Maxar Technologies Ltd. (MAXR) Q4 2018 Earnings Conference Call Transcript

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Maxar Technologies Ltd.  (NYSE:MAXR)Q4 2018 Earnings Conference CallFeb. 28, 2019, 5:30 p.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Good evening, and welcome to Maxar Technologies Limited's Q4 2018 Conference Call.

We would like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements, which represent the company's estimates, future plans, objectives and expected performance 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 actually result to differ materially from forward-looking information. You can refer to the advisory regarding forward-looking statements contained in the second quarter earnings news release and in the company's most recent Management's Discussion & Analysis and Annual Information Form, which are available online under the company's SEDAR profile at www.sedar.com, under the company's EDGAR profile at www.sec.gov, or on the company's website at www.maxar.com.

As we begin the discussion, we ask that you refer to the accommodating -- you refer to the slides for today's call that can be found on the company's website under Investor, Events & Presentation, Q4 2018 event details.

I would like to turn the discussion over to Mr. Dan Jablonsky. Please go ahead, sir.

Daniel Jablonsky -- President and Chief Executive Officer

Thank you, operator. Good afternoon. Thank you for joining our call today. We have a lot to discuss and we ensure that we have ample time to answer your questions. As some of you maybe aware, trading in our shares was suspended earlier this afternoon in both the Toronto Stock Exchange and the New York Stock Exchange. In the ordinary course, we provide the earnings release to the exchanges for pre-clearance in advance of issuing the press release, post-market close, and as the technical matter the exchange has elected to halt trading pending the issuance of the release. The primary factor appears to have been the decision to cut the dividend. We expect trading on both exchanges to commence again tomorrow morning.

This happened while I was meeting with NASA Administrator, Jim Bridenstine, when our team was showcasing our robotics and space technology. As we like to note around here, never a dull moment.

At the time we announced our management transition, we committed to moving forward with action plans related to several key challenges Maxar has faced. At that time, I said we would seek to strengthen our operational and financial performance, including delivering sustainable revenue and cash flows, determine a definitive resolution for the geocommunication satellite line of business and clarify longer term growth prospects, required investments and optimal capital structure. We remain committed to these priorities.

Please turn to Slide 3. Today, we are addressing these priorities and our action plans in greater detail. It has been just over 45 days since the transition and we have the high-level elements of our strategy in place. We've recognized the work ahead of us even if we do not yet have all the answers. We are focused on disciplined capital prioritization, serving our customers and partners and delivering value to our shareholders. As a leadership team, we know we have a lot of work to do. Our well along and resolving key challenges have a clear sense of urgency and direction and are committed to strategy that aims to make Maxar an industry leader for the future.

On today's call, we plan to discuss the following: 2018 financial results and update on leverage, liquidity and cash flows, resolution on the go-forward plan for our GEO Comsat business, changes to our operating model to make Maxar a leaner company, better able to serve customers and unlock the value in our combined businesses, expected synergies and cost outs resulting from these changes, an update on WorldView-4 and how we are proceeding to serve customers, and, finally, a high-level view of our strategy evolution and outlook for the future.

Please turn to Slide 4. Before we begin, I thought it might be helpful to summarize my perspective on the company after my first 45 days in my new role. We have clear strengths in our core business of earth intelligence that we will aggressively and strategically pursue. This includes an imagery, solid underlying demand across both government and commercial markets. In services, robust demand, low capital intensity and opportunities for margin expansion. And for MDA Canada solid franchises and continued expanding opportunities for profitable growth. We know we also have the opportunity for improvement, including reducing leverage, improving our GEO Comsat business and overall operational execution. My comments today will address the key concerns and opportunities.

Please turn to Slide 5. In the last month, we have moved quickly, we have commenced a review of alternatives for deleveraging the balance sheet and fixing the capital structure. Reduced the dividend to $0.01 to preserve cash, address GEO Comsat uncertainty with a clear focus for the future. This includes a plan for reengineering our Palo Alto Space Systems business for the 500 and 1300 bus lines, where we uniquely have opportunity in a competitive advantage.

Stopped RSGS, which was not a good use of capital in 2019. $50 million in the original budget for the year. Began the process of seeking full recovery against the loss of WorldView-4, while investigating options to replace as much of the lost revenue as possible in the near term and potentially accelerating the longer term replacement with WorldView Legion.

In (technical difficulty) significant restructuring of four operating model to make it leaner and more nimble, including a plan to reduce annual costs by almost $60 million in 2019 and evolved our strategy to best leverage our core business and unique assets.

Please turn to Slide 6. Through all of our actions, both implemented and as we move forward, we will follow guiding principles. We will pursue our purpose, which is to help our customers build a better world. We're going to drive sustainable growth across our business, we will seek to pay down our debt over time, we will aim to expand our returns on invested capital each and every year, and we will work to create a leading edge collaborative work environment that allows our team members to do the best most challenging and exciting work of their careers.

Please turn to Slide 7. We have resolved a near-term outlook for financing leverage, cash flows and covenants. We have reduced our quarterly dividend from CAD0.37 to USD0.01 per share, providing an additional $60 million in annual cash flow. And as previously announced, we sold a portion of our real estate assets in Palo Alto with proceeds totaling $70 million that we have applied to pay down debt.

As we announced previously, in our December 21, 2018 release, we received approval from our lenders to amend our credit agreement, that provides additional flexibility with regard to our consolidated debt leverage ratio. We believe that our banking relationships are solid.

Biggs will provide more detail about our liquidity and capital structure in his remarks, but at this point I am confident that we have sufficient liquidity and capital resources to fund our near-term capital needs and we are pulling together plans to better optimize our capital structure over the long-term. As part of our plans we are focused on all levers to drive cash flows and pay down debt, including cost reductions from a new operating model that I will describe in a moment.

Please turn to Slide 8. We've reached resolution on the GEO Comsat business. As mentioned in our earnings release this afternoon, we're going to continue to operate the GEO Comsat production line on a much smaller scale, the facility that provides a robust design, engineering and manufacturing platform. Our goal is to create a business model that will aim to be nimble and efficient, able to react to market upturns and downturns, deliver commitments to our customers and return to sustainable profitability.

As we went through the process of evaluating strategic alternatives, we found that the value of the business was working more to us than the indications of interest we've received from potential buyers. And the more we looked at it, it became clear that keeping the business and optimizing the cost structure was the best choice. Quite simply, we believe SSL has more value to us than to anyone else as we can leverage engineering talent, capabilities, shared infrastructure and a long-standing heritage, but we have to execute our strategy with less risk and greater upside.

We will operate the business in a more stable fashion and working cost structure, which will allow us to more quickly react to market upturns and downturns. Our plan focuses on the following key points: preserving value from our industry-leading workforce and heritage in the GEO Comsat business. We will continue executing on our backlog with the highest level of performance that our customers expect. The continuing business has a backlog of roughly $525 million and we're committed to delivering the highest quality technology solutions for our customers, while continuing to pursue and execute new orders.

Just last week, SSL launched an innovative geocommunications satellite for Indonesian operator PSN that includes a high throughput satellite payload and is one of the first to feature our next-generation electric propulsion system, which provides increased power and flexibility compared to prior systems.

Accelerating growth in new markets, particularly the US government. We're focusing on the 1300 kilogram plus bus as well as on our disruptive 500 kilogram class bus product line called Legion, which addresses a range of demanding government and commercial missions. Legion continues to gain traction. We have received positive customer acknowledgement that our Legion class bus will be competitive in a broad spectrum of US government missions and we expect it'd be a growth engine alongside a highly promising portfolio of smaller satellite, robotics and space infrastructure capabilities. We know there are clear benefits to integrating production of these two key product lines, reengineering SSL, including resizing, restructuring and reinventing our Palo Alto facility, as I just described.

We plan to further reduce debt by continuing to optimize our industrial footprint for this business, maintaining the right footprint and infrastructure to execute on both backlog and new orders, while repositioning to compete fiercely for the next wave of state-of-the-art satellites and constellations. Taken together, we expect these actions will drive improved profitability and cash flow over time. Biggs will review in more depth.

I am excited about the plan we have put in place as it preserves their franchise in the space industry with a lot of heritage and it puts Maxar on a path to more fully realize the benefits of the vertically integrated company that we have assembled.

With the process for SSL concluded, the business can focus in serving customers with a leaner more agile business model. We look forward to building upon the heritage and expertise of our team members in Palo Alto and deliver on our commitments to the customers and mission partners, who count on us every day.

Please turn to Slide 9. We're restructuring our operating model to create a leaner organization that moves faster to achieve customers objectives and deliver the solutions they need one Maxar through centralization and restructuring of our business brands, management, support, product development and go-to market functions. To align with this model, we have also restructured the business leadership team to drive these changes as follows. Instead of four business units in a corporate structure, we have transitioned to one operating company with a separate Canadian business. Reporting to me are the key operating roles; global field operations, product development, Space Systems manufacturing and engineering in Canada, as well as the corporate functions, finance, HR, legal and marketing and communications.

We believe this structure will allow us to better serve our customers with one Maxar and enhance customer service and responsiveness, better unlock growth opportunities, collaboration and synergies across the business, increase speed of execution, improve employee engagement and retention and reduce our costs. These changes are already in effect and our new teams are ready to move forward to implement our plans.

Please turn to Slide 10. As a result of these changes, we expect to deliver approximately $60 million in cost reductions in 2019, which leads to an annualized savings of more than $70 million. This is in addition to a previously announced post merger synergy target of $60 million to $120 million in run rate EBITDA by the end of the fourth quarter of 2019. We have announced a reduction in force across the business that represents approximately 4% of our workforce. While these decisions are always difficult, we recognize that we need to make Maxar a leaner, more efficient, more effective organization.

We're also announcing that we are migrating fully to the Maxar brand across our businesses to demonstrate and exemplify our more centralized approach as well as to generate cost efficiencies and unify around a single promise positioning and set of values.

Please turn to Slide 11. As previously announced, Maxar's WorldView-4 satellite, built by and procured from Lockheed Martin, experienced a failure in its control moment gyros preventing the satellite from collecting imagery due to the loss of an access of stability. The WorldView-4 satellite is insured for $183 million. Last week, we filed our insurance claim and are seeking full recovery for the loss.

We plan to apply these proceeds toward improving liquidity and reducing debt. We have identified action to replace the imagery collected by WorldView-4 and meet as much of the existing customer commitments and obligations as possible until we have our new WorldView Legion asset in place.

Looking ahead, our investment in the next generation of WorldView Legion constellation has been under way for over two years and we continue to expect to begin launch as early in 2021 or possibly late 2020. Capital for their Worldview Legion program continues to be estimated at approximately $600 million. This next-generation constellation will not only replace the capacities of Worldviews-1 and 2, which are expected to go end-of-life in the early part of the next decade, but it will also provide next-generation technology, capabilities and the configuration that can be used to address current and expected demand from our government and commercial customers.

Now to Slide 12. While our purpose and goals remain unchanged, we are evolving our strategy to meet our goals. We're intensifying our focus on improving capital allocation and capital structure, stabilizing the business to drive profitable growth and changing our operating model to better unlock capabilities and technologies across our business. We will leverage our unique capabilities, including deep customer intimacy with the US and Canadian governments as well as our global international defense and intelligence customers, our world-class talent, our commercial mindset, our unrivaled product quality and AI capabilities to unlock the value in our content, our industry-leading satellite manufacturing capabilities and track record, and finally our worldwide sales teams.

We will reengineer to win satellite business focused on 1300 and 500 buses and programs across commercial and US government, while leveraging our industry leading heritage in robotics to innovate and deliver the best solutions. We will expand our core earth intelligence business with a growing focus on analytics and insights. This will allow us to double down on driving growth of geospatial products and solutions that our customers are seeking. And we will continue to invest in MDA's unique capabilities and identity as a trusted defense partners to win opportunities in Canada and abroad, to align with the approaching large program investment cycle.

Now before turning to outlook in 2019, I want to quickly recap some of our key accomplishments and wins in 2018. We posted significant accomplishments, which include extension of our $300 million per year EnhancedView contract through 2023, renewal of Maxar's Imagery segment's Global EGD contract, and work to integrate our Imagery infrastructure with the US government systems through secured cloud-based system. Our Services business Janus win and the award of the NGA Small Business Innovation & Research Phase 3 contract, successful deployments of Maxar satellites for Telesat, Outer Space 2, Intelsat and Planet. Space Systems built robotic arm on the inside land commencing operations to explore Mars.

Maxar's MDA built laser altimeter of Bennu OSIRIS-REx spacecraft beginning to examine the Asteroid Bennu and completion of US domestication that positions us to win a broader range of US government programs.

I'd like to now turn to our outlook for this year, starting on Slide 13. We expect our Imagery segment to experience a relatively flat year versus 2018 as any remaining lost revenue and EBITDA from WorldView-4 is offset by our growth in our US government business and cost reductions. As a reminder, this business has $1.2 billion in funded backlog and another $900 million in unfunded from the EnhancedView follow-on contract we signed last fall with NRO.

The revenue streams here are highly recurring and come from the legacy EnhancedView program, the annual global EGD contract, which supports over 250,000 users inside the US government. Roughly a dozen international customers using direct to access facilities and over 400 commercial customers.

From a growth outlook perspective, we are pursuing Legion X opportunities as well as additional direct to access facilities, a number of strategic defense programs and dozens of commercial customers, including those in the Global 2000. Importantly, our growth outlook is not entirely dependent on capacity as we also go-to-market with analytics, information products and subscriptions.

Now to Slide 14. in services, we expect low to mid-single digit top line growth and stable margins. We have $246 million in funded backlog and $100 million in unfunded that we expect to convert in future budget years as the appropriators do their work. As you know, much of the activity in this business is classified and difficult to describe in detail. That said, we've listed a few of our few existing major contracts here, including SBIR Phase III and Janus Geography, two program wins we announced in 2018.

The pipeline remains robust in services, including several classified programs related to artificial intelligence and analytics, as well as the army's remote ground terminal program and GEOINT production contract with DHS and international governments.

From a capabilities perspective, we continue to focus on sensor and ground modernization, analytics, production and intelligence, all with an eye toward the GEOINT market across the US government and increasingly the international government market. We continue our efforts to productize our capability set here, which we think will help us drive both revenue growth and higher margins over time.

Please turn to Slide 15. At MDA, we expect a mid-single digit decline in the top line and several hundred basis point move lower in margins as the RCM program continuous to be a headwind this year. That program originally scheduled for a late -- for late 2018 should launch in the first half of this year, which will allow for easier comps in the coming years, that is demonstrating some of the underlined growth opportunities that exist for that business in addition to our growing pipeline.

This will be a transition year for SSL. We'll be pursuing our strategy of taking out costs and restructuring the business decided on our path to both upgrade profitability at lower volumes and to grow again by better aligning products and go-to-market strategy with the opportunity pipeline across both government and commercial end markets and focus on delivering on our commitments to our customers.

Importantly, our space system segment has $935 million in backlog, roughly $525 million of which comes from the eight GEO Comsats in production. Beyond the GEO business, we continue to work on the Restore L, Psyche, OneWeb and Space Station programs.

On the pursuit side, we have a long list of items on the 12 to 18-month horizon, including the Canadian Surface Combatant program, which our partner Lockheed Martin has been awarded. The power propulsion element for deep space gateway and the Canada arm three robotics, Lunar gateway program, which the Canadian Space Agency announced today it plans to pursue. Of course, there continue to be GEO pursuits, the Telesat LEO program and the Legion X programs that I mentioned earlier. And finally as I mentioned earlier, we are pursing several opportunities with the US and other governments that will utilize our unique 500 bus.

From a capabilities perspective, we are convinced there are few companies in the world that can tackle what we can; from communication, remote sensing satellites and radar satellites to ground station, space robotics, components and payloads, all the way to fully integrated defense system for a broad set of missions. As we rightsize and restructure the business, we will continue to execute on the opportunities in our backlog. While profits are likely to improve in 2019, we recognize the work ahead of us is to get this business back to breakeven levels and we're moving forward with urgency.

As I mentioned earlier, we've taken a hard look at SSL in connection with the strategic alternatives review process and we are confident that restructuring and optimizing the business is the best path forward.

Please turn to Slide 16. In closing, with clarification of our new operating model and associated restructuring, our domestication and move to US GAAP reporting, resolution of the GEO Comsat business and WorldView-4 asset and clarity on our business strategy, we intend to move forward and returning to sustainable growth in revenue and cash flows. We see solid underlying demand for commercial and government services in Imagery, robust demand, low capital intensity and margin expansion opportunities for services; and at Space Systems, solid franchises and continued opportunities for profitable growth in Maxar's MDA Canada business.

We are focused on our action plans in delivering commitments to all stakeholders and we'll provide regular updates as we have more information and to report progress. Medium term, we've revised our financial projections to reflect our outlook for growth in all of our business segments. And longer term, we believe our financial outlook for sustainable growth is both realistic and promising.

Now, I'd like to turn the call over to Biggs to provide a review of our financial results.

Biggs Porter -- Executive Vice President and Chief Financial Officer

Thanks, Dan; and good afternoon, everyone. Please turn to Slide 18. Before I get started I want to bring in a number of things to your attention that effect the presentation of our fourth quarter and full-year financials.

To begin with, Maxar became a US company on January 1, at which timeshares of the Canadian company were exchanged for shares of new Delaware domiciled corporation. With this change, we are now a US domestic registrant with the SEC and our conformity to US GAAP standards in our financial reporting. As a reminder, we've followed IFRS standards during their first three quarters of 2018 and issued our financial guidance using those standards. That said, our earnings release and 10-K may initially look slightly unfamiliar to many of the listeners of this call.

In addition to the change in accounting standards, we've also changed our definition of adjusted EBITDA in order to provide a simple view of our financial results. Most notably, we're no longer excluding the expensing of stock-based compensation from adjusted EBITDA. We have provided a set of reconciliation tables and information in the supplemental document that can be found on the Investor Relations section of the company's website maxar.com. It will help investors bridge the changes from IFRS to GAAP.

In my presentation today, I'm going to be speaking to our results of the fourth quarter and for all of 2018 using GAAP standards and our new definition of adjusted EBITDA. I'd also make reference to certain performance metrics under IFRS standards and our former definition of EBITDA strictly for the purpose of comparing our performance on the same basis as we reported the first three quarters of 2018 and issued our 2018 guidance for the year.

Having said that, as a US domestic registrant, we report our financial results in US GAAP and ask that you focus on our US GAAP results for all periods presented in our 10-K. This will be the last call on which we will refer to historical IFRS results in the former definition of adjusted EBITDA.

Please turn to Slide 19, where we present year-over-year comparisons for the fourth quarter on a GAAP standards using our revised definition of adjusted EBITDA. Total company revenues declined 9% year-over-year in the quarter as growth in Imagery and Services was more than offset by declines in our Space Systems segment, with the latter impacted since 2015 by the step down in industry award values for GEO Comsats. The effects of which continue to flow through our revenue line. We also experienced, as expected, a lower level of planned activity on the RCM project for the Canadian government.

This quarter also benefited from four additional selling days from the assets acquired through the DigitalGlobe acquisition.

On an organic pro forma basis, revenue declined roughly 10% in the quarter, driven by the roughly 34% decline in revenues associated with GEO and RCM. Revenues without these items increased roughly 1% year-over-year in the quarter.

Fourth quarter adjusted consolidated EBITDA margins, using our revised definition of EBITDA, declined 400 basis points year-over-year, driven largely by a margin decline in our Space Systems segment, where an increase in estimated cost to complete programs and an accrual for liquidated damages for anticipated schedule challenges created both quarter-over-quarter and year-over-year headwinds. I don't want to go any further without commenting on our fourth quarter US GAAP EPS which was a loss of $16.10 versus a gain of $0.99 a year ago.

The decline was driven largely by several impairment to partially offset by a gain on the sale of a building in our Palo Alto manufacturing facility. The initial impairments we've recorded in the fourth quarter were driven by our sustained low share price during the quarter. Under US GAAP, well, there is a sustained significant difference between market valuation on book basis and impairments to the book basis is implied. So this impairment should not be seen as a suddenly different internal view of the business as much as it is a reflection of our market cap. As a result, however, we recognize $636 million in goodwill impairment.

We also recorded a further impairment charge related to our SSL business of $116 million as a part of this overall analysis to bring our carrying values more in line with our market cap. Given the declines over the last year in the GEO business that have seemed a logical target when we look to bring our book basis in line with the market.

Additionally, we recorded a $162 million impairment related to the loss of our WorldView-4 satellite, that Dan mentioned earlier. This amount differs slightly from the $155 million expected impairment, we mentioned in our January set of the press release about the likely loss of the satellite. Difference between the two amounts relates to additional insurance premiums that will need to be paid prior to the settlement on our policy and additional capitalized assets associated with the satellite. We cannot book the offsetting insurance recovery until it's further along in the claim process. We expect that gain and the related proceeds this year.

Finally, we recorded $33 million gain on the sale of the Palo Alto facility. We've generated roughly $70 million in proceeds that we used to pay down debt.

Please turn to Slide 20. On a full year basis, revenues increased 31% year-over-year, driven by the DigitalGlobe acquisition offset by Space Systems or the GEO Comsat and RCM businesses continued its headwinds. On an organic pro forma basis, revenue declined roughly 7%, driven by the roughly 26% decline in revenues associated with GEO and RCM. Revenues without these items increased roughly 4% year-over-year in 2018.

Adjusted EBITDA margins, again using US GAAP based results and our revised definition of adjusted EBITDA, increased 700 basis points versus 2017, driven by the DigitalGlobe acquisition and partially offset by the margin decline in Space Systems.

As discussed at the beginning of the presentation, if we compare our historical results presented in IFRS to our year-end performance on an apples-to-apples basis and using our former definition of adjusted EBITDA, we closed out the year with segment margins of 29.7% versus our guidance of 32%. Once again, the Space Systems segment was a primary driver of the underperformance.

On US GAAP basis, adjusted EPS loss was $21.76 for the year compared to a positive $1.41 in 2017.

Totaling the fourth quarter and the full year, there are several impairment charges as outlined here on the slide in part offset by the gain on the sale of the Palo Alto building.

At SSL, total impairments and inventory obsolescence charges totaled $331 million for the year, including $122 million in intangible, $121 million in PPE, $66 million in inventory and $22 million in overalls (ph) gross, given a higher expected cost of service.

Once again, comparing our full year results to our historical results presented in IFRS and using our former definition with adjusted EBITDA on an apples-to-apples basis, we posted adjusted EPS of $3.47 versus our 2018 guidance of $4.05 to $4.10. The misrelativity of the guidance was largely driven by the Space Systems segment.

I'll go into details of segment performance later in the call. Importantly, we're providing this information to our historical IFRS results, so that investors can understand how we finished out the year relative to our 2018 guidance expectations, which were previously presented in IFRS. We will not refer to these metrics going forward. As a US domestic registrant, we will present our results in US GAAP and may encourage listeners to focus on the US GAAP metrics we have disclosed today in our earnings release and we'll continue to disclose as a company in the future.

Backlog, including unfunded awards, finished roughly flat for the year, reporting a book-to-bill of roughly 1 times. The burn of Space Systems backlog was offset by growth in Services and Imagery, latter of which benefited from the $900 million EnhancedView follow-on contract signed with the NRO that extends out to 2023. Please note that this contract is part of the $1 billion in unfunded backlog we reported today.

The remaining $100 million is associated with the Services segment. We expect the unfunded amounts to move to funded backlog as Congressional appropriators authorize spending on these multiyear contracts closer to the periods at which the work will be performed.

Please turn to Slide 21. On the US GAAP basis, imagery segment revenues were up 6.5% year-over-year, driven by growth in the US government and by the inclusion of revenues that DigitalGlobe transaction, which added four additional selling days in the quarter. Organically on a pro forma basis revenue was up roughly 3% year-over-year. Adjusted EBITDA margins for the segment decreased to 57.3% from 63.5%. The decrease is primarily related to revenue mix and higher cost during the quarter, down which were one-time in nature relating to a legal settlement.

On a full-year basis, revenue increased roughly $615 million. driven by the inclusion of the DigitalGlobe acquisition; while margins declined 19 basis points, driven largely by mix and the charge for legal settlement. Once again, comparing our year-end results to our previously disclosed results under IFRS and our former definition of adjusted EBITDA for comparability we finished the year at 5% growth on a pro forma basis versus our expectation of 6% growth. While EBITDA margins finished at 63.5% versus guidance of 64%, slight miss was driven largely by a push out of some revenue to the first quarter of 2019, mix and higher costs including the legal settlement, I mentioned earlier. I referred to higher costs a couple of times with respect to the Imagery segment. These were fairly temporary in nature in the segment and have been offset by cost reductions going in place in 2019.

Please turn to Slide 22. On the US GAAP basis, Space Systems experienced a 17% fourth quarter year-over-year revenue decline as growth in our US government and commercial SmallSat businesses more than offset by the decline in the GEO Comsat business and the Canadian RCM satellite program. This quarter was also negatively impacted by an accrual for liquidated damages, additionally EAC adjustments and the impacts of lower volume at our Palo Alto factory, which resulted in high turnover, reduced productivity and overhead resource. An increase in estimated cost to complete directly impacts revenue. As revenue is recognized over time under the cost to cost method.

As Dan mentioned earlier, by clarifying our path forward for GEO and SSL, we're taking positive action for this turnover and improved results.

Full year revenues declined by 11% for the segment overall, driven by declines in GEO and RCM program offset by growth in other parts of SSL and MDA. As I mentioned earlier, GEO and RCM were down 26% in 2018. Without these two items and the intercompany revenues associated with Legion program, Space Systems grew 8% year-over-year.

Fourth quarter adjusted EBITDA margins declined to a loss of 1.9% from positive 6.5% a year ago, driven largely by the project impacts that I just mentioned. Q4 of 2017 also benefited from a higher level of program leases at MDA as a result of hitting certain milestones, thus making this a tough year-over-year compare.

Full-year margins are also lower for similar reasons. Once again, comparing year-over-year results to our previously disclosed IFRS results for comparability, this segment posted 11% year-over-year decline in revenue versus our guidance of down 9% and margins finished the year at 7.5% versus guidance of 12%. Again, this miss was driven largely by the declines at SSL.

Please turn to Slide 23. On a US GAAP basis our Services business posted roughly 8% growth versus fourth quarter of 2017, driven by ramping revenue streams on recently awarded contracts, primarily with the US government as well as the inclusion of the DigitalGlobe acquisition, which added four selling days in the quarter. Pro forma organic growth was over roughly 10% in the quarter. Full-year revenues of 2018 increased largely as a result of the DigitalGlobe transaction.

Adjusted EBITDA margins in the quarter were 8.8% versus 15.9% on a year ago period as mix favored more cost plus programs versus GEOINT protection work and also due to an adjustment -- to pension expense in the fourth quarter. Adjusted EBITDA margin for full year 2018 was 9.4% compared to 16% in 2017. Decrease in margin percentage reflected the blend-in margins from DigitalGlobe's services business for a full year as compared with only approximately three months in 2017.

Once again, comparing year-end results to our previously disclosed IFRS results for comparability, this segment posted a 2% year-over-year growth in revenue on a pro forma basis for the full year versus our guidance of up 4% and margins finished the year at 11% versus guidance of roughly 12%. While we experienced robust sequential growth from the third quarter, given new program awards in the second half of the year, we are still in the process of ramping up those new projects to realize our full revenue potential. And I mentioned earlier, margins in the fourth quarter were negatively impacted by mix and a pitch-in adjustment, the combination of which drove the delta with our guidance.

Please turn to Slide 24. On the US GAAP basis, cash flow from operations for the year was $139 million, while CapEx or the cost of purchases and developed intangibles was $218 million. Remember that all R&D is expensed under US GAAP and is an outflow of operating cash. Once again, comparing year-end results and IFRS to our previously disclosed IFRS results for comparability, our adjusted operating cash flow was $281 million for the year versus our guidance range of $300 million to $400 million. Our performance was negatively impacted by the government shut down in the US, which led to a delay in some of our December payments. The government is now open and we have since received those funds. At (inaudible) our adjusted operating cash from ops would have fallen within our guidance range.

On our IFRS basis for comparability to previously issued IFRS results, CapEx and capitalized development came in at $291 million versus our guidance range of $300 million to $325 million. In addition to the cost challenges SSL experienced to this fire issues, turnover and impacts of lower business base, it was easier cash in 2018 due to the point they are in the cash curve on projects where cash is positive upfront then turns negative and recovers in the end as final milestones are achieved. Free cash flow in 2018 at SSL was used for an approximately $95 million, largely as a result of the circumstance. SSL will continue to be user cash in 2019 as this trough will continue for another year and 2019 will also be affected by retention and cash restructuring costs has we stabilized the business and positioned it for the long-term opportunities in the government sector we referred to earlier.

Please turn to Slide 25. We finished the year with consolidated net debt of a little over $3 billion, up modestly from the beginning of the year. Our bank to fund leverage ratio ended the year at approximately $4.2 million, up roughly a-three of the term for the end of last year given lower levels of trailing 12-month EBITDA, again largely as a result of weakness in the Space Systems segment. That said, we are well within our covenants. We have roughly $672 million liquidity at the end of the quarter via a combination of cash on hand and our revolver. We have no maturities until October 2020. There were some confusion on our leverage ratio on the debt covenants after our third quarter call and we thought it would be helpful to provide context. As you know, our credit agreement allows us to use IFRS accounting principles in calculating leverage for the purpose of covenants.

Looking at the quarterly run rate and our EBITDA for covenant purposes, we direct you to the $91 million of EBITDA we would have reported on IFRS basis for Q4. This data can be found in the supplemental information document we posted on our website earlier today. What we're trying to do here is bill to quarterly EBITDA numbers that represents a better run rate for covenant purposes, which means there are several items you need to add back to that $91 million.

To start, we accrued $18 million of liquidated damages in the fourth quarter. While we don't expect these to repeat you should note that the liquidated damages are excluded for the bike (ph) test. We also incurred roughly $27 million in the EAC adjustments in our Space Systems business during the fourth quarter that we do not expect to repeat. You would also have to add back three things which the covenant adjust for: iRAD or R&D; cost savings, which the covenant adds in on a run-rate basis; and ITCs, investment tax credit, on a more normalized run rate that what we posted in Q4.

The value-add for these three things is approximately $22 million. We don't have to normalize for the prospect to allow us some earnings on WorldView-4, because those have been effectively offset prospectively by cost savings. So you rolled those -- all those together, you get Q4 run rate closer to $158 million. If you did annualize that number by -- multiplying by 4, you get to $632 million of EBITDA, all without allowing for growth in any of our businesses in Q4 levels.

If you get to a similar numbers, if you use our guidance for 2019 and adjust for IFRS GAAP differences and the other bank adjustments. At that level of EBITDA, you get a leverage ratio of well below our covenant ceiling of 6x and a quarterly we have room for some variation in cash flow and earnings. I hope that all makes sense and you find this exercise helpful.

Please turn to Slide 26. Turning to guidance. Dan already walked you through our high-level thoughts of the top line and margin rates for the most of the business. We're going to refrain from providing specific guides for SSL given all the moving pieces related to our restructuring and repositioning efforts for that business. That said, I want to provide with you a few building blocks to help you with your modeling.

At this point, we expect adjusted EBITDA for Imagery Services and MDA businesses to exceed $550 million net of corporate expenses this year, driven by a flat outlook for revenue and EBITDA on Imagery, modest growth and flattish margins and services and a modest revenue decline in several hundred basis points of margin compression, driven by mix at MDA. This EBITDA guidance does not include the gain we expect on the WorldView-4 insurance claim. That is additive to the bottom line.

At SSL, we expect profitability to improve, although the roughly $80 million EBITDA loss that posted in 2018. However, as I said earlier, cash flows, which were roughly negative at $95 million, are likely to be a headwind in 2019 given the timing of milestone payments and cash restructuring charges. I will say that although this is a headwind, they are better than what we would have expected and a wind down of the GEO Comsat product line.

We 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 on this project should decline if we move closer to that date. We expect depreciation and amortization of roughly $410 million this year, which includes the amortization of purchased intangibles. We've included the amortization table for purchased intangibles on this slide to help you with your modeling.

Interest expense is expected to come in at roughly $210 million this year and we're forecasting a roughly 0% effective tax rate due to the benefits of our NOL carry forwards and ITCs. The diluted share count should come in at roughly $61 million. And as I discussed earlier, our credit agreement allows us to convert our GAAP financials back to IFRS for the purposes and compliance with our covenants, which will generally lead to a higher level of EBITDA, most notably these are R&D expense and investment tax credits.

We also have the ability to add back several items to the leverage calculation, including stock compensation, which we now deduct from EBITDA and the expected benefits of restructuring efforts in cost savings. This is already noted, complicated and will vary based on the expenses embedded on our US GAAP numbers, but these add backs can approach $100 million. To role all of the factors embedded in our guidance with these we items, we expect our leverage ratio for the purposes of our debt covenants to end the year well below 6x.

As one final note on guidance, although we do not give quarterly guidance, we do expect the first quarter to be lower than the succeeding quarters of 2019. This is because WorldView-4 became inoperable at the first of the quarter, but the cost savings and our mitigations which offset its loss for the year do not substantially kick in until the second quarter.

Lastly, here I want to draw your attention to the accounting treatment of our existing EnhancedView contract. As we disclosed in the past, we've recognized both deferred revenue and imputed interest no this contract, given the fact that the company received more cash than US government in prior periods and revenue -- the revenue service it was able to provide. This is a required treatment under US GAAP. We provided a table on this slide that details of our main deferred revenue and imputed interest that we've recognized on this contract over the next several years. Importantly, the initial EnhancedView contract ends at August 2020, after which we will stop recognizing revenue related to deferred and imputed interest balances associated with the EnhancedView. Also please note that these revenue streams have no material costs associated with them and these revenues fully count in our leverage metrics.

Finally, I want to point out that our Form 10-K will be filed tomorrow morning and includes a note from IR flagging a material weakness in our internal controls over financial reporting, this is largely attributable to the amount of change being managed in 2018, our first year under SOX requirements. We have initiated remediation. More stable 2019 alone is going to rectify much of the underlying conditions that led to this item.

Importantly for auditors who completed their subjective work on our financial statements and will issue a clean opinion of the financials in our 10-K, we just file before the market opens tomorrow. We believe our financial statements are accurate and all material aspects in D&A are signed off given our confidence in them.

Now before handing it over to the operator for Q&A, I just want to say that I recognize that we have thrown a lot of changes in investors with this release, particularly the move to US GAAP and our revisions to our definition of adjusted EBITDA. I regret that this is going to create some work for all of you, but this was a necessary step and believe that these will provide better clarity on our financial performance going forward.

We recognize we covered a lot of details on the call and we're available for a follow-up in the coming days to tie out any loose ends as you make your way through all of the data. As such, I will encourage you to use of the time we have for Q&A to address bigger picture strategy comments. We can clear up all the detailed numbers questions related to the various changes in an offline conversation.

So, with that, I'd ask the operators to remind listeners how to queue up for a question and to please open the line. Operator?

Questions and Answers:

Operator

(Operator Instructions) Your first question is from Thanos from BMO Capital Markets.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi. Good afternoon. So this isn't a big as your strategy question, but it's an important topic. You didn't provide the cash flow guidance for 2019. Obviously, you gave us some directionality on CapEx. But as we try to put together our cash flow forecast, some additional color would be helpful. Maybe perhaps in terms of working capital swings, you mentioned that SSL would be a consuming capital again. Anything of note we should think about in terms of working capital swings and the other parts of the business and any sort of magnitude you can give us in terms of cash consumption we might look for and this is all this year?

Biggs Porter -- Executive Vice President and Chief Financial Officer

So SSL, as I said was, I used our last year to expect it to be -- in a bigger user this year, a little deeper in the trough on that cycle before they get to the final milestones on projects that will start to turn in 2020. We're also making some level of investment there to stabilize the business and to set it up for longer term success particularly in pursuit of all the government opportunities we see out there.

Having said that, as I said before, that's going to be less use of cash than we would have in a wind-down scenario. So SSL from a working capital standpoint and from an investment and restructuring kind of standpoint is going to be a bigger user this year, but we're not putting -- we're not giving guidance literally on it, because it -- there are just a number of variables in there that we want to see play out.

CapEx this year will be higher because of the Legion project and really if you look back, it's -- look at the GAAP numbers, it will be fairly apparent that Legion will be ramping up this year, because the GAAP CapEx was $50 million in 2017, $156 million in 2018 and Legion, as you know, is a $600 million program. So we were one year into it. There's a lot of spent left and this year is the peak spend on that.

Once again, we're not literally giving guidance there, because I think that there are some things we're still going to be looking at from the standpoint of managing CapEx, so it's a little early to project an exact number for this year.

The flipside, insurance proceeds you need to factor in $183 million that's our expectation based upon what we believe our entitlement is. As I said, we do expect that this year, so that, if you will, is the positive, it is an offset to our considerations. Our restructuring and retention costs are probably higher this year, but as I said -- but we're spending our -- it's applied -- what we're spending in restructuring and retention is more than offset by all of the improvements we're going to get this year and on annualized basis going forward and all the savings activities that Dan referred to. So that's -- I mean, that's a long-winded answer. There's not total precision in -- on each element that I've given to you, but that gives you some ideas in terms of what our thoughts are.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

In light of the -- given the insurance proceeds, if we factor that in, should we presume that ultimately you'll be free cash flow positive in 2019, or no comment on that?

Biggs Porter -- Executive Vice President and Chief Financial Officer

Yeah. I would not make that assumption. I think that it's a positive, but there's enough other pressures from SSL and CapEx that we're going to see how it plays out. We're literally guiding at this point in time.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Okay. And then just to clarify on the SSL, presumably when you have contracts that are expected to be losing money, you take loss provision upfront and presumably you've been doing that, but nonetheless we should expect SSL to be a source of ongoing operating losses in 2019 is kind of what I'm hearing?

Biggs Porter -- Executive Vice President and Chief Financial Officer

Well, I think, as Dan mentioned, we're trying to drive it toward breakeven. We're not saying we're going to get better in 2019, but I think that there is a substantial opportunity to make it better. Let's put some context, the charges in '18 as the ones were we pulled the lot of things in. We, among other things, pulled future spending on R&D associated with similar projects into the EACs on those projects and it took a penal hit for them in 2018 putting those behind us, that was really a part of moving the GAAP. So I think that we have done a lot to go and capture the forward risks and problems. We certainly did our best to capture anything new and could quantify and that was probable and put that behind us.

So we really derisked, I think, considerably what we otherwise might have worried about with respect to the promises to sell both by doing what we did from an accounting judgement point on our GAAP, but also based upon what we're doing to stabilize the business. A lot of the challenges in the business have been associated with not just the fundamental decline in the base, but also the uncertainty in the environment. Attrition went very high in the fourth quarter, so we're acting to mitigate that. We're obviously telling people, at this point in time, we're committed to the business, we're going forward. Our retention plans, we're putting in place. We're investing in the business. So all that is a part of stabilizing and driving to what we think is a great long-term value for that business, giving everything we understand about the opportunities that are there now.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Fair enough. One last one for me. In terms of the WorldView-4 failure, presumably we've been doing -- some amateur failure, is there anything with respect to that failure that might have implications for the other WorldView satellites or getting informed whether it was something specific to that satellite that you can recap on the other ones?

Daniel Jablonsky -- President and Chief Executive Officer

Thanks, Thanos. This is Dan. We typically don't comment on the particulars of the satellite. There's competitive and regulatory reasons for doing that. I guess, I just say, the other satellites are operating well. They're on the 98% to 90% on overcapacity -- capabilities that we're expected to deliver on and we monitor the health of those at all times and we don't -- haven't change the lifetime on any of those assets. I guess, I just make the note too that we've identified many of the offsets for 2019 in terms of revenue sustainability and that Legion always has represented replacement in growth potential for us. So, we're well under way in a very capital efficient way to replace the capacity that we lost there as well as to provide more resiliency for the constellation as we do the capacity replacement eventually for WorldViews-1 and 2.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

And just to clarify your guidance for inventory 2019 is for flat revenue, I believe you said, which is better than I would have though, so is it just a function of the amount of capacity you are able to replace WorldView-4 on to the remaining satellites?

Daniel Jablonsky -- President and Chief Executive Officer

It's actually a number of factors. And I think it really points to the resiliency of this business. The first is that the US government is an anchor customer of ours and a long time mission partner and we continue to see upward trajectory in our growth with them. We had strong growth heading into 2019, so with the loss of WorldView-4 we still see some growth and we also continued to privatize and increase our subscription revenue under the business, which is not as one-time capacity dependent. So I think what you'd also see in the numbers as we've taken -- undertaken some aggressive cost cutting actions in the imagery portion of the business and we're also confident we'll be able to unlock more growth with the reorganization with the DigitalGlobe and Radiant capability. So I think, yeah, kind of flat this year, which is I think a really good outcome having lost the satellite and we're building that business for long-term sustainable growth as well.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Thanks a lot.

Operator

Thank you. Your next question is from Stephanie from CIBC. Stephanie, please go ahead.

Stephanie Price -- CIBC World Markets -- Analyst

Good afternoon. With the rightsizing of the GEO business, do expect that you could sell an additional part of the Palo Alto facility? And can you talk about the magnitude and timing of that potentially?

Daniel Jablonsky -- President and Chief Executive Officer

So, we -- obviously we sold $70 million worth of the property there. It really was the highest value property from our per acre standpoint. So that, I think, was an important deleveraging move on our part and to free up cash and capital. The remaining facility, some of it is leased. We're going to try and reduce our lease space in Palo Alto as part of rightsizing it. The core facility, it's possible as a financing transaction that we could do a sale leaseback, but if we did that it will only be on the basis that enabled us to stay in there for the long-term.

I go back and our estimates of the total value we could get out of real estate there if we sold it all or engaging the sale leaseback was $150 million to $200 million, I should capture $70 million through the one action. So, yes, there's presumably some let that we could do through a sale leaseback. It could be something presumably we can get done over the next year or but if we do that it would be only on the basis that we protect our ability to stay in there for the long term, because I go back to -- there's a lot of opportunity in this business, we see an awful lot of value in having an integrated facility there for both the 1300 and the 500 bus and there is a lot of potential for use based upon what we see as a market for the 500 bus, even if the 1300 bus is running at a relatively low-level.

Stephanie Price -- CIBC World Markets -- Analyst

Okay. And then in the GEO business, can you walk us through the supplier issues and how long you expect them to last?

Daniel Jablonsky -- President and Chief Executive Officer

The supplier issues that we had were once that really go back to the second and third quarter of last year and they created, there's some hangover effects because they created delays but the issues themselves I don't believe are creating new problems.

Stephanie Price -- CIBC World Markets -- Analyst

Okay, great. And then in terms of the slide deck, you mentioned further alternatives for deleveraging, can you walk us through that a little bit further?

Biggs Porter -- Executive Vice President and Chief Financial Officer

Well, first of all, as we've said in the past, we're obviously very committed to delevering, still planning on the CapEx holiday, talked about the Legion CapEx spend a minute ago. Once that's complete and those -- that constellation goes in a service in '21, we should be back to, if you will, more normal or normal levels of CapEx spending and we'll be able to stay there for a period of times. That CapEx holiday still creates a deleveraging opportunity for us that we plan to take advantage of. We are focused on the cash flows Space Systems. We will get past this trough on these projects that are a drag on cash in 2018 and 2019, 2020 will improve. We're also driving performance there as we talked about and getting the things stabilized and capturing new business that we said as opportunity. So that's going to improve cash flow to what it was in 2018 and what we expect in 2019. And, of course, we're driving other aspects of the business, but to go beyond that, all alternatives will be under consideration, because we are very focused on driving down leverage over the long-term.

Stephanie Price -- CIBC World Markets -- Analyst

Okay. Thank you very much.

Biggs Porter -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Your next question is from Steven from Raymond James. Steven, please go ahead.

Steven Li -- Raymond James -- Analyst

Thank you. On the -- is there any opportunity for orbital securitization in 2019?

Biggs Porter -- Executive Vice President and Chief Financial Officer

So we obviously worked on orbital securitization in 2018. We did get $18 million done. We tried diligently to get more done. The challenge with orbitals is that we cannot unilaterally go and securitize those. Our customers have to give us consent and that's just proven to be a challenge. So we won't rule it out, but we're not going to build in a near term expectation on at this point in time. We will consider that to be upside.

Steven Li -- Raymond James -- Analyst

Okay. That's helpful. And I might have missed this, but how should we model Space Systems for 2019 revenue and margins? I heard you on MDA, but I didn't hear for the Space Systems group?

Biggs Porter -- Executive Vice President and Chief Financial Officer

Yes, we didn't address the entire Space Systems group, because we think SSL is in a fairly transitory state, if we talked about, and don't think it's appropriate at this point in time for us to give guidance. So, we're just going to go to work and improve that business and communicate as it goes.

Steven Li -- Raymond James -- Analyst

Okay. And then last one for me. Did your expectations of the size of the revenue last from WorldView-4? Did that change with the capacity offsets there that you've been able to find?

Daniel Jablonsky -- President and Chief Executive Officer

No, as we publicly said, we expect to be able to replace $10 million to $15 million worth of the capacity through trade. We will of course continued to seek to find more, but that's it. That's a good number for now, but with the other things that we've undertaken as well as the resiliency and the other pieces of the business have led us to conclude that It's relatively flat for the year.

Steven Li -- Raymond James -- Analyst

Okay. Thank you.

Daniel Jablonsky -- President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) Your next question is from Robert from Credit Suisse. Robert, please go ahead.

Robert Spingarn -- Credit Suisse -- Analyst

Yeah. Hi. Good afternoon.

Daniel Jablonsky -- President and Chief Executive Officer

Good afternoon.

Robert Spingarn -- Credit Suisse -- Analyst

Dan, I wanted to understand better what the various suitors that we're looking at SSL failed to appreciate that you guys see?

Daniel Jablonsky -- President and Chief Executive Officer

Thanks, Rob. Without getting into a long list of details about the bidding process, what I'd tell you we saw and what I've seen is as we undertook the strategic review was that we actually have a real world-class asset in Palo Alto and in the San Jose operations, decades worth of heritage, key technologies, an employee base that is technologically advanced and just sort of world-class in how we think about it. I also spent a lot of time with our customers. I went and visited with many of them and heard from all of them and got really, really good feedback in terms of their analysis of the SSL capabilities, heritage, employees, their confidence in the results that they churn out and their technology capabilities.

And so that was kind of the underpinning part. And then as we dug into the 500 kilogram pipeline, including the Legion's and other capabilities that we have, it was more robust than we initially thought. And as we combine the 500 and the 1300 together in a common sort of platform, that -- it's just really a lot stronger together, so we had that view and placed a lot of value on it and for the bigger process what it warrants. So what this does though is, it derisks the business. We got to find a fix that's going on there. We preserved the valuable land in orbitals and we'll be a positive contributor over time.

And just to kind of put a cap on it, we really looked at all the alternatives including the wind-down scenario and the sale and the best and highest use in order to maximize stakeholder and shareholder value was to pursue this strategy we are. And we're very confident in that strategy and our ability to run it. That's not going to -- that's not to say it's going to be easy, but we do feel confident in the path.

Robert Spingarn -- Credit Suisse -- Analyst

So clearly you've got a world-class operation there, your customer recognizes that, but it doesn't necessarily address the volume issue. How do you think about the pipeline, whether we'r