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22 Feb 18. Rebranding: Bell Helicopter drops ‘Helicopter’ from name.
Bell Helicopter is dropping “Helicopter” from its company name to reflect that it’s more than just a chopper manufacturer, according to a Feb. 22 company announcement.
And with that change, Bell has a new logo.
The name change shows the company’s evolution from a helicopter company into something broader and more innovative. Bell doesn’t want to just be seen as a helicopter company but as a company that is redefining flight.
“Bell has always been about more than just helicopters,” company president and CEO Mitch Snyder said in a statement. “Our team has spent the past 80 years pushing the boundaries of flight and now we will accurately reflect that quest.”
The new logo features a dragonfly on a shield. “The dragonfly can take off and land wherever it wants, fly quickly and efficiently in any direction, and hover at will. It represents the mastery of flight, something Bell strives to achieve,” Snyder said. (Source: Defense News)
22 Feb 18. BAE upbeat on Typhoon fighter jet orders but expects flat earnings. Britain’s largest defence group enjoys rise in underlying sales and cash flow. BAE Systems has signalled optimism for orders for the Typhoon fighter jet even as it warned of flat earnings this year. Charles Woodburn, chief executive, said prospects for new Typhoon orders were “as good as I have seen in the last two years and possibly as good as they have been in quite some time. Landing one, two or three of those orders out there certainly puts us back into growth in Typhoon over the next decade.” Mr Woodburn announced a 4 per cent increase in underlying annual sales and a strong jump in cash flow at BAE, Britain’s largest defence group. The comments will reinforce an increasingly optimistic mood about prospects for a long-awaited order for 48 Typhoon fighter jets from Saudi Arabia. Several people close to sales discussions said in recent weeks that progress was being made though timing was uncertain. Belgium is also looking at the Typhoon and the Rafale, its French rival. The upbeat assessment will reassure employees at BAE’s aerospace sites in Lancashire, where the Eurofighter Typhoon is assembled. Recommended Fabrice Brégier bows out after dogfight at top of Airbus German armed forces in ‘dramatically bad’ shape, report finds 5 concerns for UK-EU defence after Brexit Barely four months ago, the new chief executive announced 1,400 job cuts in BAE’s aerospace division, in part due to the slowdown in Typhon production and in the absence of significant new orders or another air combat programme. Since then, however, BAE has secured a £5bn contract from Qatar for 24 fighter jets, securing production to the mid-2020s. This week the UK government also committed to developing a plan for a combat air programme, although the details and timing remain to be established. Mr Woodburn, announcing his first annual results as chief executive, said BAE had delivered a strong performance in 2017 despite losses and a £384m goodwill writedown in the applied intelligence business. The restructuring announced in October was beginning to deliver results and cost savings were being identified in the supply chain and in purchasing. Mr Woodburn was particularly upbeat about the prospects for improved defence spending in the US, the company’s biggest market outside the UK. All of the main product lines in the US were expected to deliver “good growth”, he said. In the UK, BAE signalled it did not expect a significant impact from Brexit but stressed that the UK should strengthen bilateral ties with European partners. “This will be important for ongoing collaboration in the development of defence capabilities,” the group said. Landing one, two or three of those orders out there certainly puts us back into growth in Typhoon over the next decade Charles Woodburn, chief executive It also highlighted constraints in the Royal Navy budget as the Ministry of Defence conducts a review of capability and spending. A political battle is under way to win more funding for the military. The navy is estimated to have a £300m shortfall at a time when the government has committed to substantially increasing its capability. Reported annual operating profit fell from £1.7bn to £1.5bn but rose 4 per cent to £2bn on BAE’s preferred underlying basis that strips out non-cash items and one-off charges. Earnings per share on an underlying basis rose by 8 per cent to 43.5p, in line with guidance. Sales for the year rose £0.6bn to £19.6bn largely due to currency movements. Operating cash flow increased by £748m to £1.8bn. The order backlog at £41.2bn was unchanged on a constant currency basis. The final dividend of 13p per share delivered a total of 21.8p, up 2 per cent and the 14th consecutive year of increase, said Mr Woodburn. Although growth was slower than expected in all divisions, said Christian Laughlin, defence analyst at Bernstein investment bank, the guidance for flat earnings in 2018 was in line with expectations. (Source: FT.com)
23 Feb 18. Singapore Technologies Engineering posts gains for 2017.
Singapore Technologies Engineering (ST Engineering) posted increases in earnings and profit in fiscal year 2017, the company announced on 23 February.
While group revenues in the year stayed relatively flat at SGD6.62bn (USD5bn), profit before tax increased year on year by 6% to SGD623m and earnings before interest and tax surged 17% to SGD553m. The company’s order book was also stronger compared with 2016.
ST Engineering said commercial and defence sales constituted 65% and 35% of 2017 revenues respectively.
At a sector level, the group’s aerospace business posted a 2% increase in revenues to SGD2.54bn, while electronics sales climbed 12% to SGD2.11bn. (Source: IHS Jane’s)
22 Feb 18. BAE Systems Announces 2017 Full Year Results.
Charles Woodburn, Chief Executive, said: “We delivered a good performance in 2017, consistent with our expectations for the year. We start 2018 with a streamlined organisation and a strong focus on programme execution, technology and enhanced competitiveness, providing a solid foundation for medium term growth. With an improving outlook for defence budgets in a number of our markets, we are well placed to generate good returns for shareholders.”
BAE Systems financial highlights
Financial performance measures as defined by the Group
- Sales increased by £0.6bn to £19.6bn largely reflecting currency translation.
- Underlying EBITA increased to £2,034m, a 4% increase on a constant currency basis.
- Underlying earnings per share increased by 8% to 43.5p.
- Operating business cash flow increased by £748m to £1,752m.
- Net debt reduced by £790m compared with 31 December 2016.
- Order intake of £20.3bn.
- Order backlog of £41.2bn was unchanged on a constant currency basis.
Financial performance measures defined in IFRS
- Revenue increased by £0.5bn to £18.3bn largely reflecting currency translation.
- Operating profit decreased to £1,480m, including a £384m non-cash goodwill impairment in Applied Intelligence reflecting lower growth assumptions.
- Basic earnings per share decreased by 7% to 26.8p.
- Net cash flow from operating activities increased by £668m to £1,897m.
Other financial highlights
- Group’s share of the pre-tax accounting net pension deficit reduced by £2.2bn compared with 31 December 2016 to £3.9bn.
- Final dividend of 13p per share making a total of 21.8p per share for the year, an increase of 2% over 2016.
Operational and strategic review
- Our US-based Electronic Systems business received orders on the F-35 Lightning II programme worth over $450m (£333m) for additional hardware production and five years of support.
- Growing demand for our Advanced Precision Kill Weapon System (APKWS™) laser-guided rockets, with awards totalling nearly $300m (£222m) during the year and over 13,000 units delivered at 31 December.
- During the year, our US-based Intelligence & Security business secured six task order contracts valued at more than $180m (£133m), increasing the Full-Motion Video Intelligence, Surveillance and Reconnaissance analysis support we provide to the US intelligence community.
- In Applied Intelligence, the underlying loss for the year was £61m, including £24m for a restructuring charge. The first half loss of £27m was followed by a reduced second half loss, before the restructuring charge, of £10m as the cost-reduction actions under the ongoing restructuring started to deliver bottom-line benefit.
- We received a $414m (£306m) contract for the third and final option for Low-Rate Initial Production of 48 M109A7 self-propelled howitzers and ammunition carriers under the Paladin Integrated Management programme. The award contains options for a further 180 vehicle sets over three years of Full-Rate Production.
- Under a contract signed in 2012, the first eight Typhoon and all eight Hawk aircraft for Oman were delivered to the Sultanate of Oman in the year. The remaining four Typhoon aircraft are scheduled to be delivered in 2018.
- In December, BAE Systems and the Government of Qatar entered into a contract, valued at approximately £5bn, for the supply of 24 Typhoon aircraft. Alongside supplying the aircraft, the agreement provides for the supply of ground support to the Qatar Armed Forces and delivery of technical and pilot training in Qatar. The contract is subject to financing conditions and receipt by the Group of first payment which are expected to be fulfilled no later than mid-2018.
- The full £3.7bn production contract for the first batch of three Type 26 frigates was signed in June, with £2.8bn of order intake in the year. Production of the first ship, Glasgow, commenced in July.
- Under the seven-boat Astute Class submarine programme, we received the full £1.4bn contract for the sixth submarine from the Royal Navy and the fourth boat, Audacious, was launched.
- We agreed contracts under the Saudi British Defence Co-operation Programme to provide ongoing support services to the Royal Saudi Air Force and Royal Saudi Naval Forces for a further five years to 31 December 2021.
- In November, the 2017 UK triennial pension funding valuations and, where necessary, deficit recovery plans were agreed with the trustees and certified by the scheme actuaries after consultation with the Pensions Regulator.
Guidance for 2018
The Group and segmental guidance for 2018 below is based on the Group’s actual financial performance for 2017 as re-presented to reflect both the organisational changes described in the results statement below and the impact of the adoption of IFRS 15, Revenue from Contracts with Customers.
For the year ending 31 December 2018, we expect the Group’s underlying earnings per share to be in line with full-year underlying earnings per share in 2017 of 42.1p.*
* Compared with the Group’s actual financial performance for 2017 as re-presented to reflect the impact of the adoption of IFRS 15 from 43.5p to 42.1p and assuming a US$1.40 to sterling exchange rate.
The guidance is based on the measures used to monitor the underlying financial performance of the Group.
22 Feb 18. UK explores blocking GKN takeover on national security grounds. Defence secretary raises concerns over hostile £7bn Melrose bid. The UK is investigating whether the hostile £7bn bid for GKN, the aerospace and automotive supplier, can be blocked on national security grounds. The inquiry comes after Gavin Williamson, the UK defence secretary, raised the alarm over the proposed takeover by turnround specialist Melrose Industries, whose strategy involves the eventual break-up of GKN. Mr Williamson told MPs on the Commons defence select committee on Wednesday that he had written to Greg Clark, the business secretary, with “very serious concerns” and raised “a whole series of questions” about the takeover. Mr Williamson’s intervention will turn up the political heat on the hostile bid for the 259-year-old engineering company that supplies components for the Typhoon fast jet and A400M military transport aircraft. Having made a priority of a more active industrial strategy, the government is concerned to avoid suggestions it is selling out UK industry, particularly after allowing the Japanese takeover of highly successful technology company Arm Holdings shortly after Theresa May became prime minister in 2016. Alex Chisholm, permanent secretary at the Department for Business, Energy and Industrial Strategy, confirmed to the business committee on Wednesday that the department was examining the proposed takeover. Opposition parties and unions have seized on Melrose’s proposal to split up GKN and sell the constituent parts once it has improved the group’s profit and cash performance. Although GKN’s management has also proposed splitting the aerospace and automotive businesses in the medium term, Jeremy Corbyn, leader of the Labour party, and Vince Cable, head of the Liberal Democrats, have hit out at the bid as a threat to the UK’s industrial base while others have claimed it would put national security at risk. Recommended UK defence minister announces new combat air strategy Fabrice Brégier bows out after dogfight at top of Airbus Corbyn’s hostility to takeovers would deny companies momentum. Until Mr Williamson’s intervention, however, national security concerns over GKN’s work on the Typhoon or A400M had largely failed to take hold. Some officials in Whitehall suggested there was scant evidence that GKN’s defence work justified government action to block any takeover. “The national security fears might not be as serious as some are claiming,” said one senior official. GKN’s defence business is heavily skewed towards the US, where it supplies fast jet and helicopter programmes. In the UK it makes components such as composite spars for the wings of the A400M, canopy systems for the Typhoon and F-22 combat jets, and cockpit windows for the T8 training aircraft. It also provides electro-thermal de-icing for the fifth-generation F-35 fighter as well as other composite structures. Its UK defence business employs 750 people on four sites. One defence analyst said these were not particularly sensitive businesses, with the exception of fast-jet canopies which have to be resistant to lasers and radar as part of the overall stealth treatment of an aircraft. But this could be dealt with through specified restrictions, he said. However, another Whitehall official said the UK had “a close interest” in how the technology on those programmes was used. Mr Williamson told MPs he wanted “reassurance”. “There is no clarity as to what the true approach is going to be in terms of the GKN military side of the business,” he said. Julian Lewis, chair of the defence select committee, said he was “encouraged” by Mr Williamson’s comments, which showed the defence secretary was “fully apprised of the implications for national security of a carve-up”. He added that the defence secretary himself could block the takeover on national security grounds. Mr Williamson replied that he had been advised that only the business secretary had that quasi-judicial power. Mr Clark can only intervene on grounds of national security, media propriety or financial prudential concerns. Melrose said on Wednesday night: “As a British public company we are fully aware of our ownership responsibilities with regard to all commercial stakeholders, whether they be corporate customers or government. We are happy to make this clear in any forum.” The managements of GKN and Melrose have been summoned to appear before the business committee on March 6.
21 Feb 18. Curtiss-Wright Corporation (NYSE: CW) reports financial results for the fourth quarter and full-year ended December 31, 2017.
Fourth Quarter 2017 Highlights
- Diluted earnings per share (EPS) of $1.52;
- Free cash flow of $209m and free cash flow conversion of 308%, as defined in table below;
- Net sales of $612m, up 8%, including 3% organic growth;
- Operating income of $109m, up 2%;
- Operating margin of 17.8%, down 100 basis points;
- Effective tax rate of 31.8%, including the impact of the Tax Cuts and Jobs Act (TCJA); and
- New orders of $580m, up 17%.
Full-Year 2017 Highlights
- Diluted earnings per share (EPS) of $4.80, came in ahead of expectations and up 14% compared with the prior year;
- Free cash flow of $336m and free cash flow conversion of 156%, driven by a solid reduction in working capital;
- Net sales of $2.3bn, up 8%, including 5% organic growth, driven by higher sales in all end markets;
- Operating income of $340m, up 10%;
- Operating margin of 15.0%, up 40 basis points;
- Effective tax rate of 28.3%, including the impact of the Tax Cuts and Jobs Act;
- Backlog of $2.0bn increased 3% from December 31, 2016; and
- Share repurchase of approximately $51m or 0.5m shares.
Full-Year 2018 Business Outlook
- Expect higher sales (+3-5%), operating income (+9-12%), operating margin (+90-110 basis points) and diluted earnings per share (+18-21%);
- Anticipate higher sales in all end markets;
- Adjusted free cash flow (which excludes a $50m voluntary pension contribution) to range from $280 to 300m; and
- Announced acquisition of Dresser-Rand government business expected to provide solid increase to sales and would be accretive to EPS, excluding purchase accounting.
“We were pleased with our fourth quarter results, as we generated a solid operational performance and delivered stronger than anticipated diluted EPS of $1.52,” said David C. Adams, Chairman and CEO of Curtiss-Wright Corporation. “We reported an 8% increase in sales, led by a solid contribution from the Teletronics Technology Corporation (TTC) acquisition in the Defense segment. Further, we generated over $200m in free cash flow driven by a significant reduction in working capital, while new orders increased 17% driven by strong demand in both our defense and commercial businesses.”
“Full-year 2017 results reflect a strong operational performance which exceeded our expectations driven by solid 8% top-line growth, 5% of which was organic, improved profitability that generated a 15.0% operating margin and stronger than anticipated EPS of $4.80. In addition, we significantly exceeded expectations by generating nearly $340m in free cash flow in 2017, as we efficiently reduced working capital to 18.8% of sales and achieved our goal to reach the top quartile of our peer group. We are delivering on our long-term strategy and continue to drive solid operating margin expansion and free cash flow generation.”
“For 2018, we are projecting another solid operational performance, as we expect higher sales in all end markets, double-digit growth in operating income and EPS, and 80 to 100 basis point improvement in unadjusted operating margin to a range of 15.8% to 16.0%. We are excited about the recently announced acquisition of the Dresser-Rand government business, which will significantly expand our naval defense business and supports our objective for long-term profitable growth. We remain extremely focused on driving increased operational efficiencies, continuing to invest in our future growth, and maintaining top-quartile financial performance for all of our key metrics to generate significant value for our shareholders.”
Sales of $612m in the fourth quarter increased $46m, or 8%, compared with the prior year, reflecting a $25m, or 4%, contribution from our acquisition of TTC, a $15m, or 3%, increase in organic sales, and a $6m, or 1%, benefit from favorable foreign currency translation.
Higher organic sales were driven by improved industrial demand in the Commercial/Industrial segment and higher aerospace and naval defense sales in the Defense segment, partially offset by lower power generation revenues in the Power segment.
From an end market perspective, sales to the defense markets increased 18%, 7% of which was organic, while sales to the commercial markets increased 2%, compared with the prior year. Please refer to the accompanying tables for a breakdown of sales by end market.
Operating income in the fourth quarter was $109m, an increase of $3m, or 2%, compared with the prior year. These results primarily reflect strong profitability associated with the TTC acquisition in the Defense segment, partially offset by lower sales and reduced profitability in the nuclear aftermarket business in the Power segment, and higher incentive compensation expense across all three segments.
Operating margin was 17.8%, a decrease of 100 basis points over the prior year, primarily reflecting lower sales and operating income in the Power segment, unfavorable sales mix in the Commercial/Industrial segment, and higher incentive compensation expense.
Non-segment expenses decreased by approximately $2m compared with the prior year, primarily due to lower corporate expenses and lower foreign currency transactional losses.
Fourth quarter net earnings decreased 4% compared with the prior year, as higher operating income was more than offset by a higher tax rate.
The effective tax rate (ETR) for the fourth quarter was 31.8%, an increase from 26.3% in the prior year quarter, primarily driven by a net charge of approximately $10m, or $0.23 per share, related to the 2017 TCJA, reflecting:
- a $22m charge for the mandatory deemed repatriation of foreign earnings (“transition tax”), which is payable over 8 years beginning in 2018, partially offset by:
- a $12m benefit relative to re-measurement of U.S. deferred tax balances to reflect the new lower U.S. corporate income tax rate
Free cash flow, defined as cash flow from operations less capital expenditures, was $209m for the fourth quarter of 2017, an increase of $73m compared with the prior year. Net cash provided by operating activities increased $70m to $226m, due to higher cash earnings and improved working capital, specifically lower receivables and higher deferred revenue, including a $25m advanced cash payment on the AP1000 China Direct program that was originally expected in 2018. Capital expenditures decreased by $3m to $18m, as the prior year period included increased investment in a facility expansion in the Commercial/Industrial segment.
New Orders and Backlog
New orders of $580m in the fourth quarter increased 17% compared with the prior year, due to higher demand for commercial aerospace and industrial vehicle products within the Commercial/Industrial segment, as well as higher demand for embedded computing and flight test instrumentation products within the Defense segment. Backlog of $2.0bn increased 3% from December 31, 2016.
Other Items – Share Repurchase
During the fourth quarter, the Company repurchased 112,881 shares of its common stock for approximately $13m. For full-year 2017, the Company repurchased 516,313 shares of its common stock for approximately $51m.
21 Feb 18. Boeing CEO says Embraer acquisition is a ‘not a must do.’ Boeing Co (BA.N) sees a “great strategic fit” in a possible acquisition of Brazilian plane maker Embraer SA (EMBR3.SA) but the deal is not essential, Boeing Chief Executive Officer Dennis Muilenburg said on Wednesday.
“This is actually something we’ve been working on for many years,” Muilenburg said, dismissing reports that Boeing is concerned about a recent tie-up between rival Airbus SE (AIR.PA) and Canadian plane maker Bombardier Inc (BBDb.TO).
“If we can get to a good deal and one that adds value for our customers and our companies, we will do it,” Muilenburg said at an investor conference in Miami organized by Citigroup Inc. “If we can’t get to the finish line, it doesn’t change our strategy. This is a great complement to our strategy but not a must do.” (Source: Reuters)
21 Feb 18. Elbit edges closer to IMI acquisition. Following a lengthy review process, all the necessary regulatory bodies have given their approval for the step, with some of IMI’s programmes which are considered to be “critical defence assets” to remain under government control.
The deal will dramatically increase Elbit’s dominance in the supply of weapons systems to Israel’s defence forces. This had prompted objections from stated-owned Israel Aerospace Industries (IAI) and Rafael.
“For years Elbit and IAI have been competing, in some cases in a wild form of competition that hurt both companies,” one Israeli industry source comments. “With the proposed purchase of IMI, this competition may erupt again, as it will give Elbit access to some potential markets that are now almost fully in the hands of IAI.”
One immediate potential clash is connected to a decision taken by Israeli defence minister Avigdor Lieberman to form a special ground forces unit to be equipped with surface-to-surface missiles with ranges of up to 400km (216nm). This procurement alone has a potential value of more than $1bn, and pits IAI’s Lora long-range artillery system against IMI’s shorter-range Extra missile.
Rafael is also concerned about the proposed deal. “With the leverage Elbit has in the local and international markets, we may have a big problem,” the company says.
Defence ministry sources say the acquisition will strengthen Israel’s capability to compete in the international aerospace and defence markets. “In recent years, this market has been characterised by new players that offer a huge variety of systems. A consolidation of two leading Israeli defence companies is a must,” one source states.
It is expected that the sale process will reach a point within the next few weeks where it can be approved by the Israeli government. (Source: Google/Flightglobal)
20 Feb 18. Melrose delivers on Nortek, pines for GKN. Manufacturing turnaround specialist Melrose Industries (MRO) continued to lay out the case for its proposed takeover of engineering group GKN (GKN) in its annual results announcement, with chair Christopher Miller saying he was “convinced that GKN would gain significantly from becoming part of an enlarged £10bn UK industrial powerhouse”. However, our sister publication, the FT, notes that Jeremy Corbyn chose results day to single out the company in a speech to the EEF, a manufacturing industry organisation, citing Melrose’s “history of opportunistic asset-stripping”.
The company would likely respond by highlighting the transformation of Nortek Air Solutions, a company it acquired in 2016. Management is reporting a 52 per cent increase in adjusted operating profits through last year, and a 67 per cent rise over the last full year prior to acquisition, as well as a 5.5 percentage point improvement in operating margins to 15.2 per cent. This means the group has met its original three- to five-year targets for the company within 18 months.
Conversely, Brush, the group’s 2008 acquisition, has continued to struggle due to structural change in the global gas turbine market, leading the group to announce a consultation and £40m of restructuring measures to help it adapt. Impairments against Brush assets slashed £145m from statutory profits. Bloomberg consensus estimates put expectations for 2018 adjusted EPS at 10.3p, from 9.8p in 2017.
We’re not sure what shareholders will make of the Labour leader’s intervention, but the group revealed underlying operating profits of £278m (2016: £104m), once the impairment to Brush assets and other one-off charges are factored. However, uncertainty around the proposed takeover means we remain circumspect, particularly with the shares trading above the peer average at 22 times forecast earnings. Hold.
Last IC view: Hold, 217p, 1 Sep 2017 (Source: Investors Chronicle)
20 Feb 18. Curtiss-Wright Corporation (NYSE:CW) today announced that it has entered into an agreement to acquire the assets that comprise the Dresser-Rand Government Business (Dresser-Rand), a business unit of Siemens Government Technologies which is a wholly-owned U.S. subsidiary of Siemens AG in Germany, for $212.5m in cash. The acquired business will operate within Curtiss-Wright’s Power segment, and is expected to be accretive to 2018 earnings per share and produce a free cash flow conversion in excess of 100%, excluding the effects of purchase accounting.
Dresser-Rand is a leading designer and manufacturer of mission-critical, high-speed rotating equipment solutions, including reciprocating compressors, steam turbines and steam system valves, supporting Nimitz-class and Ford-class aircraft carriers, Virginia-class and Columbia-class submarines, and most major U.S. Navy shipbuilding programs. Dresser-Rand is the sole supplier of steam turbines and main engine guard valves on all aircraft carrier programs. Through its three service centers, it is also a leading provider of ship repair and maintenance for the U.S. Navy’s Atlantic and Pacific fleets.
“The acquisition of Dresser-Rand’s government business portfolio significantly expands our shipset content and increases our footprint on new U.S. Navy Nuclear vessels, establishes a prominent Curtiss-Wright presence at U.S. Navy shipyards, and provides an opportunity to grow our existing U.S. Navy aftermarket business,” said David C. Adams, Chairman and CEO of Curtiss-Wright Corporation. “The combination of our long-standing relationships with similar customers, and proven track records supporting critical U.S. naval defense platforms, ensures that we are well-positioned to benefit from the continued expansion of our U.S. naval fleet. Further, this transaction exemplifies the ideal strategic and financial fit for Curtiss-Wright as it supports our long-term financial objectives for increased sales growth, margin expansion and strong free cash flow generation.”
For over 60 years, Curtiss-Wright has ensured safe, reliable operations by supplying innovative, high-performance products for every nuclear submarine and aircraft carrier commissioned by the U.S. Navy. Today, we are the preferred supplier of pumps and valves used in the nuclear propulsion system, which is the heart of the most critical function of these vessels, while Dresser-Rand is one of the leading providers of main steam propulsion turbines and valves.
Dresser-Rand equipment is used on hundreds of U.S. Navy ships to provide power and compression for propulsion, pump drives, ship service air, oxygen/nitrogen (O2N2) feed air, generator drives, and deballasting. The service centers primarily focus on overhauls of Dresser-Rand legacy equipment, emergent U.S. Navy shipyard repair needs and global service work pursuant to several key OEM service agreements. Dresser also produces the Terry©-branded steam turbine feedwater pumps for the commercial nuclear power market.
The Dresser-Rand government business, which employs approximately 150 people, is expected to generate sales of approximately $95 m in fiscal 2018, principally to the naval defense market, with additional sales to the power generation market. The acquisition is expected to close in April 2018, subject to the receipt of regulatory approval and other closing conditions.
15 Feb 18. Here’s Why General Dynamics Is Spending $9.6bn for CSRA. General Dynamics (NYSE: GD) at long last has put its industry-best balance sheet to work, agreeing to acquire government IT firm CSRA (NYSE: CSRA) for $9.6bn in cash and assumed debt. And while GD doing a deal was no surprise, the target was.
The deal, the largest in General Dynamics history, would beef up the company’s services and IT business. It continues a wave of consolidation in the government IT sector in which most of GD’s large defense rivals have gone in the opposite direction, lessening their exposure to the business. Lockheed Martin, for example, in 2016 shed much of its IT business in a deal that created Leidos Holdings, and L-3
Upcoming budget bonanza
But General Dynamics has a history of going against the grain, and the company clearly sees opportunity here. CSRA, a $5bn-sales provider of IT services for the Pentagon, Homeland Security, and civil agencies, was formed in November 2015 via the alphabet-soup merger of SRA International and the public-sector business of CSC.
CSRA has been a laggard at a time when defense stocks have soared, with its share price basically flat from its inception prior to the deal announcement. General Dynamics, by comparison, is up 50% over the past three years, and government IT rivals Science Applications International and CACI are up 92.9% and 69.7%, respectively. This despite CSRA’s margins coming in well above those of its rivals.
General Dynamics CEO Phebe Novakovic on a call with investors last month said that growth at her company’s internal IT arm was slowed in 2017 because of the impact of short-term government funding resolutions and delays related to the transition to a new administration. She said the unit’s backlog remained healthy, and business began to pick up in the second half of the year, which she said, “leads me to be confident that the growth in this business will materialize beginning in 2018.”
With Congress at long last seemingly near a breakthrough that would lead to a long-term budget agreement and a suspension of spending caps, previously delayed IT contracts could finally be awarded. General Dynamics should be well-positioned to receive a good deal of that new funding: The company after buying CSRA would have nearly $10bn in IT and government services sales, on par with market leader Leidos in a business where scale and cost competitiveness are vital.
“We see substantial opportunities to provide cost-effective IT solutions and services to the Department of Defense, the intelligence community and federal civilian agencies,” Novakovic said in a statement Monday. “It will allow us to deliver even more innovative, leading-edge solutions to our customers.”
The General’s time to shine?
Shares of General Dynamics, though up in recent years, have actually trailed shares of Lockheed Martin, Northrop Grumman, and Raytheon due to concerns over its Gulfstream business jet unit. With Gulfstream showing signs of stabilizing, a reinvigorated IT unit post-deal could give GD two differentiated segments that, by year’s end, could help it to make up the gap, or even outperform.
The things investors love about General Dynamics are unlikely to change because the company is buying CSRA. GD said it expects the purchase to add to earnings and free cash flow in 2019, helped on with about $200m in cost savings expected by 2020 after combining the operations.
General Dynamics, which has increased its dividend for 26 straight years, said it was committed to continuation of its dividend policy. And the company, which prior to the acquisition had less debt on its books than any of its competitors, said it expects a “rapid deleveraging” using free cash generation.
GD already looked like one of the better buys in the defense business even before buying CSRA. Though acquisitions always add a layer of risk, the company is well-positioned to be a solid performer in the years to come.
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14 Feb 18. Taking Up Arms Against the Hedge Fund View of the World.
A hostile takeover bid can improve a company by imposing cultural revolution. But it may not need to succeed to do so. Shareholders in GKN Plc are already getting the benefits of Melrose Industries Plc’s assault and the offer is still being fought over. The U.K. engineering group has come up with a defense that’s worth supporting.
Both sides have seemingly similar visions for the poorly performing maker of car and aircraft parts. GKN says it can lift operating margins from 7.4 percent to at least 10.5 percent; Melrose eyes at least 10 percent. Bidder and target both see GKN’s powder metallurgy business as something to sell — GKN now, Melrose later.
Worse Before It Gets Better
GKN’s margins dipped last year but it has a plan to drive them higher
Source: Company presentation
GKN would at some point split the remaining automotive and aerospace component businesses. Melrose would presumably sell them off separately as part of its exit plan. GKN is creating distinct operational and management structures immediately and would explore formal separation — for example a demerger — further out.
Shareholders have been focused on management credibility. There’s no clear winner on this score.
Melrose has a proven record of making money for shareholders — and its own bosses — by buying businesses, turning them around and selling them. By contrast, the appointment of Anne Stevens as boss of GKN was driven by events, after the CEO designate left with a profit warning and Melrose pounced.
But getting the job for want of a better alternative doesn’t mean Stevens can’t deliver as well as Melrose. Her diagnosis of GKN’s ailments — the pursuit of growth over returns — is right. The solution, in the form of focused capital allocation and clear management incentives, is convincing.
GKN now has a mostly new management team. The plan set out on Wednesday included 340m pounds of audited financial benefits, against operating profit of 774m pounds for 2017. The real choice comes down to the terms of Melrose’s offer and investors’ investment horizon.
The Melrose terms aren’t better than GKN’s new strategy. GKN had an enterprise value of 6.5bn pounds ($9bn) before Melrose pounced. Suppose both sides could improve that by 25 percent to 8.1bn pounds (a conservative assumption given the envisaged margin improvement). Deduct current net debt and GKN would be worth 7.2bn pounds.
Now consider a merged Melrose-GKN. Add Melrose’s undisturbed enterprise value to that of an upscaled GKN and the combined company would be worth 12.9bn pounds, with an equity value of 10.1bn pounds. GKN shareholders are being offered a 57 percent share of this plus 1.4bn pounds — about 7.2bn pounds as well.
But if GKN’s improvement goes further, the economics tilt in favor of independence — as GKN shareholders would keep 100 percent of the upside.
Taking Melrose’s offer also means abandoning GKN’s longer term upside from R&D projects that take decades to deliver, in favor of a “buy-improve-sell” model that could be done and dusted well within 10 years.
None of this guarantees GKN’s success. The prevalence of Melrose shareholders and short-term hedge funds on its register plays to the bidder’s advantage. And a raised bid would change the calculations.
(Source: Hawker Chase/Bloomberg)
Odyssey is an independent corporate finance firm which advises on acquisitions, business sales, management buy-outs and raising finance, typically in the £5m to £100m range. We have extensive experience in the niche manufacturing sector with our most recent completed deal being the sale of MacNeillie to Babcock Plc. Details can be seen at: http://www.odysseycf.com/case-study-macneillie/
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