24 Jan 19. Sparton Corporation Announces Expiration of Hart-Scott-Rodino Waiting Period With Respect to Pending Acquisition by an Affiliate of Cerberus. Sparton Corporation (“Sparton”) (NYSE:SPA) today announced that the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”), with respect to Sparton’s pending acquisition by Striker Parent 2018, LLC (“Parent”), an affiliate of Cerberus Capital Management, L.P. (“Cerberus”), expired at 11:59 p.m. Eastern Time on January 22, 2019 without a request for additional information by the Federal Trade Commission or the Department of Justice. The expiration of the waiting period under the HSR Act satisfies one of the conditions to the closing of the acquisition, which remains subject to other customary closing conditions set forth in the Agreement and Plan of Merger, dated as of December 11, 2018, by and among Sparton, Parent and Striker Merger Sub 2018, Inc. (“Merger Sub”), a wholly owned subsidiary of Parent. (Source: BUSINESS WIRE)
24 Jan 19. United Technologies Corp: Addressing Concerns; 5 Key Takeaways From Call. We got a supportive update from UTX that included favorable results and guidance as well as clarity on the COL outlook. Looking ahead, portfolio optionality, trade dispute resolution, and a compressed break-up timeline further the attractive SotP narrative, thus we remain OW.
More goodness likely to come following the supportive update. To start, UTX reported an earnings beat with adjusted EPS of $1.95 vs. MSe / consensus of $1.49 / $1.53 (see our variance here), driven by better than expected performance at Collins Aerospace, which included five weeks of the newly acquired Rockwell Collins, and a ~$0.26 tax tailwind. Elsewhere, performance was in-line with expectations with several puts and takes. With respect to the update from management, we offer our 5 key takeaways: 1) The 2019 EPS and FCF guides were broadly in-line with expectations; 2) Rockwell Collins is off to a good start with the accretion already improved; 3) The break-up timeline has compressed and strategic alternatives remain in play; 4) Solid Aerospace performance is expected to continue; and 5) Commercial trends diverge by geography, but on net are more stable. The net of these leave us comfortable with our OW-rating and $145 PT, premised on a SotP valuation to account for the planned separation into three businesses.
1) The 2019 EPS and FCF guides were broadly in-line with expectations. The company forecasted 2019 EPS of $7.70-8.00 versus MSe / consensus of ~$7.80, inclusive of a ~$0.10 benefit from a lower than expected tax rate of 23-24% (MSe of 24.5%). And items that bridge the YoY EPS include profit growth across all segments (excluding FX) alongside accretion from COL (~$0.35), offset by higher tax rates, one-time gains in 2018, increased corporate expenses, and an $0.11 contingency. The key tenants of the guide are favorable production trends from commercial OEMs, above-trend passenger traffic, and solid (though easing YoY) GDP expected in 2019. Moving to FCF, the $6.0-6.5B guide (excluding separation costs) was roughly in-line with MSe of $6.4B. Looking ahead, we expect cash flow growth to exceed the earnings expansion, driven by easing working capital and capex, thus aligning with best-in-class industrial peers at or above 100% conversion (following 90%+ in 2019).
2) Rockwell Collins is off to a good start with the accretion already improved. To start, 4Q18 saw COL performance that exceeded expectations with dilution to earnings of $0.03, lower than the expected $0.10. In addition, management raised their $0.15-0.20 2019 accretion goal and now expect $0.35. The two reasons are lower amortization (by $100M) and better than expected synergies. As it relates to synergies, the company reiterated its $500M cost target in the first four years, beginning with ~$150M in the first. On cash flow contributions from COL, the company allayed fears from the soft performance in FY2018 (that we discussed here) by raising cash flow accretion to ~$1B from the prior $500-750M inclusive of working capital benefits. Net-net, the update skewed positive per the improved contribution and supportive topline trends ahead (up MSD-HSD in 2019).
3) The break-up timeline has compressed… As the company has progressed through the separation process in recent months, it gained greater confidence in meeting, and possibly exceeding, the lower end of the 18-24 month timeline established in November 2018, making 2Q20 the new target date. This was mainly the result of traction around staffing, management, shared services, enterprise IT, and so on that it expects to complete by the end of the year. That said, the complexities and legalities around its various tax jurisdictions will ultimately dictate the separation timing within 2020. Lastly, on dissynergies, the overall dollar amounts are unchanged ($2.5-3.0B one-time and $350-400M on-going), though efforts are underway to reduce the components.
…And strategic alternatives remain in play. On strategic alternatives, management was explicit about being “open” to opportunities on the Commercial side while being “out there” and “listening” to “real value- enhancing” ideas. In our opinion, these are more likely to develop sooner rather than later to mitigate the above break-up work and aid in the separation process, which precedent with Sikorsky also supports. As we have highlighted previously, this is most likely to occur on the HVAC front, followed by Fire & Security and Otis.
4) Solid Aerospace performance is expected to continue. At the segment level, 2019 organic sales growth is expected to be in the HSD / MSD range for Pratt & Whitney / Collins Aerospace. For Pratt, it expects organic sales growth of HSD / MSD / ~10% for Commercial OE / Commercial AM / Military driven by growth on key platforms such as the GTF, F-135, and PW800 (Pratt Canada). And in the quarter, progress was solid with UTX nearly doubling YoY shipments for the GTF. Looking ahead, it expects this trend to continue, while holding negative engine operating losses flat YoY. Meanwhile, Collins Aerospace anticipates organic sales growth of MSD in Commercial OEM / Military and LSD-MSD in commercial aftermarket, with the latter mainly due to more difficult YoY provisioning compares. That said, above-trend passenger traffic growth remains favorable for the parts and repairs businesses at Collins. Overall, the solid Aerospace backlog should provide the stability and growth needed for company growth over the coming years.
5) Commercial trends diverge by geography, but on net are more stable. The discussions around the Commercial businesses revolved mainly around geographic trends. For 2019, sales growth in NAm / Asia is expected to be in the MSD for Otis and Carrier, offset by expected growth of LSD in EMEA. At a macro level, 2019 GDP of 1.4% in Western Europe is expected to lag key markets elsewhere, while continued order declines at Otis Europe factor into the $25M price / mix headwind expected in 2019. That said, Otis China orders were up 2% as price / mix continues to stabilize, thus driving the HSD equipment growth expected in 2019. Overall, the Commercial business should show modest growth in sales and operating profits albeit with challenged margin traction. Lastly, it is worth mentioning that previously mentioned headwinds related to tariffs (~$0.15 in EPS) provide potential upside should these ease in the coming quarters.
Solid progress with continued optionality ahead drive our OW-rating. Within the context of the various idiosyncratic value creation opportunities such as Commercial M&A and the GTF, we remain supportive of UTX shares looking forward. Moreover, we have greater confidence in the opportunities around the COL transaction, FCF improvement, and trade headwinds that could potentially reverse. Accordingly, we reiterate our Overweight rating and $145 PT, premised on a SotP to account for the upcoming separation, implying a ~17x 2020E FCF multiple.
24 Jan 19. Textron Inc. (NYSE: TXT) today reported fourth quarter 2018 income from continuing operations of $1.02 per share. Adjusted income from continuing operations, a non-GAAP measure that is defined and reconciled to GAAP in an attachment to this release, was $1.15 per share for the fourth quarter of 2018. Adjusted income from continuing operations excludes $73m of pre-tax special charges recorded in the fourth quarter ($0.23 per share, after-tax), and other favorable one-time adjustments ($0.10 per share, after-tax).
Full-year income from continuing operations was $4.83 per share. Full-year adjusted income from continuing operations, a non-GAAP measure, was $3.34 per share, up from $2.45 in 2017.
“We had strong execution in both the quarter and full year with significant margin improvements at Aviation, Bell, and Systems” said Textron Chairman and CEO Scott C. Donnelly. “We were also encouraged by the continued strength in new aircraft demand at Aviation.”
Cash Flow
Net cash provided by operating activities of continuing operations of the manufacturing group for the full year was $1,127 m, compared to $930 m last year. Manufacturing cash flow before pension contributions, a non-GAAP measure that is defined and reconciled to GAAP in an attachment to this release, was $784m compared to $872m last year.
In the quarter, Textron returned $400m to shareholders through share repurchases, compared to $131m in the fourth quarter of 2017. For the full year, Textron returned $1.8bn to shareholders through share repurchases, including $797m of proceeds from the sale of our Tools & Test businesses, compared to $582m in 2017.
Outlook
Textron is forecasting 2019 revenues of approximately $14bn, about flat with last year. Textron expects full-year 2019 earnings per share from continuing operations will be in the range of $3.55 to $3.75.
The company is estimating net cash provided by operating activities of continuing operations of the manufacturing group will be between $1,020 m and $1,120m and manufacturing cash flow before pension contributions (a non-GAAP measure) will be between $700 m and $800 m, with planned pension contributions of about $50m.
Donnelly continued, “Our outlook reflects the continued improvement in our operations to drive earnings growth and margin expansion. As we look to the future, we are investing for long-term growth to generate increases in shareholder value.”
Fourth Quarter Segment Results
Textron Aviation
Revenues at Textron Aviation of $1.6 bn were up 12%, due to higher volume and mix across the jet and commercial turboprop product lines, as well as favorable pricing.
Textron Aviation delivered 63 jets, up from 58 last year, and 67 commercial turboprops, up from 45 last year.
Segment profit was $170m in the fourth quarter, up from $120 m a year ago, due to the higher volumes and favorable pricing.
Textron Aviation backlog at the end of the fourth quarter was $1.8 bn.
Bell
Bell revenues were $827m, down from $983m last year, primarily on lower military volume.
Bell delivered 46 commercial helicopters in the quarter, up from 45 last year.
Segment profit of $108m was down $6m, largely on the lower military volume, partially offset by favorable performance.
Bell backlog at the end of the fourth quarter was $5.8bn.
Textron Systems
Revenues at Textron Systems were $345m, down from $489m last year, reflecting lower TAPV deliveries at Textron Marine & Land Systems and lower Unmanned Systems volume.
Segment profit was flat with last year’s fourth quarter at $37m, with lower volume and mix, offset by favorable performance.
Textron Systems’ backlog at the end of the fourth quarter was $1.5bn.
Industrial
Industrial revenues decreased $131m largely related to the disposition of our Tools & Test product line.
Segment profit was down $10m from the fourth quarter of 2017, largely due to the impact from the disposition. Favorable performance, reflecting a positive impact of $17m related to a patent infringement matter, was offset by unfavorable inflation and mix.
Finance
Finance segment revenues were up $3m, and profit was up $3m from last year’s fourth quarter.
23 Jan 19. Airbus Helicopters sees strong sales increase in 2018.
- Gross orders up 18 percent to 413 units
- First orders for the next-generation H160
- Increasing share of the military market
Airbus Helicopters delivered 356 rotorcraft and logged gross orders for 413 helicopters (net: 381) in 2018 (up from 350 gross orders in 2017), maintaining its lead in the civil & parapublic market while reinforcing its position in the military market thanks to key successes with international campaigns. The company also booked 148 orders for light twin-engine helicopters of the H135/H145 family and secured 15 orders for the next-generation H160. At the end of last year, the overall backlog increased to 717 helicopters.
“Our commercial performance in 2018 demonstrates the resilience we have developed as a company to help us navigate what remains a challenging environment,” said Bruno Even, Airbus Helicopters CEO. “Even though the civil & parapublic market remains at a low level worldwide, we have managed to maintain our global leadership thanks to our wide and modern portfolio of products and services and our international footprint. Meanwhile, we have increased our market share in the military sector by securing major contracts with leading armed forces worldwide, with best-in-class solutions. These positive trends give us the means to prepare the future and continue our transformation, with innovation at our core and customer loyalty at heart.”
In 2018, Airbus Helicopters delivered the first of 100 H135s for China in Qingdao, where a dedicated final assembly line will serve the growing demand of the Chinese market for civil & parapublic helicopters. Meanwhile, Hong Kong Government Flying Service took delivery of the first H175s in public services configuration.
Last year also proved successful for the Super Puma family which demonstrated its versatility by being selected in key military campaigns, while attracting new civil & parapublic customers with repurposed H225s previously operated on the oil & gas market. Likewise, 2018 proved to be a very positive year for the NH90, which attracted orders for 28 units in Qatar while being selected by Spain in the frame of a follow-on order for 23 units.
Key programme milestones were achieved in 2018, including the power-on and ground testing of the CityAirbus electric vertical take-off and landing (eVTOL) technology demonstrator, ahead of a maiden flight expected early 2019. The first H160 in serial configuration entered flight trials in 2018, while the VSR700 unmanned aerial system demonstrator performed its first unmanned flights at the end of the year.
Footnote:
The Full-Year 2018 net orders and backlog represent the contractual view. The Full-Year 2018 backlog value will be measured under IFRS 15 and will reflect the recoverable amount of revenues under these contracts. The FY 2017 backlog will not be restated.
22 Jan 19. DJI Uncovers Corruption Causing $150m Loss. China’s SZ DJI Technology Co Ltd, the world’s largest maker of consumer drones, has discovered several cases of serious corruption at the company and expects 2018 losses of more than 1bn yuan ($150m) as a result, the company announced.
The company said it was investigating the cases, which came to light during routine quality control in 2018, and that it had handed a number over to the authorities.
“DJI condemns any form of corruption strongly and has set up a high-level anti-corruption task force to investigate further and strengthen anti-corruption measures,” it said.
“A number of corruption cases have been handed over to the authorities, and some employees have been dismissed,” it added.
The state-run China Securities Journal cited an internal company report on corruption, which said that more than 40 people at privately-held DJI had been investigated.
Several Chinese technology companies have recently launched initiatives to stamp out corruption, and earlier this month Beijing-based ride-hailing giant Didi Chuxing said it had dismissed more than 80 employees in 2018 over corruption.
DJI’s human resources department was quoted by the newspaper as saying it employed 12,000 people at the end of 2018 and expected to grow to 14,000 by the end of the year. (Source: UAS VISION/New York Times)
21 Jan 19. Terra Drone and Plimsoll UAV Create Terra Drone Brazil. Terra Drone Japan (Shibuya-ku, Tokyo, CEO Toru Tokushige) and Plimsoll UAV (Rio das Ostras, Brazil, CEO Marcelo Belleti) announce the establishment of a joint venture called Terra Drone Brazil. Terra Drone Ltd. is a Japan-based UAV company, which serves its clients with safer and more efficient surveys and inspections by using cutting-edge drone technologies. Plimsoll UAV, in which Terra Drone has acquired a major stake, is a leading drone service provider in Brazil. Plimsoll UAV is specialized in the inspection of Floating Production Storage and Offloading System (FPSO) among Oil & Gas (O&G) fields.
Brazil has the largest number of FPSO in the world. With this agreement, we are capable of providing the most updated technical know-how of 3D surveying and hard & soft technology to enhance the wide network in Brazil that has been established by Plimsoll UAV. Thus, this new partnership will bring the latest technology to our customers, providing great benefits to their needs and delivering world-class service to our clients in Brazil.
With this new Joint Venture, Terra Drone Brazil will be able to enhance technical solutions for O&G industries in Brazil and to extend them further for exploring utility networks, cell towers, and mining through the usage of geographic information system (GIS). Terra Drone will continue to generate aerial innovations that have great impact on society. (Source: UAS VISION)
18 Jan 19. Sophos slumps again. Shares in Sophos (SOPH) tumbled by more than a fifth after the cyber-security group warned that it expects a “modest decline” in constant-currency billings for the year to March. Billings grew by just 2 per cent over the first nine months of the 2019 financial year, compared with a rise of 20 per cent during the same period last year. Bosses expect a “subdued performance” to continue into the final quarter.
Sophos cited a “challenging prior-year comparable”, after 2017’s infamous ransomware attacks spurred urgent demand for cyber-security products. And while the renewal rate for existing customers reached 122 per cent in the third quarter – up from 121 per cent in the second quarter, and 118 per cent over the first-half overall – this was offset by a decline in new-customer and hardware billings.
There were other positive glimmers, including Sophos’s addition of more than 25,000 net new customers over nine months – with more than 9,000 in the third quarter – taking total customers to 327,000.
Chief financial officer Nick Bray pointed to the more “traditional” numbers within the release. A 14 per cent rise in revenues year-to-date was buoyed by 18 per cent growth in subscription sales. Moreover, while adjusted cash profits declined by 8 per cent to $104m, reported operating profits came in at $51m – up from losses of $25m.
However, this is not the first time that management’s guidance has shifted in the past year or so. Within the 2018 preliminary results last May, bosses maintained targets for the 2020 financial year – including annual billings of around $1bn (£0.77bn) and adjusted operating profits of over $100m. These targets were not reiterated at the 2019 half-year stage in November. Here, the company said it expected a “modest improvement” in second-half constant-currency billings growth against the first, though it did expect to see a “significant improvement” in overall constant-currency year-on-year billings growth in FY2020.
Broker Stifel has revised billings estimates for FY2019 from $799m to $766m. It expects adjusted pre-tax profits of $49.7m and EPS of 11.8ȼ in FY2019 (FY2018: $33.8m and 9.4ȼ).
IC View
Stifel has retained its ‘buy’ on Sophos, noting that the stock is “not for widows or orphans” in the short-term. Repeated warnings lead us to suspect that the final quarter’s trading may also disappoint. With a forward earnings multiple of 34, we do not think the shares are priced to adequately reflect that risk or the erratic quarterly billings growth. Sell. Last IC view: Hold, 341p, 07 Nov 2018. (Source: Investors Chronicle)