26 Jul 19. Cobham’s biggest shareholder says Advent offer for company not ‘compelling.’ The biggest investor in defense company Cobham (COB.L), Silchester International Investors, said late Thursday that it did not consider a $5bn offer for the company from private equity firm Advent International as ‘compelling’.
Silchester, which owns 11.8% of Cobham, said the company had a strong balance sheet that could be improved further, possibly through the sale of its Australian business.
The London-based fund also called on Cobham’s board to “seek and respond” to other potential bidders, and suggested the company would have strategic value to a buyer with significant North American interests.
For overseas buyers, the current weakness of the pound provided “an excellent opportunity”, it added.
On Thursday, Advent offered to pay 4 billion pounds for Cobham, known for its pioneering air-to-air refueling technology. The price of 165 pence a share represented a 50% premium to the three-month average price. (Source: Reuters)
26 Jul 19. Japanese Space Industry Startup Synspective Raises US $100m in Funding. Synspective Inc., is a Japanese startup which provides satellite data solutions using small sized SAR (Synthetic Aperture Radar) satellites.
The company accumulated $100m USD in funding since its foundation in February 2018. Raising that amount in less than 17 months makes Synspective the world’s fastest and Japan’s second highest funded space startup. The investment will help strengthen the company’s SAR satellite development, manufacturing systems, and solutions development.
Synspective provides one-stop solutions by satellite gathered geospatial data. The core technology was developed by the ImPACT program* led by The Cabinet Office, Government of Japan, building small SAR satellites and constellation, allowing frequent observation of areas of interest. Synspective uses SAR satellites to provide data and produce user-friendly information to Governments and Private Companies.
SAR satellites actively observe and acquire earth surface information by transmitting and receiving reflected microwaves. Compared to optical satellites, which depend on sunlight reflection, SAR can capture images of the ground surface in all-weather conditions and any time of the day or night.
Synspective’s Co-founder and CEO, Motoyuki Arai, commented that “Synspective’s first demonstration satellite is to be launched in 2020 and is steadily being developed. Customized solutions services have already been contracted by several companies, prior to launch. By providing objective satellite data, Synspective will contribute to the progress of the advancing world by supporting people’s decision-making and impactful actions”.
- Space aSTART 1 Limited Partnership
- SHIMIZU CORPORATION
- JAFCO SV5 Investment Limited Partnership / JAFCO SV5-STAR Investment Limited Partnership
- Innovation Platform 1 Investment Limited Partnership
- Keio Innovation Initiative 1,LPS
- Abies Ventures Fund I, L.P.
- MIRAI SOUZOU 1 Investment Limited Partnership
- Mitsubishi UFJ Trust and Banking Corporation
- Fuyo General Lease Co.,Ltd.
- MORI TRUST CO., LTD.
- SBI AI&Blockchain LPS
- Mizuho Growth Fund No.3 Limited Partnership
(Source: BUSINESS WIRE)
25 Jul 19. Cyber security group NCC sees overhaul paying off. Revenue and profits rise at Manchester company after ‘pivotal’ year of transformation. Manchester-based NCC has completed the first of a three-year plan to revitalise itself under Adam Palser, who joined as chief executive in late 2017. NCC Group, the British cyber security company, matched analyst expectations in its full-year results, drawing a line under a rocky period as it forged ahead with a wide-ranging overhaul. The Manchester-based group, founded in 1999, has completed the first of a three-year plan to revitalise itself under Adam Palser, who joined as chief executive in late 2017, having held the same position at public services provider NSL. Revenue increased by 7.6 per cent on the previous year, to £250.7m. Meanwhile, adjusted profits before taxation grew 9.2 per cent to £32m. “This has been a pivotal year in NCC Group’s transformation as we lay the foundations to enable us to compete and win globally,” said Mr Palser. He also said the company had overcome perceived recruitment problems, adding: “We’re especially pleased with the way we have been able to recruit — and retain — more than 100 new employees in the past year. “We have been working very hard to get the information we need to make the right business decisions, and build a new nervous system for our company, stitching all the parts together. It has been a very intense year but we are on the journey to becoming a truly world-class organisation.”
NCC’s three-year plan was outlined after the departure of former chief executive Rob Cotton, who quit the role in early 2017 when the company reported a £55.3m loss. Following Mr Cotton’s departure, an overhaul led to less time being spent on his so-called “walled garden” of secure domain names, and more on the operation of the business. Julian Yates and Roger Philips, analysts at Investec, the specialist banking and asset management group, said the company was “rebuilding credibility”. “Historically, the business created a perception beyond the reality of its capabilities, resulting in an unsustainable high rating and disappointment in the execution of this vision,” they said. “Trading issues facing the business have been largely worked through and the business is now focused on a clear and credible strategy which plays to its strengths, in our view.” Moving forward, Mr Palser said the company would continue working to build relationships inside, as well as outside, the company, introducing a new mentoring scheme and partnering Workday, the human resources software company, to manage some internal processes. (Source: FT.com)
25 Jul 19. USAF Has Withheld $360m — and Counting — For Boeing’s Tanker Woes. The U.S. Air Force has withheld $360m from Boeing due to problems with the company’s KC-46 tanker, according to a service official. It’s the first time the Air Force has disclosed the total amount being held back until Boeing fixes various problems with the planes. Service officials previously said they could withhold up to $28m per plane, roughly 20 percent of its delivery cost. Wednesday’s disclosure shows that the Air Force is following through with that pledge. To date, Boeing has delivered 13 tankers to the Air Force, meaning the firm has been shorted nearly $27.7m per plane.
“The Air Force is withholding payments to protect our interests and incentivize Boeing to deliver KC-46s that meet all specification requirements in the contract,” Capt. Cara Bousie, an Air Force spokeswoman, said in an email Wednesday. “To date, the Air Force has withheld approximately $360m from Boeing for KC-46s delivered so far.”
Asked when Boeing hopes to eventually get the money, spokesman Todd Blecher declined to comment.
The problems with the plane largely involve the video systems used to monitor planes approaching the tanker during refueling. The fix requires both software and hardware changes, according to a June Government Accountability Office report. Boeing must pay for those fixes.
Separately, the Air Force has routinely found tools and trash inside the KC-46 tankers Boeing has delivered, prompting the Air Force to twice stop accepting planes into its squadrons. Will Roper, the head of Air Force acquisition, has called ita cultural issue within Boeing’s assembly lines.
The tanker withholdings come amid a massive losses from the grounding of Boeing’s 737 Max, the passenger airliner involved in two deadly crashes. Boeing reported a $5bn loss due to the 737 Max grounding when it reported second quarter earnings Wednesday. It’s still building the Max, but has not delivered any of those planes since regulators grounded the aircraft in March. (Source: Defense News Early Bird/Defense One)
25 Jul 19. Raytheon Reports Strong Second Quarter 2019 Results.
– Record bookings of $9.5bn; book-to-bill ratio of 1.32
– Strong net sales of $7.2bn, up 8.1 percent
– EPS from continuing operations of $2.92, up 5.0 percent
– Operating cash flow from continuing operations of $823m
– Increased full-year 2019 guidance for sales, EPS and operating cash flow
– Merger activities progressing well for previously announced merger of Raytheon and United Technologies; expected close remains on track for first half of 2020
Raytheon Company (NYSE: RTN) today announced net sales for the second quarter 2019 of $7.2 bn, up 8.1 percent compared to $6.6bn in the second quarter 2018. Second quarter 2019 EPS from continuing operations was $2.92 compared to $2.78 in the second quarter 2018. The increase in the second quarter 2019 EPS from continuing operations was primarily driven by operational improvements and pension-related items, partially offset by a favorable tax-related EPS impact of $0.33 in the second quarter 2018 related to a discretionary pension plan contribution.
“The company had very strong second quarter operating results, with our bookings, sales, operating margin, EPS, and cash flow all exceeding our expectations,” said Thomas A. Kennedy, Raytheon Chairman and CEO. “We begin the second half with continued confidence in our growth outlook given our innovative technologies, breadth of franchises, and record backlog.
“Integration planning for the merger with United Technologies is progressing well, with the integration team developing detailed execution plans to capture revenue and cost synergies rapidly and ensure seamless operations post close. We continue to expect the transaction to close in the first half of 2020.”
Operating cash flow from continuing operations for the second quarter 2019 was $823 m compared to $1,156m for the second quarter 2018. The decrease in operating cash flow from continuing operations in the second quarter 2019 was primarily due to the timing of collections. Operating cash flow from continuing operations for the second quarter 2019 was better than the company’s prior guidance.
In the second quarter 2019, the company repurchased 1.7m shares of common stock for $300m. Year-to-date 2019, the company repurchased 4.4m shares of common stock for $800m.
The company had record bookings of $9.5 bn in the second quarter 2019, resulting in a book-to-bill ratio of 1.32. Second quarter 2018 bookings were $8.7bn.
25 Jul 19. Cash Offer For Cobham Plc By AI Convoy Bidco Limited (Advent International plc,). The boards of Bidco and Cobham are pleased to announce that they have reached agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Cobham by Bidco. The Acquisition is to be effected by means of a scheme of arrangement under Part 26 of the Companies Act.
Under the terms of the Acquisition, Cobham Shareholders shall be entitled to receive for each Cobham Share 165 pence in cash representing an attractive premium of approximately:
*34.4 per cent. to the closing price per Cobham Share of 123 pence on 24 July 2019 (being the latest practicable date prior to publication of this Announcement);
*45.8 per cent. to the volume weighted average price per Cobham Share of 113 pence for the one month period ended 24 July 2019 (being the latest practicable date prior to publication of this Announcement); and
*50.3 per cent. to the volume weighted average price per Cobham Share of 110 pence for the three month period ended 24 July 2019 (being the latest practicable date prior to publication of this Announcement).
*The Acquisition values the entire issued and to be issued ordinary share capital of Cobham at approximately £4.0bn on a fully diluted basis.
*Today, Cobham has announced an interim dividend of 0.4 pence per Cobham Share (the “Interim Dividend”) payable to Cobham Shareholders on the register on 11 October 2019 (the “Interim Dividend Record Date”). If the Interim Dividend Record Date occurs before the Effective Date, the Acquisition Price shall be reduced by the amount of the Interim Dividend.
*Except for the Interim Dividend, if any dividend or other distribution is authorised, declared, made or paid in respect of Cobham Shares on or after the date of this Announcement, Bidco reserves the right to reduce the Acquisition Price by the amount of such dividend or other distribution. In such circumstances, Cobham Shareholders would be entitled to retain any such dividend or other distribution.
*The Cobham Directors, who have been so advised by BofA Merrill Lynch, J.P. Morgan Cazenove and Rothschild & Co as to the financial terms of the Acquisition, consider the terms of the Acquisition to be fair and reasonable. In providing their advice to the Cobham Directors, BofA Merrill Lynch, J.P. Morgan Cazenove and Rothschild & Co have taken into account the commercial assessments of the Cobham Directors. BofA Merrill Lynch and Rothschild & Co are providing independent financial advice to the Cobham Directors for the purposes of Rule 3 of the Takeover Code.
*Accordingly, the Cobham Directors intend to recommend unanimously that Cobham Shareholders vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the General Meeting as the Cobham Directors have irrevocably undertaken to do in respect of their own beneficial holdings of 935,492 Cobham Shares representing, in aggregate, approximately 0.04 per cent. of Cobham’s issued ordinary share capital on 24 July 2019 (being the latest practicable date prior to publication of this Announcement).
Letter of intent
*Bidco has also received a letter of intent from Artemis Investment Management LLP to vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the General Meeting in respect of 122,677,960 Cobham Shares, representing, in aggregate, approximately 5.13 per cent. of Cobham’s issued ordinary share capital on 24 July 2019 (being the latest practicable date prior to publication of this Announcement).
*Bidco has therefore received irrevocable undertakings or a letter of intent in respect of a total of 123,613,452 Cobham Shares representing, in aggregate, approximately 5.17 per cent. of Cobham’s issued ordinary share capital on 24 July 2019 (being the latest practicable date prior to publication of this Announcement).
*Further details of these irrevocable undertakings (and the circumstances in which they shall cease to be binding or otherwise fall away) and the letter of intent are set out in Appendix III to this Announcement.
Information on Bidco
*Bidco is an indirect subsidiary of funds managed by Advent. Advent is one of the largest and most experienced global private equity investors. The firm has invested in more than 345 buyout transactions in 41 countries. As of 31 March 2019, it had US$36bn in assets under management. Advent has a strong track record of investing in high quality global industrial and engineering companies to achieve long term revenue and earnings growth, in domestic and international markets.
Information on Cobham
*Cobham offers an innovative range of products and services to solve challenging problems in defence, aerospace and space markets with an emphasis on keeping people alive and assets safe in harsh or remote environments.
*Cobham employs around 10,000 people and has customers and partners in over 100 countries. It has specialist capabilities and know-how in: wireless; audio; video and data communications, including satellite communications; defence electronics; air-to-air refuelling; aviation services; life support and mission equipment markets.
*Cobham operates across four Sectors, each with differentiated capabilities and many leading market positions. Three of the Sectors design, manufacture and test intelligent hardware, primarily subsystems, with expertise in components. The fourth provides outsourced aviation services for an international customer base.
Timetable and Conditions
*The Acquisition shall be put to Cobham Shareholders at the Court Meeting and at the General Meeting. In order to become effective, the Scheme must be approved by a majority in number of the Cobham Shareholders voting at the Court Meeting, either in person or by proxy, representing at least 75 per cent. in value of the Cobham Shares voted. In addition, a special resolution approving and implementing the Scheme must be passed by Cobham Shareholders representing at least 75 per cent. of votes cast at the General Meeting.
*The Acquisition is subject to the further conditions and terms set out in Appendix I to this Announcement, including the receipt of the relevant clearances from the competition and regulatory authorities, in particular anti-trust clearances in the United States and the EU and foreign investment and regulatory approvals in the UK, Australia, France, and Finland. It is expected that the Scheme will become effective before the end of 2019.
*Bidco will work with Cobham to engage constructively with all relevant stakeholders to satisfy these conditions.
*The Scheme Document, containing further information about the Acquisition and notices of the Court Meeting and the General Meeting shall be published as soon as practicable. The Court Meeting and the General Meeting are expected to be held on or around 16 September 2019.
Commenting on the Acquisition, Jamie Pike, Chairman of the board of Cobham, said: “Cobham has leading positions in a number of attractive technology markets, with capabilities and know-how that are well aligned with our customers’ priorities. The Cobham management team’s turnaround actions over the last two and half years have begun to improve our performance, which is reflected in our 2019 interim results announced today. We believe that Advent would provide a complementary partner for Cobham’s stakeholders.
The Cobham Board is unanimously recommending the offer from Advent as it represents an opportunity for shareholders to realise their investment in Cobham in cash in the near term. The offer represents a 50.3% premium to the average share price over the last three months.”
David Lockwood, CEO of Cobham added: “We have worked intensively over the last two and half years to focus on our customers and our financial and operating performance, and these fundamentals, along with the investment in the business Advent can provide, will enable us to leverage the quality of our products and services. Most of all, this offer reflects the potential for future growth and improving performance, and is an endorsement of our turnaround strategy and our hard working people.”
Commenting on the Acquisition, Shonnel Malani, a Managing Director of Advent International plc, said: “We are pleased the Board of Cobham has agreed unanimously to recommend the Acquisition of Cobham by Advent. We strongly believe in the importance and potential of Cobham’s businesses and look forward to bringing our long track record of successful stewardship of companies to ensure that Cobham flourishes under our ownership.”
BATTLESPACE Comment: Cobham was in a terrible mess when david Lockwood took over two and a half years ago with litigation of the KC-46A Pegasus tanker deal from Boeing and other issues. The PR machine at Cobham ground to a halt well before that time and there was very little engagement with the press over new products and exhibitions. There are some gems in the Cobham inventory including the satcom business which the likes of Viasat might look to purchase or the training business which would fit in well with Lockheed or Thales. (SEE: BATTLESPACE ALERT Vol. 21 ISSUE 17, 25 July 2019, Cash Offer For Cobham Plc By AI Convoy Bidco Limited)
25 Jul 19. Cobham snapped up by US buyout group Advent in £4bn deal. Takeover of a UK defence industry supplier likely to spark political scrutiny. Cobham, the UK aerospace and defence supplier, will be bought by US buyout group Advent International in a deal that values it at £4bn, becoming the latest public company to be snapped up by private equity. It is the first high-profile takeover of a British company since Boris Johnson took over as prime minister on Wednesday. The deal, which was first reported by the Financial Times, comes after the FTSE 250 group only recently found a firmer financial footing. The company issued a number of profit warnings between 2015 and 2017, sending its shares tumbling from their peak four years ago. Under the terms unveiled on Thursday morning, Cobham shareholders will receive 165p in cash, representing a premium of 34.4 per cent to the group’s closing price of 123p on July 24. It is a 50.3 per cent premium to the average share price over the last three months. Cobham’s shares have rallied in the past few months but are still more than 50 per cent below an all-time high set in 2015.
Jamie Pike, Cobham chairman, said in a statement the board believed Advent would “provide a credible and complementary partner for Cobham stakeholders”. David Lockwood, Cobham chief executive, said the offer “reflects the potential for future growth and improving performance, and is an endorsement of our turnaround strategy”. The takeover of a UK defence industry supplier may spark political scrutiny, following the opposition to last year’s £8bn hostile takeover of engineering company GKN by turnround group Melrose Industries. The sale of GKN, a manufacturer of aircraft and automotive components, drew criticism from politicians and trade unions who argued its sale to a turnround specialist could put jobs and investment in the British manufacturing sector at risk. Cobham employs more than 10,000 people and makes critical components that it says are found in every Airbus passenger jet manufactured today, including satellite communication equipment and parts that prevent fuel tank explosions on the popular A320 aeroplane. The company also on Thursday released interim results, reporting underlying operating profit rose 12 per cent to £107.1m. It gave investors reason for cheer earlier this year when it promised to reinstate its dividend, following the resolution of a dispute with Boeing. For Advent, the deal is its latest in the UK market. In 2018, it bought London-listed electronic components maker Laird for £1bn. Two years earlier, Advent acquired Brammer, the Cheshire-based distributor of industrial repair kits. Dealmaking by private equity groups is set for the strongest year ever, fuelled by nearly $2.5tn of cash that buyout funds have raised from investors as well as historically low borrowing costs. (Source: FT.com)
25 Jul 19. Northrop Grumman Posts Strong Second Quarter With Earnings, Sales Higher. Northrop Grumman [NOC] on Wednesday reported a strong second quarter on higher earnings and sales and strong order flow also drove a substantial increase in the company’s backlog.
Net income increased 9 percent to $861m, $5.06 earnings per share (EPS), from $789m ($4.50 EPS) a year ago, beating consensus estimates by 38 cents per share. Sales increased 19 percent to $8.5 bn from $7.1bn.
The primary driver behind the higher sales was the contribution from the former Orbital ATK, which Northrop Grumman acquired last June. Organic sales, were up 4 percent, driven by infrared countermeasures, airborne radar, classified programs, space payloads and mission programs at the Mission Systems segment and F-35 production and a civil space program at the Aerospace Systems segment.
The company’s classified work, as a percent of revenue, is growing across its businesses, Kathy Warden, Northrop Grumman’s president and CEO, said on a call with analysts. The company booked $843m in classified space work during and $4.5 bn in the first quarter, she said.
Overall, orders in the second quartered totaled $13.5bn, fueling an increase in backlog to $63 bn from $57.3bn at the end of the first quarter.
Income at the operating segment level was robust, with all four of the company’s segments contributing, led by the Orbital ATK acquisition, but also due to improved performance on classified programs, improved performance in services work, the absence of a charge for information technology work that dented earnings a year ago under a state and local services contract, and higher sales at Aerospace Systems.
Segment operating margins rose 70 basis points to 11.6 percent.
Based on performance so far this year combined with the outlook for the rest of 2019, Northrop Grumman boosted its adjusted earnings guidance for the year to between $19.30 and $19.55
per share from the prior outlook of between $18.90 to $19.30 per share. The forecast for sales remains around $34 bn.
Warden said that within the Aerospace Systems segment, space business is expected to be the leading growth driver given government budget increases. It will also be “one of the fastest growing segments in the company over time,” she said of the space division.
The outlook for the Aerospace Systems segment remains positive overall with growth expected in programs like the E-2D Hawkeye airborne warning aircraft, F-35, and unmanned aircraft, particularly given the ramp up in the Triton program for the Navy and international sales, Warden said.
Free cash flow in the quarter was $1.4 bn. (Source: Defense Daily)
24 Jul 19. GD Reports Higher Sales And Earnings In Second Quarter; Raises Guidance. General Dynamics [GD] on Wednesday reported higher second quarter sales on strong gains in four of its five operating segments and earnings were also up on lower taxes and other nonoperating benefits.
Net income increased 3 percent to $806m, $2.77 earnings per share (EPS), from $786m ($2.62 EPS) a year ago, topping analysts’ expectations by 9 cents a share.
Overall segment profits were flat as gains in the Mission Systems, Combat System and Marine Systems segments were offset by declines in Aerospace and Information Technology. Segment operating margin dipped 40 basis points to 11.4 percent.
Sales increased 4 percent to $9.6bn from $9.2bn due to increases at Aerospace, Combat Systems, Mission Systems and Marine Systems. Increased business jet deliveries, increased production for Army M1 Abrams tanks, growth in munitions and armaments, space, intelligence, cyber systems, and shipbuilding work drove the topline gains.
Combat Systems is in good position for continued growth with Army demand for upgraded platforms, particularly for Abrams and the Stryker wheeled vehicle, Phebe Novakovic, GD’s chairman and CEO, said on a call with analysts.
Sales at GD’s IT segment, which combines the company’s legacy IT operations with the former CSRA International that was acquired in April 2018, fell largely due to a number of divestitures last year. These divestitures account for about $1 bn in annual sales, Jason Aiken, the company’s chief financial officer, said on the call.
Excluding the divestitures and an acquisition in the Aerospace segment, organic sales topped 4 percent, Novakovic said.
For 2019, GD now expects sales of $39.2 bn versus the prior guidance of around $38.5bn, operating earnings of about $4.6bn, she said. Driving the better than expected sales are growth in IT, Mission Systems, Aerospace and Combat Systems. Per share results are now expected to between $11.85 and $11.90 against the prior outlook of $11.60 to $11.70.
The two-year budget deal reached between the White House and House leadership to lift potential federal budget caps is “very good news” as it “looks like we’ve got some clarity in our political landscape at the moment,” Novakovic said.
Responding to a question from Alembic Global Advisors aerospace and defense analyst Pete Skibitski about the affordability of the Navy’s Columbia-class ballistic missile submarine and if that vessel might crowd out other Navy spending if budgets flatten, Novakovic said the new submarine is a “national priority.”
There is “no doubt” about funding Columbia, she said, noting it can be done in various ways, including possibly creating a special account just like was done in the 1980s for current ballistic missile Ohio-class submarines. She added that there is bipartisan “consensus in Washington” to recapitalize the Navy’s ships, including submarines.
Backlog at the end of the quarter stood at $67.7bn, up from $66.3bn a year ago. Free cash flow was $110 m. GD continues to experience payment delays from the Canadian organization that contracts with the company for light armored vehicles that are in turn supplied to Saudi Arabia.
Aiken said the payment delays remain a timing item and “considerable funding” from the customer is expected in August and GD expects to resolve the balance of funding it is owed by the end of 2019. (Source: Defense Daily)
24 Jul 19. FLIR Systems Announces Second Quarter 2019 Financial Results.
GAAP Diluted EPS of $0.34; Adjusted Diluted EPS of $0.56
Revenue Growth of 6%; Organic Revenue Growth of 3% Over Prior Year
Maintaining 2019 Revenue and EPS Outlook
FLIR Systems, Inc. (NASDAQ: FLIR) today announced financial results for the second quarter ended June 30, 2019. “We are pleased with our execution in the second quarter of 2019,” said Jim Cannon, FLIR President and Chief Executive Officer. “Overall our businesses performed well in the quarter executing on our strategic plan, managing headwinds in a few of our end markets and integrating our recently acquired unmanned businesses.”
Mr. Cannon continued, “We grew topline revenue by 6.5% with meaningful contributions from our recent acquisitions. We also delivered organic growth as we lapped the very strong performance experienced in the second quarter of 2018 when we reported 10.7% organic revenue growth. Our current backlog is up 12.4% positioning the company well to deliver in the second half of 2019 and on into 2020.”
Second Quarter 2019
Second quarter 2019 revenue was $482.0 m, 6.5% higher than second quarter 2018 revenue of $452.7m. Organic revenue growth was 2.6%, which excludes revenue from acquisitions within the last twelve months.
GAAP Earnings Results
GAAP gross profit in the second quarter 2019 was $233.6m, compared to $232.6m in the second quarter 2018. GAAP gross margin decreased 290 basis points to 48.5% in the second quarter 2019, compared with 51.4% in the prior year. GAAP operating income in the second quarter decreased 28.1% to $63.7m, compared to $88.7m in the prior year, representing a 640 basis point decline in operating margin. GAAP gross margin and GAAP operating margin were both negatively impacted by the increase in amortization of intangible assets associated with the previously announced acquisitions.
Second quarter 2019 GAAP net earnings were $46.1 m, or $0.34 per diluted share, compared with GAAP net earnings of $71.6m, or $0.51 per diluted share in the second quarter last year. GAAP net earnings in the quarter were also negatively impacted by the increase in amortization of intangible assets associated with the previously announced acquisitions.
Cash provided by operations was $121.5m for the six months ended June 30, 2019, compared to $153.3m realized in the first half 2018. Approximately one million shares were repurchased in the first half of 2019.
Non-GAAP Earnings Results
Adjusted gross profit was $248.1 m in the second quarter 2019, increasing 5.0% over adjusted gross profit of $236.4m the second quarter 2018. Adjusted gross margin decreased 70 basis points to 51.5%, compared with 52.2% in the second quarter 2018. Adjusted operating income was $101.8m in the second quarter 2019, which was flat compared to adjusted operating income in the second quarter 2018. During the second quarter 2019, the acquisitions of Aeryon Labs and Endeavor Robotics contributed an operating loss. Adjusted operating margin decreased 140 basis points to 21.1%, compared with 22.5% in the second quarter 2018.
Adjusted net earnings in the second quarter 2019 were $77.0m, or $0.56 per diluted share, which was 1.7% higher than adjusted earnings per diluted share of $0.55 in the second quarter 2018.
Business Unit Results
Revenue from the Industrial Business Unit was $188.9m, an increase of 0.3% over the second quarter results of last year, with strength in cooled thermal cores. The Government and Defense Business Unit contributed revenue of $197.5m during the second quarter, up 22.7% from the prior year, with all major product lines experiencing strong growth, led by strength in unmanned systems and solutions, including the revenues from the acquisitions of Aeryon Labs and Endeavor Robotics. The Commercial Business Unit recorded $95.6m of revenue in the second quarter, down 7.4% from the prior year. The Commercial Business Unit was negatively affected by slowness in the Maritime market, restructuring impact on the Outdoor and Tactical Systems business (OTS), and continued negative foreign exchange effects.
Financial Outlook for 2019
Based on financial results for the second quarter of the year and the outlook for the remainder of the year, FLIR continues to expect revenue in 2019 to be in the range of $1.92bn to $1.95bn. This represents 8% to 10% revenue growth compared to 2018, including approximately 5% organic revenue growth, in-line with the strategic plan presented in May 2018. FLIR also continues to expect 2019 adjusted operating income margins to be in the range of 22% to 23%, and adjusted earnings per diluted share to be in the range of $2.30 to $2.36. 2019 financial outlook includes contributions from the Aeryon Labs and Endeavor Robotics acquisitions, which have been and are expected to be dilutive to adjusted EPS through 2019.
FLIR’s Board of Directors has declared a quarterly cash dividend of $0.17 per share on FLIR common stock, payable on September 6, 2019, to shareholders of record as of close of business on August 23, 2019.
23 Jul 19. Cohort plc today announces its unaudited results for the year ended 30 April 2019.
Highlights include: 2019 Unaudited
- Revenue £121.2m £110.5m
- Adjusted operating profit1 £16.2m £15.2m
- Adjusted earnings per share1 33.60p 29.08p 16
- Net (debt)/funds (£6.4m) £11.3m n/a
- Order intake £189.9m £76.6m 148
- Order book (closing) £190.9m £103.8m 84
- Proposed final dividend per share 6.25p 5.65p
- Total dividend per share 9.10p 8.20p 11
- Statutory profit before tax £5.7m £10.2m (44) • Basic earnings per share 13.37p 18.95p (29)
- Overall results in line with expectations:
o Initial contribution from Chess better than expected
o Growth at MASS, SEA and MCL o Weaker performance at EID • Record order intake of £189.9m (2018: £76.6m), with better performance across the Group
- All the large order opportunities signalled last year were won – both renewals and new orders
- 81.84% of Chess acquired for an initial cash consideration of £20.1m in December 2018
- Chess’s Counter Unmanned Air Vehicle (C-UAV) system was deployed at Gatwick Airport in December 2018 • Dividend increased by 11% – dividend raised every year since IPO in 2006
- Strong order book and pipeline of prospects provide a good underpinning for revenue in the coming year.
- The 30 April order book of £190.9m underpins nearly £81m of revenue, representing 55% (2018: 46%) of consensus forecast revenue for the year. This has risen to 60% as at the end of June.
- Expect the Group to grow, including an improved performance from EID. • Financial resources in place for investment and acquisitions. Net debt expected to remain flat.
Commenting on the results, Nick Prest CBE, Chairman of Cohort plc said: “MASS, MCL and SEA all posted increases in profits and the result also benefitted from the acquisition of Chess in December 2018, partially offset by a weaker performance at EID.” “Our record order intake of nearly £190m and an all time high closing order book of £191m gives us a strong base for the coming financial year. We also have a good pipeline of order prospects.” “Overall, we expect the Group to continue to make progress in the coming year and beyond, taking into consideration the budgetary risks of our main UK customer, the timing of exports and the strong opening order book”.
24 Jul 19. Boeing sinks to biggest ever quarterly loss on 737 Max crisis. Prolonged grounding of bestselling jet continues to take its toll on US plane maker. Boeing slumped to a loss of close to $3bn in the second quarter — its biggest quarterly loss ever — as the prolonged grounding of its bestselling 737 Max jet continues to take its toll on the US plane maker. The company reported a net loss of $2.94bn for the second quarter after announcing last week it would book an after-tax charge of $4.9bn in the period to compensate airlines that have been affected by the grounding of the 737 Max. The company is having to pay for schedule disruptions and delays in aircraft deliveries. Boeing warned last week the charge would result in a $5.6bn cut in revenues and pre-tax earnings for the second quarter. The net loss compares with a profit of $2.2bn in the same period last year. The US plane maker on Wednesday said revenues in the second quarter were $15.7bn, down from $24.5bn the year before, reflecting the impact of the Max crisis but also higher volumes in its defence and services businesses. It recorded an earnings per share loss of $5.21, compared with $3.73 in the same second quarter last year.
The hit to its earnings underlines the magnitude of the crisis for Boeing with continuing uncertainty over exactly when the grounded jet will resume flying. The plane was taken out of service globally in March after two deadly crashes in Ethiopia and Indonesia killed 346 people. Boeing said on Wednesday that due to the continuing uncertainty surrounding the return to service of the Max it would issue new guidance for the full year at “a future date”. The company initially suspended its guidance in April. It said it continued to work “very closely” with the US aviation safety agency, the Federal Aviation Administration, to certify a proposed software update for the Max, adding that “disciplined development and testing is under way”. “This is a defining moment for Boeing and we remain focused on our enduring values of safety, quality, and integrity in all that we do, as we work to safely return the 737 MAX to service,” said Dennis Muilenburg, chief executive of Boeing, in a statement. “During these challenging times, teams across our enterprise continue to perform at a high level while delivering on commitments and capturing new opportunities driven by strong, long-term fundamentals.” Boeing also said its first flight of its new 777X wide-body jet was delayed until early 2020, due to problems with the engine provided by General Electric. (Source: FT.com)
25 Jul 19. Deputy SECDEF Nominee Says Raytheon-UTC Merger Consideration Will Be His Responsibility. With new Secretary of Defense Mark Esper recusing himself from any matters involving his former employee Raytheon [RTN], the Pentagon’s evaluation of the top defense contractor’s impending merger with United Technologies Corp. [UTX] will be handled by two deputies, said David Norquist, the nominee for deputy secretary of defense.
Norquist, who was confirmed in 2017 as the undersecretary of defense/chief financial officer, told the Senate Armed Services Committee (SASC) July 24 that if confirmed to the role of deputy secretary of defense, he would be responsible for analyzing the proposed merger along with Ellen Lord, the undersecretary of defense for acquisition and sustainment.
Lord’s office “would take a look at the risks to the industrial base, the ability to support competition, [and] what it means to existing programs,” Norquist said in response to a line of questioning from SASC member Sen. Richard Blumenthal (D-Conn.) “I don’t remember at which level the decision is made, but it would be worked with Undersecretary Ellen Lord and myself.”
Raytheon plans to merge with UTC’s aerospace business to create a $73.6bn defense aerospace business, the companies announced June 9 (Defense Daily, June 9). Norquist could not share details on when he and Lord would begin analyzing the merger, should he be confirmed.
Blumenthal also asked Norquist to share any concerns about the overall trend toward consolidation in the defense industry, noting, “the numbers of defense contractors has diminished very substantially over the past decade or so.”
Norquist acknowledged that he has not seen all of the data that would reveal consequences of recent mergers, but said, “there are certain areas where those types of combinations can be very valuable, and in other areas where you risk using the competition.”
“You want to keep an eye on it over the long term to make sure you’re not putting yourself in a place where you have fewer and fewer suppliers,” he added.
Blumenthal said the Raytheon-UTC merger raises “some very significant policy implications – both positive and concerns – about the effects of a consolidation trend generally.” He requested that once confirmed, Norquist submit an outline to the committee as to the considerations and criteria he will study, “because I think they set an important framework for broader issues facing the defense industry.”
Norquist was formally nominated to become the permanent deputy secretary of defense Tuesday, after previously performing the duties of the deputy secretary of defense since January. The Senate Armed Services Committee is expected to quickly approve his nomination for consideration on the Senate floor before the chamber leaves for August recess Aug. 2.
Esper was sworn in as the 27th secretary of defense Tuesday evening at the White House, and has pledged to recuse himself from all matters related to Raytheon during his tenure. (Source: Defense Daily)
25 Jul 19. Boeing Swings To Loss, Sales Plummet Amid 737 MAX Challenges. A surprise to no one, Boeing [BA] on Wednesday swung to a loss in its second quarter on massive charges related to its 737 commercial aircraft program, which also led to a precipitous decline in sales, but the negatives were partially offset by gains in the company’s defense and services businesses.
“The safe return to service of the 737 MAX is our company’s top priority,” Dennis Muilenburg, Boeing’s chairman, president and CEO, said on the company’s earnings call, repeating a statement he made during, and since, the company’s first quarter call in April.
Regulatory authorities and airlines worldwide have grounded the fleet of 737 MAX aircraft until Boeing can complete fixes that caused two catastrophic crashes last year and earlier this year. The company also is making software updates unrelated to the sensor issues that caused the crashes.
The net loss in the quarter was $2.9bn, $5.21 earnings per share (EPS), from $2.2 bn ($3.73 EPS) in net income a year ago, but still beat consensus estimates that anticipated a loss of $6.69 per share. Last week Boeing said it would take a $4.9 bn ($8.74 EPS) after-tax charge in the second quarter related to its estimate of potential costs of the 737 MAX grounding and delivery delays.
Sales slid 35 percent to $15.8bn from $24.3bn a year ago as the 737 MAX charge lopped $5.6 bn from the topline and the company delivered less than half the commercial aircraft than it did a year ago.
Boeing’s defense business delivered strong results, with sales up 8 percent to $6.6 bn on higher volume for aircraft, satellites and weapons, while operating income rose 159 percent to $975 mon a property sale and lower cost growth on the Air Force KC-46 refueling tanker.
The real estate sale is part of ongoing affordability initiatives to “optimize our footprint and productivity,” Greg Smith, Boeing’s chief financial officer, said on the call.
Boeing Global Services reported an 11 percent increase in sales to $4.5bn due to an acquisition and an increase in international government services work, and operating income rose 14 percent to $687m on the sales growth.
Sales at the commercial aircraft segment dove 66 percent to $4.7bn on a 54 percent decline in aircraft deliveries and the MAX charge, and the operating loss was $5 bn.
The company’s earnings call was dominated by questions about the MAX and other commercial aircraft programs. Boeing suspended its earnings guidance earlier this year due to the MAX issues and will update its outlook once it has clarity.
Total backlog at the end of the quarter stood at $474.3bn, down from $490.5 bn at the end of 2018. Defense backlog stood at $63.9bn, up from $61.3 bn in December, and the
business took in $4bn in orders. Of the current backlog, 31 percent of is from international customers.
Free cash in the quarter was an outflow of $1bn. Despite the financial challenges stemming from the 737 woes, Boeing paid its shareholders $1.2bn in dividends. (Source: Defense Daily)
24 Jul 19. Kromek’s bumper contract momentum. Sedgefield-based Kromek (KMK:23p), a radiation detection technology company focused on the medical, security screening and nuclear markets, released a sizzling hot set of results just as I was departing for a well-earned break at the start of the month. Cash profit quadrupled to £2m on revenues up 22 per cent to £14.5m in the 12 months to end April 2019, including a storming second half when Kromek delivered cash profit of £2.5m on revenue of £10.8m, a performance that highlights the robust momentum in the business and high operational leverage, too.
Furthermore, the contract momentum shows no sign of abating. Having won contracts worth almost $80m (£64m) in 2018-19, the current order book is estimated at $90m, according to analyst Paul Hill at Equity Development, the visibility from which underpins 80 per cent of Mr Hill’s revenue target of £18.5m for the current financial year to produce a cash profit of £2.7m. There could be upside to these forecasts, too.
Importantly, having moved to a state-of-the-art medical-grade facility in Pittsburgh last year that has the design, engineering and technological capabilities needed to produce commercial quantities of cadmium zinc telluride (CZT) crystals, Kromek is well funded to capitalise on end-market demand for its CZT technology, having raised £19.9m in a placing, at 25p a share, earlier this year (‘Kromek equity raise worth backing’, 11 February 2019).
For instance, Kromek has signed a five-year contract worth $7.8m (£6.2m) with an existing original equipment manufacturer (OEM) customer to customise its current X-ray imaging systems with CZT technology for the baggage screening market. Another OEM customer has almost doubled its contract with Kromek to $5.8m and divisional orders are set to ramp up further given the heightened terrorism risk, which makes border security critical at ports, airports and international rail terminals.
In the medical imaging industry, Kromek’s CZT technology is being used by 11 OEM customers across single photon emission computed tomography (Spect), bone mineral density (to treat osteoporosis) and gamma probes (used for radio-guided surgery). The company’s CZT-Spect medical imaging detectors are capable of diagnosing and monitoring conditions such as Parkinson’s disease and making early diagnosis of cancer. It’s proving popular, too. Indeed, Kromek landed a massive $58m seven-year contract to supply a customer with CZT detectors in its state-of-the-art medical imaging systems.
The same is true in the nuclear sector as Kromek has been awarded a raft of contracts, including a $2m initial 12-month award from the US Department of Defense to develop a proof-of-concept device for a vehicle-mounted biological threat identifier. It could be extended into a multi-year award for the development of a fully deployable vehicle.
Kromek continues to work with the US authorities in nuclear threat detection using its D3S ‘dirty bomb’ detectors, which are 10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors. Bearing this in mind, analysts believe that a number of military and civilian pilot schemes will be upgraded to full roll-outs by US Homeland Security over the next 12 to 24 months. It’s not just in the US as Kromek has just announced £1.6m-worth of international orders for its D3S technology. Expect more deals to follow. It’s worth considering that 84 per cent of Kromek’s sales are non-UK, so could become far more valuable in the event of sterling weakness post Brexit.
So, with order momentum expected to ratchet up as adoption of Kromek’s CZT technology gains further traction, I maintain my positive stance, having first initiated coverage at 25p (‘Follow the smart money’, 27 February 2017). My financial models point towards a target price of 40p to value the company’s equity at £138m and giving it an enterprise value of £123m after adjusting for net cash of £15.2m on the balance sheet. Buy. (Source: Investors Chronicle)
24 Jul 19. Lockheed Martin Invests In Rocket Developer ABL Space Systems. ABL Space Systems Company on Monday evening said it has received a strategic investment from Lockheed Martin [LMT] with the financing going toward ongoing development and testing of ABL’s RS1 rocket system. The value of the investment wasn’t disclosed.
ABL, based in California, said it is planning an integrated stage test in the second half of 2019, leading toward the first launch of RS1 in 2020.
The RS1 is being developed to provide a low-cost solution for quick access to space for small payloads. The investment was made by Lockheed Martin’s Ventures unit, which provides funding in startups and other disruptive companies in a number of areas including space technologies, cyber security, autonomous systems and robotics, undersea technologies, artificial intelligence and machine learning, data analytics, and more.
“The U.S. government is increasingly interested in responsive small launch vehicles and the distinct capabilities they offer,” ABL CEO Harry O’Hanley said in a statement. “Lockheed Martin Space has been providing successfully end-to-end solutions to the government for decades and its support offers an excellent opportunity for us to deliver ABL products at scale.”
Rick Ambrose, who heads Lockheed Martin Space, said in a statement that “space has become a contested environment,” adding that, “We recognize the growing importance of on-demand and flexible launch options as part of a suite of solutions necessary to counter this and other growing challenges.”
ABL was founded in 2017 by former engineers of SpaceX, completed its first development vehicle in 2018, and more recently successfully completed tests of the E2 bipropellant rocket engine. The company recently announced the RS1 will have an improved 1,200-kilogram payload capacity and price of $12m. (Source: Defense Daily)
22 Jul 19. Eaton Commits to Acquire Souriau-Sunbank Connection Technologies for $920m. Enhances Eaton’s electrification strategy and long-term growth prospects in global aerospace and industrial markets. Power management company Eaton Corporation plc (NYSE:ETN) today announced it has committed to acquire the Souriau-Sunbank Connection Technologies business of TransDigm Group Incorporated for $920m, which represents a trailing 12-month EBITDA multiple of approximately 12x.
Headquartered in Versailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions for harsh environments for customers in the aerospace, defense, industrial, energy, and transport industries. Founded over 100 years ago, the company has a workforce of approximately 3,200 people and manufacturing facilities in France, the Dominican Republic, India, Morocco, Mexico, and the United States. For the trailing 12-month period ending June 30, 2019, sales of the business were $363m.
“Souriau-Sunbank is a great fit with our current aerospace portfolio,” said Craig Arnold, Eaton chairman and chief executive officer. “Souriau-Sunbank’s extensive connectors capabilities will accelerate our participation in the growing market for electrical content on aircraft, and also give us a strong portfolio of connectors for the industrial, energy, and transport markets that we serve today.
“Adding Souriau-Sunbank is another example of our strategy to bring our broad electrical expertise into new markets, such as our recently created eMobility segment targeting electric vehicles,” Arnold added.
Patrice Cavelier-Bros, president, Souriau-Sunbank, said, “We are extremely pleased to become part of Eaton. This combination will better position our businesses and brands to serve our customers and generate growth.”
Completion of the acquisition is subject to the required consultation processes with works councils, customary closing conditions, regulatory approvals, and TransDigm’s completion of other required steps. The transaction is expected to close by the end of 2019 and be accretive to adjusted earnings per share in 2020.(Source: BUSINESS WIRE)
23 Jul 19. United Tech profit beats on aircraft parts demand after MAX grounding. United Technologies (UTX.N) on Tuesday raised its full-year sales and profit forecasts, aided by an increase in demand for its aircraft maintenance parts and services as airlines grapple with overworked planes due to the grounding of Boeing’s MAX jets.
FILE PHOTO: United Technologies logo is displayed on a screen at the post where it’s stock is traded on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 5, 2017. REUTERS/Brendan McDermid
Shares of UTC, which makes the Pratt & Whitney aircraft engines and is on track to spin off its Otis elevator and Carrier air conditioner units, rose as much as 2.7% in morning trade.
UTC is among the first aero parts supplier to signal gains from the Boeing groundings, which has otherwise rattled the aerospace sector as more than 300 737 MAX passenger planes have been taken out of service, leaving several airlines to deal with thousands of flight cancellations and reschedules.
“There is impetuous on the airlines and the (maintenance and repair) shops to ensure that the existing fleet is in a ready to fly state,” UTC Chief Financial Officer Akhil Johri told Reuters, talking about the MAX grounding.
“In that environment, the (repair) shops and the airlines are ensuring that they have the parts supply available and that is definitely helping (UTC).”
UTC said sales in its Collins aerospace unit, which makes engine components, landing gear, wheels and brakes, and interior and exterior aircraft lighting, surged about 66% percent to $6.58 bn in the second quarter.
The unit is UTC’s biggest and is also benefiting from the acquisition of aero parts maker Rockwell Collins.
Johri added that growth in the unit will slow in the second half compared with the first, as stocking of spare parts by airlines and shops eases with the possibility of MAX returning to the sky.
UTC said it expects its acquisition of Rockwell to add an extra $150m sales and 15 cents per share to its profit in 2019.
That helped the company raise its current-year adjusted earnings per share outlook to a range of $7.90 to $8.05, from $7.80 to $8.00.
UTC now expects full-year adjusted sales to rise between 4% and 5%, up from 3% and 5% forecast previously.
“The guide was tweaked up more than we had been expecting,” J.P. Morgan analyst Stephen Tusa wrote in a note.
UTC reported earnings per share of $2.20 for the quarter ended June 30, beating the average analyst estimate of $2.05, according to IBES data from Refinitiv.
The company’s net sales rose 17.5% to $19.63bn, above Wall Street expectation of $19.55bn. (Source: Reuters)
23 Jul 19. UTC sees extra $150m sales boost from Collins deal. United Technologies Corp (UTX.N) expects its acquisition of aero parts maker Rockwell Collins to add an extra $150 m to full-year sales in 2019 and 15 cents per share to its profit, Chief Financial Officer Akhil Johri has told Reuters.
The estimates are the first hard numbers the company has given on the additional impact on this year’s sales and profit from the acquisition and compare to its overall target for cost synergies from the deal of about $600m. It raised its overall sales and profit guidance in its quarterly earnings release earlier on Tuesday.
“The Collins integration is going extremely well,” Johri said in a telephone interview after the results.
He added that he continued to expect a 10 cent per share impact on profit of this year’s Boeing MAX groundings. (Source: Reuters)
22 Jul 19. Chinese firms bump down Western companies on Top 100 list. Like so much in Washington these days, this year’s Top 100 list is all about China. For the first time since 2001, it includes Chinese defense firms, with six cracking the overall top 15, a major upheaval of the top defense companies in the world.
Unlike most Western defense firms, there are no public statements about defense revenue from the Chinese companies. To calculate their rank, Defense News teamed with the London-based International Institute for Strategic Studies, whose Lucie Béraud-Sudreau and Meia Nouwens have extensively studied the Chinese defense industry for several years.
The duo tracked primary sources such as company or government reports, secondary Chinese-language sources (like financial media outlets), and non-Chinese-language news sources to come up with total revenue figures for eight Chinese state-owned enterprise, or SOE, conglomerates with defense-industrial concerns.
The trickiest part was determining defense revenue versus commercial revenue for each SOE conglomerate. To do that, the IISS team looked at hundreds of small subsidiary companies for each SOE, narrowing those down to 460 mid-level subsidiaries. The researchers then determined whether the subsidiaries’ activities were primarily military or commercial.
The assumption was that if 50 percent of a group’s subsidiaries were military-focused, then the assumption was that 50 percent of the group’s revenue comes from defense.
This method was substantiated in part by the China North Industries Group Corporation Limited, otherwise known as Norinco, the only one of the eight companies that reported a distinction between its civilian and military activities.
According to Norinco, 80.8 percent of its revenue comes from civilian activities, which essentially matches the estimate for the company that IISS came up with. That Norinco’s official figures lined up so well with the estimates gave “confidence” for the researchers, Beraud-Sudreau said. “We got pretty close to their official number. So we think this methodology is viable.”
Notably, Nouwens said, gathering information on 2018 statistics was much harder than in previous years, with one company blocking access to its website from outside China. “If this is a concerted effort by these companies, on purpose, it really shows their own concerns with how much information they now give out and make available,” she said. “It might be coincidental or it might be a response to current tensions with the American tech sector and government.”
The top Chinese firms by fiscal 2018 defense revenue are:
- Aviation Industry Corporation of China ($24.9bn, 5th overall)
- China North Industries Group Corporation Limited ($14.8bn, 8th overall)
- China Aerospace Science and Industry Corporation ($12.1bn, 10th overall)
- China South Industries Group Corporation ($12bn, 11th overall)
- China Electronics Technology Group ($10.3bn, 12th overall)
- China Shipbuilding Industry Corporation ($9.8bn, 14th overall)
- China Aerospace Science and Technology Corporation ($8.1bn, 19th overall)
- China State Shipbuilding Corporation ($5 bn, 22nd overall)
Overall, those eight firms totaled approximately $97bn in defense revenue for 2018, putting China’s defense market behind only the U.S.; that amount is also just shy of the approximately $100bn in defense revenue from the European countries on the list.
But while Chinese firms are clearly major players in terms of revenue, Nouwens questioned how much of a global player they are likely to be in the near term.
“The buzzwords of this year are ‘great power competition,’ and countries will have to make a major decision to align with the U.S. or China on arms sales,” she said. “And countries now aligned with the U.S. won’t want to give that up.”
While there have been a few notable reports of Gulf states buying Chinese-made UAVs, Chinese firms actually have limited exports overall. The vast majority of revenue flowing into those firms comes directly from Beijing, with exports largely limited to Bangladesh, Algeria, Myanmar and Pakistan. The latter accounts for 36 percent of Chinese defense exports. China exports high-end combat aircraft to Pakistan, thanks to the co-production deal of the JF-17 Thunder aircraft, and more recently to Myanmar.
“European or Russian companies have to export to survive. Chinese and American companies don’t need that — they have a sufficiently large domestic customer that they can survive without external markets,” Beraud-Sudreau said. “Given the restrictions from the U.S., and American pressure on other countries to limit their connections to China, expect a focus on domestic production in the near future.”
Should anyone face export challenges from China, it will likely be Russian firms, the researchers said, particularly in areas like Latin America or Africa, where nations often have limited budgets and are willing to trade capability for lowered cost.
Chinese firms do have weaknesses. The researchers identified three key areas — aircraft engines, naval propulsion systems and combat-management systems — where Chinese industry lags behind. However, there appears to be a concerted effort from Beijing to close those gaps, either through technology creation at newly formed innovation centers throughout the country, or through partnerships, such as one with Ukrainian company Motor Sich to work on aircraft engines.
And just like in the U.S., there is the possibility of merger and acquisition activity spurring innovation and reducing costs. There is a long-running expectation that China State Shipbuilding Corporation and China Shipbuilding Industry Corporation will merge, which would create a single major shipbuilder in China, with a combined defense revenue of about $14.7 bn. That would boost it to ninth place on the Top 100 list.
Such a merger would be driven from the government, according to the IISS researchers, and represents a notable difference between the U.S. and China. While the Pentagon worries that consolidation will lead to less competition and higher prices, China, with a more controlled system, may see such moves as simply smart business to eliminate duplicative efforts.
China launched 11 ships for the People’s Liberation Army Navy in the first half of 2019 alone. This figure is made up mainly of Type 056A corvettes, but also includes four Type 052D destroyers and another Type 071 landing platform dock.
China also launched ships for its growing naval export market during the same period, with one for Malaysia and three for Nigeria, although these are relatively small and modest vessels.
Other ongoing naval construction work for the PLAN includes at least eight Type 055 cruisers in various states of construction as well as several more Type 052Ds. China is also building two more aircraft carriers in addition to Liaoning, a refurbished ex-Soviet carrier. A modified version of the Liaoning is currently being fitted out in northern China, while another, larger carrier is having its modules built at a shipyard in the city of Shanghai. China is also building a Type 075 helicopter assault ship at another shipyard in the same city, while continuing to crank out a variety of conventional and nuclear-powered submarines. (Source: Defense News)
23 Jul 19. Parsons To Acquire QRC Technologies In Further Expansion Of Defense And Intel Business. Parsons Corp. [PSN] on Monday said it has agreed to acquire QRC Technologies for $215 m in cash in a deal that expands its work in the defense and intelligence markets and its offerings in signals intelligence and radio frequency areas.
QRC, which is based in Fredericksburg, Va., is owned by the private equity firm DC Capital Partners. The company has about 115 employees and expects to generate about $56 m in sales and $18 in operating earnings in its fiscal year 2020. Parsons expects the deal to be accretive to its 2020 earnings excluding one-time transaction costs.
The acquisition will add U.S. Special Operations Command as a customer for Parsons. QRC also adds in-house product development as a new capability for Parsons, “which will provide significant value and unlock untapped potential for our customers across federal solutions and critical infrastructure,” a spokesman for Parsons told Defense Daily.
“Bringing QRC into the Parsons family complements our existing portfolio, increases our presence in the high-growth markets of spectrum awareness and surveillance, adds critical intellectual property that complements and expands our available capabilities for the Special Operations and intelligence communities,” Chuck Harrington, chairman and CEO of Parsons, said in a statement. “Our expansion into military hardware will provide value for both our shareholders and customers across federal solutions and critical infrastructure.”
QRC’s customers also include the Navy, Marine Corps and international. Larry Swift, the company’s CEO, said that joining with Parsons gives his company “scale, including increased investments, expanded pipelines, existing protocols, and additional business development resources which will result in additional speed and value to our current and future customers.”
In the past 14 months, Parsons has also acquired Polaris Alpha, which provided mission solutions capabilities in machine learning, data, video, multi-source analytics, and automated reasoning technologies for the Defense Department and intelligence community, and OGSystems, which gave it sensor solutions and software for defense and intelligence as well.
Parsons, which is based in Northern Virginia, is an engineering, construction, defense and security company. It significantly boosted its defense work in 2011 with the acquisition of Sparta.
Parsons put the net value of the deal for QRC at $185m due to the net present value of a $30 m related tax benefit. Goldman Sachs is Parsons’ financial adviser on the acquisition. QRC didn’t use a financial adviser. It received legal advice from the law firm of Arnold & Porter Kaye Scholer. (Source: Defense Daily)
23 Jul 19. Lockheed looking to shift sourcing F-35 parts to U.S. from Turkey: CEO. Lockheed Martin Corp (LMT.N) said on Tuesday it has been working to establish alternate supply sources for F-35 parts in the United States after the Pentagon decided last week to remove Turkey from the fighter jet program.
“These actions should limit any future production or sustainment impact, and we remain on track to meet our commitment of delivering 131 F-35s this year,” Chief Executive Officer Marillyn Hewson told investors on a post-earnings call.
The move to remove Turkey as a parts supplier for the F-35 jets has been long threatened and expected after Ankara began accepting delivery of an advanced Russian missile defense system earlier this month. (Source: Reuters)
23 Jul 19. Lockheed beats quarterly profit estimates, raises 2019 forecast. Lockheed Martin Corp (LMT.N) reported a better-than-expected quarterly profit on Tuesday and raised its 2019 profit forecast for the second time in three months, helped by increased demand for its stealth F-35 combat jets and missiles. The company’s shares rose 2.1% in pre-market trading. Defense stocks have rallied this year following Washington’s hike in defense spending in the budget proposed late last year. Lockheed’s better-than-expected results come at a time the United States has decided to remove Turkey from the advanced F-35 jet program, following its purchase of a Russian missile defense system. (Source: Reuters)
22 Jul 19. The great industrial competition: Mergers, acquisitions and geopolitical events fuel revenue. For the third straight year, overall defense revenues for the Top 100 defense companies in the world have increased, as defense budgets around the globe continue to climb in what has been dubbed a new era of great power competition.
Total fiscal 2018 defense revenues for the Top 100 companies came in at $490bn, easily eclipsing 2012, the last time the Top 100 combined to top $400bn.
That growth is largely driven by a first for the Top 100 list since 2001: the inclusion of Chinese defense firms. The list included eight Chinese companies in the top 25 spots, with six in the top 15. Even without eight new Chinese firms, that overall total is down to $393bn, which would still represent an approximately $17bn increase over the previous year’s$375bn total.
Click here for this year’s Top 100 list of global defense companies.
The top 25 companies accounted for just less than 75 percent of total defense revenues in the year, and the top 10 firms accounted for about 50 percent of total defense revenues in the year.
Geographically, 41 of the top 100 firms are based in the U.S., which accounted for about 52 percent of total defense revenue, slightly down from 2017. Thirty-two firms are located in Europe (including the United Kingdom and Turkey but excluding Russia), accounting for roughly 20 percent of defense revenue. Non-Chinese firms from the Asia-Pacific region claimed 11 companies; Israel housed three; Russia two; and Canada, Brazil and South Africa each are home to one.
The annual Defense News Top 100 list is compiled through a mix of open-source figures and self-reporting from companies, many of whom provide estimates rather than definitive data for their defense percentages. Hence, while the list is the industry standard, the numbers come with some variance; they also do not take into account major industrial movements that would be reported after the end of FY18. Defense News researched more than 150 firms from around the world.
Combined, the top 10 firms brought in $246.5bn in defense revenue in 2018, just over 50 percent of the overall total of the top 100 — evidence that while traditional defense firms are facing increased competition from new entrants into the market, the largest companies maintain a stranglehold on the defense industry.
The biggest change in the list is the inclusion of Chinese firms. Combined, the eight Chinese firms contributed just under $97bn in defense revenue, behind only the United States and Europe. Because of their presence on the list, the top 10 spots have experienced their biggest shake-up in recent Top 100 history.
Three Chinese firms — Aviation Industry Corporation of China (5th on the list, with $24.9 bn in defense revenue), China North Industries Group Corporation Limited (8th, with $14.8bn) and China Aerospace Science and Industry Corporation (10th, with $12.1bn) — crashed the top 10, helping to displace firms previously in that group such as Russia’s Almaz-Antey (8th on last year’s list, and 15th on this year’s list), Leonardo (previously 10th, now 13th) and Thales (previously 9th, now 16th).
But China’s presence was not enough to keep Lockheed Martin from remaining the top defense contractor in the world for a 20th straight year. Lockheed’s $50.5 bn in defense revenue represents about 10 percent of the Top 100’s total defense revenues, and dramatically outpaces the No. 2 company on the list, Boeing, which brought in $34 bn in defense revenue.
Lockheed’s continued dominance is no surprise, said Byron Callan of Capital Alpha Partners. He’s confident the company will remain the leader for many years to come.
“The only way you knock Lockheed off its perch is if they are somehow forced to break up or divest, or the F-35 gets canceled, and that’s not going to happen,” Callan said. “Is there maybe another big deal out that, something massive like Boeing buying Northrop, that could top Lockheed? Possibly. But that just gets you where Lockheed is, and Lockheed would probably react.”
Northrop Grumman ($25.3bn) and Raytheon ($25.2bn) round out the top five. Overall, eight companies on the list increased their defense revenue by $1bn or more over FY17 figures: Lockheed ($2.6bn), Northrop ($3.6bn), Raytheon ($1.6bn), General Dynamics ($4.5bn), Airbus ($1.9bn), United Technologies ($1.5bn) and Boeing ($13.5 bn). The eighth firm, Aviation Industry Corporation of China ($2bn), was not included on last year’s list of FY17 figures.
However, Boeing’s large increase comes with a similarly large asterisk. For last year’s list, the company changed how it reported defense revenue thanks to the creation of its Global Services business unit. The move had dropped the company down to fifth overall. For this year’s list, Boeing reorganized its revenue reporting so that all defense revenue is accounted for; it therefore has a 66 percent defense revenue increase year over year.
Boeing aside, the largest percentage increases in defense revenue belong to John Cockerill Defense (73 percent), Korea Aerospace Industries (72 percent), KBR (57 percent), STM Savunma Teknolojileri Muhendislik ve Ticaret A.S. (53 percent) and Fluor (44 percent).
Roman Schweizer, a market analyst with Cowen, said the overall shape of the defense market is one that is “top-heavy, not a lot of mid-cap guys left in the middle, and then some smaller guys. It’s really an inverted pyramid, which is just a function of consolidation over several decades. And that’s unlikely to change.”
He also said to expect defense revenues to continue to grow – at least in the near term.
“It can take anywhere from one to five years for budget authority to roll into contract obligations and turn into revenue. So the big budget increases from 2016 through 2019 will have a tail for another couple of years,” he said.
However, after that, “revenue would start to flatten out and conceivably drop depending on the trajectory of the budget,” he added.
New, missing and mergers
Including Chinese firms, there were 16 companies listed in this year’s list that did not appear in the previous edition, notably the privately held firm Sierra Nevada Corporation (58th overall, $1.5bn in defense revenue).
Another notable is TransDigm, which reported $1.3 bn in defense revenue and landed at 62nd place. The company is currently under scrutiny from Congress following a Pentagon report that found the contractor was making “excess profits” off of the department.
However, the list was also altered by a number of companies that declined to participate. Some Russian firms that had placed in last year’s Top 100 refused to share information with Defense News this year, and 2018 annual reports for those firms are yet to be released. Among those no longer listed are United Aircraft (14th on last year’s list) and Russian Helicopters (36th on last year’s list), the latter of which had previously complained when not ranked. American firm Accenture, number 57 on last year’s list, also declined to participate this year, but left open the possibility of rejoining the list next year.
Also missing from the list are a number of Japanese firms that were previously featured, a reflection of how Japan’s Ministry of Defense awarded only a fraction of dollars in FY18 when compared to the previous fiscal year. Looking back, Tokyo awarded about $12 bn to Japan’s top 20 contractors in FY17, but just under $1bn in contracts to the top 20 in FY18. That is reflected in the fact that Kawasaki Heavy Industries dropped from spot 50 to spot 100 in the new list, reporting approximately $1.4 bn less in defense revenue.
Accordingly, Kawasaki had the largest percentage drop in defense revenue (-94 percent) from the previous year, followed by Melrose Industries (-61 percent), Chemring (-42 percent), Cubic (-41 percent) and Denel (-39 percent).
Since the start of 2017, the defense industry has undergone a series of major mergers and acquisitions activity. Due to the time frame captured in this year’s list, some — but not all — of that activity has been illustrated. Among the M&A activity of note:
- The acquisition of Engility (79th on last year’s list) by SAIC (42nd on this year’s list).
- The acquisition of Orbital ATK (previously 30th) by Northrop Grumman.
- Israel’s IMI Systems (previously 86th) absorption by Elbit Systems (currently 35th).
- The takeover of Rockwell Collins (previously 41st) by United Technologies (currently 17th).
- General Dynamics’ (currently 6th) takeover of CSRA; the latter declined to participate in the list last year, as the takeover was pending. On the 2017 list, which measured FY16 data, CSRA landing at 39th place in defense revenue. The addition of CSRA to General Dynamics helps explain GD’s approximate $4.5 bn defense revenue increase on this year’s list.
However, this year’s list misses two of the largest shake-ups in the defense industry in years. It does not reflect the October 2018 announced merger of L3 Technologies and Harris Corporation. Combined, L3 ($8.2bn, 18th overall) and Harris ($4.6bn, 26th overall) would have a projected $12.8bn in defense revenue, ranking them 10th overall. It also does not reflect the recently announced merger of Raytheon and United Technologies. Based on this year’s figures, the combined company’s estimated defense revenue would reach $34.5bn, ranking it in second place, behind only Lockheed Martin.
Daniel Gouré of the Lexington Institute believes the shape of the merger and acquisition market has changed in recent years, moving from attempts by companies to add whole new business units – for example a rush of companies buying cyber firms at the start of the decade – only to abandon them shortly thereafter when the pieces didn’t fit.
Now, “rather than try to [move] into new areas, companies are sticking closer to home and doing things that make sense from an integrated product side, completing sub-tier integration like L3 and Harris. So it seems to be a series of relatively smart mergers and acquisitions — not nearly as speculative.”
However, Gouré said, the shrinking mid-tier market means M&A in the American defense industry may slow down in the near term. “We may be seeing in some respects the end of the wave in the next year or so. There’s just not a lot of things left where there isn’t such an obvious conflict of interest where you could add stuff to your portfolio and the Pentagon can say they still maintain two production lines,” he noted. “It’s a little harder to find those places.”
Callan also questioned how much consolidation may happen abroad. While Europe appears fairly fragmented, the desire by individual countries to have indigenous “national champions” means no one will be giving up their local defense firms anytime soon.
However, he noted, there may be room in the U.K. and Russia for consolidation. And consolidation is already happening in China, where it is expected China State Shipbuilding Corporation and China Shipbuilding Industry Corporation will merge, creating a single major shipbuilder in China, with a combined defense revenue of about $14.7bn — boosting it to No. 9 on the overall Top 100 list. (Source: Defense News)
22 Jul 19. What’s left in the dust of a massive merger? There’s a phrase — the mid-market squeeze — that encapsulates a truism in defense contracting: If you’re not really big, and you’re not categorically small, then you’re going to have a harder time competing.
That is oversimplifying the issue, but there are practical reasons for this to be at least notionally true. Agencies and prime contractors both have set-aside goals that they’re expected to meet in terms of divvying a percentage of contract dollars to small businesses — goals they notoriously miss. That makes a small business designation for a company a valuable marketing tactic when competing to be on the team of a prime or to win a contract direct from a defense agency (less common, but it happens). I wouldn’t say it makes competition for small businesses simple, but it helps.
At the other end of the spectrum, you of course have the prime contractors, who have both the benefit of a direct relationship with the customer and, at least for the top tier, the sheer scale to meet more requirements at a lower cost.
That leaves the mid-tier suffering the Jan Brady effect.
And it stands to get worse as some of the biggest mid-tier players — cognizant of the squeeze and the benefit of scale — combine. The challenges of the midmarket were definitely a factor in the L3-Harris merger that closed July 1, Bill Brown, chairman and CEO of the newly formed L3Harris Technologies, told me during an interview ahead of the Paris Air Show.
The squeeze is driving consolidation and frankly is why there’s not many mid-tier players left, he said. “L3 and Harris were two; put them together and they become bigger.”
It’s a simple concept that nonetheless stands to redefine what a mid-tier company actually is — or, more accurately, to create a whole new category unto itself. L3Harris still doesn’t build platforms — Brown is quite adamant about that, as was Raytheon CEO Tom Kennedy when I spoke to him about the merger with United Technologies. That used to be a qualifier for the mid-tier — creating systems that often go in and on platforms built by the tier-one manufacturers. But now, the fact that these merged companies are or will be large enough in terms of revenue to rival some of those tier-one defense manufacturers makes them quite different. What we have in L3Harris and the future Raytheon Technologies are companies with phenomenal scale and diversity.
We’ve watched a similar market shift among the IT services companies in the last few years, with medium companies combining to become mega providers that can price low, and offer more.
So where does that leave the other mid-sized defense companies? Probably looking around to see who they could perhaps merge with to leapfrog to that new category — or close to it. That’s not easy, though. As Brown noted, the pickings are becoming increasingly slim. And other factors matter: lack of market overlap, namely, to ensure a merger won’t raise antitrust issues and will promote diversity to put together more comprehensive systems.
If you look at this year’s Top 100 list, it’s hard to identify mergers that would fit the bill — though as Brown told me in June: “I wouldn’t have seen six months ago United and Raytheon.”
Plus, with big mergers come divestitures. L3Harris expects a “pretty significant” piece of business to be shed either as a sale or a spinoff in its first six months. One can figure the same from Raytheon and UTC, once the deal closes. That provides options for those mid-tier players looking to expand.
And down the road? Who knows. These things often happen in cycles, where an era of consolidation makes companies a whole lot of money, and then a couple years later they break up.
As Brown and L3Harris Chief Operating Officer Chris Kubasik told me: “It’s worked for bankers.” (Source: Defense News Early Bird/Defense News)
21 Jul 19. CAE Inc. (CAE)’s Financial Results Comparing With Triumph Group Inc. (NYSE:TGI). This is therefore a comparing of the profitability, analyst recommendations, risk, dividends, earnings and valuation, institutional ownership in CAE Inc. (NYSE:CAE) and Triumph Group Inc. (NYSE:TGI). The two are both Aerospace/Defense Products & Services companies that compete with one another.
Risk and Volatility
CAE Inc.’s volatility measures that it’s 5.00% less volatile than Standard & Poor’s 500 due to its 0.95 beta. Triumph Group Inc.’s 172.00% more volatile than Standard & Poor’s 500 volatility due to the company’s 2.72 beta.
The current Quick Ratio of CAE Inc. is 0.8 while its Current Ratio is 1.1. Meanwhile, Triumph Group Inc. has a Current Ratio of 1.4 while its Quick Ratio is 0.9. Triumph Group Inc. is better positioned to pay off its short-term and long-term debts than CAE Inc.
Competitively Triumph Group Inc. has a consensus price target of $28.5, with potential upside of 27.63%.
Insider & Institutional Ownership
Institutional investors owned 73.3% of CAE Inc. shares and 0% of Triumph Group Inc. shares. CAE Inc.’s share owned by insiders are 1.1%. Competitively, Triumph Group Inc. has 0.8% of it’s share owned by insiders. For the past year CAE Inc.’s stock price has smaller growth than Triumph Group Inc. Triumph Group Inc. beats CAE Inc. on 5 of the 9 factors.
CAE Inc., together with its subsidiaries, designs, manufactures, and supplies simulation equipment worldwide. It operates in three segments: Civil Aviation Training Solutions, Defence and Security, and Healthcare. The Civil Aviation Training Solutions segment provides training solutions for flight, cabin, maintenance, and ground personnel in commercial, business, and helicopter aviation; flight simulation training devices; and ab initio pilot training and crew sourcing services. The Defence and Security segment operates as a training systems integrator for defense forces in the air, land, and naval domains, as well as for government organizations responsible for public safety. The Healthcare segment designs, manufactures, and markets simulators; offers audiovisual and simulation center management solutions; and develops courseware and offers services for training of medical and allied healthcare students, as well as clinicians in educational institutions, hospitals, and defense organizations. The company was formerly known as CAE Industries Ltd. and changed its name to CAE Inc. in June 1993. CAE Inc. was founded in 1947 and is headquartered in Saint-Laurent, Canada.
Triumph Group, Inc. designs, engineers, manufactures, repairs, overhauls, and distributes aero structures, aircraft components, accessories, subassemblies, and systems worldwide. The company operates through four segments: Integrated Systems, Aerospace Structures, Precision Components, and Product Support. It offers aircraft and engine mounted accessory drives, thermal control systems and components, cargo hooks, high lift actuations, cockpit control levers, hydraulic systems and components, landing gear actuation systems, control system valve bodies, landing gear components and assemblies, electronic engine controls, main engine gear box assemblies, exhaust nozzles and ducting, fuel pumps, geared transmissions and drive train components, secondary flight control systems, fuel metering units, and vibration absorbers, as well as offers processing services. The company also offers aircraft wings, flight control surfaces, composite and metal bonding, helicopter cabins, engine nacelles, precision machined parts, stretch-formed leading edges and fuselage skins, empennages, wing spars and stringers, acoustic and thermal insulation systems, and composite ducts and floor panels. In addition, it offers product support services, including component maintenance, repair, and overhaul, as well as postproduction supply chain services for air cycle machines, blades and vanes, APUs, cabin panes, shades, light lenses and other components, speed drives, combustors, engine and airframe accessories, stators, transition ducts, integrated drive generators, sidewalls, light assemblies, remote sensors, overhead bins, thrust reversers, and fuel bladder cells. The company serves the aviation industry, including original equipment manufacturers of commercial, regional, business, and military aircraft and aircraft components, as well as commercial and regional airlines and air cargo carriers. Triumph Group, Inc. was founded in 1993 and is headquartered in Berwyn, Pennsylvania. (Source: Google/https://www.marketbeat.com)