25 Apr 20. Proxy advisers recommend Boeing shareholders vote against key board members. Two proxy advisers, Glass Lewis and Institutional Shareholder Services (ISS), have recommended that shareholders of Boeing Co (BA.N) vote against key board members of the planemaker to show objections to the company’s handling of the 737 Max crisis.
FILE PHOTO: The Boeing logo is displayed on a screen, at the New York Stock Exchange (NYSE) in New York, U.S., August 7, 2019. REUTERS/Brendan McDermid
Glass Lewis recommended that at Boeing’s annual meeting on April 27 shareholders vote against Larry Kellner, the chairman of its board who previously oversaw the board’s audit committee.
“We believe the audit committee failed to mitigate the risk posed by management’s decisions and should be held accountable for its oversight,” Glass Lewis said in its recommendation.
In a separate recommendation, ISS advised shareholders to vote against four longtime board members – Arthur Collins, Edmund Giambastiani, Susan Schwab and Ronald Williams – who had served when the 737 MAX was being developed and rolled out.
ISS also said that a vote for newly named Boeing Chief Executive David Calhoun is “warranted, with caution” and that he will need to show that he can be an “effective leader of cultural change” at the company.
The recommendations, issued earlier in April and viewed by Reuters, were reported first by the Wall Street Journal on Friday.
A Boeing spokesman said the planemaker is continuing to learn from the 737 Max crashes and is taking actions to rebuild trust.
Proxy advisers recommend how investors should vote in corporate elections and cast ballots on behalf of some asset managers. The role of proxy advisers has gained more attention in recent years as they have grown more influential.
Boeing, which has been struggling to get its 737 MAX aircraft flying again following two fatal crashes in 2018 and 2019, has been forced to cut production due to falling demand amid the coronavirus pandemic. And on Saturday, the company said it had canceled a $4.2 billion (£3.4 billion) deal to buy the commercial jets division of Brazil’s Embraer SA (EMBR3.SA).
The Chicago-based company suspended 737 MAX deliveries in March 2019, when the Federal Aviation Administration grounded the aircraft following the deaths of 346 people in crashes of two 737 MAX planes operated by Lion Air and Ethiopian Airlines. (Source: Reuters)
26 Apr 20. Airbus warns staff on jobs with its ‘survival at stake.’ European planemaker Airbus (AIR.PA) issued a bleak assessment of the impact of the coronavirus crisis, telling the company’s 135,000 employees to brace for potentially deeper job cuts and warning its survival is at stake without immediate action.
In a letter to staff, Chief Executive Guillaume Faury said Airbus was “bleeding cash at an unprecedented speed” and that a recent drop of a third or more in production rates did not reflect the worst-case scenario and would be kept under review.
Airbus said it did not comment on internal communications.
The letter was sent to employees late on Friday, days before the company is due to give first-quarter results overshadowed by a pandemic that has left airlines struggling to survive and virtually halted jet deliveries since mid-March.
Airbus has begun implementing government-assisted furlough schemes starting with 3,000 workers in France, “but we may now need to plan for more far-reaching measures,” Faury said.
“The survival of Airbus is in question if we don’t act now,” he added.
Industry sources have said a new restructuring plan similar to its 2007 Power8 which saw 10,000 job cuts could be launched in the summer, but Faury indicated the company was already exploring “all options” while waiting for clarity on demand.
People familiar with the matter say Airbus is also in active discussions with European governments about tapping schemes to assist struggling industries, including state-guaranteed loans.
It has already expanded commercial credit lines with banks, buying what Faury described as “time to adapt and resize”.
To stem the outflow of cash, Airbus this month said it would slash benchmark narrow-body jet production by a third to 40 jets a month. It also issued targets for wide-body jets implying cuts up to 42% compared with previously published rates.
“In other words, in just a couple of weeks we have lost roughly one-third of our business,” Faury wrote in the letter, which was earlier reported by Bloomberg News. “And, frankly, that’s not even the worst-case scenario we could face”.
Reuters reported on April 3 that Airbus was looking at scenarios involving output cuts of up to a half, and analysts say Boeing is expected to unveil comparable cuts along with lay-offs this week, lowering monthly 787 output to as low as 6 jets.
Faury said Airbus’s new production plan would remain for as long as it took to make a more thorough assessment of demand, adding this would probably be between two and three months.
He said it was too early to judge the shape and pace of a recovery, but mentioned scenarios including a short and deep crisis with a fast rebound or a longer and more painful downturn with previous demand levels only returning after 5 or 10 years.
Analysts and airlines have so far mostly spoken of a downturn lasting no more than 3-4 years.
Rival Boeing (BA.N), with even weaker finances due to the year-old grounding of its 737 MAX, scrapped a $4.2bn (3.4bn pounds) tie-up with Brazil’s Embraer on Saturday in a move widely seen as triggered by the crisis, though it cited contractual reasons.
“Unfortunately, the aviation industry will emerge into this new world very much weaker and more vulnerable than we went into it,” Faury wrote. (Source: Reuters)
25 Apr 20. Boeing walks away from $4bn Embraer jets deal. US group had hoped to broaden its aircraft portfolio to better compete with European rival Airbus.
Boeing has walked away from its $4bn deal to acquire the regional jet business of Brazil’s Embraer as the US aircraft maker reels from the impact of a crisis in aviation. The company said on Saturday that it had tried for two years to finalise the deal before the termination date which fell on Friday, but ultimately negotiations were unsuccessful. “It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues,” said Marc Allen, president of Boeing’s Embraer Partnership & Group Operations.
The collapse of the deal will be a blow to Boeing which had moved to broaden its portfolio of aircraft to compete with European rival Airbus, which in 2017 had swooped on Bombardier’s C-Series, a 100-150 seater regional jet. Embraer could also find it tougher to compete against the Airbus backed C-Series — now renamed the A220 — in a market which is expected to be substantially smaller in the coming years as a result of the global crackdown on air travel.
The Boeing-Embraer tie-up has faced several obstacles over the past year and a half, with substantial political opposition in Brazil while in Europe regulatory approval has taken longer than expected. But the year long grounding of the 737 Max had already strained Boeing’s cash resources and now the coronavirus has significantly reduced expectations for aircraft demand in the coming years. Roughly two-thirds of the global fleet has been grounded, with airlines around the world seeking government bailouts to survive. Many expect to emerge from the crisis with significantly smaller fleets. Boeing which has estimated the cost of the Max grounding at $19bn, is also under severe cash pressure as airlines cancel and defer large volumes of orders.
This had reduced the likelihood of any deal taking place, said one analyst. “It’s a liquidity question,” said Bank of America analyst Ron Epstein. “Is Boeing in a position to spend $4bn on an acquisition given what’s going on in the broader commercial aviation market?” Boeing is widely expected to receive financial support from the US government’s recent stimulus plan. The company’s chief executive Dave Calhoun has said Boeing and the wider aerospace supply chain would need $60bn to survive the current crisis. The group is expected to slash production next week when it announces first-quarter results, and will have to revise cash flow expectations as a result.
Airbus earlier this month cut production rates by one-third, including its best-selling A320 single-aisle family. Further cuts are possible, depending on the extent of the aviation downturn. The collapse of the Boeing-Embraer deal follows the decision by Hexcel and Woodward — two of the US company’s big suppliers — to pull the plug on their $6.4bn merger, the first big deal to collapse due to the coronavirus pandemic. Boeing moved to acquire Embraer’s regional jet business in 2018, after European rival Airbus swooped on Bombardier’s C-Series, a 100-150 seater single aisle. Under the agreement, Boeing would have taken an 80 per cent stake in Embraer’s jet business. Boeing on Saturday said it would continue a separate partnership agreement with Embraer to jointly market and support the C-390 military transport. Embraer will hold 51 per cent of this separate venture and Boeing 49 per cent.
After some intense back-and-forth, the agreement granting Boeing 80 per cent control over Embraer’s commercial aircraft and services operations for $4.2bn was approved in January 2019 by Brazil’s president Jair Bolsonaro. The tie-up would have enabled Embraer to boost sales by providing more heft in negotiations with the world’s biggest airlines, while helping Boeing gain a strategic foothold in the market for smaller regional jets. It would have also given Embraer the ability to move up into larger aircraft, while giving Boeing the ability to move down into smaller ones. Embraer declined to comment on Saturday. But the cancellation is a blow for the Brazilian aircraft maker. Nelson Salgado, Embraer’s chief financial officer, told the Financial Times last year that the deal would have allowed “revenue growth for Embraer which it otherwise would not be able to achieve on its own”. Donna Hrinak, Boeing’s president for Latin America, said in 2019 that Boeing’s “original intent was to buy the whole company”. (Source: FT.com)
Boeing Terminates Agreement to Establish Joint Ventures with Embraer. Boeing (NYSE: BA) announced today that it has terminated its Master Transaction Agreement (MTA) with Embraer, under which the two companies sought to establish a new level of strategic partnership. The parties had planned to create a joint venture comprising Embraer’s commercial aviation business and a second joint venture to develop new markets for the C-390 Millennium medium airlift and air mobility aircraft.
Under the MTA, April 24, 2020, was the initial termination date, subject to extension by either party if certain conditions were met. Boeing exercised its rights to terminate after Embraer did not satisfy the necessary conditions.
“Boeing has worked diligently over more than two years to finalize its transaction with Embraer. Over the past several months, we had productive but ultimately unsuccessful negotiations about unsatisfied MTA conditions. We all aimed to resolve those by the initial termination date, but it didn’t happen,” said Marc Allen, president of Embraer Partnership & Group Operations. “It is deeply disappointing. But we have reached a point where continued negotiation within the framework of the MTA is not going to resolve the outstanding issues.”
The planned partnership between Boeing and Embraer had received unconditional approval from all necessary regulatory authorities, with the exception of the European Commission.
Boeing and Embraer will maintain their existing Master Teaming Agreement, originally signed in 2012 and expanded in 2016, to jointly market and support the C-390 Millennium military aircraft.
Embraer S.A. (“Embraer” – EMBR3 and ERJ), in compliance with the provisions of the CVM Instruction 358/02 and in connection with the strategic partnership between Embraer and The Boeing Company (“Boeing” and such partnership, the “Transaction“), informs its shareholders and the market that Embraer received today a notice sent by Boeing communicating its decision to terminate the Master Transaction Agreement (“MTA“), based on Boeing’s assertion that supposedly certain closing conditions in the MTA have not been satisfied by Embraer.
Embraer strongly believes that Boeing has wrongfully terminated the MTA, that it has manufactured false claims as a pretext to seek to avoid its commitments to close the transaction and pay Embraer the US$ 4.2 billion purchase price. Embraer believes Boeing has engaged in a systematic pattern of delay and repeated violations of the MTA, because of its unwillingness to complete the transaction in light of its own financial condition and 737 MAX and other business and reputational problems.
Embraer believes it is in full compliance with its obligations under the MTA and will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination and violation of the MTA.
The Transaction involved a long, costly and complex process, which was supported by government authorities and the substantial majority of Embraer’s shareholders, all understanding that the Transaction would be in the best interest of Embraer, its employees, suppliers and customers in commercial aviation.
Embraer remains today a successful, efficient, diversified and vertically integrated company, with a history of serving customers with highly successful products and services built on a strong foundation of engineering and industrial capabilities. Embraer is an exporter and technology developer, with global presence and defense, executive and commercial businesses. Our employees will proudly continue to provide for our clients the high quality products and services they depend on from Embraer every day.
Embraer’s history of over 50 years is lined with many victories but also some difficult moments. All of them were overcome. And that’s exactly what Embraer is going to do again. Embraer shall overcome these challenges with strength and determination.
Embraer will keep its shareholders, the market in general, and all employees, suppliers and clients informed about any relevant updates.
São José dos Campos, April 25, 2020.
Antonio Carlos Garcia
Executive Vice President of Finance and Investor Relations
On April 26th, Reuters reported that Embraer SA (EMBR3.SA) said that after a $4.2 billion (£3.4 billion) deal with Boeing Co (BA.N) fell apart over the weekend, it is working on adjusting production levels and capital expenditures, as well as working to preserve cash.
The company added in a statement that it finished 2019 with a “solid cash position” and had no “significant debt in the next two years.”
“We are taking additional measures to preserve our liquidity and maintain our solid finances during these turbulent times,” the company added.
Other measures include adjustments to inventory, extension of payment cycles, reduction of expenses and seeking financing, Embraer said.
The deal between Embraer and Boeing was announced almost two years ago and the companies were in the final stages of closing it before it fell apart. Boeing was to take 80% of Embraer’s commercial aviation division, which makes planes of up to 150 seats.
Boeing and Embraer had already received antitrust approvals from all necessary governments except for the European Union, and Embraer had spent millions carving out the business segment that Boeing would take over.
Embraer, the world’s No. 3 planemaker, saw the deal as necessary for its long-term survival as the Boeing-Airbus duopoly has strengthened.
23 Apr 20. Disembark from stalling Rolls-Royce. Rolls-Royce (RR.) was already battling to regain investor confidence before Covid-19 hit. But with civil aerospace accounting for half of revenue last year, the decimation of the global airline industry has sent its shares into a tailspin. With a bleak multi-year outlook for aviation, there’s still time for investors to head for the emergency exit.
Supplying wide-body engines to Airbus (FRA:AIR) and Boeing (US:BA) – both of which have seen orders cancelled or deferred – Rolls makes an average loss per unit. But it makes up for this by collecting revenue over an engine’s lifetime according to how many hours it flies. Engines flying hours dipped 25 per cent in the first quarter of 2020, plummeting 50 per cent year on year in March alone. Further deterioration is expected. Broker Jefferies estimates almost two-thirds of the world’s aircraft fleet is currently grounded.
Rolls’ ‘risk and revenue sharing partners’ (RRSPs) are suppliers who help finance engine development and receive a proportion of revenue generated. According to JPMorgan Cazenove, RRSPs have larger stakes in newer engines. So, with older grounded aircraft heading for early retirement, a higher percentage of cash flows will be paid out in future. Early retirements will also hit higher-margin aftermarket sales, with Jefferies expecting a 25-50 per cent decline this year.
Before coronavirus arrived, Rolls was addressing blade deterioration issues with its Trent 1000 engines. A £1.4bn exceptional charge last year reflected compensation costs and provisions against future losses. Together with restructuring costs, ‘one-off’ Trent charges have pushed Rolls into a statutory loss for the past two years. Cash costs for Trent 1000 in-service issues amounted to £578m in 2019, with a total £2.4bn anticipated between 2017 and 2023.
Having aspired to reach £1bn of free cash flow in 2020, this target has been canned alongside the rest of its guidance and final 7.1p dividend. While it declared £873m of free cash flow last year, this was flattered by advance payments from customers for future aftersales work – so-called ‘long-term service agreement payments’ (LTSA). Rolls books the net change in its LTSA balance in its cash flows, which added £754m in 2019. Really, this is deferred revenue and only the profit when these services are actually undertaken is cash belonging to the company. Besides, LTSA payments are likely to drop as the active engine fleet shrinks.
Including £2.35bn in lease liabilities, the £993m of net debt reported for 2019 (and earlier years) is arguably understated, given that supply chain financing (SCF) – paying suppliers early via short-term bank loans – is recorded as working capital rather than debt. Rolls used £859m of SCF last year, up from £817m in 2018.
Rolls believes it has sufficient liquidity for the ’Corona crunch’. It added a £1.5bn revolving credit facility, and having fully drawn a £2.5bn facility, had gross cash of £5.2bn as at 31 March. But it used £1.7bn of cash in the first three months of this year, which it attributes to seasonal working capital movements and a £300m coronavirus headwind. JPMorgan thinks Rolls is “severely under-capitalised” and will need to raise £6bn of equity. Meanwhile, a £208m pension deficit (from a £641m surplus in 2018) could widen, as market turmoil sees scheme asset values tumble and lower interest rates push up liabilities.
Providing just over half its total £808m of underlying operating profit in 2019 and a fifth of revenue, Rolls’ defence activities should remain stable, benefiting from long-term government contracts and exposure to rising US defence spending. With a record £5.3bn order intake last year, this includes a five-year $1.2bn (£1bn) contract to maintain AE1107 engines for the US military.
Rolls enjoys an entrenched market position as the number two aero engine maker behind General Electric (US:GE). New competition is doubtful and air travel will resume at some point. With the shares down almost 50 per cent since the beginning of March, it’s tempting to see value in a potential recovery play. But the industry revival will be arduous – long-haul travel will take longer to bounce back and financially distressed airlines won’t exactly be eager for new planes. With earnings likely to be depressed over the coming years, the shares’ descent could continue. Sell. Last IC View: Sell, 298p, 7 Apr 2020. (Source: Investors Chronicle)
23 Apr 20. Meggitt PLC – First quarter trading statement and Covid-19 update Meggitt PLC (“Meggitt” or “the Group”), a leading international company specialising in high performance components and sub-systems for the aerospace, defence and energy markets, today issues a trading update providing: further details of the measures being taken to protect our people and our business in this challenging period; a summary of the Group’s financial and operational performance during the first quarter and; an update on our funding and liquidity position. Safeguarding our people and our operations Our priorities are to safeguard the health and wellbeing of our employees and to continue to support our customers, suppliers and the communities in which we operate across the globe. In support of this, we have implemented a number of proactive measures across the business which comply with local and national guidelines issued by government and health authorities. Our operational plans are working well and the response of our employees has been outstanding.
The majority of our manufacturing facilities remain open to continue to support the critical markets that we serve in Defence, Energy and in Aerospace for repatriation of citizens and transport of food, freight and medical supplies. Our Defence portfolio represents a significant part of the Group’s revenues and is performing strongly as work on key defence programmes continues as scheduled. First quarter trading performance While trading in the first quarter of 2020 was ahead of the comparative period, in the last few weeks we have started to see a softening in our civil aerospace business both in terms of revenue and the forward order book. Group revenue was up 5% on an organic basis in the first quarter, with strong growth in defence more than offsetting a softer performance in civil aerospace and energy. Civil aerospace revenue was slightly ahead of the comparative period on an organic basis, within which original equipment revenue decreased by 1% and aftermarket revenue grew by 2%, with good growth in both OE and AM in business jets. Defence revenue increased 15% organically, driven by particularly strong growth for original equipment. We continue to see good order flow and expect demand in this part of the business to be robust throughout 2020. Energy revenue was 3% lower than the comparative period. 2 Impact of Covid-19 and actions to reduce cash expenditure and our cost base Covid-19 will result in a significant reduction in demand across our civil aerospace business in 2020 in both OE and AM, as our customers adapt and scale back their activities to reflect the reduction in global air traffic. We have modelled a number of scenarios for planning purposes based on a combination of actual and anticipated customer demand signal changes and external industry forecasts, including those of IATA.
We have also assumed that demand remains robust across our defence business, which represented 36% of the Group’s revenues in 2019, of which over 70% is derived from the US. To mitigate the reduction in demand, we have already taken action to reduce variable costs including accessing furlough schemes where available and reducing temporary labour. While we recognise the need to retain flexibility as demand patterns develop over the coming months, we have taken the difficult decision to reduce the size of our global workforce by around 15%, subject to ongoing consultation in the regions in which we operate. This action will ensure that our internal capacity across our civil aerospace business reflects the reduction in demand and positions us appropriately as we enter 2021. We are also implementing a number of other measures to reduce our operating cost base in 2020.
These include: a freeze on all new hiring; removal of annual salary increases for all employees; material cuts in operating costs; and, for the second half, reducing fees for our Non-Executive Directors and salaries for our CEO, CFO and Executive Committee by 20%. In addition, we are also taking a number of cash specific actions including significant reductions in both capital expenditure and inventory. This is in addition to the cancellation of our final dividend payment for 2019 (as announced on 27 March). The successful implementation of these combined measures throughout the year will be to reduce our cash expenditure levels by around £400m to £450m in 2020. Financial and liquidity position At the end of the first quarter, we had £1,671m of committed facilities in place providing headroom of £668m. On 22 April, Meggitt was confirmed as an eligible issuer under the UK Government’s Covid Corporate Financing Facility (CCFF). Medical ventilators As previously announced, Meggitt continues to work within the VentilatorChallengeUK consortium to increase the supply of intensive care medical ventilators needed to treat patients hospitalised with Covid-19. 3 Outlook In light of a highly fluid market and global macro-economic situation, it remains the Board’s position that it is too early to provide forward looking guidance at the current time. We will continue to monitor external events and keep the market updated on developments as appropriate. Information regarding our Annual General
Investors Chronicle Comment: Meggitt’s (MGGT) organic revenue grew 5 per cent in the first quarter of 2020, with 15 per cent growth in defence. But the last few weeks have seen some softening of revenue and forward orders in the civil aerospace business. The division is expected to see a significant reduction in demand for both original equipment and aftermarket products. The group is reducing the size of its workforce by around 15 per cent, freezing new hires, and cutting operating costs. It aims to reduce cash expenditure by £400m-450m this year. As at 31 March, Meggitt had £1.67bn of committed facilities with £668m of headroom. It is eligible for the Bank of England’s Covid corporate financing facility.
23 Apr 20. OneSky Series A Funding Round led by Sumitomo Corporation. OneSky Systems, Inc., a developer of Unmanned Traffic Management and Urban Air Mobility platforms, announced that it secured a Series A funding round led by Sumitomo Corporation, through Sumitomo Corporation of Americas.
This funding will enable significant global expansion and accelerated development of the company’s robust traffic management platforms. Sumitomo’s investment aligns with their focus on air mobility in establishing innovative new transport services.
This investment aligns with our focus on air mobility in establishing innovative new transport services and will support OneSky’s software development and scale their marketing capabilities.
OneSky is a spinoff of Analytical Graphics, Inc. (AGI), the leading engineering software developer for the global aerospace and defense communities. AGI began exploring the UTM market in late 2014 after determining that their proven aerospace technology directly addresses the technical challenges of the emerging Unmanned Aircraft Systems (UAS) and Urban/Advanced Air Mobility (UAM/AAM) markets. The spinoff enables OneSky to better target these markets while enabling outside investment through this mature Series A funding round.
OneSky has exclusive access to AGI’s core software technology comprised of more than seven million lines of aerospace software code developed at an expense of over $200m.
Robert Hammett, the Chief Executive Officer of OneSky explained,
“The Series A funding from Sumitomo will allow OneSky to accelerate our pursuit of these exciting new aviation markets.” Hammett continued, “As the UAS and AAM efforts advance, and operating standards and regulations put in place, OneSky is well positioned to enable the safe integration of these innovative air platforms and services.”
“We are very pleased to become part-owner of OneSky Systems,” said Kevin Hyuga, General Manager of Construction & Transportation Systems at Sumitomo Corporation of Americas. “Sumitomo has a longstanding history in transportation, including the aerospace market. We see significant potential in growing and scaling OneSky’s capabilities so that it can support the air mobility needs of the future.”
Air mobility is regarded as the next frontier in transportation, utilizing networks of AI-driven, unmanned vehicles. This transformation in mobility is expected to reduce transport times in urban areas and help improve access to remote locations like islands and mountainous areas. The technology developed by companies like OneSky will be imperative to the success and safety of these future mobility systems.
This isn’t Sumitomo’s first foray into the air mobility space. In January of 2020, the company concluded an air mobility business partnership with Bell Helicopter Textron Inc., a major U.S. helicopter manufacturer, and Japan Airlines. Following this project, Sumitomo is now considering the provision of services employing unmanned logistics drones and air taxis developed by Bell with an eye towards commercialization by the mid-2020’s. (Source: UAS VISION)
21 Apr 20. IBM reports lower software sales and withdraws guidance. Customers cut back spending to deal with coronavirus crisis. IBM withdrew financial guidance for the rest of the year as it revealed that the coronavirus crisis had taken a bite out of its software sales at the end of March, pushing revenue down by 3 per cent in the first quarter. The decline, to $17.6bn, was in line with Wall Street’s reduced expectations for the company, while pro forma earnings per share, at $1.84, were five cents ahead of forecasts. Jim Kavanaugh, chief financial officer, said the figures — including a 1.5 percentage point improvement to IBM’s gross profit margin — showed the US computer maker had made headway on its strategy, despite the crisis.
Speaking in an interview with the Financial Times, he also said it had stress-tested its business model based on various assumptions about the length and depth of the crisis, and that under every scenario it would be able to “continue to invest in the business and secure the dividend”. IBM generates around 60 per cent of its revenue from annuity-like sources, giving it some protection from the immediate impact of the downturn. But Mr Kavanaugh said customers had cut back spending to protect their own operations in the crisis, hitting software sales as well as work in IBM’s global business services division geared to new application development. Net income fell by 26 per cent to $1.2bn, or $1.31 a share, compared with $1.78 a share the year before, based on formal accounting principles. IBM said revenue at Red Hat — the open source company it bought last year and a key part of its new strategy — had grown by 20 per cent in the latest quarter. As a result, revenue from its cloud and cognitive software segment rose 5 per cent, to $5.2bn — though without the inclusion of Red Hat, which became part of IBM last July, the segment would have declined around 10 per cent. (Source: FT.com)
21 Apr 20. Elbit Systems Updates its Cash Tender Offer for Ashot’s Shares. Elbit Systems Ltd. (NASDAQ: ESLT) (TASE: ESLT) (“Elbit Systems” or the “Company”) announced today, further to its announcement of April 7, 2020, that its wholly-owned Israeli subsidiary, IMI Systems Ltd. (“IMI”), has updated the conditional full cash tender offer issued on April 7, 2020, to acquire all ordinary shares of the Israeli publicly-traded company, Ashot Ashkelon Industries Ltd. (“Ashot”), held by the public, currently representing approximately 15.02% of Ashot’s outstanding share capital (the “Updated Tender Offer”).
The Updated Tender Offer will remain open through April 27, 2020 and is for the price of NIS 12 (approximately $3.37) per share and for a total consideration of NIS 42,479,436 (approximately $11.959m). The price reflects a premium of approximately 86.77% above the closing price of Ashot’s shares on April 6, 2020 and approximately 17.88% above the closing price of Ashot’s shares on April 21, 2020.
The Updated Tender Offer documents, detailing the terms of the offer, have been filed with the Israeli Securities Authority and the Tel Aviv Stock Exchange. (Source: PR Newswire)
21 Apr 20. Lockheed Martin trims sales outlook as coronavirus hits supply chain. Lockheed Martin (LMT.N) said on Tuesday the spread of coronavirus has delayed shipments of vital supplies to its numerous businesses and will likely hurt its sales this year.
The Pentagon’s top weapons dealer reported quarterly results and said COVID-19 was hurting production in its biggest unit, its aeronautics division that makes the F-35 fighter jet.
Still, the defense contractor reported a better-than-expected quarterly profit even as it was forced to trim its sales outlook. Quarterly sales in its aeronautics unit rose 14%to $6.4 bn.
The U.S. defense sector is expected to see much less COVID-19 disruption due to generally stable cash flows compared with industrial markets, according to analysts. Early on in the pandemic the defense industry was deemed essential, giving those workers an avenue to continue production.
Lockheed’s earnings announcement disclosed that while earnings for the first quarter had not been impacted, “the corporation is beginning to experience some issues in each of its business areas related to COVID-19” such as supplier delivery delays and suspending access at work sites.
The Pentagon’s chief weapons buyer, Ellen Lord, said on Monday a three-month slowdown was now expected on major defense programs as a result of supplier operating challenges during the coronavirus pandemic.
For the aircraft the Lockheed makes, there was “likely going to be some production impacts” due to the pandemic, CFO Ken Possenriede said on a conference call with Wall Street analysts, potentially delaying F-35 deliveries.
Marillyn Hewson, the outgoing CEO, said that the company was also watching its international supply chain closely and could provide extra financial support to keep those businesses healthy.
The company said it now expects full-year sales in a range of $62.25bn to $64.00bn, down from $62.75bn to $64.25bn, forecast previously. Lockheed reaffirmed its 2020 earnings per share forecast of $23.80 – the mid point of the range.
“While defense companies like Lockheed Martin are not immune to coronavirus, the projected impact on the 2020 results looks very minor compared to what is likely to be seen elsewhere in the industrial sector,” analyst Robert Stallard of Vertical Research wrote in a note on Tuesday.
Stable demand along with the Pentagon increasing interim payments to defense contractors, and also paying them for sick time or quarantined employees are expected to buoy the defense industry as coronavirus hits the economy.
Shares of Lockheed fell 2% $375.54. Shares of Lockheed Martin fell as much as 49% during the economic fallout from the coronavirus from its 52-week high of $442.43 on Feb. 11, to $226.58 on March 23, before recovering.
Among the uncertainties Lockheed faces for its second-quarter results is the loss of an aircraft maintenance contract in the United Arab Emirates in April.
Net earnings rose to $1.72bn, or $6.08 per share, in the first quarter ended March 29, from $1.70bn, or $5.99 per share, a year earlier, beating analysts’ average estimate of $5.80 per share. (Source: Reuters)
21 Apr 20. Italy’s Piaggio Aerospace postpones again deadline for bids. Italy’s Piaggio Aerospace said on Tuesday it would postpone for the second time in less than a month the deadline to submit expressions of interest for the company, due to the ongoing coronavirus crisis. The private jet maker, which sought protection from creditors in late 2018 and then launched a call for international bidders at the end of February, said bids could now be filed until May 29. The group added in a statement that it had partially resumed aircraft production on Monday and around 60% of its employees was working. (Source: Reuters)
22 Apr 20. Covid-19: Hexcel’s sales, income drop due to virus, 737 MAX. Hexcel’s net sales and income fell sharply in the first quarter of 2020, as coronavirus caused plant closings and the continued grounding of the Boeing 737 MAX airliner dealt a double blow to the US-based aircraft parts maker. Net sales totalled USD541m in the first quarter, down 11.3% from the same period in 2019, the company said late on 20 April. Net income plunged 41.3% to USD42.4m. Hexcel said its 737 MAX production is at a standstill, while the coronavirus disease (Covid-19) has “forced temporary closures at a number of our plants as well as customer plants.” The customer plants include Airbus and Boeing factories. (Source: Jane’s)
20 Apr 20. AMERGINT Technologies to Acquire Raytheon Technologies’ Space-Based Precision Optics Business. AMERGINT Technologies Holdings, Inc. (“AMERGINT”) today announced it has reached a definitive agreement to acquire Raytheon Technologies Corporation’s space-based precision optics business, headquartered in Danbury, Connecticut (“Danbury”). The business, which is part of Collins Aerospace, a Raytheon Technologies business unit, is a leading technology provider of precision electro-optical systems for National Security Space missions and defense survivability needs.
Larry Hill, CEO of AMERGINT Technology Holdings, said: “We are thrilled to work with Andreas Nonnenmacher and the team at Danbury. For as long as the United States has recognized the need to observe the Earth from space, this business has delivered technological breakthroughs to do so. We are proud to bring together their preeminent electro-optical capabilities with AMERGINT’s next generation solutions for capturing, processing, transporting and exploiting mission critical data.”
AMERGINT is a leading provider of software-defined technology for military, intelligence and commercial space. Founded in 2008 by Mark McMillen, Randy Culver and Sean Conway, AMERGINT delivers next generation solutions to manage the capture, processing, transport and exploitation of vital mission data for communication and data links. AMERGINT is headquartered in Colorado Springs, Colorado.
Robert Basil, Board Member of AMERGINT, added: “We are proud to add Raytheon Technologies’ storied precision-optics franchise to the AMERGINT partnership as we build a generational asset that focuses on delivering high performance national security space technologies. There has never been a more important time for technological advances in national security space applications and, together, AMERGINT and Danbury will continue to solve our partners’ toughest challenges to advance and protect U.S. interests.”
The transaction is subject to customary closing conditions, including the receipt of the required U.S. regulatory approvals. Terms of the transaction were not disclosed.
AMERGINT Technologies is an essential and trusted partner in the evolution of the Space and Defense Industries by focusing on mission-critical communication and data paths through the capture, processing, transport and exploitation of vital mission data. (Source: BUSINESS WIRE)
20 Apr 20. ST Engineering shows ‘robust’ start to FY2020. ST Engineering secured $1.6bn of new contracts in Q1 of FY2020 for its Aerospace and Electronics sectors. In total, new Aerospace contracts equated to $838m. This includes agreements for A320 heavy maintenance and CFM56-7B engine maintenance for Chinese airlines. An undisclosed southeast Asian airline also placed a contract for Maintenance-by-the-hour for its entire fleet of Boeing 737 and Bombardier Q400 aircraft which were signed at the Singapore Air Show in February. ST Engineering Electronics secured contracts totalling $730m for cybersecurity and training and simulation products such as the provision of Security Operations Centres and cyber advisory services. The company has also achieved a Phase 2 contract to produce and supply Hunter AFVs (pictured) to the Singapore Armed Forces. In a 20 April statement, ST Engineering said its order book for Q1 FY2020 remained ‘robust’. (Source: Shephard)
20 Apr 20. Pennant (PEN:34.5p), an Aim-traded supplier of products and services that train and assist engineers in the defence and civilian sectors, delivered the annual results I had previewed a few months ago (‘Follow the insiders’, 24 February 2020). However, the share price has been hit on concerns relating to the Covid-19 impact on the company’s operations. They are being massively overplayed.
For starters, Pennant has key worker status so has been able to work on its defence contracts and has seen minimal disruption through the lockdown. In particular, the company has two valuable government contracts with the Canadian and Australian defence departments to use its Oracle-based OmegaPS software product that reduces the support cost of major capital equipment. These contracts are worth £6m in annual revenue.
In addition, the company has repurposed its longstanding contract to provide electro-mechanical trainers and computer-based training for the Ajax fighting vehicles to the British Army. The contract value has increased by £1.5m to £13.5m, of which £3.4m is scheduled for delivery this year. Pennant also won a £3.4m award last autumn to design and build a full-size representation of a training aid for Leonardo Helicopters, of which £2m is deliverable this year. Add to that a raft of smaller contracts and the scheduled 2020 order book for delivery is £16.3m, or half the total order book of £33m, and representing a high proportion of the £20.4m of revenue Pennant reported in the 2019 financial year.
Moreover, contracted revenue excludes a contribution from the recent earnings enhancing acquisition of Absolute Data Group (ADG), a Brisbane-based software company that complements Pennant’s existing OmegaPS software business. ADG helps its client base (military aviation, commercial aerospace, and marine, rail, nuclear and automotive sectors) to manage vast quantities of maintenance and training data. Bearing this in mind, chief executive Phil Walker informed me during this morning’s results call that ADG has an order book worth A$2m to A$3m (£1m to £2m), and has been “exceeding our expectations”, noting some significant live cross selling opportunities.
Pennant’s contracted order book also excludes any contribution from a potential award (at the final stages) to supply a generic suite of training aids (contract value of £5m of which £3m could be delivered in the second half of 2020) with an existing client in the Middle East, nor any contribution from a contingent award (worth £28m over three years) for the design, build and delivery of training equipment to the Ministry of Defence (MoD). Mr Walker is confident that the huge contingent contract will commence in the third quarter of 2020 as planned, albeit it was pushed back from last year, the reason why the company reduced net operating costs by £600,000.
It’s also worth noting that although Pennant ended 2020 with net debt of £2.2m, it is refinancing its banking lines to increase its facility from £3m to £4m, and has renegotiated £4m of milestone payments (previously loaded to the back end of contracts) on two major awards, of which £3m will be paid in the first half of 2020. Furthermore, Mr Walker says that the company has stripped costs back to realign them with contracted revenues only (it has furloughed 44 of its 120 UK staff) in the short-term. There has been little impact on the manufacturing side of the business to date as the contracts it is delivering in the first half are not yet at the production stage. That’s worth noting.
Admittedly, there is execution risk on the Ajax and Leonardo contracts, but management will be having discussions with the clients later this week. However, what’s clear to me is that Pennant’s strategy is the right one to trade through the lockdown, and with the benefit of strict working capital and cost management, and likely conversion of the two aforementioned contracts, the company is in a far better shape than the market is giving it credit for. I still expect a recovery in underlying pre-tax profits and earnings per share this year, although not the two thirds increase to £2.7m and 6.9p that analysts had expected prior to withdrawing their forecasts last month in light of the Covid-19 uncertainty. The £12.5m market capitalisation company is very undervalued. Recovery buy. (Source: Investors Chronicle)
20 Apr 20. AEgis Acquires sUAS Manufacturer EMRC Heli. AEgis Technologies Group has acquired small unmanned aerial systems manufacturer EMRC Heli for an undisclosed amount. AEgis provides a wide spectrum of capabilities in the Directed Energy (DE) community including development and deployment of novel targets and instrumentation to characterize High Energy Laser (HEL) and High Power Microwave (HPM) DE weapon systems.
EMRC’s capabilities enhance AEgis’ DE mission area, accelerating the testing and fielding of DE weapon systems and expanding our UAS portfolio to support multi-mission sensor suites, swarm applications, and proxy warfare for the warfighter.
AEgis Technologies Group CEO Jonathan Moneymaker said: “The acquisition of EMRC Heli to the AEgis platform deepens our offering to our existing markets while enabling us to offer complete platform-to-payload solutions and rapidly integrate new advanced capabilities support to adjacent missions.”
Moneymaker added: “The recent advancements in our hybrid power units and multi-mission design allow these platforms to address the critical needs of our warfighters across a wide spectrum of ISR, Directed Energy, or even atmospheric phenomenology applications.”
Founded in 2010 by Tommy Whitaker, EMRC specializes in the design, rapid prototyping, manufacturing, integration, test, and support of multiple fixed and rotary-wing small Unmanned Aerial (sUAS) Platforms. EMRC will integrate into AEgis’ existing management structure with their platforms going to market horizontally through its various mission areas as well as direct to their existing customer base.
“I’m incredibly proud to join the AEgis team,” said Tommy Whitaker, EMRC Heli founder. “The cultural, technical, and overall strategic fit is perfect and allows us access to new customers, to accelerate our development, and resources to grow.”
The two business were already partnered on some projects before the acquisition, with AEgis using EMRC Heli’s small UAS in the development of directed energy weapons. (Source: UAS VISION)
17 Apr 20. Rosoboronexport unaffected by COVID-19 pandemic. Rosoboronexport has not suspended any of its activities as the coronavirus outbreak gradually grows in Russia, according to a 16 April statement. The company has set up a joint operational headquarters with the Federal Service for Military-Technical Cooperation, Ministry for Industry and Trade, Rostec State Corporation and regional authorities to ensure the defence industry continues to meet contract expectations.
Alexander Mikheev, Director General of Rosoboronexport, insisted: ‘COVID-19 has not stopped Rosoboronexport’s activities in the field of military-technical cooperation with foreign countries.’
Mikheev added that there is ‘a sufficient safety net to ensure that the global pandemic… and related constraints do not have a critical impact on the established business contracts and good relations with more than 100 countries worldwide’.
The business-as-usual approach of the company reflects the wider attitude towards the virus held by the Russian Armed Forces as they continue to hold regular training exercises and drills across the country. However, the Victory Day parade in Moscow, scheduled originally for 9 May, has been postponed. (Source: Shephard)
16 Apr 20. NSR’s Analyst Gagan Agrawal. The Evolution of SATCOM Price Discounting. SATCOM markets are experimenting with a wide range of new business models, with price discounting a key factor in most. With 2020 representing a key transition phase, NSR analyzed historical patterns of price discounting to ascertain what lies ahead. Every year, NSR takes a deep dive in the Satellite Capacity Pricing Index report with a proprietary pricing tool to understand the impact of 18 pricing factors on the overall lease price. In this article, those strategies and factors are analyzed as to how they have evolved and what it means for the SATCOM business.
Contract Duration (Backlog Indicator)
Contract durations have sharply decreased in the Enterprise, Backhaul and Consumer Broadband segments, with large HTS satellites launched every year along with the anticipation of LEOs. Average Video Distribution contract duration shrunk to below 3 years in 2020, in contrast to Aero contracts that remain the longest in the industry. With more than 30-50% decline in contract duration over the past 3 years, backlog has been severely affected, denting investor expectations on stock prices
Capacity Amount (Bulk Leasing Indicator)
Discounts for leasing higher amounts of capacity have gradually increased over the past 3 years, as operators look to lease the bulk of a satellite to an anchor customer. Bulk discounts on HTS satellites can be far steeper than FSS, owing to a larger reduction in the cost of sales metric. Video Distribution, DTH and Maritime were most impacted in 2019-20, while Aero and Backhaul witnessed large discounts in 2017-18 and 2018-19, respectively.
SLAs and Ground System Efficiency
Premium capacity demand for the enterprise FSS segment fell in the past 3 years, with a need for more bandwidth and acceptance of lower link reliability. While the Mobility FSS segment continues to provide differentiation on premium vs. cheap contracts, the video segment has seen a sharp preference for content over underlying TPE quality, thus ushering in lower prices. Meanwhile, increasing modem efficiencies across segments has given leeway to service providers to cut losses, and provided EBITDA cushion to operators.
Supply Pressure (Competition and Retention)
With increasing supply, fill rates have taken a large hit. As business models are largely based on data consumption today, supply has largely exceeded demand, except in segments like Aero. This has intensified regional competition, consequently resulting in heavy discounting. While new HTS supply directly impacts backhaul and broadband segments, stagnant demand in video has warranted steep customer retention discounts from operators in 2019-20.
Demand Elasticity (Market Addressability)
The Industry has been packing more Hz per dollar right from building IPSTAR as first HTS satellite, to the ViaSat-1/Jupiter-1 breakthrough, to the upcoming ViaSat-3/Jupiter-3 class of satellites. As cost of bandwidth drops, consumer business models have become more attractive, exponentially increasing the addressable market. Similar is the case for backhaul, transitioning from FSS to HTS, and to unlocking and enabling small cells today. Both pre-launch discounts and anticipation of elasticity has a large impact on service providers negotiating hard to close new business cases, a trend that has accelerated lately.
There are several external factors at play. OTT had an increased impact on DTH in 2019, while declining advertising has adversely impacted FTA. The impact of fiber is seen as less severe on the incumbent satellite broadband market (better bandwidth plans), although higher churn is witnessed in backhaul. Efficient ground systems remain a key to unlocking more bits per Hz and stabilizing price. There is less pressure in mobility segments, which are largely satellite centric to connectivity. Consolidation of service providers in mobility increased pressure over operators during the past 3 years, though consolidation in the equipment layer is expected to hasten the pace of innovation and alleviate it.
Stability in currency, politics, inflation and risk of default have had an outsized impact in regions of Africa and oil dependent businesses. Satcom prices have seen large plummets and with COVID-19, the pressure on pricing is going to sustain, if not increase.
It’s critical to understand discounts and premium pricing factors to dissect the correct SATCOM market dynamics. Operators must optimize their business cases to not be left behind. COVID-19 will play a crucial role in deciding the short to medium strategy for all players.
While higher advertising on payTV and essential Gov/Mil communications will keep operators afloat, downturn in mobility will largely have operators book losses. Higher bandwidth demand in data segments should ease off the supply pressure, while service providers will look to test the limits of the elasticity curve. (Source: Satnews)
16 Apr 20. Possible Additional Investment Infusion for OneWeb + Charlie Ergen’s Challenge. At the Advanced Television infosite, journalist Chris Forrester reports that OneWeb might be in Chapter 11 bankruptcy (under ‘debtor in possession’ rules); however, that company’s major backer, Japan’s SoftBank, has stated that in addition to a $75m fresh loan to the company, the firm might extend that by another $225m.
The maximum of $300m will help keep OneWeb alive while the company seeks to sell itself or its main assets. OneWeb entered Chapter 11 on March 27.
The SoftBank loan is structured as $10 m now, with the $65 m of funding contingent on OneWeb making some progress towards selling its most valuable asset, it spectrum and licensed frequencies.
If a Letter of Intent comes forward from a potential buyer, then extra cash will flow into OneWeb. OneWeb has stated the firm hopes to secure this Letter of Intent by May 11. These extra funds come on top of the existing $2bn in terms of investment in OneWeb that SoftBank has already made in the company. OneWeb’s total equity and debt has topped $3.4bn.
OneWeb has a handful of other significant debtors, not the least of which are Airbus Group, Banco Azteca, Qualcomm Technologies, Institución de Banca Múltiple as well as the Ruwandan government.
Additionally, Advanced Television is reporting that Charlie Ergen, co-founder of Dish Network and the EchoStar family of business, might just have badly timed his latest venture.
Analysts at MoffettNathanson (MN) aptly described Ergen’s position a “petri dish” of challenges, stating that Ergen’s entry into the pre-paid wireless business would have been challenging, even under the best of circumstances. These aren’t the best of circumstances. Sprint’s Boost – which Ergen is acquiring – was already beset by sky-high churn even before the coronavirus crisis. Its customers skew towards lower income, urban, and, now (presumably) unemployed. “Welcome to the wireless business,” stated MN.
The analysts admit that they were never wholly convinced by Ergen’s plan to build a fourth national wireless network, but add that it is “even harder now. Dish’s subscription businesses – a satellite TV business that has always positioned itself as payTV’s budget option, and a pre-paid wireless business that caters to urban lower-income subscribers – will face a particularly challenging path.
“As Dish’s credit spreads have widened, the cost of funding the network has risen, lowering whatever would otherwise have been the project’s NPV. And the odds that Dish will be able to attract a strategic partner have fallen (although we’ve never thought that was a realistic expectation, either). Even if one believed their network could be built for just $10bn – we expressed our skepticism on this score, as well – at Dish’s current cost of debt, the financing costs of building the network would consume about half of the cash flow generated by their faltering satellite TV business,” stated MN, adding that the firm’s satellite TV business will suffer in the recession as well. With no sports on the air, and with soaring unemployment, Americans will inevitably search for costs they can shed. As with pre-paid, Dish is disproportionately skewed to lower credit quality consumers.
However, most recognize Ergen as a skilled poker player and a master at second-guessing the market. MN is not convinced. They bluntly state there is “no floor” for Dish’s equity and have slashed their Target Price for Dish to just $15 a share (down from the previous $30 mark). (Source: Satnews)