we've, by and large, been substantially able to do that. We're continuing to look for other opportunities to go past that, but we've been able to do that during this year. And I think that's some of what you see from the improving results in Q3 and are holding on the guidance for the year.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [39]

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Okay. And just one last one from me. With respect to the financing you're doing today, I'm not sure you can sort of give any color around it. But can you give us a sense of what the interest rate on that debt would be?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [40]

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Yes. While we're in the marketing process, really can't -- I mean, obviously, this is ultimately driven by the market. So you just have to wait on that one.

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Operator [41]

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(Operator Instructions) Your next question comes from the line of Jason Hahn with Principal Global Investments.

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Jason Hahn, Principal Global Investors, LLC - Senior High Yield Analyst [42]

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I just wanted to maybe get a little bit more clarity on the debt financing and the Palo Alto proceeds. So if I understand it correctly, you've got essentially just short of $1.2 billion of debt outstanding on the term Loan A1, A2 and the revolver. You've got -- it sounds like $280 million-ish of proceeds coming in on the Palo Alto facility. So that gets you down to sort of a net funded debt on the front end of about $916 million. But you've announced a deal size for $1.25 billion. Will the incremental proceeds there be used to repay term Loan B borrowings? Or is there some other use of proceeds to reduce debt here that I'm missing?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [43]

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Yes. No, sure thing, Jason, and thanks for the question. You bring up a good point. If the assumption that we get to closing this year on the Palo Alto real estate sale, we would apply that to the debt offering that we have underway. So there'd be -- we take out the 2, first, call it, $250 million of that and be closer to about $1 billion of debt rolling over.

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Jason Hahn, Principal Global Investors, LLC - Senior High Yield Analyst [44]

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Yes. I guess I was confused. So I thought that, that deal was at least initially structured as noncall, too?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [45]

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So the new offering, because of the timing of cash inflows from it relative to the timing of cash flows for the land sale, the new offering gives us the ability to redeem $250 million of that after its initial issuance.

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Operator [46]

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Your last question comes from the line of Michael McCaffery with Shenkman Capital.

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Michael McCaffery;Shenkman Capital;Analyst, [47]

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What's the time frame that we should expect for the Palo Alto transaction to close?

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [48]

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It's still subject to closing conditions. We do expect it to close in this calendar year with proceeds being applied in this calendar year.

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Michael McCaffery;Shenkman Capital;Analyst, [49]

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And am I reading language in the Q correctly that the amendment on the credit facility is getting the secured bond deal done?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [50]

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Yes. So the majority of the amendment on the credit facility is conditioned upon the bond at $1.250 billion. There are exceptions to that, as I noted. One exception is where the language was clarified that the proceeds from the land sale can be used against term Loan A or term Loan A1 as opposed to needing to be pro rata spread over both term Loan A and B. So that part, the amendment, that clarifying language is independent of the bond transaction.

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Michael McCaffery;Shenkman Capital;Analyst, [51]

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Okay. So that piece alone will -- that amendment -- so is that a separate amendment? Are there multiple amendments then that...

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [52]

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It's -- I mean it's structured such that, within the amendment, there are some elements of it which are not contingent and some elements that are.

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Daniel L. Jablonsky, Maxar Technologies Inc. - President, CEO & Director [53]

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But I guess for clarity, Michael, the part that's not contingent on the bond offering is that we can apply the proceeds from the land sale to the term Loan As that are due next year.

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [54]

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Yes. But Dave, with or without a bond, we have clear path to be able to pay down term loan A1.

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Michael McCaffery;Shenkman Capital;Analyst, [55]

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Right. So assuming the bond deal gets done, is there a reason then once the real estate proceeds came in that, that would be targeted at the bond versus some type of pro rata with the parity term Loan B?

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Biggs C. Porter, Maxar Technologies Inc. - CFO & Executive VP [56]

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No. As I said earlier, it would go -- we issued a bond at $1.250 billion that when the land proceeds come in, $250 million of that would be used to redeem $250 million of the bond issuance at par.

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Operator [57]

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And I will now turn the call back over to the presenters.

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Jason Michael Gursky, Maxar Technologies Inc. - VP of IR [58]

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Okay. Great. Thanks, everyone, for dialing in today. I appreciate the interest and the support. We'll probably see some of you out here on the road in the next couple of weeks. Otherwise, I look forward to catching up with you in the coming weeks and months as we make our way towards the end of the year. Thanks, everyone.

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Operator [59]

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