OA
#Yes, hi, <UNK>.
Yes, at this point, we are trying to take a fairly conservative outlook for all future periods, including the second half of the year.
If things go according to plan, with not only the CRS contract, but maybe some others, there could be some upside.
But until we're certain that events in the business justify that, we'd like to stay a bit on the conservative side.
We haven't specifically, well, I won't break out the numbers, but one was with a ---+ Rolls-Royce on engines and composite structures for aircraft engines, and the other was a military program.
Yes, sure.
Let me just go through those one by one.
Let me start with ---+ I'll start with the satellite, the in-space satellite servicing project that we discussed earlier in the year.
Our space systems group, early in the second quarter announced a five-year contract with Intelsat as the first customer for this satellite servicing system.
Late in the second quarter, we completed a first system design review and placed long-lead material orders for the first of these satellite servicing vehicles, which is on track for delivery and launch in the final quarter of 2018, and after a check-out period, the commencement of service in early 2019.
Schedules, cost and technical performance are proceeding as planned on that project at present.
In our defense systems group, we, at the beginning of the year initiated a three-year three-step research development program to develop and produce advanced ammunition, particularly medium caliber ammunition.
In the first half of the year, we started testing, and in the second quarter continued with demonstrations of an initial version of a 30 millimeter airburst round, that works in conjunction with our own market standard medium caliber gun systems.
Also in the most recent quarter, we began detailed technical discussions with various military customers and industry partners, covering some of the work related to platform integration and related topics for this new generation of advanced ammo.
And then finally, in the flight systems group, the Company and the Air Force continued to work in the first phase of what might develop, as a four year long joint development program aimed at fielding a new intermediate and large class launch vehicle.
Our investments this year, which are being strongly supplemented by the Air Force are focused on the initial design and early development work.
And in the second quarter, we completed the vehicle's core preliminary design review in June.
A joint Air Force and Orbital ATK decision about moving the program into full development is expected in mid 2017, based on our progress between now and then, and a variety of other factors.
Well, let me start at a general level, and then I'll ask <UNK> if he wants to add any specifics.
Looking at both the ending balances in 2015, and also total working capital at the end of the first quarter of this year, the metrics there clearly indicated some room for improvement.
Part of our longer-term cash flow outlook is based on improving receivables in particular, and we saw some progress in that regard this quarter, but we still have a ways to go.
So there are, in the second quarter, the space system segment made the greatest progress in that regard.
And as we look out to the second half of the year, we expect to see, not only more progress in that segment, but also in the other two parts of the business.
And I think that will continue to be a theme that we'll talk about next year, and probably well into 2018.
I would just add to that, <UNK> and myself are leading this effort, on behalf of the executive management to reduce unbilled receivables.
And looking at details of it, and what actions we can take to monetize them, looking at potential contract terms that we've agreed to in the past, that don't enhance the ability to generate free cash flow.
So it's a process that is moving, and it will take some time.
But I'd say in the first 12 months, and we started it, it was a couple of quarters ago, a quarter ago, I guess to say, to be exact ---+ we're targeting to take out $100 million, and to move on from there.
That is not the endpoint.
We believe that the way that our contracts are structured that we can improve that.
And also bring management focus to hitting milestones, and ensuring that we're turning the receivables and improving that.
I would just add to that, <UNK>, that coming off, using our March quarter ending balance sheet as a baseline, over the next couple of years, we're targeting to reduce days outstanding on receivables by almost a factor of 2.
Well I, this is <UNK>.
We believe that we are conservative, we want to be conservative.
We don't want to be unrealistic, in terms of what we're talking about.
But this is a 10 year contract and the way it works, is there are delivery orders.
The first seven are set to be executed over time.
We're in delivery order number four right now and as we go from four, five, six and seven, there is a point there at point ---+ at delivery order seven, where the customer, the DoD US Army has a decision whether they are going to go on to eight, nine or ten.
And they can say, we don't want to go on for next three delivery orders, or we want to go on for one, or two, or all three ---+ or none.
Our assumption, which I think is a good one, is that they are want to go on to all ten orders.
This is an attractive fixed-price contract to our country, and I believe that it will go on through that period of time.
So every year we're producing somewhere in the order of $225 million to maybe $250 million in revenue over the 10 year period.
So when you look at it over 10 years and you look at the charge, it gives you a little more sense of a contract that is $2.3 billion, and we do believe it will be executed over that time.
The fixed-price contract, the largest single component in that is the material, which is brass and zinc which translates to ---+ the metal that is used, brass in the bullet.
That is pretty much fixed.
So the latitude that we have is labor costs and overheads and the like, so there's not a lot of room to move on that.
The contract also has the additional aspect that, from the first delivery order through the tenth delivery order, the price drops each time.
So the price on each delivery order decreases through the last delivery order on ten.
So it's a tough contract.
Our people have worked very hard to improve the profitability.
We will continue that, by the way.
The fact that we set up a forward reserve, is there for good accounting, but from a management standpoint, we will continue to attempt to reduce costs and improve efficiency at the facility.
<UNK>, do you want to add to that.
You're welcome.
And <UNK>, this is <UNK> <UNK>.
We do not have a balance sheet to discuss with you today.
We will, when we file our 10-Q, but we do not have that here with us today.
So that's ---+ it is not possible to give you an exact number.
Yes, I think that's fair.
We have been up around 150 or a little higher.
We would like to be below 100, exactly how much we can ---+ below we can go and when, we'll have to see, but we'd like to be below 100.
I think, in unwinding the two receivables, we talk about regularly, CRS and A350, then we'd like to get the underlying business more, what you'd think of as industry normal for a working capital as a percent of sales.
Hi, <UNK>.
Well, let me handle the first one.
This restatement involves only the US Army small caliber production contract, not the commercial ammo production that we do for Vista, or any other smaller work we do in areas like non-standard ammo and so on.
So typically, the small caliber systems division which is based at Lake City, is about a $600 million per year business.
The Army small caliber contract is about $250 million, and all of the other activities with Vista, nonstandard ammo and so, round out the rest of it.
So this effects just the Army contract.
And <UNK>, this is <UNK>.
There's two answers to your question.
One from an accounting standpoint, it will be a zero margin, there will not be a loss.
So we are accruing for that now, and over each quarter and each year, it will not show any loss, because the reserve will offset, to the extent that the embedded loss is there, that we are setting up in FY15.
On an economic standpoint, there is negative cash flow, which we can tax effect, and when you do that, it's about $25 million to $30 million a year going forward.
And to the extent that we've incurred losses up to the current point, we can go back and amend our tax returns, and there will be a tax benefit that will come through to us, which would offset part of this negative cash flow that I am talking about.
Yes, you're right, Mike.
It's really timing.
I mean, typically they're within the first say, 90 days of contract award, they're a couple of major milestones that are scheduled.
Once those are completed, payment events are triggered.
With the second order not yet in hand, and right now assumed not to be booked until the fourth quarter, we won't have an opportunity to fully accomplish some of the early startup milestones, that might have been possible had we booked things earlier in the year.
So, yes, that is mostly timing.
Only if it was really to slide way into the winter.
Okay.
Thank you.
All right.
With that, we will bring this morning's call to a close.
Thank you for joining us today, and we look forward to speaking with you again, when we report our third-quarter 2016 financial results.
So this concludes today's call.
Thank you.
