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01 Aug 18. BAE maintains earnings guidance. BAE Systems (BA.) didn’t exactly get off to a flying start in the six months to June, but there were signs of progress and the suggestion of momentum to come in the second half. By the group’s own non-standard measurement, sales fell from £9.5bn to £8.8bn – stemming from a decline in Typhoon production activity. Indeed, sales within the air division were down 11 per cent to £3.3bn. But these numbers don’t include the contract signed with Qatar in June to supply Typhoon and Hawk aircraft – nor an initial contract for Australia’s SEA 5000 frigate programme. Similarly, while the order backlog rose from £38.7bn to £39.7bn, this didn’t reflect the respective deals which are expected in the second half. Management maintained its full-year guidance, still anticipating underlying EPS in-line with 2017. This is thanks to an expected improvement in earnings from the electronic systems division, and cyber and intelligence, mitigating certain challenges faced by the maritime and platforms-and-services businesses. Within maritime, the order backlog rose from £9.1bn to £9.5bn. But performance issues on the Offshore Patrol Vessels programme led to a £15m loss provision. Meanwhile, platforms and services took a charge relating to challenges with a subcontractor on its Radford facilities programme. Prior these results, JPMorgan was forecasting for adjusted EPS of 43.4p in 2018, against 43.5p in 2017.

IC View: Management reckons it has the ingredients for growth and “sustainable cash flow”, against a promising outlook for defence budgets in various countries. The recent launch of the UK’s Combat Air Strategy should provide some impetus. BAE’s blended forward PE ratio represents a two-year historical discount to peers, and implies share price upside of 13 per cent. Buy. Last IC view: Buy, 585p, 22 Feb 2018. (Source: Investors Chronicle)

03 Aug 18. Numis knocks Inmarsat down to ‘sell’ as it sees few catalysts for meaningful share movement. In a note to clients, Numis said it was “unlikely” to make any changes to its estimates despite having yet to work through the detail of the telecoms group’s half-year results. Numis’ analysts also questioned the stability of Inmarsat’s L-band business, which comprises over 80% of its total business unit sales. Analysts at City broker Numis have downgraded Inmarsat PLC (LON:ISAT) to ‘sell’ from ‘hold’ as they saw little that could galvanise any changes in its target price. In a note to clients, the broker said it was “unlikely” to make any meaningful changes to its estimates despite having yet to work through the detail of the FTSE 250 telecoms group’s half-year results. They added that despite the company’s chief executive, Rupert Pearce, saying the offer for the company from US satellite communications company EchoStar Corp “significantly undervalued the company’s prospects”, he did not say anything beyond “what he has highlighted several times before Echostar’s approach. Therefore we cannot increase our estimate of ISAT’s NPV [net present value] (which, in turn, determines our Target Price for the stock)”. Analysts also said that it was “too bullish” to expect Inmarsat’s L-band business, which comprises over 80% of its total business unit sales, to “remain stable, let alone grow”. In its half-year results on Thursday, Inmarsat swung to a pre-tax loss of US$119.1m from a US$63.4m profit in the same period last year despite revenues rising to US$717.2m from US$683.7m. The swing was attributed to a jump in net financing costs, which more than doubled to US$259.8mln from US$121.8mln in the first half of 2017, due to a “significant” increase in the unrealised conversion liability on the 2023 convertible bond following EchoStar’s takeover attempt in June. In lunchtime trading Friday, Inmarsat’s shares were up 4.4% at 561.8p.(Source: proactiveinvestors.co.uk)

03 Aug 18. Cobham, warning of long road to recovery, reiterates full-year outlook. A growing order intake helped British engineer Cobham (COB.L) to reiterate its full-year underlying profit forecast on Friday but the group warned its full recovery would still take time and risks and challenges remained. Cobham, known for its air-to-air refuelling technology, has been trying to turn around its business after a string of profit warnings forced it into a rights issue in 2017. It said on Friday its expectations for 2018 group underlying profit remained unchanged “with a range of potential outcomes”. Its order intake stood at £1.03bn, up from £916m in 2017. (Source: Reuters) (see: FEATURES: Cobham – Progress But Still A Lot More Hard Work To Do, By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.)

02 Aug 18. Siemens CEO Kaeser plays his last card on strategy. German trains-to-turbines group Siemens launched its biggest strategy overhaul in four years, aimed at making it more nimble and profitable in the digital industrial age beyond the reign of current Chief Executive Joe Kaeser. Siemens reported industrial profit slightly ahead of expectations in the three months to the end of June, helped by another strong performance by its Digital Factory industrial automation unit that compensated for a slump in power and gas. But the figures were overshadowed on Thursday by the Munich company’s unveiling of its new Vision 2020+ strategy, which will trim its number of industrial businesses to three from five, giving them more autonomy. Siemens shares fell 4.8 percent to the bottom of Germany’s blue-chip DAX as analysts asked whether the measures, designed to lift profitability by 2 percentage points from the company’s current 11-12 percent target, were ambitious enough.

“Our aspiration is to create a company that is not only successful today, but well prepared for the decade to come,” said Kaeser, who is due to step down in 2021 from the group that began as a telegraph technology business in the 19th century. “We will shift from a one-size-fits all set-up to a purpose-driven and market-focused set-up that can readily create and adapt to disruption and foster consolidation, “the 61-year-old told a news conference in Munich.

Kaeser, who has hived off Siemens’ wind power and train businesses into joint ventures and listed its medical technology unit on the stock exchange, said there was no plan to float any of the three new operating companies. The decision to avoid a full break up of the company and continuing problems at the power and gas division – where profit halved – also weighed on the share price. One investor expressed disappointment at the new strategy, saying it did not go far enough.

“The new strategy goes in the right direction: focusing and expanding digitalisation expertise, more individual responsibility of the individual business units, bundling of service activities and reduction of costs and bureaucracy,” said Christoph Niesel, a portfolio manager at Union Investment. “But it was disappointing that, compared to market expectations, Siemens did not give a clear figure what cost savings and efficiency savings Vision 2020+ will achieve, and nothing about more advanced portfolio restructuring measures, primarily at Power & Gas, has been communicated,” said Niesel whose company is Siemens 10th largest investor with a 0.75 percent stake, according to Reuters data.

Industrial conglomerates like Siemens – whose activities span industrial software to medical scanners – have become increasingly unloved by investors, who favour companies with simpler businesses they can more easily value. Rivals including Switzerland’s ABB have come under pressure from shareholders to separate weaker businesses, while General Electric (GE.N) is spinning off its healthcare business and divesting its stake in oil-services firm Baker Hughes (BHGE.N).

MANAGEMENT CHANGES

The Siemens overhaul also triggered management changes, with Lisa Davis, an American who was brought in with the 2015 acquisition of Dresser-Rand, taking charge of the new Gas and Power operating company and being offered an extended contract. Chief Technology Officer Roland Busch becomes chief operating officer, a signal he could be a rival to board member Michael Senn to eventually replace Kaeser, who has led Siemens since 2013. Kaiser said the new strategy created space for his eventual successor and would not box them in. He also defended the decision to keep the power business, saying one part of the stakeholder community had greater expectations of a change than others.

“Running a company is more than just optimising one single piece of interest in a very well networked community,” Kaeser said.  “I guarantee you that what we are going to do is better than most people think at this time,” he added.

Siemens said its industrial profit rose 2 percent to 2.21bn euros (£1.96bn) in the three months to the end of June, just ahead of an average forecast for 2.18bn in a Reuters poll of analysts. Revenue fell 4 percent to 20.47bn euros, missing expectations of 20.73bn euros, but orders increased 16 percent to a better-than-expected 22.8bn euros. During April-June the Power and Gas business reported a 56 percent slump in profit, with Siemens citing “ongoing adverse markets” as customers switch from fossil fuels to renewable energy sources, although orders jumped 54 percent. During the quarter it sold only five large gas turbines, and Siemens said there could be further declines in the market. But the downturn was compensated by the continued strong growth in Siemens Digital Factory industrial automation unit, which delivered the fastest profit increase of all Siemens’ industrial businesses. The division, the jewel in Siemens crown, increased profit by 54 percent during the quarter, helped by strong growth in revenues China and the United States. (Source: Reuters)

02 Aug 18. Inmarsat Reports rise in revenue. Operational highlights – H1 2018: • Group Revenue increased $33.5m (4.9%) to $717.2m (up 5.2% to $652.4m, excluding Ligado), predominantly driven by growth in Aviation and reflecting our diversified and resilient growth portfolio:

*Maritime: solid performance supported by continued strong market traction with Fleet Xpress o Government robust performance against tough comparator in Q2 o Aviation: on-going double digit revenue growth:

*In-flight Connectivity (“IFC”) revenues doubled, with over 1,400 aircraft under contract

*Another excellent performance in our Core business, with revenues up 17.1% o Enterprise: performance mainly driven by satellite phone airtime and handset revenues

o GX: airtime and related revenues doubled to $110.2m (H1 20171: $53.0m), including $60.2m in Q2 2018, (Q2 20171: $24.8m) with continued customer take-up in every target market

* Q2 Group Revenue: increased 5.0% to $371.8m (up 5.5% to $339.1m, excluding Ligado) o Group EBITDA: decreased by $7.5m (2.0%) to $372.9m (down 2.7% to $308.1m, excluding Ligado), with growth in revenue and gross margin being offset by higher indirect costs, mainly due to adverse currency movements in Q1: o Q2 EBITDA: increased 0.4% to $197.8m (up 0.5% to $165.1m, excluding Ligado), driven by generally higher revenues and gross margin

*Liquidity position further improved: with new 5 year Revolving Credit Facility of $750m agreed, to replace existing $500m facility, on substantially the same terms

02 Aug 18. L3 shuffles business to create new ISR division. L3 Technologies announced a significant business reorganization Aug. 2, one that creates a new intelligence, surveillance and reconnaissance (ISR) systems segment. The company is combining its aerospace systems and sensor systems segments to form the new ISR-focused segment, which it projects will bring in $4.7 bn in sales in 2018. Jeffrey A. Miller, corporate senior vice president and president of sensor systems, will lead the new segment. Following the successful transition, Mark Von Schwart, the current president of aerospace systems, will retire from the company. Von Schwartz has led L3′s aerospace division since June 2015. Speaking to Defense News in June 2018, Chris Kubasik, L3′s chief executive, hinted the company may be undergoing organizational changes to capitalize on market opportunities that match the company’s capabilities.

“It used to be each of the divisions would have their own strategy and pursue their own growth. And many times one or two would sign an exclusive agreement with an [original equipment manufacturer],” he said. “By changing that strategy and talking about collaboration up the food chain, everybody embraced the idea of working together. So I think it was change of leadership, change of strategy and change of expectations.”

A focus on electronics and sensors has also driven L3′s acquisition strategy. In the same interview, Kubasik said ISR technologies “are our high-growth segments with good margins. And we talk internally about earning the right to grow. So as entities are well-run and fixed and generating cash we try to give them priority over other segments, which still have organic challenges.”

Following L3′s $540m sale of Vertex, the company acquired Azimuth Security and Linchpin Labs, collectively known as L3 Trenchant, for approximately $200m. Miller said in a press release these companies are “pioneering intelligence solutions — the ‘I’ in ISR — [and] give our customers an intelligence advantage through next-generation network security and threat mitigation.” L3 is also exploring international business opportunities. Following the business realignment he added the “increased scale of our new ISR Systems segment highlights our attractive position as a Global ISR prime contractor and accelerates our ability to address our customers’ increasingly complex needs.” But in addition to classic airborne ISR platforms, L3 leaders believe there is a large market opportunity beneath the waves. When asked about the company’s plans for developing unmanned underwater vehicles Kubasik said, “[c]learly our strategy would be analogous to the UAV market 20 years ago. And we think it will accelerate more quickly because the customer and the world is accepting of autonomous air vehicles. I don’t think it’s going to take 20 years for the UUV market to get to where the UAV market is. We’re at the forefront. And the nice thing is that it aligns with customers — it aligns with some of the threats and customer desires.”

Introduced in April 2018, L3′s Iver precision workhorse autonomous underwater vehicle is one example of the company’s investment in UUV technology. The vehicle is designed with increased autonomy and the ability to carry a multi-sensor payload to conduct multi-domain ISR, anti-submarine warfare (ASW), seabed warfare and mine warfare.  (Source: Defense News)

01 Aug 18. Cisco to buy cyber security group Duo for $2.35bn. Duo focuses on multi-factor authentication, a key information security measure. Cisco on Thursday announced plans to buy Duo Security for $2.35bn in cash and assumed equity awards as it pushes deeper into the cyber security sector. Michigan based Duo Security provides multi-factor authentication through the cloud, something that has become increasingly important in protecting everything from email to bank accounts. The move comes amid Cisco’s push into the cyber security business, where its revenues grew 11 per cent in its most recent quarter. Dug Song will continue to lead Duo Security, which will join Cisco’s Networking and Security business. The deal is expected to close in Cisco’s fiscal first quarter of 2019. Cisco chief executive Chuck Robbins, who took the helm three years ago, has shifted the company’s focus back towards its networking business, after forays into set-top boxes and server manufacturing as his predecessor searched for a replacement for the hardware that powered Cisco’s growth through the 1990s and early 2000s. Throughout that time, the technology group has relied on acquisitions for relevance in a fast-changing industry. Before the latest deal, Cisco had spent more than $80bn on acquisitions since the mid-1990s, only including deals with publicly disclosed prices. Within the first two years of Mr Robbins’s tenure, he reckoned he had done around 15 to 20 acquisitions. But the volume of deals means that many have been relatively small in size — the largest being the $6.9bn move into set-top boxes — and Cisco has lacked a truly transformational deal. Cyber security has been regarded by analysts as a weak spot in Cisco’s portfolio for some time, although it has been making a concerted push in the area. In February this year it launched a deal with Apple, insurer Allianz and broker Aon that gave cheaper insurance to companies using Cisco’s ransomware defence or a range Apple’s hardware products. (Source: FT.com)

02 Aug 18. Huntington Ingalls Industries (NYSE:HII) reported second quarter 2018 revenues of $2.0bn, up 8.7 percent from the same period last year. The increase was driven primarily by higher volume at HII’s Newport News Shipbuilding segment. Operating income in the quarter was $257m and operating margin was 12.7 percent, compared to $241m and 13.0 percent, respectively, in the second quarter of 2017. The increase in operating income was mainly the result of a higher Operating FAS/CAS Adjustment compared to the prior year, partially offset by lower segment operating income. The decrease in operating margin was due to lower segment operating margin, partially offset by a higher Operating FAS/CAS Adjustment compared to the prior year. Diluted earnings per share in the quarter was $5.40, compared to $3.21 in the same period of 2017. The increase was predominantly due to a claim for higher research and development tax credits for the post-spin-off 2011 through 2015 tax years, a lower statutory federal income tax rate, a favorable change in the non-operating portion of retirement benefit expense and higher operating income. Second quarter cash from operations was $239m and free cash flow1 was $154m, compared to $186m and $107m, respectively, in the second quarter of 2017. New contract awards in the quarter were approximately $1.1bn, bringing total backlog to approximately $21bn as of June 30.

“I am pleased with our solid financial performance for the first half of the year,” said HII President and CEO Mike Petters. “Our team remains focused on program execution and capturing quality contract awards that support long-term, sustainable value creation.”

Newport News Shipbuilding revenues for the second quarter were $1.2bn, an increase of $182m, or 18.2 percent, from the same period in 2017, mainly due to higher revenues in aircraft carriers and naval nuclear support services. Higher aircraft carrier revenues were primarily the result of increased volumes on the execution contract for the refueling and complex overhaul (RCOH) of USS George Washington (CVN 73), the construction contract for John F. Kennedy (CVN 79) and the advance planning contract for Enterprise (CVN 80), partially offset by decreased volumes on the execution contract for the RCOH of the redelivered USS Abraham Lincoln (CVN 72), the inactivation of the decommissioned aircraft carrier Enterprise (CVN 65) and the construction contract for the delivered USS Gerald R. Ford (CVN 78). The increase in naval nuclear support services revenues was mainly the result of higher volumes in submarine support and facility maintenance services, partially offset by lower aircraft carrier support volume.

Newport News Shipbuilding segment operating income for the second quarter was $91m, an increase of $11m from the same period last year. Segment operating margin was 7.7 percent for the quarter, compared to 8.0 percent in the same period last year. The increase in segment operating income was primarily driven by the higher volumes described above, and the decrease in segment operating margin was due to year over year changes in contract mix.

Key Newport News Shipbuilding milestones for the quarter:

• Delivered the Virginia-class submarine Indiana (SSN 789) to the U.S. Navy
• Began a 25-month overhaul of the Los Angeles-class submarine USS Boise (SSN 764)
• Authenticated the keel of the Virginia-class submarine Montana (SSN 794)
• Completed the inactivation of the aircraft carrier Enterprise (CVN 65)

Technical Solutions

Technical Solutions revenues for the second quarter were $243m, a decrease of $1m from the same period in 2017, primarily due to lower integrated mission solutions, fleet support and nuclear and environmental revenues, offset by higher oil and gas services revenue.

Technical Solutions segment operating income for the second quarter was $7m, a decrease of $2m from the same period last year. The decrease was primarily driven by lower performance in fleet support services.

Key Technical Solutions milestones for the quarter:

• Triad National Security, a joint venture supported by HII’s Technical Solutions segment, was awarded the contract to manage and operate the Los Alamos National Laboratory.
• N3B, a joint venture between HII’s Technical Solutions segment and a segment of BWX Technologies, Inc., completed the transition period of the Los Alamos Legacy Cleanup Contract.

31 Jul 18. Kawasaki reports falling defence sales. Kawasaki Heavy Industries (KHI) has registered overall financial gains despite falling defence sales in the first quarter of fiscal year 2018, it said on 31 July. The Japanese company said its net sales for the quarter ending on 30 June were JPY343.7bn (USD3bn), a year-on-year increase of 2.5%. KHI’s operating income, or earnings before interest and taxes, increased 45% to JPY7.1bn. However, KHI said its quarterly aerospace sales declined to JPY104.9bn partly because of a decrease in orders from the Japanese Ministry of Defense (MoD). KHI added that the decrease in aerospace sales to the MoD is expected to continue throughout 2018. (Source: Google/IHS Jane’s)

02 Aug 18. Rheinmetall increases Group earnings and operating margin.

• Operating earnings for the Group grow by €20m to €154m in the first half of the year
• Operating margin in the Group increased from 4.8% to 5.6%
• Group sales with €2,753 m approximately at previous year level adjusted for currency effects
• Automotive increases sales to €1,491m and operating margin to 8.9%
• Defence: sales decline to €1,263m – earnings rise by €17m to €31m
• Order backlog for the Group stable at €7bn

Rheinmetall AG, Düsseldorf, presented another rise in consolidated operating earnings for the first half of the year. Both sectors of the technology group are making a positive contribution to the earnings growth. For the current fiscal year, the forecasts for the Group have been refined within the existing ranges.

Armin Papperger, CEO of Rheinmetall AG: “We have successfully increased earnings in the Group overall and continued to improve our operating margin. Given the good development, especially in the second quarter, we are confident of achieving the targets we have set ourselves in the current fiscal year. We want to keep growing profitably and building on our positions in international markets. We are helped here by the fact that we are convincingly represented on the key growth markets with our pioneering technologies.”

The Rheinmetall Group’s sales decreased by €55m or 1.9% year-on-year to €2,753m in the first half of 2018 (previous year: €2,808m). Adjusted for currency effects, however, the decline is only 0.6%. This sales development related exclusively to the first quarter, in which, in particular, bottlenecks in the supply chain, deliveries postponed at customer request and a lack of export licenses due to the delayed formation of a government in Berlin had a negative effect on business volume in the Defence sector. By contrast, the sales trend in the Defence sector in the second quarter again showed growth compared to the previous year. In addition, the Automotive sector increased its sales by €26m year-on-year in the first half of the year. Consolidated operating earnings performed positively. They rose by €20m or 15% to €154m. The Group’s operating margin thus grew from 4.8% to 5.6%.

The order backlog in the Rheinmetall Group remains at record level. As of June 30, 2018, it amounted to €7.0bn after €7.1bn on the same date of the previous year.

The proportion of international business activities remains high at 77% at Group level.

Automotive: growth in sales and earnings

In the first six months of 2018, the Automotive sector recorded sales growth of 1.7% compared to the same period of the previous year to €1,491m. Adjusting for currency effects increases the growth to 4.2%. The sector therefore surpassed the development of the global production of light vehicles in the first half of the year, which grew by 1.7%. All divisions contributed to the increase in sales. The operating earnings for the first half of 2018 rose by €4m or 2.8% to €133m, which resulted in a slight improvement in the operating margin to 8.9% compared to the previous year’s 8.8%. The Mechatronics division’s sales grew by 1.6% to €846m in the first half of 2018 (+2.7% after adjustment for currency effects). The high demand from automotive manufacturers for solutions from the future-oriented product portfolio to reduce pollutant emissions continued. However, the growth was weakened by the decline of the diesel market. As in the previous year, operating earnings amounted to €90 m after the first six months of 2018. The Hardparts division generated sales growth of 0.8% to €504 m in the first half of 2018 (+5.5% after adjustment for currency effects). The division’s operating earnings increased by €2m to €35m. The Aftermarket division increased its sales by 7.6% year-on-year to €189m in the first six months of 2018 (+9.8% after adjustment for currency effects). Products of the Group’s Kolbenschmidt and Pierburg brands once again proved to be the main drivers of growth here. The division’s operating earnings amounted to €17m in the first half of 2018, compared with €16m in the same period of the previous year.

Joint ventures with Chinese partners grow faster than the market

The activities of the joint ventures in China have again performed better than the market there. While light vehicle production in China in the first half of 2018 grew by 2.8% year-on-year, the joint ventures in China increased their sales by 4.5% in the first half of 2018 (+7.9% after adjustment for currency effects) to €447m. Sales of the German joint venture KS HUAYU AluTech Group grew by 9.5% to €172m in the first six months of the current fiscal year, mainly owing to increased sales of research and development as well as equipment and tools.

Defence: earnings increase and persistently high order intake

The Defence sector increased its operating earnings despite a declining sales volume in the first half of the year. Sales fell by 6.0% from €1,343m to €1,263m (-3.4% after adjustment for currency effects), with the decline in the first quarter of 2018 being partly offset in the subsequent quarter. After €509m in the first quarter of 2018, Defence already increased the sales volume to €754m in the second quarter of 2018. Operating earnings were increased from €14m to €31m in the first half of the year. At €1,427m, incoming orders for the Defence sector in the first half of 2018 remained at the high level of the previous year (H1 2017: €1,422m) despite negative currency effects of €-33 m. Larger individual orders were an order in the Weapon and Ammunition division from an international customer worth around €380 m for the delivery of artillery and tank ammunition and an order in the Electronic Solutions division worth €102m to supply air defence products in Asia. The order backlog totaled €6,510m, down slightly on the previous year’s figure of €6,661m.

In the Weapon and Ammunition division, sales fell by €108m or 22% year-on-year. This was primarily because the previous year still included a trading contract amounting to around €110m. The division is reporting operating earnings of €4m after €12m in the previous year. However, the division’s earnings improved significantly quarter-on-quarter: After €-19m in the first three months, Weapon and Ammunition generated significantly better operating earnings of €23m in the second quarter of 2018.

The Electronic Solutions division posted an increase in sales of €44m or 16% compared with the previous year’s figure. The Air Defence and Radar Systems business unit was the main driver behind this. Operating earnings improved by €9m to €4m, thanks to sales growth and cost-cutting measures. The Vehicle Systems division recorded a slight year-on-year drop in sales of €15m or -2% in the first half of 2018. Adjusted for currency effects, the division’s sales remained at the same level as in the previous year. Sales of military trucks were down year-on-year in the first half of 2018, as bottlenecks in capacity continued at some suppliers in the second quarter. However, sales of other types of vehicles increased. Operating earnings were increased to €34m and thus more than doubled year-on-year.

OUTLOOK

Sales growth continues in both corporate sectors

Rheinmetall expects the Group’s growth to continue in the current fiscal year. Rheinmetall AG’s annual sales are expected to grow organically by around 8% in the current fiscal year, based on €5.9bn in 2017. Sales are expected to increase in both corporate sectors. Sales performance in the Automotive sector is strongly influenced by economic development in global automotive markets and by external factors such as the adjustment of European test cycles. Based on current expert forecasts regarding trends in global automotive production this year, which predict growth of 2.1%, Rheinmetall still expects sales growth of 3% to 4% for the Automotive sector. On the basis of the business performance in the first half of the year, Rheinmetall projects sales growth of around 12% for the Defence sector in fiscal 2018. This corresponds to the lower end of the previous sales forecast. As in the previous year, the sales forecast for 2018 is largely assured based on relatively high coverage through the existing order backlog. The growth forecast assumes that exchange rates for the remainder of fiscal 2018 will not change significantly compared to current levels.

Further improvement in earnings expected in fiscal 2018

Assuming stable economic development, Rheinmetall expects an absolute improvement in operating earnings and an operating margin of around 8.5% for the Automotive sector in fiscal 2018. Rheinmetall also anticipates a further improvement in operating earnings in the Defence sector in 2018 and expects an operating earnings margin of around 6.5%. This corresponds to the upper end of the previous forecast range of 6.0% to 6.5%.

Taking into account holding costs and including expenses for the realization and marketing of new technologies, the Rheinmetall Group’s margin comes to around 7%.

02 Aug 18. Rolls-Royce sees 2018 results at upper end of guidance. British engine-maker Rolls-Royce (RR.L) said that its 2018 results would come in at the upper half of its guidance range, after its civil aerospace and power systems businesses posted a stronger than expected first-half performance. The upgrade to guidance comes despite the company being under pressure to fix problems with its Trent 1000 engine which powers the Boeing 787 (BA.N). A parts durability issue has grounded planes resulting in Rolls facing extra costs. Rolls said in its half-year report on Thursday that it would be recognizing an exceptional charge of £554m in respect of the Trent 1000 issues for the period to 2022. For the full-year, Rolls said in February that its free cash flow will come in at about £450m, give or take £100m. It said on Thursday that this figure was now expected to be at the upper half of guidance. (Source: Reuters)

02 Aug 18. Serco Group plc half year results 2018. Rupert Soames, Serco Group Chief Executive, said: “As foreseen in our five-year strategy, profits are now starting to grow, with Underlying Trading Profit having increased by 20% at constant currency in the first half. We have also seen a continuation of the strong order intake achieved in 2017, with contract awards so far in 2018 of some £1.6bn, around 80% of which is from customers outside the UK; this order intake delivers another period during which the book‑to‑bill ratio has exceeded 100%, and sees our order book increase to £11.0bn. The financial and order intake performance has been accompanied by strong operational delivery and effective implementation of our transformation programme. In addition we have also made progress with value-enhancing acquisitions; BTP has been integrated within our US defence business to deepen our satellite and radar capabilities, and we have now completed the transfer of all six Carillion hospital contracts which will materially increase the scale and profitability of our UK health facilities management business.  Notwithstanding market conditions that remain less than ideal, particularly in the UK, we are responding appropriately and continue to make progress in line with our strategy.”

• Revenue(1) at constant currency was down 5.6%, comprising a 6.0% organic decline from net contract attrition, partially offset by a 0.4% net contribution from acquisitions.  In addition there was an adverse currency impact of £57m or 3.8%, resulting in a 9.4% decline in revenue at reported currency.
• Order intake of £1.6bn, includes the rebid of our US health insurance eligibility contract and 16 other awards worth more than £10m; around 80% of order intake came from customers of our Americas, Middle East and AsPac divisions, with the remaining 20% from the UK & Europe.  70% of the order intake comprised existing work being rebid or extended, and 30% was new business.
• Book-to-bill ratio of close to 120%; closing order book increased to £11.0bn, up from £10.7bn at the start of the year; a further £0.7bn will be added following the Carillion contract transfers.
• Underlying Trading Profit(2) at constant currency increased by 20%, largely as a result of the successful implementation of our transformation plans; adverse currency impact of £3.2m or 9%, resulted in an 11% increase at reported currency. Margin increased to 2.8% (2017: 2.3%).
• Reported Operating Profit increased by 56% and includes a £7.8m release of Contract & Balance Sheet Review items, which is excluded from Underlying Trading Profit.  Onerous Contract Provisions (OCPs) tracking to plan and liability now stands at £123m, down from £447m in 2014 and £168m at the start of the year.
• Pre‑exceptional tax costs of £11m (2017: £16m); net exceptional costs also lower at £11m (2017: £27m).
• Underlying EPS increased by 29%, reflecting the growth in Underlying Trading Profit, together with lower net finance costs and tax rate; Reported EPS, which includes the impact of the other non-underlying items and lower tax and exceptional costs, resulted in a profit per share of 1.32p (2017: loss per share of 1.77p).
• Free Cash Flow(4) outflow of £26m, similar to the comparable period; in addition, £24m cash exceptional costs, £15m net acquisition consideration and a £13m net foreign exchange and hedging impact led to a £79m increase in net debt.  Leverage for covenant purposes of 1.75x, comfortably within our normal target range of 1-2x.
• Value-enhancing acquisitions: completed and integrated BTP Systems within our US defence business to deepen our satellite and radar capabilities; after the period end, completed the transfer of the six Carillion health facilities management contracts in the UK.
• Pipeline of larger new bid opportunities increased to £4.7bn, reflecting successfully reloading the pipeline with new opportunities to replace those removed on bid outcomes during the first half of the year.
• Consistent with the closed period update issued on 29 June, guidance for 2018 full year is revenue of £2.7-2.8bn and Underlying Trading Profit to grow to around £80m.  For 2019, we expect revenues to be broadly flat in constant currency, and to see further good growth in Underlying Trading Profit.  With the completion of the Carillion contract transactions in the second half, we expect accounting net debt at the end of 2018 to increase slightly from the June position and to be at the mid-to-upper end of our £200-250m guidance range, equivalent to leverage for covenant purposes of 1.5-2x.

01 Aug 18. France confirms Fincantieri-STX shipyard deal, cautious on defense merger. France hopes Italian shipbuilder Fincantieri’s (FCT.MI) takeover of STX France will be wrapped up soon, French Finance Minister Bruno Le Maire said on Wednesday, but sounded a more cautious note on any defense naval merger. Speaking in Rome after meeting two Italian ministers, Le Maire said France had not changed its position on the STX deal, quelling concerns the takeover could be hampered by tenser relations with Italy’s new anti-establishment government.

“Italy and France share the same desire to wrap up the STX-Fincantieri merger, which will produce one of the biggest civilian shipbuilders in the world,” Le Maire told reporters after talks with his Italian counterpart Giovanni Tria and Deputy Prime Minister Luigi Di Maio.

Paris and Rome are also exploring the creation of a Franco-Italian naval group involving French military shipyards firm Naval Group and Fincantieri, in a bid to ward off the threat from industrial powers such as China and the United States. The two countries had previously indicated they wanted to agree to the outlines of a deal by June, but Le Maire said it was up to the two firms to pursue talks “at their own pace” and warned against any talk of a possible merger.

“It would not be wise” to discuss a defense merger now, Le Maire said, stressing that a full fusion was not part of an original 2017 agreement to look into possible tie-ups. A French official, speaking off the record, said Naval Group could not be privatized, adding that parts of its activities, such as building nuclear submarines, were national strategic assets that could not be absorbed into any international group.

GOOD NEIGHBORS

Relations between France and the new Italian government got off to a rocky start in June when President Emmanuel Macron accused Rome of acting with “cynicism and irresponsibility” by closing its ports to a ship carrying rescued migrants. An initial meeting between Le Maire and Tria was abruptly canceled as a result of the row, but the French minister insisted that the two countries saw eye to eye on many issues.

“Regarding the euro zone, honestly, Italy is the country with which we share the closest position,” Le Maire said, adding that both nations were in favor of creating a European budget and setting up a backstop fund in case of financial crises. He also denied there were any tensions over Italy’s call for a thorough review of an ambitious rail project meant to connect the French city of Lyon with the Italy’s Turin. The Franco-Italian project received a green light last year and hundreds of millions of euros have already been spent on preparatory work, but Di Maio’s anti-establishment 5-Star Movement has said the link represents a massive waste of money.

“Di Maio’s position does not shock me. These are legitimate questions and we have to discuss this together,” he said. “You don’t have France on the one side which is totally in favor of the Turin tunnel, and Italy on the other, which is against. It isn’t that at all. It is much more complicated than that,” Le Maire added. (Source: glstrade.com/Reuters)

01 Aug 18. Geospace acquires tactical security firm. Oil and gas equipment firm Geospace Technologies announced on 30 July that it had acquired tactical surveillance systems firm Quantum Technology Services (QTS). The terms of the deal were not disclosed. QTS design and develop seismic sensors to detect pedestrians, vehicles, and other moving objects that are deployed for security applications by US government defence and security agencies. Geospace Technologies said that the acquisition will enable the company to diversify into the border and perimeter security markets, as well as increase its exposure to the government and commercial critical national infrastructure security sector. (Source: IHS Jane’s)

01 Aug 18. BAE Systems sticks to annual forecast. Britain’s biggest defence company BAE Systems (BAES.L) stuck to its forecast for flat earnings this year, saying that some issues at U.S. projects and in its maritime unit would be offset by a stronger performance from other parts of the business. BAE, which is building Britain’s new nuclear submarines, manufactures Eurofighter Typhoon jets and provides electronics for the F-35 combat jet, posted a 2 percent drop in underlying earnings per share to 19.8 pence for the half year period. For the full-year it is aiming to match the 43.5 pence it made in 2017, and it said it was on course to do so, adding that it expected to see some additional benefit from exchange translation. The company, which won a $26bn (£19.83bn) contract to build war ships for Australia in June, signalled its confidence by lifting its interim dividend by 2 percent to 9 pence per share.

 “With a large order book and a positive outlook for defence budgets in a number of key markets, we have a strong foundation to deliver growth and sustainable cash flow,” Chief Executive Charles Woodburn said in a statement on Wednesday.

The company said higher earnings from its electronic systems unit, which provides equipment for combat jets like engine controls, surveillance and night vision systems, and its cyber and intelligence business would offset problems elsewhere.

Those issues included extra costs on a programme to deliver five patrol vessels for Britain, and challenges with a subcontractor in factories that make equipment for the U.S. Army. BAE said it had taken steps to address these issues. (Source: Reuters)

01 Aug 18. BAE Systems Announces 2018 Half Year Results. Charles Woodburn, Chief Executive, said: “We have made good progress in the first half strengthening the outlook through significant wins on the Australian SEA 5000 and US Amphibious Combat Vehicle programmes. These, combined with the launch of the UK Combat Air Strategy, provide good momentum into the second half and beyond. Operationally, there have been some notably strong performances in our Electronic Systems and Air sectors, but also some disappointments on certain long-standing programmes in Maritime and Platforms & Services (US), where we have now taken steps to strengthen management and improve programme execution. In this transition earnings year, our Group earnings guidance is maintained and, with a large order book and a positive outlook for defence budgets in a number of key markets, we have a strong foundation to deliver growth and sustainable cash flow.”

Financial highlights

Financial performance measures as defined by the Group

• Order backlog increased to £39.7bn, with £9.7bn of orders in the first half. Order backlog does not yet include the initial contract on the SEA 5000 programme, or the contract for the supply of Typhoon and Hawk aircraft to Qatar, both of which are expected in the second half of the year.
• Sales at £8.8bn, down 3% on a constant currency basis, as a result of reduced Typhoon production activity.
• Underlying EBITA at £874m, down 6% on a constant currency basis.
• Underlying earnings per share decreased by 2% to 19.8p, or up 2% on a constant currency basis. The Group’s effective tax rate for the first half of the year was 16.5%, compared to a rate of 23% in the same period last year.

Financial performance measures defined in IFRS

• Revenue decreased to £8.2bn, down 5% on a constant currency basis.
• Operating profit decreased by 11% to £792m, or 7% on a constant currency basis.
• Basic earnings per share decreased by 17% to 14.8p.

Pension and dividend

• The Group’s share of the pre-tax accounting net pension deficit reduced to £3.0bn (31 December 2017 £3.9bn).
• Interim dividend increased by 2% to 9.0p per share.

Operational and strategic key points

Air

• In March, the UK government signed a Memorandum of Intent with the Kingdom of Saudi Arabia to aim to finalise discussions for the purchase of 48 Typhoon aircraft.
• In March, contracts worth A$1.0bn (£0.6bn) were agreed for the upgrade and sustainment of the Jindalee Operational Radar Network upgrade programme in Australia.
• In June, the Commonwealth of Australia selected the Group as the preferred tenderer for the design and build of nine ships for the Future Frigate programme for the Royal Australian Navy.
• In July, the UK government announced its Combat Air Strategy, under which the UK government and industry will jointly invest in next-generation combat air systems.
• BAE Systems and the Government of the State of Qatar signed a contract in December 2017 for the supply of 24 Typhoon aircraft to the Qatar Emiri Air Force along with a bespoke support and training package, which was extended to include nine Hawk aircraft, along with an initial support package. This contract was subject to financing conditions and receipt by the Company of first payment. Discussions have progressed and a number of milestones achieved, including the issuing of a Royal Decree relating to Qatar’s financing of the contract. Financing discussions are in progress and, when successfully concluded, it is anticipated first payment would be received in the third quarter of 2018.

Maritime

• Andrew Wolstenholme has been appointed to lead Maritime with a clear focus on programme schedule and cost performance.
• In March, the Group secured the full £1.5bn contract for delivery of the seventh Astute Class submarine and a further £0.9bn of funding on the Dreadnought programme from the Ministry of Defence.
• The first of the five Offshore Patrol Vessels (OPV), HMS Forth, completed sea trials in December 2017, although short-term performance issues on the programme are being addressed which are expected to result in cost growth, with a loss provision of £15m being recognised in the first half.
• Maritime performance was also impacted by more conservative margin trading on the Aircraft Carrier programme.

Electronic Systems

• Further awards for APKWS® laser-guided rockets were secured worth $399m (£302m).
• Demand for our products in the Electronic Systems business is growing and the portfolio is well aligned with the new US National Defense Strategy published earlier this year and our customer requirements. The business has a record order backlog at 30 June 2018 of $7.1bn (£5.3bn).

Platforms & Services (US)

• In June, a contract worth $198m (£150m) was secured for the US Marine Corps Amphibious Combat Vehicle programme, with options for a total of 204 vehicles worth up to $1.2bn (£0.9bn).
• The US Ship Repair business received orders totalling $607m (£460m) in the first half of 2018. A further charge has been taken in the first half of the year on the final commercial ship. The Group has taken the decision not to pursue new contracts for the Mobile, Alabama, shipyard, resulting in non-recurring impairment and other charges of $45m (£33m) in the first half of the year.
• Challenges with a subcontractor on the Radford facilities programme have required a charge to be taken in the first half of the year. Other than for this item and the Commercial Shipbuilding charges, return on sales performance for the Platforms & Services (US) business would have been in line with the 2017 half year for this segment.

Cyber & Intelligence

• In our Applied Intelligence business, the restructuring actions taken to return the business to profitability are taking hold and the business achieved a much improved first half performance.

Guidance for 2018

In aggregate, we expect the Group’s underlying earnings per share for 2018 to be in line with the full-year underlying earnings per share for 2017, with some small additional benefit from exchange translation.*

* Compared with the Group’s actual 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$1.35 to sterling exchange rate.

(SEE: BAE Systems – Positioning For Future Growth, By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.)

01 Aug 18. Capita, the government outsourcer seeking to rebuild its finances, is another UK company that wants to look forward rather than back over its shoulder. A recent £701m rights issue, and a transformation programme to cut £175m a year in costs and invest up to £500m, has helped shareholders overcome the crick in their necks. It has helped get the business, which has £1.2bn of debt and made a pre-tax loss of £535m in 2017, back on track. But is it now trying to run before it can walk? This morning’s half year results show nearly £1bn of new orders in the period – taking the order book to £7.7bn – and a series of big new contract wins, the most recent with British Airways. Capita announced that the airline had chosen it to deliver “enhanced customer services” from a global centre in Cape Town, South Africa ”utilising our customer management expertise and capability”. Given BA customers recent experiences, it will need all of that expertise.

Other new wins include an expanded contract with Southern Water for customer services, billing and correspondence-handling, print and mail, worth £30m over five years; a contract with the Financial Services Compensation Scheme (FSCS) to consolidate all its claims handling services, worth £37m over four years and nine months, and with BBC Audience Services for five years.

You cannot say Capita ducks a challenge

Shareholders, however, having just stumped up that £700m, will be more interested in the fact that the pension deficit is down; leverage is reduced to 1.53 times earnings, which is the mid point of Capita’s target range, and cost savings are on track for  £70m this year. That leaves underlying pre-tax profit guidance excluding disposals unchanged. Capita is at least running in the right direction(Source: FT.com)

31 Jul 18. TMD enters the final phase of its SiG (Sharing in Growth) government funded programme – an initiative introduced to raise the competitive capability of manufacturing suppliers in the UK aerospace industry – and boost overseas trade. From August this year TMD Technologies Limited (TMD), West London based manufacturer of world class microwave and RF products, will enter the final phase of its Sharing in Growth (SiG) competitiveness improvement initiative. After completing the first diagnostic phase of the SiG leadership programme some three years ago, TMD has since been successfully implementing the various recommendations across the company. In the next 18 months TMD plans to accelerate growth and embed improvements to meet forecast volume orders of the company’s state-of-the art modular microwave power modules (MPMs) and commercial amplifier products.

Said David Pike, TMD’s Operations Director: “The SiG programme has been a significant element in assisting us to achieve our current business growth objectives. We have fully embraced the SiG programme, and its support is helping us to make improvements in several key areas, including a customised approach to maximising manufacturing flexibility, reduction in production costs and lead times, and enhanced supply chain procedures.”

SiG will support TMD through on-site coaching, training, mentoring, and support for improvement activity and charters. In June this year TMD was a finalist in the SiG All STAR event held in Nottingham, where it presented its journey through business improvement and achievements over the past three years.

Summing up, Jane McAlister, TMD’s Sales and Business Development Director, said: “As an established world leader in the supply of specialised microwave and RF products to the important aerospace sector, we are very pleased with the on-going results of the SiG programme, focussing not only on better efficiency, but right through to our increased ability to attract new customers and open up new global business markets. Involvement with SiG has also helped to raise our manufacturing profile in the UK, as evidenced by our appearance on the BBC news this year as part of a feature on the UK economy.”

Why SiG?

The UK aerospace sector is the European leader and holds second position globally. Manufacturing some of the most sophisticated and advanced components and parts for today’s aircraft, it has created a high-tech, high-skill industry of some 3,000 companies – with massive benefits to the UK economy. Furthermore, the industry is expected to double over the next few years.

To fully capitalise on the enormous growth potential offered by this market it was recognised that manufacturing suppliers needed to invest in their ability to deliver a competitive performance on an international scale. In order to implement and support this strategy, non-profit company Sharing in Growth UK Ltd (SiG) was set up to take eligible suppliers through rigorous development and quality training to achieve a worldwide competitive advantage and thus share in the future growth of the UK aerospace civil and defence sector.

Established in August 2013, the SiG programme is helping more than 60 aerospace supply chain companies to improve their productivity and competitiveness so they are better placed to win a share of continued growth in the global aerospace market. Each company participates in an intense training and business transformation programme which enables them to double their sales turnover in around four years. Having helped more than 60 programme participants to secure £2.5bn in contracts totalling over 22,000-man years of high value work, SiG is well on target to safeguard 10,000 UK jobs by 2022 and to return £60 in contracts for every £1 of public investment.

The SiG programme is endorsed by Airbus, BAE Systems, Boeing, Bombardier, GE, GKN, Leonardo, Lockheed Martin, MBDA, Rolls-Royce, Safran and Thales, and is supported by the Regional Growth Fund and more than £150m in private investment.

TMD – ticking all the boxes

A worthy participant in the SiG programme, TMD is recognised as a world class designer and manufacturer of specialised transmitters, microwave power modules, high voltage power supplies, microwave tubes, and transponders for radar, electronic warfare and communications applications. The company also produces a range of advanced instrumentation microwave and RF amplifiers for EMC testing, scientific and medical applications. More than 70% of its products are exported – mainly to the USA. To provide commercial and technical support for its customers in the USA, TMD opened a successful and growing US subsidiary, namely TMD Technologies, LLC. This new company is actively engaged in new business development in the States, for the entire range of TMD’s products.

31 Jul 18. Profiting from cyber security. Aim-traded Kape Technologies (KAPE:125p), a provider of cyber security software formerly known as Crossrider when I included the shares, at 47.9p, in my 2017 Bargain Shares Portfolio, has reported a robust pre-close trading update ahead of half-year results on 24 September. I had expected as much given that the company offers tangible benefits to more than 1m customers, around 30 per cent of whom take out premium subscriptions for Kape’s products, which include: Reimage, a patented Microsoft-based product tool that enables users to clean up their computers; DriverAgent, a PC maintenance software products company offering a device driver search and update service, which scans computers for outdated drivers; and Cyberghost, a provider of secure virtual private networks (VPNs) that securely pass data traffic over public networks. All of these activities are performing well, so much so that Kape’s cash profits increased by almost half to $4.3m (£3.3m) on revenues of $26.4m in the first half of this year, underpinning expectations of analysts at Edison Investment Research that the company can deliver cash profits of $10.2m for the full year to boost pre-tax profit from $7.5m to $8.7m. On this basis, expect adjusted EPS of 5.4¢, or 4.1p at current exchange rates. A key take for me is Kape’s rising recurring income stream – 40 per cent of Reimage sales in the first half were sold on a subscription basis – which improves the quality of revenues as well as forward visibility, thus de-risking forecasts. The other point worth noting is that having seen last year’s €9.2m (£8.2m) earnings accretive acquisition of Cyberghost outperform internal budgets, the board are using $16m of the company’s $62.7m cash pile to acquire Seattle-based Intego, a leading Mac and iOS cybersecurity and malware protection software-as-a-service (SaaS) business.

The acquisition provides Kape with a foothold in the malware protection market and boosts its product portfolio with the addition of complementary malware protection and security solutions; offers scope to leverage Intego’s technology and development skills to expand into other complementary software solutions – Kape’s management intends to develop and launch an anti-malware product for Windows users based on Intego’s technology; increases Kape’s user base by 150,000 paying users, with high renewal rates of above 75 per cent; and creates cross-selling opportunities for both Kape’s and Intego’s products across their respective customer bases.

I would also flag up that although Intego is already highly profitable – the business posted pre-tax profits of $1.4m on revenue of $6m in 2017 based on an average annual subscription of $40 per customer – there is potential to accelerate Intego’s user acquisition strategy and boost its profit margin by leveraging off Kape’s digital marketing expertise. Moreover, after factoring in a full 12-month contribution from Intego next year, then analysts predict Kape can increase its revenues by a sixth to $69.7m in 2019 to deliver cash profits of $13.2m. On this basis, expect pre-tax profits of $11.8m and EPS of 7.2¢ (5.5p). Also, after factoring in retained profits earned in the second half of this year, and adjusting for the $7m special dividend of 3.55p a share paid out in May, Kape should have $52m (£37m) net funds on its balance sheet by the year-end, a sum equating to 21 per cent of its current market capitalisation.

This means that net of cash the shares are rated on 18 times 2019 earnings estimates, hardly a full valuation given the potential for Kape’s management team under the leadership of chief executive Ido Erlichman to maintain the strong growth they have delivered since I initiated coverage two and a half years ago. There is also scope for the directors to make further complementary acquisitions to augment Kape’s product portfolio, and boost earnings further. In the circumstances, I am lifting my target price to 180p to value Kape’s equity at £253m based on an enterprise value to cash profit multiple of 20 times for 2019. Buy. (Source: Investors Chronicle)

31 Jul 18. Aeronautics Gets $27m Thailand Deal. Aeronautics Ltd. will supply Dominator unmanned aerial vehicles (UAVs) to the Thai Ministry of Defense, the company reported to the Tel Aviv Stock Exchange (TASE). The volume of the deal, which includes UAVs, land equipment, and accompanying services, is $27m over three years. Payment will be according to the milestones set in the agreement. The Dominator, developed by Aeronautics on the basis of a manned aircraft converted by the company into a UAV, can carry up to 1,900 kilograms in special payloads (such as a camera, radar, or bomb), simultaneously and can stay airborne for 20 hours. Aeronautics said that the Thai Ministry of Defense was one of its veteran customers and that the Thai army had been using the company’s UAVs for the past decade. Aeronautics develops and manufactures UAVs, observation balloons, bomb fuses, and advanced navigational systems. The company is controlled by the KCPS, Viola, and Bereshit funds. Its CEO is Amos Mathan and its chairperson is former Israeli navy commander and former Rafael Advanced Defense Systems Ltd. CEO Vice Admiral (res.) Yedidia Yaari, who recently replaced former Israel air force commander Maj. Gen. Eitan Ben Eliyahu. Aeronautics’ share price responded to the news by rising, but has lost nearly 60% of its value since the company went public in June 2017, following weak results and an affair that culminated in the Ministry of Defense suspending Aeronautics’ license to market the K1 Orbiter UAV to an important customer in a foreign country (a gag order is still in effect in the affair after a criminal investigation was opened last November).  (Source: UAS VISION/Globes)

31 Jul 18. Brazil’s Embraer to fight bid by leftist lawmakers to halt Boeing talks. Embraer (EMBR3.SA) said on Monday it will defend itself against a lawsuit brought by leftist lawmakers aimed at halting a bid by Boeing Co (BA.N) to take over most of the Brazilian planemaker’s commercial jet unit, the latest legal headache for the proposed tie-up. The lawsuit, filed by four congressmen for the left-wing Workers Party against the federal government and Embraer, seeks an injunction to freeze talks between the two planemakers, the Brazilian company said. While Embraer is a private company, the government holds a special stock that grants it veto power over major business decisions. The lawsuit is just the latest headache for a deal that has drawn fire from critics worried about its impact on Brazilian jobs and those concerned about Embraer’s financial viability without the lucrative commercial jet unit. The proposed deal with Boeing would not include Embraer’s defense and executive jets business, where the Brazilian government would maintain veto power. A Brazilian labor judge this month rejected a call to make the proposed acquisition dependent on a pledge to preserve all local jobs at the company. That injunction request was filed by Brazil’s labor prosecutors, a special group that investigates potential violations of the country’s strict labor laws. They responded to the judge’s rejection by announcing plans for a civil lawsuit against the government. Embraer executives said earlier this month they do not expect to finalize the deal until late next year, forcing Embraer to compete single-handedly against the European and Canadian rivals. (Source: Reuters)

31 Jul 18. Italy’s Leonardo lifts 2018 sales, cashflow guidance on Qatar deal. Italian defence group Leonardo (LDOF.MI) lifted its 2018 revenue and free operating cashflow guidance on Monday to reflect a 3bn euro (£2.67bn)helicopter deal with Qatar. The deal for 28 medium-sized military helicopters was signed in March between Qatar and the NHI consortium, which includes the helicopter divisions of Leonardo and Airbus’ (AIR.PA) and Dutch aircraft manufacturer Fokker. State-controlled Leonardo, which is the prime contractor, has previously said its share in the deal would be over 40 percent. Leonardo raised its 2018 revenue guidance to between 14.0 and 14.5bn euros ($17bn) from a previous 12.5bn-13.0bn euros. Free operating cashflow at the end of the year is seen at between 300m and 350m euros from a previous target of about 100m euros. The outlook for orders and profits remains unchanged.

“The new guidance reflects the Qatar contract, which had only been partially included in (Leonardo’s) earlier guidance,” Chief Financial Officer Alessandra Genco told analysts in a conference call after the company released its first-half results.

In January the group said it aimed to return to double-digit profit margins by 2020 – half-way through its five year plan – after it cut revenue and profit guidance last year over issues with its helicopter business.

“First-half results were in line with expectations, we are focused on the execution of our industrial plan. Recovery of the helicopter (sector) is moving ahead…. guaranteeing the group a sustainable growth in the long term,” Chief Executive Alessandro Profumo said in a statement.

In the first half of the year the group’s revenues rose 1.7 percent from a year earlier to 5.59bn euros. Net income, however, halved to 106m euros, dragged down by an estimated 170m euro one-off cost linked to a retirement plan involving up to 1,100 workers. The group said its helicopter unit, its Achilles heel in recent years, was recovering in line with the company’s plan and that deliveries this year would exceed last year.

“This year (the helicopter) business is performing in a more linear and upward trajectory,” Genco said.

She said the group’s AW139 helicopter was the most profitable programme, adding orders were skewed more towards emergency and medical services and search and rescue operations than to offshore activities. Offshore business was nonetheless largely recovering, she said, after the slowdown in the oil and gas business had hit sales. ($1 = 0.8535 euros) (Source: Reuters)

31 Jul 18. Quickstep eyes JSF boost for 2019.  Australia-based Quickstep Holdings has released its results for the fourth quarter of 2018, providing financial, operational and key program updates for Quickstep’s participation in the F-35 and C-130J programs.  Quickstep delivered strong sales growth in Q4 with sales revenue of $16.6m, an increase of 14 per cent compared with $14.6m in Q4 FY17. Full-year sales were $59.0m, an increase of 14 per cent compared with $51.9m in FY17.  Quickstep remains on track to deliver higher Joint Strike Fighter (JSF) volumes over the next two years, with JSF revenue expected to increase more than 40 per cent in FY19. All components were supplied on time and in line with program demand. Operating cashflow was $1.1m for Q4 with OneQuickstep initiatives improving gross margin and delivering positive EBITDA and working capital reduction. This was offset by a net deferred income reduction of $2.9 m:

• Deferred income had a net negative cash impact of $2.9 m in Q4 (which reflects the timing of half-yearly partial advance payments received in Q1 and Q3 for C-130J production);
• EBIT was positive and stronger in Q4. The business achieved positive EBIT in FY18 H2 and EBIT is expected to continue to improve in FY19; and
• Cost savings from OneQuickstep activities of around $3.5m net achieved in FY18.

At 30 June 2018, the group held $2.9m in cash (31 March 2018: $2.9m) and $0.8m in restricted term deposits (31 March 2018: $0.7m). Total outstanding debt, including capitalised interest, was $13.6m at 30 June 2018. This was a reduction of $0.2m from 31 March 2018.

Stronger volume production and savings from lean manufacturing contributed to improved gross margin in H2 with an increase of 5 percentage points in H2 compared with H1. Further, gross margin improvements are expected in FY19 as JSF volumes continue to increase and the ongoing lean manufacturing program. Cost benefits from OneQuickstep helped deliver EBITDA of $1.9m in H2.

Key new actions and activities:

• Boeing Defense: Quickstep continued the development for two new small contracts from Boeing Defense for F-15 and F-18 components – these contracts add a new tier 1 customer, and business platforms and part families to Quickstep’s key portfolios;
• General Atomics: Quickstep is partnering with General Atomics as part of the ‘Team Reaper’ tender for remotely piloted aircraft (RPA) systems. The partnership is progressing and may lead to additional project opportunities and collaboration with General Atomics;
• Airbus: Quickstep is now an approved supplier to Airbus in Australia and the south Pacific. This will allow Quickstep to formally quote for new business with Airbus in Australia Pacific; and
• US market: Quickstep appointed a senior business development leader in Q4, who will be US-based. This will allow for more regular and deeper engagement with existing and potential new US customers.

C-130 J Super Hercules:

• Lockheed Martin awarded Quickstep the sole supplier of composite wing flaps for the C-130J ‘Super Hercules’ military transport aircraft;
• Quickstep’s initial five-year memorandum of agreement (MoA) extends through to 2019 in line with Lockheed Martin’s C-130J Multiyear II contract with the US Department of Defense;
• Discussions are underway for a further five-year contract for the period 2020 to 2024; and
• The business supplies wing flaps in shipsets, which comprise of four main structures – an inner and outer left and right flap. Spares supplied can be a partial shipset (one quarter) through to a full shipset.

F-35 Joint Strike Fighter:

• Over the life of the JSF program, Quickstep will manufacture and supply more than $1bn in JSF composite components and assemblies;
• The F-35 Lightning II JSF Program is the world’s largest military aerospace program, valued in excess of US$300 billion;
• Quickstep is the key supplier globally to Northrop Grumman for 21 JSF components including doors, panels, skins and other composite parts; and
• Quickstep will also supply 700 sets of vertical tail parts over 14 years under an agreement with BAE Systems’ supplier, Marand Precision Engineering.

Mark Burgess, managing director of Quickstep, said, “This was a strong quarter with increased revenue and positive operating cashflow. The OneQuickstep Program has successfully realigned the business to drive growth, improve gross margins and reduce costs. Over the next year, we expect further improvement as JSF production increases. We were delighted to achieve approved supplier status with Boeing and also Airbus in Australia and south Pacific. This opens up significant business opportunities, and the company is well positioned for further growth.”

Quickstep Holdings is is the largest independent aerospace-grade advanced composite manufacturer in Australia, employing more than 220 people in Australia and internationally. Quickstep operates from state-of-the-art aerospace manufacturing facilities at Bankstown Airport in Sydney, NSW and a manufacturing and R&D/ process development centre in Geelong, Victoria. (Source: Defence Connect)

30 Jul 18. Senior hikes dividend after reporting above-forecast first-half profits, says current trading ahead of expectations. For the six months ending on 30 June, the FTSE 250-listed engineer saw its pre-tax profits jump by 20% to £39.0mln, beating estimates for around £37.0m. Senior raised its interim dividend by 6.8% to 2.19p. Senior PLC (LON:SNR) has hiked its dividend after reporting above-forecast first-half profits, thanks to an improved performance from both of its main divisions, and it said current trading is ahead of expectations. For the six months ending on 30 June, the FTSE 250-listed aerospace and automobile engineering group saw its pre-tax profits jump by 20% to £39.0mln, beating estimates for around £37.0m. On an adjusted basis, Senior’s operating margins improved by 90 basis points to 8.3%, driving a 9% improvement in free cash flow to £32.2m, even as the company cut its net debt by £33.0m to £148.8m. However, total sales only rose by 2.6% to £523.3m, as negative exchange rate effects wiped £22.4m from the firm’s top-line. As expected, Senior benefitted from a 30% jump in the production of North American heavy-duty trucks during the first half, which benefited its Flexonics division.

However, although upstream oil and gas markets continued to see increased drilling activity, the downstream market remained “flat”, the firm said. The group said: “At current exchange rates, the Board’s expectation of making good progress in 2018 is unchanged, with performance still expected to be slightly weighted to the second half.”

It added: “Overall, end markets are generally healthy, though we are watching with care any impact from the ongoing geopolitical trade discussions.”

The group raised its interim dividend by 6.8% to 2.19p. Senior’s group chief executive David Squires commented: “Trading across the Group in the first half of 2018 has been slightly ahead of expectations with margin progression in both Aerospace and Flexonics and the Group delivered another strong cash performance.” (Source: proactiveinvestors.co.uk)

30 Jul 18. Caterpillar raises outlook after strong Q2, shrugs off tariff costs. Caterpillar again raised its guidance for the full year after delivering record second-quarter earnings that sailed past expectations and said it intended to offset the impact of recently imposed tariffs by raising prices. The world’s biggest earthmoving equipment maker said its order rates were healthy and there was a solid backlog during the quarter, while certain applications, such as those in the oil and gas and mining sectors, were seeing strong demand and taking orders well into next year. The Illinois-based company has been regarded by investors as a potential casualty of a trade war and is regularly sold off when tensions between the US and its trading partners, particularly China, flare up: shares are down 9.5 per cent in 2018. However it seems confident of overcoming such hurdles. Caterpillar said the recently imposed tariffs are expected to hit material costs in the second half of the year to the tune of $100m to $200m, and it also expects freight costs to face upward pressure. “However, the company intends to largely offset these impacts through announced mid-year price increases” as well as by keeping a short leash on costs. The company expects to report profit per share this year in the range of $10.50 to $11.50, up from $9.75 to $10.75 previously. On an adjusted basis, that range lifts to $11 to $12 a share, up 75 cents at both ends. For the three months ended June 30, Caterpillar reported a 24 per cent increase in sales to $14bn, compared with an average of $13.9bn in a survey of analysts by Thomson Reuters. Earnings more than doubled to $2.82 a share, a record for the second quarter, from $1.35 a year ago and comfortably above market forecasts for $2.58 a share. Adjusted earnings were $2.97 a share. Caterpillar shares were up 3.2 per cent in pre-market trade on Monday. Caterpillar’s board also authorised a new $10bn stock buyback programme, effective January 1, 2019, that replaces the previous one from 2014. (Source: FT.com)

26 Jul 18. L3 Announces Second Quarter 2018 Results.

• Funded orders increased 32% to $2.8bn, with a book-to-bill ratio of 1.09x
• Sales increased 8% to $2.6bn
• Diluted earnings per share (EPS) from continuing operations of $2.33
• Diluted EPS from continuing operations excluding gain on sale of businesses and debt retirement charge of $2.47
• Increased 2018 financial guidance

L3 Technologies, Inc. (NYSE:LLL) today reported diluted earnings per share (EPS) from continuing operations of $2.33 and adjusted diluted EPS(1) from continuing operations of $2.47 for the quarter ended June 29, 2018 (2018 second quarter) compared to diluted EPS from continuing operations for the quarter ended June 30, 2017 (2017 second quarter) of $2.39. Adjusted diluted EPS from continuing operations is diluted EPS from continuing operations excluding: (1) a gain on sale of the Crestview Aerospace and TCS businesses of $0.31 per diluted share and (2) a debt retirement charge of $0.45 per diluted share. The 2017 second quarter includes a pre-tax gain of $42m ($26m after-tax, or $0.33 per share) in connection with the sale of the company’s property in San Carlos, California. Net sales of $2,583m for the 2018 second quarter increased by 8% compared to the 2017 second quarter.

“We had a strong second quarter, led by growth in orders, sales and operating income. We are making steady progress optimizing our business and delivering affordable solutions to our customers,” said Christopher E. Kubasik, L3’s Chairman, Chief Executive Officer and President. “My leadership team and employees have embraced our initiatives for integration, collaboration and innovation, which are transforming L3 and I’m grateful for their continued focus on our customers and world class performance.”

(1) Adjusted diluted EPS from continuing operations is not calculated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The company believes that the gain relating to the Crestview Aerospace and TCS businesses divestiture and the debt retirement charge affect the comparability of the results of operations and that disclosing diluted EPS from continuing operations excluding these items is useful to investors as it allows investors to more easily compare 2018 results to 2017 results. However, these non-GAAP financial measures may not be defined or calculated by other companies in the same manner.

L3 Consolidated Results

The 2018 second quarter results were impacted by a gain on the sale of the Vertex Aerospace businesses and a debt retirement charge related to the refinancing of $1.8bn of senior notes further discussed below.

• On June 29, 2018, the company successfully completed the sale of its Vertex Aerospace businesses for a sales price of $540m subject to customary closing net working capital adjustments. In connection with the sale, the Company recognized: (1) a pre-tax gain from continuing operations of $48m ($25m after income taxes, or $0.31 per diluted share) related to the Crestview Aerospace and TCS businesses (the “Crestview & TCS Businesses”) and (2) a pre-tax gain from discontinued operations of $237m ($180 m after income taxes, or $2.27 per diluted share) related to the Vertex Aerospace business; and
• On June 6, 2018, the company issued $1.8bn of senior notes comprised of $800m of 3.85% senior notes due 2023 and $1bn of 4.40% senior notes due 2028 (collectively, the “Senior Notes”). The net cash proceeds from the Senior Notes, along with cash on hand, were used to fund the concurrent tender offers for the company’s outstanding $1bn of 5.20% senior notes due October 15, 2019 (2019 Senior Notes) and $800m of 4.75% senior notes due July 15, 2020(2020 Senior Notes). In connection with the tender offers, the company redeemed approximately $1.2bn of Senior Notes in total and recorded a pre-tax debt retirement charge of $48m ($36m after income taxes, or $0.45 per diluted share). On June 6, the company also initiated a redemption of its 2019 and 2020 Senior Notes that remained outstanding after the expiration of the tender offers. The company completed the redemption of the 2019 and 2020 Senior Notes on July 6, 2018. In connection with the redemption, the company will record a pre-tax debt retirement charge of $21m ($16m after income taxes, or $0.20 per diluted share) in the third quarter of 2018.

Second Quarter Results of Operations: For the 2018 second quarter, consolidated net sales of $2,583m increased $198m, or 8%, compared to the 2017 second quarter. Organic sales(2) increased by $178m, or 7%, to $2,563m for the 2018 second quarter. Organic sales exclude $20 m of sales increases related to business acquisitions. For the 2018 second quarter, organic sales to the U.S. Government increased $158m, or 10%, to $1,811m and organic sales to international and commercial customers increased $20m, or 3%, to $752m.

Segment operating income for the 2018 second quarter decreased by $21m, or 7%, compared to the 2017 second quarter. Segment operating income as a percentage of sales (segment operating margin) decreased by 170 basis points to 10.6% for the 2018 second quarter from 12.3% for the 2017 second quarter. The 2017 second quarter includes a pre-tax gain of $42m ($26 m after-tax, or $0.33 per share) on the sale of the company’s property in San Carlos, California in connection with the consolidation of the EDD/ETI Traveling Wave Tube (TWT) businesses in the Communication Systems segment. Excluding this gain, segment operating margin would have been 10.6% for the 2017 second quarter. Lower severance and restructuring costs, primarily at Communication Systems, were largely offset by higher research and development costs, primarily at Sensor Systems. See the reportable segment results below for additional discussion of sales and operating margin trends.

The effective income tax rate for the 2018 second quarter was 20.3%. Excluding the sale of the Crestview & TCS Businesses, the debt retirement charge and the related income tax impacts of each, the effective income tax rate would have decreased to 15.6% from 23.2% for the 2017 second quarter. The decrease was primarily driven by an increase in tax benefits from equity compensation and the reduction of the U.S. corporate income tax rate enacted under the U.S. Tax Cuts and Jobs Act.

Diluted EPS from continuing operations was $2.33 for the 2018 second quarter compared to $2.39 for the 2017 second quarter. The 2018 second quarter includes: (1) a gain of $0.31 per diluted share related to the sale of the Crestview & TCS Businesses and (2) a debt retirement charge of $0.45 per diluted share. The 2017 second quarter includes a gain of $0.33 per diluted share in connection with the sale of the company’s property in San Carlos, California. Diluted weighted average common shares outstanding for the 2018 second quarter decreased slightly compared to the 2017 second quarter due to changes in the dilutive impact of common share equivalents.

First Half Results of Operations: For the first half ended June 29, 2018 (2018 first half), consolidated net sales of $4,954m increased $248m, or 5%, compared to the first half ended June 30, 2017 (2017 first half). Organic sales increased by $217m, or 5%, to $4,913m for the 2018 first half. Organic sales exclude $41m of sales increases related to business acquisitions and $10m of sales declines related to business divestitures. For the 2018 first half, organic sales to the U.S. Government increased $177m, or 5%, to $3,451m, and organic sales to international and commercial customers increased $40m, or 3%, to $1,462m.

Segment operating income for the 2018 first half decreased by $7m, or 1%, compared to the 2017 first half. Segment operating margin decreased by 70 basis points to 10.6% for the 2018 first half from 11.3% for the 2017 first half. Excluding the gain on sale of the company’s property in San Carlos, California, segment operating margin would have been 10.4% for the 2017 first half. Improved contract performance primarily for the Electronic Systems and Aerospace Systems segments, and lower severance and restructuring costs primarily at Communication Systems, were partially offset by higher research and development costs, primarily at Sensor Systems. See the reportable segment results below for additional discussion of sales and operating margin trends.

The effective income tax rate for the 2018 first half was 15.9%. Excluding the sale of the Crestview & TCS Businesses, the debt retirement charge and the related income tax impacts of each, the effective income tax rate would have decreased to 13.5% from 22.3% for the same period last year. The decrease was primarily driven by trends similar to the 2018 second quarter.

Diluted EPS from continuing operations was $4.67 for the 2018 first half compared to $4.32 for the 2017 first half. The 2018 first half includes: (1) a gain of $0.31 per diluted share related to the sale of the Crestview & TCS Businesses and (2) a debt retirement charge of $0.45 per diluted share. The 2017 first half includes a gain of $0.33 per diluted share in connection with the sale of the company’s property in San Carlos, California. Diluted weighted average common shares outstanding for the 2018 first half increased slightly compared to the 2017 first half due to changes in the dilutive impact of common share equivalents, primarily caused by a higher L3 stock price.

Orders: Funded orders for the 2018 second quarter increased 32% to $2,808m compared to $2,129m for

the 2017 second quarter. Funded orders for the 2018 first half increased 20% to $5,444m compared to $4,518m for the 2018 first half. The book-to-bill ratio was 1.09x for the 2018 second quarter and 1.10x for the 2018 first half. Funded backlog increased 4% to $8,833m at June 29, 2018, compared to $8,493m at January 1, 2018.

Cash Flow: Net cash from operating activities from continuing operations was $178m for the 2018 first half, a decrease of $137m compared to $315m for the 2017 first half. The decrease is primarily due to higher working capital requirements, primarily contract assets and milestone payments for aircraft procurements related to U.S. and foreign government contracts. Capital expenditures, net of dispositions, increased by $76m compared to the 2017 first half. Excluding the proceeds of $64m from the sale of the company’s San Carlos, California property, capital expenditures, net of dispositions, increased by $11m. In addition, during the 2018 second quarter, the company received proceeds from: (1) the sale of the Vertex Aerospace businesses of $535m and (2) the issuance of the Senior Notes of $1,798m. The company paid $1,263m to purchase a portion of its outstanding senior notes. The company paid dividends of $128m during the 2018 first half compared to $119m during the 2017 first half. Repurchases of the company’s common stock were $287m during the 2018 first half compared to $26m during the 2017 first half.

Reportable Segment Results

The company has four reportable segments. The company evaluates the performance of its segments based on their sales, operating income and operating margin. Corporate expenses are allocated to the company’s operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. Accordingly, segment results include all costs and expenses, except for goodwill impairment charges, gains or losses on sale of businesses and certain other items that are excluded by management for purposes of evaluating the performance of the company’s business segments.

Electronic Systems

Second Quarter: Electronic Systems net sales for the 2018 second quarter increased by $45m, or 6%, compared to the 2017 second quarter. Organic sales increased by $32m, or 4%, compared to the 2017 second quarter. Organic sales exclude $13m of sales increases related to business acquisitions. Organic sales increased by: (1) $20m for Precision Engagement Systems primarily due to increased deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army and (2) $1m for Link Training & Simulation due to higher deliveries of training systems for the U.S. Army’s Flight School XXI program. Electronic Systems operating income for the 2018 second quarter increased by $10m, or 10%, compared to the 2017 second quarter. Operating margin increased by 50 basis points to 13.9% due to acquisitions.

First Half: Electronic Systems net sales for the 2018 first half increased by $92m, or 6%, compared to the 2017 first half. Organic sales increased by $78m, or 5%, compared to the 2017 first half. Organic sales exclude $24m of sales increases related to business acquisitions and $10 m of sales declines related to business divestitures. Organic sales increased by: (1) $49m for Precision Engagement Systems due to increased deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army, (2) $21m for Security & Detection Systems due to increased deliveries for airport screening devices primarily to the U.S. Transportation Security Administration(TSA) and higher volume on an industrial automation control contract for a commercial customer and (3) $8m primarily for Link Training & Simulation due to higher volume for training systems to the U.S. Navy.

Electronic Systems operating income for the 2018 first half increased by $28m, or 15%, compared to the 2017 first half. Operating margin increased by 100 basis points to 13.8%. Operating margin increased by 160 basis points primarily due to improved contract performance across all business areas and 60 basis points due to higher margins related to acquisitions. These increases were partially offset by 120 basis points primarily due to sales mix changes at Power & Propulsion Systems, Precision Engagement Systems and Security & Detection Systems.

Aerospace Systems

Second Quarter: Aerospace Systems net sales for the 2018 second quarter increased by $62m, or 9%, compared to the 2017 second quarter. Sales increased primarily due to the procurement of one U.S. Air Force (USAF) Compass Call Recap aircraft to begin missionization. Aerospace Systems operating income for the 2018 second quarter increased by $5m, or 9%, compared to the 2017 second quarter. Operating margin was 8.2% for the 2018 and 2017 second quarters. Operating margin increased by 30 basis points due to lower pension costs, which was offset by sales mix changes primarily related to the Compass Call Recap aircraft procurement at Mission Integration.

First Half: Aerospace Systems net sales for the 2018 first half increased by $52m, or 4%, compared to the 2017 first half. Sales increased by: (1) $55m related to the procurement of one USAF Compass Call Recap aircraft to begin missionization, (2) $42m due to higher volume related to the Presidential Aircraft Recap Program and (3) $30m primarily due to higher volume on large Intelligence, Surveillance and Reconnaissance (ISR) aircraft systems for the U.S. Department of Defense (DoD). These increases were partially offset by lower volume of: (1) $47m related to international aircraft modifications primarily the Australian Defence Force C-27J aircraft and (2) $28 m primarily on ISR aircraft systems for foreign military customers as contracts near completion.

Aerospace Systems operating income for the 2018 first half increased by $6m, or 5%, compared to the 2017 first half. Operating margin increased by 20 basis points to 8.3%. Operating margin increased by 50 basis points due to favorable contract performance adjustments and 30 basis points due to lower pension costs. These increases were partially offset by sales mix changes at Mission Integration.

Communication Systems

Second Quarter: Communication Systems net sales for the 2018 second quarter increased by $4m, or 1%, compared to the 2017 second quarter. Sales increased by $33m for Space & Power Systems due to higher volume on power devices for commercial and military satellites. The increase was partially offset by $29 m due to lower production volume for Unmanned Aerial Vehicle (UAV) communication systems for the DoD in Broadband Communication Systems.

Communication Systems operating income for the 2018 second quarter decreased by $39m, or 46%, compared to the 2017 second quarter. Operating margin decreased by 720 basis points to 8.1%. Operating margin decreased by: (1) 770 basis points due to a pre-tax gain of $42m related to the sale of the company’s property in San Carlos, California in connection with the consolidation of the EDD/ETI TWT businesses in the 2017 second quarter that did not recur and (2) 170 basis points primarily due to lower volume at Broadband Communication Systems. These decreases were partially offset by 220 basis points due to lower severance and restructuring costs of $6m and lower operating costs of $6m for the 2018 second quarter compared to the 2017 second quarter, primarily at Space & Power Systems.

First Half: Communication Systems net sales for the 2018 first half decreased by $40m, or 4%, compared to the 2017 first half. Sales decreased by $64m primarily driven by lower production volume for UAV communication systems for the DoD in Broadband Communication Systems. The decrease was partially offset by $24m primarily for Space & Power Systems due to higher volume on power devices for commercial and military satellites.

Communication Systems operating income for the 2018 first half decreased by $44m, or 35%, compared to the 2017 first half. Operating margin decreased by 380 basis points to 7.8%. Operating margin decreased by: (1) 390 basis points due to the gain on the sale of the company’s property in San Carlos, California, in the 2017 first half that did not recur and (2) 160 basis points primarily due to lower volume at Broadband Communication Systems and Space & Power Systems. These decreases was partially offset by 170 basis points due to lower severance and restructuring costs of $10m and lower operating costs of $9m for the 2018 first half compared to the 2017 first half, primarily at Space & Power Systems.

Sensor Systems

Second Quarter: Sensor Systems net sales for the 2018 second quarter increased by $87m, or 22%, compared to the 2017 second quarter. Organic sales increased by $80m, or 21%, compared to the 2017 second quarter. Organic sales exclude $7m of sales increases related to business acquisitions. Organic sales increased by: (1) $34m for Warrior Systems due to increased deliveries of night vision products, primarily to foreign military customers, (2) $16m due to increased deliveries of airborne turret systems, primarily to foreign militaries, (3) $14m for Maritime Systems primarily due to increased volume for new commercial contracts, (4) $11m primarily for Advanced Programs due to higher volume for mission management systems and (5) $5m for Space Systems due to higher volume for optical systems, and space electronics and infrared detection products to the U.S. military.

Sensor Systems operating income for the 2018 second quarter increased $3m or 6%, compared to the 2017 second quarter. Operating margin decreased by 180 basis points to 11.3%. Operating margin decreased by 330 basis points due to higher research and development costs related to imaging, space and undersea growth investments and 50 basis points due to lower margins related to acquisitions. These decreases were partially offset primarily by higher volume, which increased operating margin by 200 basis points.

First Half: Sensor Systems net sales for the 2018 first half increased by $144m, or 19%, compared to the 2017 first half. Organic sales increased by $127m, or 17%, compared to the 2017 first half. Organic sales exclude $17m of sales increases related to business acquisitions. Organic sales increased by: (1) $34m for Warrior Systems due to increased deliveries of night vision products primarily to foreign military customers, (2) $31 m due to increased deliveries of airborne turret systems, primarily to foreign militaries, (3) $23m for Space Systems due to higher volume for optical systems, and space electronics and infrared detection products to the U.S. military, (4) $17m for Intelligence & Mission Systems due to increased deliveries of electronic warfare countermeasures products primarily to foreign militaries, (5) $17m for Maritime Systems primarily due to higher volume for compact towed array products to the U.S. Navy and (6) $5m for Advanced Programs due to higher volume for mission management systems. Sensor Systems operating income for the 2018 first half increased by $3m, or 3%, compared to the 2017 first half. Operating margin decreased by 180 basis points to 11.7% due to trends similar to the 2018 second quarter.

30 Jul 18. KBR Announces Second Quarter 2018 Financial Results.

– Revenue growth of 16% overall, with 11% organic growth in Government Services

– Solid earnings, with Net Income of $42m, GAAP EPS of $0.30; Adjusted EPS of $0.34

– Strong operating cash flow performance of $94m

– Book-to-bill of 1.2x overall KBR, with 2.6x Hydrocarbons Services

– EPS guidance raised

KBR, Inc. (NYSE: KBR), a global provider of differentiated, professional services and technologies across the asset and program life cycle within the government services and hydrocarbons industries today announced second quarter 2018 financial results.

“I’m pleased to report that KBR had a solid second quarter with positive performances from all three of our business segments,” said Stuart Bradie, KBR President and CEO. “We experienced continued year over year organic growth in our Government Services business, increased profitability in Technology and stabilized sequential revenues with a very healthy book-to-bill in our Hydrocarbons business,” Bradie continued. “The signals we are getting from customers on the capital projects outlook in Hydrocarbons has improved measurably in recent months. In addition, on the operations side we maintained our targeted margins in all segments and produced a healthy cash flow result. Improving fundamentals in our government and hydrocarbons end markets coupled with our strategic positioning and performance of our recent acquisitions enable us to raise our outlook for the year,” said Bradie. “Our people continue to be the foundation of this company and its success, consistently delivering the best execution and one of the strongest safety performances in the business.”

Three Months Ended, June 30, 2018:

Revenue: The increase in revenues was driven by strong organic growth of 11% in our GS business segment, the consolidation of acquired entities in the Aspire Defence program and our acquisition of SGT. The increase was partially offset by completion or substantial completion of several projects within our HS business segment, and the non-recurrence of $35m in revenues associated with the PEMEX settlement in second quarter of 2017.

Gross Profit: The increase in gross profits were driven by the consolidation of the Aspire Defence project entities, the inclusion of SGT, coupled with strong organic growth in our GS business segment.  Included in gross profit for the quarter was the favorable close out of an LNG project in Australia offset by the non-recurring gain associated with the PEMEX settlement in the second quarter of 2017.

Equity in earnings: The decrease in equity in earnings was driven by the consolidation of the Aspire Defence entities in our GS business segment, now reported in gross profit, and reduced activity on the Ichthys project in our HS segment as we near completion.

Operating cash flow: The cash provided by operations totaled $94m in the three months ended June 30, 2018 compared to cash provided by operations of $325m in the three months ended June 30, 2017.  Operating cash flows in the three months ended June 30, 2017 included collection of a $344m payment (net of tax) associated with the PEMEX settlement.

Six Months Ended, June 30, 2018:

Revenue: The increase in revenues was driven by strong organic growth in our GS business segment, the consolidation of acquired entities in the Aspire Defence program and our acquisition of SGT. The increase was partially offset by completion or substantial completion of several projects within our HS business segment and the non-recurrence of $35m in revenue from the PEMEX settlement in second quarter of 2017.

Gross Profit: The increase in gross profits were driven by the consolidation of the Aspire Defence project entities, inclusion of SGT, organic growth in our GS business segment, and increased profit in our Technology business segment.  These increases were partially offset by decreased profit in our HS business segment due to reduced activity and the non-recurring PEMEX settlement.

Equity in earnings: The decrease in equity in earnings was driven by the consolidation of the Aspire Defence project entities in our GS business segment, now reported in gross profit and decreased activity on a JV in Mexico. These decreases were partially offset by an increase in earnings provided by the Ichthys LNG project, partially resulting from increased cost estimates in the first quarter of 2017 that did not recur in 2018.

Gain on consolidation of Aspire entities: The gain was recognized upon consolidation of the Aspire Defence entities as a result of adjusting our investment to fair value as required by U.S. generally accepted accounting principles.

Operating cash flow: The cash used in operations totaled $36m in the six months ended June 30, 2018 compared to cash provided by operations of $210m in the six months ended June 30, 2017.  Operating cash flows in the six months ended June 30, 2017 included collection of a $344m payment (net of tax) associated with the PEMEX settlement.

New Business:

Government Services

• We were awarded a $133m task order by the U.S. Army to provide technical and engineering services to the PATRIOT missile system.
• We were awarded a cost-plus-fixed-fee contract modification to provide base life support services to the U.S. Army under the LOGCAP IV contract.
• We were awarded a contract modification by the U.S. Marine Corps to provide prepositioning and logistic support services for the USMC Blount Island Command.
• We secured a seat on a $900m indefinite-delivery/indefinite-quantity contract to provide rapid solutions to fix problems identified through the Department of Defense’s Joint Test and Evaluation Program.

Technology

• We were awarded an ammonia plant revamp contract by Krishak Bharati Cooperative Ltd to provide licensing and basic engineering design services for their ammonia plant in Hazira, India.
• We were awarded a license, engineering and proprietary equipment supply contract by China Pingmei Shenma Group for two new polycarbonate plants in the Henan Province in China
• We were awarded a license and engineering contract by GS Caltex Corporation to supply SCORE Ethylene technology at their mixed feed cracker project in Yeosu, South Korea.
• We were awarded a nitric acid plant revamp contract by Haifa Chemicals Ltd for its plant in Mishor-Rotem, Israel.

Hydrocarbons Services

• We were awarded a multi-year contract to provide engineering, procurement and construction management services to a fortune 100 chemicals manufacturer for their facilities in the U.S. and Mexico.
• We were awarded a FEED leading to reimbursable construction EPC by Arkema Chemicals to increase sulfur derivatives production at their Beaumont, Texas site.
• We were awarded a contract to provide project management, engineering, procurement and construction management services for DuPont Safety & Construction at its facility in Contern, Luxembourg.
• We were awarded a project management consultancy services contract by Oman LNG, to assist in the selection and management of the EPC contractor for its 120 MW gas engine power plant.

KBR backlog increased from $13.2bn as of March 31, 2018 to $13.5bn as of June 30, 2018.  Backlog increases in Hydrocarbons Services of $544 m and $86m in Technology were partially offset by decreases in Government Services of $291m, which includes unfavorable foreign exchange rate differences primarily due to strengthening of the U.S. dollar against the British pound.

Guidance

We are increasing the company’s full year 2018 fully diluted adjusted earnings per share guidance range to $1.40 to $1.50 per share from the previous range of $1.35 to $1.45.  Our guidance of earnings per share is on an adjusted EPS basis, which excludes legacy legal fees for U.S. Government contracts, acquisition & integration-related expenses associated with the Aspire and SGT acquisitions, new amortization associated with the Aspire acquisitions and the gain on the Aspire consolidation.  The estimated legacy legal fees do not assume any cost reimbursement from the U.S. Government that could occur in the future.  Our estimated effective tax rate for 2018 is unchanged and estimated to range from 22% to 24%.  The operating cash flows are also unchanged and estimated to range from $125m to $175m for 2018.

29 Jul 18. The US Navy’s Columbia class submarines could squeeze General Dynamics’ profits. The Navy’s new ballistic missile submarine is likely to squeeze General Dynamics’ profit margins, the company’s top executive told analysts this week on its quarterly earnings call. General Dynamics, which owns Electric Boat in Groton, Connecticut, usually sees eight-to-10 percent margins on its boats. But GD chief executive Phebe Novakovic told investors and analysts on its quarterly earnings those margins will be under pressure as they move from just constructing Virginia-class attack submarines to kicking off the Columbia class, the first new ballistic missile submarine in decades.

“As we ramp up on Columbia, we will see some margin compression quite naturally because that will be cost-plus work,” Novakovic said.

“And given the long duration of the shipbuilding contracts and the shipbuilding process itself for any one of these single submarines, that margin compression can [last] for a while, offset of course by increased improvements in our Virginia class performance which we have historically shown.” The first Columbia-class boat will start construction in 2020, Novakovic said, and said the company would have more clarity on just how much margin they can eek out of Columbia and Virginia in future years within the next year or two. Last September, General Dynamics was awarded a $5.1bn detailed design contract for Columbia, which is destined to replace the Ohio-class ballistic missile subs. The acquisition is slated to cost about $128bn. The Government Accountability Office issued a report in December saying the Navy was underplaying the technology risk involved in Columbia and risked significant cost growth in the program as it ironed out the kinks. The first Columbia is slated to make a patrol in 2031. (Source: Defense News Early Bird/Defense News)

27 Jul 18. China’s CASIC secures finance deal. The China Aerospace Science and Industry Corporation (CASIC) has signed an agreement with the China Development Bank (CDB) to support a range of initiatives related to industrial modernisation and defence research and development. In a press release on 24 July CASIC said that its financial co-operation agreement with the CDB will prioritise “national defence construction” including the development of aerospace-military equipment, product upgrades, and civilian-military integration. The corporation said the financial deal will also support its programme to develop smart manufacturing processes that leverage internet of things technologies, advanced robots, and big data analytics. The company said the funding would also support efforts to expand international collaboration. (Source: IHS Jane’s)

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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/

As a result of this and related projects we have developed relationships with buyers and funders looking to acquire or invest in the sector.  We would be happy to share further insights into the sector and to carry out reviews of businesses whose shareholders are considering an exit, acquisition or fundraise.

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If this is of interest we would be happy to meet at your convenience.

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