15 Aug 19. GE CEO calls Markopolos report ‘market manipulation’ and ‘false.’ General Electric Co (GE.N) Chief Executive Larry Culp said on Thursday that a report alleging GE was hiding financial problems was “market manipulation – pure and simple.”
In a statement responding to a report alleging fraud at GE, Culp said the report “contains false statements” and that author Harry Markopolos stood to gain from short-selling related to the report. GE’s shares fell as much as 15% Thursday after the report came out. (Source: Reuters)
15 Aug 19. Tough times ahead for Gooch & Housego. In February, photonics specialist Gooch & Housego (GHH) warned that, during its first quarter, it had witnessed a slump in demand for components used in industrial lasers for microelectronic manufacturing, particularly from China. The cyclical nature of the microelectronics sector and the US-China tariff dispute had dampened demand. Gooch’s bosses cautioned that excess inventory in the supply chain could take longer than expected to work through, but added that they expected the market for industrial lasers to pick up in the second half of the financial year that ends next month.
Months have passed, and Gooch is still waiting for recovery. The group, which makes optical components and systems serving aerospace and defence, life sciences, and industrial and scientific research, subsequently issued a profit warning at its first-half results in June, flagging that it did not expect the industrial lasers market to return to more “normal” levels this year. It added that it would only manufacture for orders “that are known or where we have a high level of certainty”, which raised questions over order visibility. In response, house broker FinnCap lowered its estimates for earnings per share for 2019 and 2020 by 22 per cent and 19 per cent, respectively. Gooch’s share price fell by almost a quarter.
There is likely to be more pain. True, US tariffs themselves don’t directly attack Gooch’s business, according to its chief executive, Mark Webster, as the group can shift production from its US facility in Fremont to Ilminster, in the UK. Rather, falling confidence in the Chinese market is choking demand for industrial lasers. Growth in output for the world’s second-largest economy has been been dull by historical standards – the second quarter’s year-on-year growth was just 6.2 per cent, down from 6.4 per cent in the first quarter. Flickering signs of efforts at resolving the trade war have been punctuated by Mr Trump’s rhetoric. In August, the president threatened a 10 per cent tariff on a further $300bn (£248bn) of Chinese goods coming into the US. China’s malaise may well continue.
So the short-term picture is bleak. But Gooch & Housego’s underlying metrics suggest a business that has internal issues to reckon with, too. Capital returns and profit margins have edged downwards since 2014. Its September 2018 acquisition of Gould Technology, which it uses to provide fused fibre-optic technology to US aerospace and defence customers, has underperformed, with programme delays hitting order intake. Industrial lasers don’t make up the whole of Gooch’s industrials segment, and it is receiving significant orders in telecommunications. Nevertheless, the segment is important – it accounted for half of Gooch’s revenues in the first half of 2017-18 and 61 per cent of the full-year turnover.
IC View
With a record half-year order book, a burgeoning life sciences division and opportunities to come with the roll-out of 5G mobile telecoms, we don’t expect to stay bearish about Gooch & Housego for too long; besides, the agility of its supply chain is encouraging. But with no discernible end in sight to tariff wars, and with expectations being revised downwards, we can easily see a share rating of well over 20 times earnings coming under further pressure. Sell. Last IC View: Sell, 954p, 4 Jun 2019. (Source: Investors Chronicle)
15 Aug 19. GE’s financials targeted in report by Madoff whistleblower. Company calls allegations ‘false and misleading’ as its shares fall 5%. Shares fell 5 per cent in pre-market trade to $8.61 following the report, in which Mr Markopolos alleges that “GE’s $38bn in accounting fraud amounts to over 40 per cent of GE’s market capitalisation, making it far more serious than either the Enron or WorldCom accounting frauds”. He argued that the conglomerate has understated its liabilities in its insurance business, said its cash situation is worse than disclosed in its filings and that it has not properly accounted for its acquisition of a stake in oilfield services provider Baker Hughes, which was completed in 2017. GE began to sell down that stake in 2018. “While we can’t comment on the detailed content of a report that we haven’t seen, the allegations we have heard are entirely false and misleading,” GE said in a statement to the FT. “GE stands behind its financials. We operate to the highest level of integrity in our financial reporting and we have clearly laid out our financial obligations in great detail.” The company added: “It’s widely known and the WSJ has previously reported that he works for and is compensated by unnamed hedge funds. Such funds are usually financially motivated to try to generate short selling in a company’s stock to create unnecessary volatility.” The allegations were first reported by the WSJ. GE shares were up 24 per cent year-to-date as of Wednesday’s close. (Source: FT.com)
15 Aug 19. Defence Publishing shakeout? A raft of announcements over the past few weeks suggests that the current defence publishing model of a monthly printed publication with an online news service has been found wanting. One of the reasons for this is the inability to generate the same revenues online as in published format. BATTLESPACE was started in 1997 as an online publication with printed coming later for specific exhibitions. We noticed the decline in advertising in 2009 and adjusted our frequency in published magazines accordingly from six to four a year. One problem has been for the propensity for MoDs and Companies to do their publishing in-house spreading the word as they see it. Other publishers branched out into Apps, which we did and was a notable failure and TV and video which have also proved fruitless. This has proved more problematic for publishing houses with high staffing levels and multiple magazine titles who are facing expensive redundancies in the event of any layoffs or closures. So, over the past four weeks we have seen Flight being sold, Rotor & Wing closing, Governing from e.Republic closing, Jane’s being put up for sale, Mönch folding Safety & Security International earlier and Shephard closing its Special Forces title. The inevitability of a war with China or indeed Russia and the growth of Budgets across the world suggest that this is a strange time for contraction. At BATTLESPACE, we haven’t seen any decline in interest for our publications as our DSEI issue will clearly show. But, certainly recent events show that the current model is broken and that online will prosper against print. Adam Konowe and Peter Bradfield are lecturing on this topic, ‘Advertising Trends and Topics,’ in London on September 9th. A timely opportunity and one that industry and Mods should look closely at as the choice for media promotions for products and services declines. In addition, the combination of subject matter experts retiring coupled to reduced editorial budgets means a reduced ability for true analysis of defence contracts and thus the ability for costly mistakes and expensive overruns to be revealed and rectified at a fraction of the cost if MoDs cover up or fail to spot technical glitches in systems and equipment, often after lives have been lost.
(SEE Features: Why less is truly less, A clarion call in light of recent A&D media closures. By Adam Konowe. Adam Konowe, FRAeS, is vice president of client strategy at TMP Worldwide)
15 Aug 19. Elbit Systems Ltd. (NASDAQ: ESLT and TASE: ESLT), (the “Company”) the international high technology company, reported today its consolidated results for the quarter ended June 30, 2019.
Management Comment: Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems, commented: “We are pleased with the results of the second quarter, with an ongoing increase in backlog as well as solid revenue growth of over 19%, diversified across all our main regions of business.
We are also encouraged that, with the IMI consolidation, our ongoing focus on efficient operations enabled us to maintain a similar level of operating margins to that of the second quarter last year.
We continue to integrate and extract synergies from all our recent acquisitions and are looking forward to further growth of our business.”
Second quarter 2019 results:
Revenues in the second quarter of 2019 were $1,064.0m, as compared to $892.2 m in the second quarter of 2018. The strong growth was driven mainly by the consolidation of IMI.
Non-GAAP (*) gross profit amounted to $294.3m (27.7% of revenues) in the second quarter of 2019, as compared to $254.8m (28.6% of revenues) in the second quarter of 2018. GAAP gross profit in the second quarter of 2019 was $288.4m (27.1% of revenues), as compared to $250.0 m (28.0% of revenues) in the second quarter of 2018.
Research and development expenses, net were $77.3m (7.3% of revenues) in the second quarter of 2019, as compared to $76.6m (8.6% of revenues) in the second quarter of 2018.
Marketing and selling expenses, net were $73.6m (6.9% of revenues) in the second quarter of 2019, as compared to $69.9m (7.8% of revenues) in the second quarter of 2018.
General and administrative expenses, net were $57.2m (5.4% of revenues) in the second quarter of 2019, as compared to $37.0m (4.2% of revenues) in the second quarter of 2018.
Other operating income, net in the second quarter of 2018 was $45.4 m. This was the result of net gains related to valuation of shares in two of our Israeli subsidiaries in the commercial cyber and medical instrument areas, due to third party investments.
Non-GAAP(*) operating income was $89.6m (8.4% of revenues) in the second quarter of 2019, as compared to $73.1m (8.2% of revenues) in the second quarter of 2018. GAAP operating income in the second quarter of 2019 was $80.3 m (7.5% of revenues), as compared to $111.8m (12.5% of revenues) in the second quarter of 2018.
Financial expenses, net were $20.3m in the second quarter of 2019, as compared to $10.7m in the second quarter of 2018. Financial expenses, net in the second quarter of 2019 include exchange rate differences of approximately $5.2m related to the recognition of lease liabilities denominated in foreign currencies (mainly in New Israeli Shekels) as a result of the adoption of ASC 842, Leases, effective January 1, 2019.
Other income, net was $1.6m in the second quarter of 2019, as compared to other expenses, net of $5.1 m in the second quarter of 2018, mainly due to the non-service cost components of pension plans, in accordance with ASU 2017-07 and adjustments to the fair value of our investments in Israeli subsidiaries.
Taxes on income were $10.8 m (effective tax rate of 17.6%) in the second quarter of 2019, as compared to $7.3 m (effective tax rate of 7.6%) in the second quarter of 2018. The effective tax rate is affected by the mix of the tax rates in the various jurisdictions in which the Company’s entities generate taxable income and other income and expenses that are not a part of the taxable income.
Equity in net earnings of affiliated companies and partnerships was $3.5m (0.3% of revenues) in the second quarter of 2019, as compared to $3.3m (0.4% of revenues) in the second quarter of 2018.
Net income attributable to non-controlling interests was $0.4m in the second quarter of 2019, as compared to $0.1 m in the second quarter of 2018.
Non-GAAP(*) net income attributable to the Company’s shareholders in the second quarter of 2019 was $64.3m (6.0% of revenues), as compared to $61.0m (6.8% of revenues) in the second quarter of 2018. GAAP net income attributable to the Company’s shareholders in the second quarter of 2019 was $53.8m (5.1% of revenues), as compared to $91.9m (10.3% of revenues) in the second quarter of 2018.
Non-GAAP(*) diluted net earnings per share attributable to the Company’s shareholders were $1.46 for the second quarter of 2019, as compared to $1.43 for the second quarter of 2018. GAAP diluted earnings per share in the second quarter of 2019 were $1.22, as compared to $2.15 for the second quarter of 2018.
The Company’s backlog of orders as of June 30, 2019 totaled $9,796m, as compared to $8,065m as of June 30, 2018. Approximately 60% of the current backlog is attributable to orders from outside Israel. Approximately 56% of the current backlog is scheduled to be performed during the second half of 2019 and 2020.
14 Aug 19. Embraer announced earnings.
- Embraer delivered 26 commercial and 25 executive (19 light and 6 large) jets during 2Q19, compared to 28 commercial jets and 20 executive (15 light and 5 large) jets in 2Q18;
- The Company’s firm order backlog at the end of 2Q19 was US$ 16.9 bn, up from the US$ 16.0bn reported at the end of 1Q19. Embraer achieved book-to-bills of above 1x in each of its major business units during the quarter, led by sales performance in the Executive Jets segment;
- EBIT and EBITDA in 2Q19 were US$ 26. m and US$ 67.0m, respectively, yielding EBIT margin of 1.9% and EBITDA margin of 4.9%. In the first six months of 2019 the Company’s EBIT was US$ 11.4m (EBIT margin of 0.5%) and EBITDA was US$ 97.9m (EBITDA margin of 4.4%);
- 2Q19 Net income attributable to Embraer shareholders and Earnings per ADS were US$ 7.2 m and US$ 0.04, respectively. Adjusted net loss (excluding deferred income tax and social contribution) for 2Q19 was US$ (13.9)m, with Adjusted loss per ADS of US$ (0.08). Embraer reported adjusted net loss in 2Q18 of US$ (0.4)m, for an adjusted loss per ADS of US$ (0.002) in the quarter;
- Embraer reported 2Q19 Free cash flow of US$ 1.5 m, versus free cash flow of US$ 43.3m reported in 2Q18. The Company expects free cash flow generation to improve in the second half of the year given higher expected aircraft deliveries and cash inflows related to Defense & Security contracts;
- The Company finished the quarter with total cash of US$ 2,478.8m and total debt of US$ 3,569.1m, yielding a net debt position of US$ 1,090.3m at the end of 2Q19;
- The Company reaffirms all aspects of its 2019 financial and deliveries guidance.
14 Aug 19. Rafael/Stolero set to complete Aeronautics purchase. The acquisition of Israeli unmanned aerial vehicle (UAV) manufacturer Aeronautics by Rafael Advanced Defense Systems and businessman Avihai Stolero moved closer to completion on 13 August after approval from the government’s socio-economic cabinet. Aeronautics shareholders and the Government Companies Authority had already approved the Rafael/Stolero offer. Under the NIS850m (USD243.64m) deal, state-owned Rafael and Stolero will each hold a 50% stake in Aeronautics. Their successful bid almost doubled a previous offer of ILS430m, which was rejected as too low by Aeronautics in 2018. The joint bid prevailed over a NIS600m bid from Israel Aerospace Industries. Once the acquisition is completed, Aeronautics will be delisted from the Tel Aviv Stock Exchange. (Source: IHS Jane’s)
14 Aug 19. New defence group to start operations in late 2019, says AirBoss. Canada-based AirBoss expects to complete the formation of AirBoss Defense Group (ADG) in the fourth quarter of 2019 by merging its defence activities with privately run US company Critical Solutions International (CSI). AirBoss announced the deal in May, but it remains subject to approval by the Committee on Foreign Investment in the United States. In the meantime, AirBoss continues to bid on international defence contracts.
“While management believes there are numerous synergies associated with the transaction, most important is the creation of a strong platform with the scale, capabilities, and flexibility to act on an array of growth opportunities, both organic and transactional,” the company stated on 13 August in its second quarter financial results announcement. (Source: IHS Jane’s)
13 Aug 19. Chinese shipbuilding merger geared toward technology development. The planned merger between China’s two biggest shipbuilding corporations – the China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC) – will enable the country to achieve further technological advancement, Hu Wenming, the chairman of CSIC has said. In comments to the state-owned China Securities Journal on 11 August, Hu also stated that the merger will not create a monopoly given the growing capabilities of China’s private-sector shipbuilders. After years of planning, the merger was finally confirmed by the two state-run corporations in July. A schedule for the merger has not yet been confirmed by the Chinese government, although Hu indicated it could start soon. (Source: IHS Jane’s)
13 Aug 19. Moody’s downgrades Rolls-Royce on cash flow concerns. Rating agency lowers debt to lower medium investment grade of Baa1. Rolls-Royce has had its rating lowered by Moody’s on concerns over its cash flow, a week after the UK-based aero-engine group reported an extra charge to cover costs for its engine programme and said it has spent £100m preparing for a no-deal Brexit. The rating company on Tuesday said it had downgraded the long-term senior unsecured debt rating of Rolls-Royce to the lower medium investment grade of Baa1 from A3 and changed its outlook to stable from negative. Moody’s change reflects the “expectation that target free cash flow in 2019 will include working capital gains, which are not considered sustainable” and that it will be similarly supported in 2020, the agency said in a report. “The company has made several important steps towards improving longer term performance,” Moody’s said, “including reducing the losses on the sale of large commercial engines, whilst achieving strong growth in commercial engine after-market revenues and in power systems.” The agency added that it continues to expect the company to improve earnings and cash flow particularly as the installed base of engines grows. Rolls-Royce said last week it had spent extra funds building up inventory and arranging logistics should the UK exit the EU without a deal on October 31. The group also reported an extra charge of £100m over the next three years to cover additional costs on its Trent 100 engine programme, which powers Boeing’s 787 Dreamliner. This is as well as the £1.5bn already earmarked for that purpose. Free cash flow for the first half of 2019 was negative, with an outflow of £391m for the core business, due largely to a seasonal timing of engine deliveries. Rolls-Royce has maintained its guidance of £700m and £1bn free cash flow for this year and next, Moody’s pointed out. Moody’s expects about £600m to £800m of working capital gains but does not view them as “sustainable in the long term”. (Source: FT.com)
12 Aug 19. Artemis reduces stake in Cobham ahead of expected Bidco deal. Artemis Investment Management has reported a change in ownership of defence and aerospace company Cobham while continuing to maintain its support for the planned sale of the UK firm to AI Convoy Bidco. When the announcement was made in July that private equity firm Advent International Corporation’s indirect subsidiary Bidco had made a GBP4bn (USD4.8bn) bid for Cobham, Artemis owned 122,677,960 shares in Cobham although it has since sold a number and now owns 121,761,285. This represents a decrease from 5.13% of the holding in Cobham to approximately 5.09%. As its share remains above 5%, Artemis had to report the change on 8 August in accordance with regulatory requirements. (Source: IHS Jane’s)
09 Aug 19. SRT Marine Swings To Profit As It Works On Pipeline Conversion. Maritime surveillance, monitoring and management systems provider SRT Marine Systems reported a 286% improvement in revenue in its final results on Thursday, to £20.6m. The AIM-traded firm said its gross profit margin improved to 45% for the year ended 31 March, from 43% in the prior year, with the company swinging to a profit before tax of £3.2m from a loss before tax of £4.2m in the 2018 financial year. It said it had £3.9m cash as at year end. On the operational front, SRT won a £32m systems contract with the Philippine Government Fisheries (BFAR), adding that it had a “strong pipeline” of system business opportunities.
Its senior Management team was strengthened during the period, with the firm also expanding its GeoVS development and systems delivery teams. The development of new products and functionalities was also continuing, the board said.
“Maritime security, sovereignty and safety is of increasing importance around the world,” said chief executive officer Simon Tucker. “This is driving our growth as demonstrated by the 286% increase in revenues we are reporting today.”
Tucker said its pipeline of further contract opportunities was “significant and growing”, with six of them worth over £220m in aggregate and expected to come to fruition in the near term. Our many years of investments to develop a scalable fully integrated maritime surveillance system that fuses multiple surveillance sensor systems and embeds advanced data analytics and digital display technologies with command, control and logistics has placed us at the forefront of this growing global market.” (Source: Sharecast)
05 Aug 19. CPI Acquires SATCOM Technologies from General Dynamics Mission Systems. Communications & Power Industries LLC (CPI) has entered into an agreement to purchase SATCOM Technologies, the antenna systems business of General Dynamics Mission Systems, Inc., a business unit of General Dynamics. SATCOM Technologies designs, manufactures and installs satellite communications antenna systems used in commercial, defense and scientific applications, as well as provides related radio frequency products and electronics, including feed components, amplifiers, converters, antenna control systems, and engineering and installation services. This business will complement CPI’s existing portfolio of communications products for government, military and commercial applications.
The acquisition is expected to close before the end of calendar year 2019, subject to customary closing conditions. Financial terms of the agreement were not disclosed.
Bob Fickett, President and CEO of CPI, said satellite communications technology plays a vital role in modern communications, serving the seemingly insatiable thirst for more bandwidth and greater speeds. Acquiring SATCOM Technologies enables the company to provide CPI’s customers with a wide range of complementary products, capabilities and resources to support this dynamic and growing market, making this an excellent fit for CPI. These capabilities and resources include extensive expertise in VSAT, large and medium communications antennas, and very large, complex antenna systems. (Source: Satnews)