20 Feb 20. BAE Systems predicts 2020 growth despite Saudi ban. Britain’s BAE Systems (BAES.L) forecast another year of growth in 2020, saying the company was well-placed to take advantage of increased defence spending that could help to offset any future impact from a German ban on arms exports to Saudi Arabia.
Full-year results announced on Thursday at the upper end of forecasts, helped to drive shares 3.5% higher at 664.6 pence by 0954 GMT.
The maker of Typhoon fighters, combat vehicles and Astute Class nuclear-powered attack submarines, has been affected by a German ban announced in 2019 on exporting arms to Saudi Arabia.
The export ban has put a question mark over a multi-billion pound deal to sell 48 Eurofighter Typhoon jets to Riyadh, built by a BAE-led consortium that also includes MTU Aero Engines (MTXGn.DE) and Airbus (AIR.PA).
CEO Charles Woodburn shrugged off its impact, saying there were other opportunities.
“A number of European countries are looking to increase their defence spending and move closer to meeting their NATO commitments. The group is well-positioned to benefit,” he told reporters on Thursday.
The company expects Germany to order more of its Typhoon jets, anticipates higher sales at European missile maker MBDA, in which it owns a stake, and new orders for its Swedish-based land vehicle business.
Woodburn also predicted business in the Middle East, despite the difficulties in Saudi Arabia.
“Within the Middle East region, there are a number of other customers in addition to Saudi, who I think in future will be looking at additional Typhoons,” he said. Oman, Kuwait and Qatar are existing customers.
The Typhoon, whose full name is the Eurofighter Typhoon, is the most important combat aircraft in BAE Systems’ portfolio.
BAE said its earnings per share would grow by a mid-single digit percentage next year. The group also said on Thursday it would make a £1bn ($1.29bn) one-off payment into its pension scheme in the coming months, funded by debt.
Jefferies analyst Sandy Morris said he was encouraged the company had addressed its pension deficit.
“We figure there is certainly renewed life at BAE,” he said.
BAE’s earnings per share were 45.8 pence for 2019, at the upper end of a forecast for a mid-single digit rise on 2018’s 42.9 pence, helped by an improved operational performance, after a focus on boosting performance in its U.S. combat vehicle unit, and a slightly lower tax rate.
BAE’s results this year could exceed forecasts, as they exclude any boost from two U.S. acquisitions totalling $2.2bn, which it announced in January and which should be completed this year. (Source: Reuters)
20 Feb 20. BAE Systems trumps cash-flow expectations. BAE Systems (BA.) beat consensus forecasts for 2019 full-year free cash-flow generation, while boosting underlying cash profits by 10 per cent to £2.21bn, as performance metrics over the second half strengthened due to an increase in vehicle production deliveries and improved operational efficiencies.
The defence giant recorded free cash flow of £850m, up from £615m in 2018 and above consensus expectations of £819m. This was fuelled by operating business cash flow jumping by almost a third to £1.3bn from £993m, as BAE registered significant increases linked to its electronics systems and US platforms and services segments (much of which are combat vehicles). BAE is setting up new facilities in two locations in the US in order to meet a record electronics order backlog of £6bn.
Combat vehicles have proven particularly lucrative for the group’s US platforms wing, powering the segment through the £4bn mark on order intake. Its order backlog now stands at £5.8bn, which includes total in-year funded combat vehicle orders received of £1.9bn. The group made its first deliveries of its amphibious combat vehicle to the US Marine Corps, and this quarter has taken the decision to hit a full production rate for its M109A7 self-propelled howitzer and ammunition carrier vehicles.
BAE also announced a new pension deficit recovery plan for its onerous retirement obligations. It consolidated six of its nine UK pension schemes in October 2019, which had a deficit of £1.9bn as of 31 October. BAE has replaced an old recovery plan with a commitment to make a one-off payment of £1bn over the coming months, followed by funding of around £490m over this year and next.
House broker Morgan Stanley forecasts full-year 2020 earnings per share of 47.8p, rising to 51.3p in 2021.
Announced earlier this month, the US 2021 defence budget proposal represents an essentially flat funding level for next year’s military expenditure, which could potentially dampen contractual activity given the group’s exposure here. Current levels of revenue booked under these programmes are low compared to BAE’s expected direction of travel, according to Morgan Stanley analysts, while the group isn’t short of business elsewhere, including increased activity on Qatar’s Typhoon and Hawk programmes. Overall, underlying EPS is expected to grow by mid-single digit percentage through 2020. Hold. Last IC View: Hold, 641p, 20 Jan 2020. (Source: Investors Chronicle)
20 Feb 20. BAE to halve pension deficit with £1bn injection. UK defence group forecasts growth in earnings and cash on back of strong order book. BAE Systems said it will borrow to accelerate pension payments as part of its plan to clear the £1.9bn deficit five years early, by the end of 2021. BAE Systems is taking steps to more than halve the deficit of its £20bn pension fund with a £1bn injection as it forecasts further growth in earnings and cash this year on the back of a strong order book. The UK defence company on Thursday said it would borrow to accelerate pension payments as part of its plan to clear the £1.9bn deficit five years early, by the end of 2021. A £1bn injection would be made in the coming months, helping to lighten a burden that for years has weighed down on its shares and constrained the group’s ability to deploy cash. Two further payments would be made this year and next amounting to £490m. With 108,000 members, BAE Systems runs one of the largest pension schemes in the FTSE 100. The announcement helped the shares edge up 2.3 per cent to 654.8p in midday trading and came as BAE posted a 5 per cent rise in annual underlying earnings before interest and tax to £2.1bn, on a constant currency basis. Charles Woodburn, chief executive, said the pension payment, along with other steps taken during the year would “help to accelerate our strategy and further our growth outlook. It provides clarity and certainty for us going forward.”
The company is forecasting a sharp rise in free cash flow for this year, up from £850m in 2019 to £1bn in 2020, as well as a mid-single digit rise in earnings. The steps to address the deficit, coming on the heels of last month’s deal to pay $1.93bn for the military global positioning business of US engineer Collins Aerospace, were welcomed by analysts and pension experts. Sandy Morris, defence analyst at Jefferies who has had BAE shares rated as a “hold” since 2016, said the pension deficit had been a “long-running sore and distraction”. But with the accelerated payments, there was “renewed life at BAE . . . The equity story may be stirring”. Nick Cunningham of Agency Partners said the injection would take net debt up to £1.8bn, while acquisitions were still to be included. “But it ends the pension top-up payments early, with last payment in 2021,” he said. The group’s “recent actions gives a sense of management acting proactively to increase the value of group”. Pensions experts warned that even with the injection, underlying liabilities would continue to present a challenge. “BAE is doing the right thing by reducing the recovery period, with a £1bn one-off contribution now, plus £0.25bn in each of 2020 and 2021,” said John Ralfe, an independent pension consultant. “But its total underlying pension liabilities, including the US, are almost £30bn, much larger than its market cap and pensions remain a big issue for BAE. “And, unlike other companies with large pension liabilities, such as BA or BT, BAE has not closed its defined benefit scheme to existing members, so its pension liabilities will continue to increase.” BAE also gave a three-year guidance for free cash of £3.5bn to £3.8bn, which does not include the GPS business, BAE’s biggest acquisition in a decade.
Analysts are expecting the targets could be revised once that deal is completed next year. The group’s numbers revealed a stronger than expected performance in its air and maritime divisions in 2019, and BAE said its future guidance was supported by an expected increase to full production rate of the F-35. The Lockheed Martin fighter is one of the most advanced jets in the world, and the most costly, but equally has been fraught with technical problems. Yet it has been a strong revenue generator for BAE, which has roughly 10 per cent of the work on the programme by value. Mr Woodburn said discussions continued with potential new partners on the UK’s Team Tempest combat air programme after Italy and Sweden last year joined the next-generation combat air capability. Overall, revenue increased 7 per cent to £1.7bn, excluding the impact of currency translation. Reported operating profit rose from £1.6bn to £1.9bn. Net debt decreased from £904m to £743m. Peter Lynas, finance director, said that after both the acquisitions and the pension injection, net debt would represent two times earnings before interest tax, depreciation and amortisation. The group announced orders of £18.4bn during the year, putting the backlog at £45.4bn. Basic earnings per share increased 48 per cent to 46.4p. The final dividend of 13.8p gives a total of 23.2p per share, up 4.5 per cent. (Source: FT.com)
20 Feb 20. BAE Systems 2019 full-year results. Charles Woodburn, Chief Executive, said: “2019 has been a year of significant progress for BAE Systems. We delivered a good set of financial results in line with guidance, growing sales and earnings, with improved operational performance and increased investment in the business to underpin our growth outlook. Strategically we took a number of actions to strengthen the portfolio and the pensions agreement announced today is good for all stakeholders. These will help to accelerate our strategy and further our growth outlook. We have a large order backlog and remain focused on strong programme performance to deliver a sustainable business model with enhanced financial performance.”
Financial performance measures as defined by the Group
- Sales increased by £1.7bn, a 7% increase, excluding the impact of currency translation.
- Underlying EBITA increased to £2,117m, a 5% increase on a constant currency basis and excluding the impact of IFRS 16.
- Underlying earnings per share increased by 7% to 45.8p (excluding the one-off tax benefit).
- Operating business cash flow increased by £314m to £1,307m.
- Net debt decreased to £743m.
- Order intake of £18.4bn.
- Order backlog of £45.4bn.
Financial performance measures defined in IFRS
- Revenue increased by £1.5bn, a 7% increase, excluding the impact of currency translation.
- Operating profit increased by £294m to £1,899m, including £27m of non-recurring charges (2018 £154m).
- Basic earnings per share increased by 48% to 46.4p.
- Net cash flow from operating activities increased by £397m to £1,597m. Under IFRS 16 net lease cash outflows of £273m are now classified under financing and investing activities.
Post-employment benefits and dividend
- Group’s share of the pre-tax accounting net post-employment benefits deficit increased by £0.5bn to £4.5bn compared with 31 December 2018.
- After consultation with the The Pensions Regulator in the UK, the Group has reached agreement with the Trustee Board of the combined pension scheme on the accelerated funding valuation and a revised deficit recovery plan.
- At the 31 October 2019 funding valuation date, the deficit was £1.9bn. The current deficit recovery plan which runs to 2026 will be replaced by a new deficit recovery plan, under which a one-off payment of £1bn is to be made in the coming months, with approximately £240m of funding payable in the scheme year ending 31 March 2020 and approximately £250m by 31 March 2021.
- Final dividend of 13.8p making a total of 23.2p per share for the year, an increase of 4.5% over 2018.
One-off tax benefit
- A one-off tax benefit of £161m was recognised in the year, arising from agreements reached in respect of overseas tax matters, net of a provision taken in respect of the estimated exposure arising from the EU’s decision regarding the UK’s Controlled Foreign Company regime.
Operational and strategic key points
- Qatar Typhoon and Hawk aircraft programme met its contractual milestones in the year. Contract amendment agreed to accelerate Typhoon deliveries
- F-35 programme Lots 12 to 14 price negotiations concluded. 142 rear fuselage assemblies delivered in the year in line with ramp-up to full rate production in 2020
- Tempest technology maturation programme contracted between industry and UK government. Italy and Sweden governments committed to working with UK to develop next-generation combat air capability
- The first four Hawk aircraft assembled in Saudi Arabia were accepted and entered service in-Kingdom
- UK Tornado fleet successfully retired from service on schedule following RAF declaration that Typhoon had met Centurion standard with embodiment across the Typhoon fleet
- The design and production readiness phase of the Hunter Class programme for the Royal Australian Navy continues to make good progress
- HMS Prince of Wales vessel acceptance achieved in December
- Four River Class Offshore Patrol Vessels have now been accepted, with the programme on target for completion in 2020
- Construction commenced on second of the three contracted Type 26 frigates in August
- Construction of the first Dreadnought Class submarine continues to advance, with £1.4bn of funding received in the year
- Sea trials for the fourth Astute Class submarine are due to take place in 2020
- A £230m seven-year Torpedo Repair and Maintenance contract was awarded
- The UK combat vehicles joint venture between Rheinmetall and BAE Systems Land UK was launched on 1 July
- Design requirements for the Canadian Surface Combatant are progressing towards finalisation with partners and the Royal Canadian Navy
- Growing demand for Advanced Precision Kill Weapon System (APKWS®) laser-guided rockets, with production awards totalling over $400m (£302m) received in the year
- Over 500 electronic warfare systems delivered for the F-35 Lightning II programme, and awarded production and Block 4 modernisation contracts worth more than $750m (£566m)
- Acquired Riptide Autonomous Solutions to advance capabilities in maritime mission requirements
- Continuing growth in space resilience domain
- Establishing new facilities in Huntsville, Alabama and Manchester, New Hampshire to meet the record order backlog
- Active interceptors certified for Gulfstream G500 and G600 jets and in production
- Battery electric and fuel cell electric transit systems recorded five million zero emission miles
Platforms & Services (US)
- Deliveries of the M109A7 self-propelled howitzer and ammunition carrier vehicle sets are progressing and the decision to proceed to full-rate production was made in Q1 2020
- First deliveries achieved of the Amphibious Combat Vehicle to the US Marine Corps
- Contract modification award of $575m (£434m) received for LRIP vehicles on the Armored Multi-Purpose Vehicle programme
- Work underway to upgrade 332 vehicles to the Bradley A4 configuration
- Awarded contracts worth $466m (£352m) to upgrade configuration on various M88 vehicles
- First tandem docking of two large warships in San Diego dry-dock for contracts worth more than $170m (£128m)
- Deliveries continue of the M777 ultra-lightweight howitzer to the Indian Army, with subsequent systems to be assembled at the Mahindra Defence Systems facility
Cyber & Intelligence
- Received orders exceeding $100m (£76m) to provide logistics sustainment support to US Air Force Space Command
- Awarded $437m (£330m) task order to provide open source support to US Army and Army Intelligence & Security Command approved partners
- Technology offerings further developed and the business achieved four Amazon Web Services designations, recognising our technical proficiency and operational excellence
- Divestment of the Silversky business and exit from the UK-based Managed Security Services business in progress at year-end. Restructuring charge of £20m recognised in the year
- Strong order intake and revenue growth in the Government business unit
Guidance for 2020
Whilst the Group is subject to geopolitical uncertainties, the following guidance is provided on current expected operational performance.
Impacts from the proposed acquisitions announced in January of the Collins Aerospace Military Global Positioning business and Raytheon’s Airborne Tactical Radios business are not included in the following guidance.
For the year ending 31 December 2020, the Group’s underlying earnings per share is expected to grow by mid-single digit percentage compared to the full-year underlying earnings per share in 2019 of 45.8p, assuming a $1.30 to sterling exchange rate.
20 Feb 20. Kleos Space secures $5.5m to drive satellite roll-out. ASX-listed Kleos Space has secured a $5.5m loan agreement with Dubai-based family office Winance to support the company’s commercialisation plans. The loan agreement ensures Kleos is well-funded to execute its commercialisation plans while awaiting revenues from early adopter contracts. The Loan Agreement is for 12 months, or later if agreed by both parties. Interest is 1.5 per cent per month, payable monthly.
Alternatively, Kleos may elect to issue CDIs in payment of the interest, in which case the interest rate will be 2.0 per cent, per month (the CDIs will be issued at the average VWAP of CDIs over the three trading days (inclusive) on which trades are recorded prior to the issue date).
Drawdown on the loan agreement is conditional upon, among other things, Kleos and Winance entering into a warrant deed under which Kleos will issue to Winance warrants over CDIs.
Chief executive of Kleos Space Andy Bowyer said, “This funding provides Kleos with working capital to progress the development of our second cluster of satellites while we await revenues from our Scouting Mission satellites.”
Kleos will use the funds to progress the development and launch of its second cluster of satellites, increase its international business development presence within the defence and security sector and repay existing convertible notes issued on 12 September 2019 and 20 December 2019. Kleos will generate revenues after the launch of its Scouting Mission satellites from Chennai, India (see ASX release 12 February 2020). (Source: Space Connect)
19 Feb 20. Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500® science and technology leader, today reported financial results for the fourth quarter and fiscal year 2019.
Roger Krone, Leidos Chairman and Chief Executive Officer, commented: “We delivered strong fourth quarter results, including record organic revenue growth, increasing margins and significant year-over-year non-GAAP earnings growth. Our growth and execution momentum accelerated throughout 2019 and has continued into 2020 with significant new program wins and the opportunity to create value from our two recently announced acquisitions. I am confident that we are growing the company with the right talent, the right capabilities and the right strategy to continue to drive value for our customers, employees and shareholders.”
Fourth Quarter Summary Results
Revenues for the quarter were $2.95bn, compared to $2.65bn in the prior year quarter, reflecting an 11.6% increase.
Operating income for the quarter was $261m, compared to $188m in the prior year quarter. Operating income margin increased to 8.8% from 7.1% in the prior year quarter. Non-GAAP operating margin for the quarter was 10.5%, compared to 9.3% in the prior year quarter, primarily due to favorable program mix.
Diluted earnings per share (“EPS”) attributable to Leidos common stockholders for the quarter was $1.26, compared to $1.25 in the prior year quarter. Non-GAAP diluted EPS for the fourth quarter was $1.51 compared to $1.10 in the prior year quarter. The weighted average diluted share count for the quarter was 144m compared to 150m in the prior year quarter.
Defense Solutions revenues for the quarter of $1.40bn increased $135m, or 10.7%, compared to the prior year quarter. The revenue growth was primarily attributable to new awards and a net increase in program volumes, partially offset by the completion of certain contracts.
Defense Solutions operating income margin for the quarter was 8.9%, compared to 6.3% in the prior year quarter. On a non-GAAP basis, operating margin for the quarter was 9.9%, compared to 7.7% in the prior year quarter, primarily attributable to new awards, the release of a contract reserve, favorable program mix and higher net-profit write-ups in the current year quarter.
Civil revenues for the quarter of $1.03bn increased $143m, or 16.2%, compared to the prior year quarter. The revenue growth was primarily attributable to a net increase in program volumes and new awards, partially offset by the impact of the sale of our commercial cybersecurity business and the completion of certain contracts.
Civil operating income margin for the quarter was 9.4%, compared to 7.1% in the prior year quarter. On a non-GAAP basis, operating margin for the quarter was 11.4%, compared to 9.8% in the prior year quarter, primarily attributable to profit write-ups in the current year quarter, new awards and favorable program mix.
Health revenues for the quarter of $526 m increased $29 m, or 5.8%, as compared to the prior year quarter. The revenue growth was primarily attributable to a net increase in program volumes, new awards and our acquisition of IMX Medical Management Services, Inc. (“IMX”), partially offset by the impact of the sale of our health staff augmentation business and the completion of certain contracts.
Health operating income margin for the quarter was 13.9%, compared to 13.7% in the prior year quarter. On a non-GAAP basis, operating margin for the quarter was 16.0%, consistent with 16.1% in the prior year quarter.
Fiscal Year 2019 Summary Results
Revenues for fiscal year 2019 were $11.09bn, compared to $10.19bn in the prior year, reflecting an 8.8% increase.
Operating income for fiscal year 2019 was $912m, compared to $749m in the prior year. Operating income margin for fiscal year 2019 was 8.2%, compared to 7.3% in the prior year. Non-GAAP operating margin was 9.9%, compared to 9.8% in the prior year, primarily due to the payment of an arbitration award relating to a contract in a prior business operation and favorable program mix.
Diluted EPS attributable to Leidos common stockholders for fiscal year 2019 was $4.60, compared to $3.80 for the prior year. Non-GAAP diluted EPS for fiscal year 2019 was $5.17, compared to $4.38 in the prior year. The diluted share count was 145 m compared to 153 m in the prior year.
Defense Solutions revenues of $5.37bn for fiscal year 2019 increased $401m, or 8.1%, compared to the prior year. The revenue growth was primarily attributable to new awards and a net increase in program volumes, partially offset by the completion of certain contracts.
Defense Solutions operating income margin for fiscal year 2019 was 7.6%, compared to 7.1% in the prior year. On a non-GAAP basis, operating margin for the year was 8.7% compared to 8.5% in the prior year, primarily attributable to new awards, the release of a contract reserve and favorable program mix.
Civil revenues of $3.73bn for fiscal year 2019 increased $318m, or 9.3%, compared to the prior year. The revenue growth was primarily attributable to new awards and a net increase in program volumes, partially offset by the impact of the sale of our commercial cybersecurity business, the completion of certain contracts and lower net profit write-ups in the current year.
Civil operating income margin for fiscal year 2019 was 7.9%, compared to 8.3% in the prior year. On a non-GAAP basis, operating margin for the year was 10.0%, compared to 11.2% in the prior year, primarily attributable to lower net profit write-ups in the current year and a net increase in bad debt expense on certain international contracts, partially offset by new awards.
Health revenues of $2.00 bn for fiscal year 2019 increased $181m, or 10.0%, compared to the prior year. The revenue growth was primarily attributable to a net increase in program volumes, new awards and our acquisition of IMX, partially offset by the completion of certain contracts and the impact of the sale of our health staff augmentation business.
Health operating income margin for fiscal year 2019 was 12.1%, compared to 12.7% in the prior year. On a non-GAAP basis, operating margin for the year was 14.3%, compared to 15.2% in the prior year, primarily attributable to reduced margins on awarded re-compete contracts.
Cash Flow Summary
Net cash provided by operating activities for the quarter were $169m compared to $104m in the prior year quarter. The higher operating cash inflows were primarily due to more favorable timing of working capital changes, partially offset by timing of interest payments.
Net cash used in investing activities for the quarter were $54m compared to $20m in the prior year quarter. The higher cash outflows were primarily due to higher purchases of property, equipment and software.
Net cash used in financing activities for the quarter were $144m compared to $290m in the prior year quarter. The decrease in financing cash outflows was primarily due to lower stock repurchases, partially offset by the timing of dividend and debt payments.
Net cash provided by operating activities for the fiscal year were $992m compared to $768 m in the prior year. The higher operating cash inflows were primarily due to more favorable timing of working capital changes including higher advance payments from customers, $59m received in payment of an arbitration award relating to a contract in a prior business operation and lower payments for integration and restructuring costs. These activities were partially offset by higher tax payments, the timing of interest payments and proceeds received from the termination of interest rate swaps in the prior year.
Net cash provided by investing activities for the fiscal year were $65m compared to $114m net cash used in investing activities in the prior year. The higher cash inflows were primarily due to proceeds received for the dispositions of our commercial cybersecurity and health staff augmentation businesses and the sale of real estate properties, as well as cash paid in the prior year related to our 2016 acquisition. These activities were partially offset by cash paid related to the acquisition of IMX, higher purchases of property, equipment and software and lower proceeds from promissory notes.
Net cash used in financing activities for the fiscal year were $709m compared to $707m in in the prior year. The increase in financing cash outflows were primarily due to the timing of debt payments and higher stock repurchases, partially offset by cash paid related to a tax indemnification in the prior year and the timing of issuances of stock.
As of January 3, 2020, the Company had $668m in cash and cash equivalents and $3.0bn in debt.
New Business Awards
Net bookings totaled $3.0bn in the fourth quarter of fiscal year 2019 and $14.5bn for fiscal year 2019, representing a book-to-bill ratio of 1.0 and 1.3 for the fourth quarter and fiscal year 2019, respectively.
Notable recent awards received include:
- Federal Aviation Administration Flight Services Support: The Company was awarded a follow-on prime contract by the Federal Aviation Administration (“FAA”) to continue serving the general aviation community under the Future Flight Services Program (“FFSP”). Under the FFSP contract, Leidos will help the FAA achieve its vision to transform and modernize the delivery of flight briefing services by reducing program costs, providing technology enhancements, and engaging the broader general aviation community. The single award, firm-fixed-price contract has a five-year base period of performance followed by ten one-year option periods at an approximate value of $1bn, if all options are exercised.
- U.K. Metropolitan Police Service Command and Control System Support: The Company was appointed by the Metropolitan Police Service (“MPS”) to upgrade its Command and Control system responsible for officer and vehicle deployment to emergency (999) and non-emergency (101) calls and events across the city of London. Under the program, Leidos U.K. will deliver a flexible map centric system that captures emergency contacts from the public and subsequently coordinates deployment of officers and other resources to incidents, pre-planned events and other operations. The new Command and Control solution will provide a modern, easy to use, cloud-based system to help the MPS visualize where officers are located, allow more efficient deployment, drive operational efficiency and keep the citizens and visitors of London safe. The single award, firm-fixed-price contract has a 22-month implementation phase followed by a 10-year base period of performance and a five-year option.
- U.S. Intelligence Community: The Company was awarded contracts valued at $1.2bn, if all options are exercised, by U.S. national security and intelligence clients. Though the specific nature of these contracts is classified, they all encompass mission-critical services that help to counter global threats and strengthen national security.
The Company’s backlog at the end of fiscal year 2019 was $24.1bn, of which $5.4bn was funded. (Source: PR Newswire)
18 Feb 20. Arlington Capital Partners’ Portfolio Company Cadence Aerospace Announces the Acquisition of Premier Processing. Cadence Aerospace (“Cadence” or the “Company”), a portfolio company of Arlington Capital Partners (“Arlington Capital”), today announced the acquisition of Premier Processing (“Premier”). Premier is a leading provider of surface finishing and special processing capabilities for aerospace and defense customers. Premier is headquartered in Wichita, KS with a single 35,640 square foot facility and numerous industry and customer accreditations. Premier will continue to be run by Brad Hart and the existing management team.
Peter Manos, a Managing Partner at Arlington Capital, said, “The acquisition of Premier allows us to significantly expand Cadence’s key capability set into the attractive special processing market, which has been a long-standing investment focus for both Arlington Capital and Cadence. Furthermore, we plan to invest significantly to further expand Premier’s special processing capabilities, and will work with Brad and his team to roll-out special processing capabilities across the broader Cadence footprint. This extremely strategic addition will allow Cadence to further differentiate itself as one of the leading manufacturers of complex aerospace and defense components.”
Thomas Hutton, CEO of Cadence, said, “We are looking forward to an extremely fruitful and collaborative partnership with Brad and the entire Premier team, who have done a phenomenal job building an enterprise with unique special processing capabilities, operational excellence, a strong culture and longstanding customer relationships. We are excited to work together to further build upon the excellent work the Premier team has done to date.”
Brad Hart, President of Premier, said, “The partnership with Cadence will allow us to further execute on our growth strategy, including highly strategic capital investments to expand the size and complexity of parts we can process. This will allow us to better serve existing and new customers, as well as to handle more of the highly complex and large parts that Cadence manufactures.”
Bilal Noor, a Vice President at Arlington Capital, said, “The addition of Premier significantly enhances Cadence’s strategic profile by further positioning the combined business as a highly differentiated and vertically integrated provider of precision manufacturing. This acquisition will boost Cadence’s margins, decrease lead times while improving quality and service, and position Cadence as a ‘one-stop-shop’ for its customers.”
About Cadence Aerospace
Cadence Aerospace is a leading provider of highly complex structural and engine components and assemblies to blue-chip aerospace and defense customers. Cadence has unique expertise in difficult-to-machine geometries as well as large, monolithic and deep-pocket 5-axis machining. Cadence is headquartered in Anaheim, California, and has eight centers of excellence across the Pacific Northwest, Southern California, Arizona, Wichita and New England, including low-cost operations in Mexico. www.cadenceaerospace.com (Source: BUSINESS WIRE)
18 Feb 20. Aselsan reports record results. Turkish defence company Aselsan has reported record results for 2019 with earnings and sales up more than 40% over the prior year. Aselsan – a developer of electronic systems for military and security applications – revealed that revenue increased 44% to pass TRY13bn (USD2.1bn). Net earnings increased 45% to TRY3.4bn. 2019 also marked a successful year for Aselsan’s exports, which the company said reached TRY2bn, a new high and a 50% increase over the previous year. The company’s earnings before interest, deductions, and amortisation (EBITDA) grew by 21.9% and exceeded the 19-21% range that was predicted for the close of 2019. (Source: News Now/Jane’s)
14 Feb 20. Patria acquires Milrem Latvia SIA. Patria ISP has acquired 100% of shares of Milrem Latvia SIA from Milrem LCM OÜ, the company announced on 12 February.
The acquired company will be named Patria Latvia and will focus on the Latvian market.
Patria provides defence, security and aviation life cycle support services and technology solutions to aerospace and military customers. Its solutions include equipment availability, continuous performance development as well as selected intelligence, surveillance and management system products and services.
Jukka Holkeri, president, international support partnerships, Patria, said: ‘This acquisition is part of the execution of Patria’s strategy in which one of the main growth areas is international maintenance and life-cycle support business. Through Patria Latvia, Patria enters the Latvian defence market and is there to stay. Patria will offer a broad scope of services to the Latvian National Armed Forces and to international OEMs operating in Latvia.’
Patria is owned by the State of Finland (50.1%) and Norwegian Kongsberg Defence & Aerospace AS (49.9%). (Source: Shephard)
13 Feb 20. Should the Pentagon stop playing the role of venture capitalist? “The US government must recognize its proper role in this innovation ecosystem,” Chris Brose of Anduril Industries told Congress on Feb. 5, 2020. “Innovative companies do not need the U.S. government to try to play venture capitalist.”
Katherine Boyle from General Catalyst agreed at a Defense News roundtable: “That’s another core component that I’ve seen from a number of the branches. ‘Oh, we’ll invest alongside of you.’ There’s so much capital — interest rates are so low — we don’t need you to invest. We need contracts.” In other words, government should provide revenue, not equity financing.
The number of government innovation hubs engaging startups has exploded over the last five years. They have used a wide range of vehicles. For example, the Army’s Venture Capital Initiative was chartered to invest in companies alongside venture capitalists. In-Q-Tel represents the venture arm of the intelligence agencies.
But these programs are the exception, not the norm. Most government startup funding comes as revenue. As Air Force acquisition executive William Roper described, the government is an “ideal” investment partner: “Our money is non-dilutive; our company equity requirements, nil.”
The Air Force’s pioneering pitch days seek to organically grow startups into large enterprises. It starts with a $50,000 round one contract that may scale to $1-2m, which may in turn scale between $3m and $30m, or perhaps more. Successful projects are then in line to receive a coveted program of record, likely worth hundreds of millions of dollars over several years.
For years, industry has begged the Pentagon to make big bets on promising startups. Only two firms have reached a $1bn valuation in the defense market in the last 30 years. If more success stories were available, more venture capitalists would invest in defense startups.
At the same time, if the Pentagon organically grows startups with contracts, then VCs are presented with a problem. Why would startups need them? After all, the Pentagon has long covered all development costs ahead of product launch.
“Can you dissect that a little,” asked Rep. Seth Moulton, D-Mass., “the difference between making big bets but also not ‘playing’ VC?”
“When I talk about making big bets,” Chris Brose responded, “I talk about betting on capabilities that have proven to be effective in the kinds of operational experimentation and real-world scenarios that we’re talking about. … It’s not injecting money into companies in the sense of financing. There’s plenty of money to do that in America.”
Here, Brose hints at the real meaning behind why government shouldn’t play VC. He implies that the Pentagon should have big contract dollars ready for companies that demonstrate a promising product. VCs should make choices about which new technologies or founders get off the ground in the first place.
Implicit in the argument is the idea that private VCs are better at selecting and motivating early-stage companies. As Shield AI founder Ryan Tseng said, “Few people in the world will drive more performance than venture investors … the standards are incredibly high and the work ethic is outrageous.”
John Tenet of 8VC added: “The DoD should just stop funding startups that are not venture-backed. Create some 1-to-1 matching mechanism.”
Indeed, that’s where the Air Force is moving. It requires private matching in its pitch day contracts. That may weed out companies that have depended on small business being set aside for decades. But it may create a few problems.
First, the unique requirements and sales motions of government means that dual-use companies might not be efficient.
Second, VCs will remain skeptical of financing pure defense startups until after a string of unicorns are made, leaving good companies sidelined.
Third, no one is suggesting that VCs finance the entire development process. When does government come in? What does that imply about fair and reasonable pricing?
Fourth, how will venture-backed startups get access to military users? Cooperative research and development agreements as well as innovative uses of “other transactions” will be required to access user feedback in the early stages.
These challenges can be met. But the concept still requires a major feat. Congress must amend the budget process so that relatively big dollars can be reallocated in the year of execution. That would require something like mission-funded accounts, as opposed to the current two-or-more-year programming cycle.
As Trae Stephens of Founder Fund concluded: “If you can’t figure out this out-of-cycle funding for companies, then you’re just going to get stuck in this multiyear budgeting process that — due to its very nature — is biased toward the integrators that have been playing the game long-term.”
Chris Brose concurred. “We have gone too far as a nation tying the hands of the [Defense] Department. I think greater flexibility for experimentation in current fiscal year is vital.” (Source: Defense News Early Bird/Defense News)
13 Feb 20. Prosecutors Challenge Antitrust Approval of Boeing-Embraer Tie-Up. Brazilian prosecutors have filed an appeal with antitrust agency Cade asking the regulator to reconsider its approval of a deal selling control of Embraer SA’s commercial aviation division to Boeing Co, according to public filings. The deal had been approved without restrictions on Jan. 27 by Cade’s General Superintendent Alexandre Cordeiro Macedo. Cade’s top administrative council can still call for a review of the case, putting the matter to a vote. In the appeal filed on Wednesday, prosecutors referred to “some omissions” in the decision made by Macedo when assessing the markets that would be affected, citing the regional aviation market, which uses aircraft with fewer than 100 seats. Boeing has offered to pay $4.2bn for 80% of Embraer’s commercial jet division, which builds passenger jets in the 70- to 150-seat segment. The appeal, seen by Reuters, was filed by Deputy Attorney General Samantha Dobrowolski. Under Brazilian antitrust law, it will be now be assigned to a reporting commissioner who will decide whether it should be considered by the body. (Source: defense-aerospace.com/Reuters)