13 Jul 20. FLIR Systems Announces Preliminary Expected Revenue Results for Second Quarter 2020. FLIR Systems, Inc. (NASDAQ: FLIR) (“FLIR” or the “Company”), a world leader in the design, manufacture, and marketing of intelligent sensing technologies, today announced its preliminary expected revenue results for the second quarter 2020. Based on preliminary financial information, FLIR expects revenue for the second quarter 2020 to be approximately $480m. The preliminary revenue estimate reflects increased demand for thermal cameras used in Elevated Skin Temperature or EST screening in light of COVID-19 and increased volumes for unmanned systems, partially offset by reduced demand in commercial end markets such as maritime and security products as well as delays associated with certain international orders.
13 Jul 20. Comtech Telecommunications Corp. Provides Business and M&A Litigation Update. Comtech Telecommunications Corp. (NASDAQ: CMTL) provided today a business update related to its fourth quarter fiscal 2020 targets and its pending lawsuit against Gilat Satellite Networks Ltd. (“Gilat”).
Business Update: Q4 Fiscal 2020 Targets
Comtech remains an essential business as defined by the U.S. government and continues to operate its business with the safety of its employees, customers, partners and suppliers in mind. Despite the reported increase of coronavirus infections around the world and ongoing travel limitations, Comtech’s business is rebounding, and Comtech expects that its fiscal 2020 fourth quarter consolidated net sales and Adjusted EBITDA will be meaningfully better than the results it achieved during the third fiscal quarter of 2020. Net income for Q4 will be impacted by $4.7M of acquisition costs and M&A legal expenses.
Commenting on the business activity experienced so far during the current quarter, Chairman and CEO Fred Kornberg stated: “Our customers appear to be adjusting to new ways of doing business and our pipeline of opportunities looks like it is growing. We are very fortunate to have a diverse customer base and a broad range of products and services, many of which—like our 911 solutions for public safety agencies and U.S. government solutions —address critical communications needs.”
Business Update: M&A Litigation Update
Comtech has amended its complaint in the pending lawsuit against Gilat, adding to the complaint a request for a declaratory judgment that Gilat has suffered a Material Adverse Effect (as defined in the Merger Agreement). The amended complaint alleges that this is due in significant part (but not entirely) to the enormous damage the COVID-19 pandemic has done to the airline industry – an industry upon which Gilat is disproportionately dependent compared to its peers and other companies in the industries in which it competes. As a result, the amended complaint alleges that Comtech is not required to close on the acquisition of Gilat.
The amended complaint retains Comtech’s earlier request for a declaratory judgment that certain actions, including unilaterally interfering in Comtech’s application for Russian regulatory approval and/or disposing of and/or restructuring Gilat’s business operations in Russia, if taken by Gilat, would breach Gilat’s obligations under the Merger Agreement.
Comtech believes that it remains in compliance with all of its obligations under the merger agreement with Gilat. Further, without waiver of its rights as set forth in the Amended Complaint, unless and until its merger agreement with Gilat is terminated, Comtech intends to continue to comply fully with its obligations under the merger agreement, including all obligations with respect to seeking Russian regulatory approval.
Comtech Telecommunications Corp. designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. The Company sells products to a diverse customer base in the global commercial and government communications markets.
Additional Information and Where to Find It
This press release includes information relating to a pending business combination involving Comtech and Gilat. This document does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for any securities or a solicitation of any vote or approval nor shall there be any sale, issuance or transfer of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
In connection with the pending business combination involving Comtech and Gilat, a Registration Statement on Form S-4 (File No. 333-236840) has been filed with and declared effective by the SEC. This document is not a substitute for the prospectus/proxy statement included in the Registration Statement or any other document that Comtech or Gilat may file with the SEC in connection with the proposed transaction. Investors and security holders of Comtech and Gilat are urged to read the definitive proxy statement/final prospectus contained in the Registration Statement and any other relevant documents that will be filed with the SEC carefully and in their entirety when they become available because they will contain important information about the pending transaction.
You may obtain copies of all documents filed with the SEC regarding the proposed transaction, free of charge, at the SEC’s website (www.sec.gov). In addition, investors and security holders will be able to obtain a free copy of the proxy statement/prospectus (when they become available) and other documents filed with the SEC by Comtech on Comtech’s Investor Relations page on Comtech’s web site at www.comtechtel.com or by writing to Comtech, Investor Relations, (for documents filed with the SEC by Comtech), or by Gilat on Gilat’s Investor Relations page on Gilat’s web site at www.Gilat.com or by writing to Gilat, Investor Relations, (for documents filed with the SEC by Gilat). (Source: BUSINESS WIRE)
14 Jul 20. QinetiQ announced the acquisition of Naimuri for £25m. The details are contained in our trading update press release issued yesterday but the main facts are below for your convenience:
- Naimuri is a leading software development and data analytics company, providing agile cloud-based services and technology to the UK intelligence and law enforcement communities.
- QinetiQ already partners with Naimuri on several critical programmes delivering mission-led innovation around data-intensive challenges.
- Naimuri will now become part of our Cyber & Information business, and we will invest and build upon Naimuri’s strong capabilities in data analytics, data intelligence and agile software development to meet customer needs and drive growth in both the security and defence sectors.
- Naimuri employs c.70 people at its headquarters and main facility in Manchester.
14 Jul 20. First Quarter Trading Update and Acquisition of Naimuri. QinetiQ Group plc today issues a trading update covering its first quarter of trading and announces the acquisition of Naimuri Limited.
First quarter performance
As we entered the COVID-19 crisis, we took decisive action to maintain the strength of our company and ensure we retain the critical skills and capabilities to drive long-term growth. Our response has continued to focus on our three strategic priorities of protecting the health and wellbeing of our employees, continuing to deliver critical work for our customers and maintaining the strength of QinetiQ for the long-term. The actions we have taken have increased the resilience of our company, allowing us to maintain a strong balance sheet and position the company for growth as we emerge from this crisis.
Order intake throughout the first quarter continued to be strong, despite COVID-19 related disruption in all of our markets. Although revenue and profit have been impacted by the disruption, the proactive and robust cost management actions taken have reduced the impact on profitability and delivered a strong cash performance. As we have stated previously, due to the on-going uncertainty of the COVID-19 crisis around the world, we will provide guidance for Group performance as soon as possible to do so.
We have seen limited impact from COVID-19 within EMEA Services as the division benefits from long-term contracts and delivers work that is critical to sovereign defence capabilities. Some customer trials and training activity have been delayed causing impacts such as reduced flying hours in Germany; however, much of this activity is now resuming.
In Global Products we experienced more significant disruption causing delays to customer deliveries, which are beginning to resume; however, top line growth continued, driven by the contribution of MTEQ.
Our strategy to deliver mission-led innovation for our customers’ advantage and grow the company, whilst enhancing returns for shareholders continues to gain momentum. With growing uncertainty globally and an increasingly complex threat environment, we believe our strategy is increasingly relevant to this new world and will support growth in the coming years. We successfully delivered a number of strategic milestones in the first quarter demonstrating our progress as we leverage our capabilities globally.
We are delivering on our commitment to lead and modernise UK test and evaluation:
- Through our Engineering Delivery Partner (EDP) programme, we secured a £30m five year contract to provide mission data and technical services to the RAF Typhoon Delivery Team. This contract is an example of partnering with UK MOD to deliver better programme performance and long-term savings.
- We have continued to operate all the ranges under the Long Term Partnering Agreement (LTPA) during the COVID-19 crisis to support critical national defence outputs, including the first firing of the Martlet missile from a Wildcat helicopter at MOD Aberporth, a key milestone in demonstrating the ability to protect the UK’s new aircraft carriers.
We are continuing to successfully build a more international company in our key home countries:
- On 13 July 2020 we announced the signing of an agreement with the Defense Counterintelligence & Security Agency (DCSA) to operate all our US defence operations under a new Special Security Agreement (SSA), replacing the previous Proxy Agreement. This agreement fundamentally improves how we approach the largest defence market in the world and is a major milestone in our growth strategy.
- In Australia we have secured a contract to design and construct an unmanned aerial systems (UAS) flight test range for the Queensland Government, leveraging our skills and experience of operating some of the most advanced land, sea and air ranges in the world under the LTPA for the UK MOD.
We are increasing our focus on delivering mission-led innovation to meet our customers’ needs:
- We have secured a managed service contract with the UK MOD, worth up to £30m, to provide an Open Source Intelligence capability, enabling our Armed Forces to use publicly available information and social media content to improve understanding of global events, emerging threats and to support operational decision-making. This win builds momentum in our strategy to grow our data analytics and intelligence capability critical to the future of modern warfare.
- Today, we announce the acquisition of Naimuri on a cash-free, debt-free basis for £25m. Naimuri is a leading software development and data analytics company, providing agile cloud-based services and technology to the UK Intelligence and Law Enforcement communities. QinetiQ partners with Naimuri on several critical programmes delivering mission-led innovation around data-intensive challenges. We will invest and build upon Naimuri’s strong capabilities in data analytics, data intelligence and agile software development to meet customer needs and drive growth in both the security and defence sectors. In the 12 months to 31 July 2020, Naimuri is expecting to deliver in excess of £9m revenue and £2m EBITDA. Naimuri employs c.70 people with its headquarters and main facility in Manchester. Naimuri will be reported in EMEA Services, managed within the Cyber & Information business.
- On 25 June 2020 we announced the disposal of Boldon James Limited to HelpSystems International Limited for £30m. Boldon James provides data classification and secure email solutions, and in the year ended 31 March 2020 generated £9m revenue. The disposal of Boldon James and acquisition of Naimuri have been strategy-led choices, generating capital from a non-core asset and reinvesting in a capability that is central to our vision-based strategy, to drive growth and shareholder value.
13 Jul 20. QinetiQ enters next phase of growth in the US. QinetiQ announces that it has signed an agreement with the US Defense Counterintelligence & Security Agency (DCSA) to operate all of its US defence and security operations under a new Special Security Agreement (SSA).
This agreement replaces the prior Proxy Agreement for the QinetiQ North America business and also covers all operations undertaken through the recent MTEQ acquisition (completed in December 2019).
The SSA enables the bringing together of all of QinetiQ’s US defence and security operations under a single entity, QinetiQ Inc, and as a single QinetiQ brand. This agreement fundamentally changes and improves how QinetiQ approaches the largest defence market in the world and is a major milestone in the growth strategy for QinetiQ.
The US business is led by Mary Williams, former MTEQ President and CEO. The Board is set in accordance with DCSA standards and comprises The Honorable John Hillen (QinetiQ Inc Chair), Steve Wadey (QinetiQ CEO), David Smith (QinetiQ CFO), Directors Dr Pamela Drew and Tom Mills, with Mary Williams.
The unified US business employs 700 people across our main sites in Virginia, Massachusetts and Pennsylvania and combines world leading expertise in robotics and autonomy with our sensors and integration capability. These aligned capabilities and support from the wider Group are key to QinetiQ’s US growth strategy, enabling QinetiQ to create a business focused on ‘mission-led innovation’; a strategy that will deliver solutions critical to next generation warfighting capability for the US. QinetiQ’s recent win of the Robotic Combat Vehicle Light (RCV-L) programme is a great example of the strength of the combined capabilities of the new QinetiQ US business, leveraging the combination of expertise in advanced sensors, robotics and autonomy.
Steve Wadey, QinetiQ Group Plc CEO, said: “Building on the acquisition of MTEQ, this new Special Security Agreement enables us to fundamentally reset the way we go to market as an integrated global defence and security company. The way we have come together as a new team, and worked with the DCSA, to achieve the signing of this vital change at pace is notable. The SSA will enable much greater levels of collaboration, making it easier to build integrated business capture teams and to leverage investment across the Group. It will have a profound and positive impact on the way we work, building bigger propositions that add value to the US warfighter.”
Mary Williams, QinetiQ Inc President and CEO, said: “We are now able to move to our next phase of integration for our US business, seeking to fully leverage the range of talent within our US business, and tapping into the capabilities and investments of QinetiQ. This is an exciting time as we develop and execute our mission-led innovation strategy to deliver the adaptable products and services that our armed forces need, and at a pace that exceeds their expectations.”
13 Jul 20. SRT to make waves. I initiated coverage on Aim-traded SRT Marine Systems (SRT:39p), a global leader in AIS, an advanced identification communications technology used to track and monitor maritime vessels, in my August 2019 Alpha Report (‘Set sail for a profitable voyage’, 16 August 2019).
The shares duly hit my 55p target in early January to deliver a 51 per cent return, offering ample time to take profits before the stock market crash. I subsequently advised buying in again at, 25.5p (‘Stock picking for bear market gains’, 16 April 2020), noting that SRT’s profit generation from existing contracts and a £550m validated sales pipeline was materially undervalued. The share price has risen by 50 per cent since then, primarily driven by news that work has recommenced on SRT’s flagship Philippines fisheries management system project. A significant cash payment has been received on the contract, too, thus allaying any cash flow concerns. The revised project plan is to accelerate implementation to make up for as much of the time lost due to the Covid-19 lockdown as possible.
There has been good news from the Middle East, too. Two new national vessel tracking systems awards and a smaller system upgrade had been delayed due to Covid-19 lockdowns, but final contract negotiations are expected to conclude imminently with the projects commencing in the coming months. The Philippines and Middle Eastern contracts are worth over £100m in revenue to SRT, or more than five times its annual revenue in the last financial year. I estimate that these contracts should contribute upwards of annual revenues of £50m and operating profit of more than £10m. Also, SRT’s transceivers business, which made £8.1m in revenue last year, is performing better than expected with sales higher than in the first quarter last year.
When SRT reports annual results on Monday, 7 September 2020 I would expect further positive news on contracts and analysts to reinstate estimates. Based on my financial models, the £64m market capitalisation company should be in a net cash position by then, too. The strong profit recovery in the 2020/21 financial year is still being materially undervalued. Buy. (Source: Investors Chronicle)
10 Jul 20. Fitch Revises GKN’s Outlook to Negative; Affirms IDR at ‘BB+.’
Fitch Ratings – London – 10 Jul 2020: Fitch Ratings has revised UK-based GKN Holdings Limited’s (GKN) Outlook to Negative from Stable, while affirming the company’s Long-Term Issuer Default Rating (IDR) at ‘BB+’. We further revised UK-based GKN Aerospace Services Limited’s (GASL) Outlook to Negative from Stable, while affirming the company’s Long-Term IDR at ‘BB’.
The Negative Outlook reflects the likelihood that the effects of the coronavirus pandemic could materially hinder or delay the previously expected recovery in cash generation and leverage to levels consistent with a ‘BB+’ rating. It also reflects the risk of a protracted weakened economic environment and its potential effect on new vehicles and aircraft production.
The ratings continue to incorporate a business profile that is strong for a ‘BB+’ rating, record of successful restructuring by sole owner Melrose Industries plc (Melrose) and adequate financial flexibility.
KEY RATING DRIVERS
Drop in Production: Fitch expects global vehicle production to fall about 20% and production of several civil aircraft programmes to fall 25%-35% in 2020. We expect vehicle production to recover from 2H20, albeit to lower levels than assumed prior to the pandemic. Pick-up in production of single-aisle airplanes is not expected before 2022, except for the B737 from a low base in 2020, while production of wide-body airliners is expected to stabilise after 2022. The underlying sharp drop in expected revenue by Fitch is somewhat mitigated by sustained demand for defence programmes and for Ergotron’s products, while Fitch’s expected sales declines at Nortek Air Management and Brush are expected to be in single-digits in 2020.
Profitability Hit in 2020: The fall in revenue will strongly impair fixed-cost absorption with a material effect on profitability. Our rating case includes a decline of about 50% of EBITDA and funds flow from operations (FFO). We, therefore, expect free cash flow (FCF) to turn slightly negative in 2020 from 1% in 2019. Lower capex on weaker demand and production stoppages and no dividend payments in 2020 limit the downward adjustment to our FCF forecast. Nonetheless, a larger-than-expected fall in profitability and worse-than-expected deterioration in receivable terms and inventory levels could further stress FCF generation over 2020.
Profitability Uplift from Restructuring: We expect EBITDA and FFO to strongly rebound in 2021, albeit to lower levels than in 2019, before gradually improving over the medium term. We also expect the FCF margin to be well above 1% post 2020. This is subject to successful implementation of Melrose’s earnings and cash generation enhancement programmes, which are a central tenet of the group’s business strategy. This is particularly important, since we expect production in most of its end-markets to remain below 2019 levels until at least 2023. A slow realisation of expected benefits of restructuring or weaker recoveries of underlying markets could put further pressure on the ratings.
Leverage Spike from Weaker Cash-flows: Our expectations of materially lower FFO generation result in higher FFO leverage of 6.5x at end-2020, versus 3.9x at end-2019. We expect the metric to improve as FFO recovers and positive FCF, after acquisitions and divestitures, is partly used to reduce debt. Nonetheless, our rating case forecasts FFO leverage remaining above our negative sensitivity of 3.5x until at least end-2021, at 4x in 2021. Furthermore, execution risks for the rationalisation programmes and uncertainty over the direction of global production of vehicles and airliners could delay or constrain projected deleveraging.
Deleveraging Potential with Disposals: Leverage increase could be slowed or deleveraging hastened depending on the cash deployments of the potential net proceeds from disposals of owned assets. Melrose has demonstrated its ability to identify and execute disposals of businesses following its investments cycle, which allow it to repay some of its debt raised for acquisitions with a portion of net disposal proceeds. This strategy differentiates Melrose from typical corporates. However, the ownership, funding and management structures mean it remains a conglomerate rather than an investment fund.
Strong Market Positions, Cyclical End-markets: GKN is, respectively, a top-20 and a top-50 aerospace and automotive supplier with leading global market positions in several end-markets, such as aero structures, driveshaft and all-wheel drive systems. It focuses on the development of business-critical components, which requires scale, sound execution, standard of quality and up-front investments, which all create high entry barriers. The business profile further benefits from Melrose’s diversification in light commercial air management systems and electric power products. However, the group is exposed to cyclical industries, faces customer concentration risks and has limited services and aftermarket operations.
Consolidated Credit Profile Drives Rating: GKN’s and GASL’s ratings reflect the consolidated credit profile for the group. Fitch’s business profile analysis and credit metrics, therefore, incorporate non-GKN diversified operations and their financial obligations as well as Melrose plc’s debt and liquidity position. As such, actual and forecast financial performance analyses are based on the consolidated financial statements of Melrose.
Ratings Reflects Melrose Linkage: The ‘BB+’ rating of GKN reflects its strong legal and operational ties with Melrose. The debt structure incorporates upstream guarantees from certain GKN entities to Melrose, and downstream guarantees from Melrose to GKN’s bonds. Melrose’s committed bank facilities contain a cross-default clause referencing any member of the group. There is no legal ring-fencing impeding intragroup liquidity movement with cash being channelled to Melrose as much as possible. Daily operational management is delegated to GKN divisions’ executives. Nonetheless, Melrose has effective control of GKN’s board and remains responsible for setting the strategy and overseeing GKN’s performance.
GASL’s IDR Notched Down: GASL’s IDR is notched down once from immediate parent GKN’s. The top-down approach reflects strong operational and strategic ties that are offset somewhat by moderate legal ties. The downward notching is due to the lack of a formal parent guarantee for liabilities not linked to the UK-defined benefit pension schemes. In addition, the majority of GASL board members are independent Directors. Nonetheless, local management carries out the group’s strategy for the aerospace sector. GASL is strategic for and integrated within GKN Aerospace as its aerospace & defence arm in the UK. GASL also relies on the cash pooling system of the group for external liquidity needs.
Fitch considers GKN a tier 1 aerospace and automotive supplier, but mostly in manufacturing of components rather than complete systems. The consolidated group’s scale and solid market share in end-markets, geographical diversification, and somewhat high exposure to cyclical sectors compare well with that of Schaeffler AG (BBB-/Negative), Dana incorporated (BB+/Negative) and MTU Aero Engines AG (MTU, BBB/Negative). The group benefits from greater business diversification than these peers and from lower customer concentration than MTU.
Nonetheless, its business profile is considered weaker than that of larger global tier 1 suppliers such as Rolls-Royce plc (BBB-/Negative), General Electric Company (BBB/Stable) and Continental AG (BBB/Stable). These peers typically benefit from higher technology content, greater R&D capability and a larger share of revenue sourced from service and replacement activities than Melrose.
The consolidated group’s FFO margin in 2019, which is the first full-year of GKN assets’ consolidation, has been weaker than MTU’s and Schaeffler’s, but broadly in line with Dana’s and Rolls-Royce’s. The potential benefits of the restructuring initiatives are expected to bring cash generation in line with low investment-grade peers’. Fitch expects FFO leverage to remain outside our sensitivities until at least end-2021, although remaining in line with Dana’s.
Fitch applied its Parent Subsidiary Linkage (PSL) methodology and assessed that GKN can be rated on a consolidated basis. GASL’s rating is also based on Fitch’s PSL methodology and is notched down once from GKN’s. No Country-Ceiling or operating environment aspects affect the ratings.
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
-Global vehicle production to decline about 20% in 2020, with only partial recovery in 2021, and low-single-digit growth over the medium term
-Combined production of A350/A320/A321/B787 aircrafts to decline around 25% in 2020 and a gradual increase of production of B737 from June 2020
-Aerospace and automotive revenue to decline more than 20% in 2020, due to significantly lower industry demand
-Higher price pressure from customers over the next two to three years
-Margins at GKN Aerospace, GKN Automotive and Powder Metallurgy divisions are low in 2020 before beginning to improve in 2021
-Aggregate working capital inflows of around EUR0.1 bn in 2020-2023
-Average annual capex at 4.9% of sales in 2020-2023 (4.7% in 2019)
-No dividend paid in 2020, EUR100m in 2021 and increasing to more than EUR250m in 2023
-GKN Wheels and Structure sold in 2021
-No acquisitions for the next three years
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-Consolidated FFO leverage below 2.5x (2019: 3.9x, 2020F: 6.5x, 2021F: 4x)
-Consolidated FFO margin above 8.5% (2019: 7.5%, 2020F: 5.1%, 2021F: 8%)
-Consolidated FCF margin above 2% (2019: 1%, 2020F: -0.2%, 2021F: 2%)
-Weak linkages between GKN and Melrose, with GKN consisting of at least the aerospace and automotive divisions, without material re-leveraging of GKN
-Strengthening of the legal ties between GKN and GASL
-An upgrade of GKN, although this is unlikely
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Consolidated FFO leverage above 3.5x
-Consolidated FFO margin below 7%
-Consolidated FCF margin below 1%
-Disposals of material assets without adequate deleveraging
-Looser ties between GKN and GASL
-Downgrade of GKN
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Sound Liquidity: GKN has access to Melrose’s liquidity. Liquidity is ample with GBP152 m of readily available cash and cash equivalent at end-2019, including Fitch adjustments of GBP165 m viewed as restricted to cover day-to-day operational needs, and about GBP1 bn of headroom under a revolving credit facility (RCF) at end-April 2020. This compares with limited consolidated debt maturities over 2020 and 2021. Some FCF absorption expected by Fitch in 2020 will weigh on liquidity but we expect a return to positive FCF generation beyond 2020. The group’s positive net trade receivables/payables position also makes the impact on the liquidity position of production stoppage or limited capacity utilisation more manageable.
Debt Structure: At end-2019, Melrose’s debt comprised two bonds of GBP450m (maturing 2022) and GBP300m (maturing 2032) together with a multi-currency term loan (denominated GBP100m and USD960m, maturing in April 2021 with the option to extend to April 2024 at the group’s request) that is fully drawn. The group also has a multi-currency RCF (denominated GBP1.1bn, USD2bn and EUR0.5bn, maturing January 2023) with headroom of about GBP1bn remaining at end-April 2020.
SUMMARY OF FINANCIAL ADJUSTMENTS
Amortisation of intangible assets acquired in business combinations and restructuring costs are viewed as an operating item by Fitch. Impairment of goodwill is viewed as non-operating item by the agency.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
GKN linkage with its 100% owner Melrose and GASL linkage with its immediate parents GKN and Melrose are detailed in the Key Rating Drivers section.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 – ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg. (Source: Google/Fitch)
09 Jul 20. Senior’s sales plunge as Covid-19 roils end markets. As Covid-19 sends the commercial aerospace industry into a tailspin, Senior (SNR) is guiding that revenue for the six months to 30 June will fall by 30 per cent year-on-year alongside “significantly lower” margins. Chief executive David Squires has warned that “the impact will be with us for some time to come”.
The technology and components supplier was already pointing to a difficult year before the pandemic really started to bite – back in March it predicted that aerospace revenue in 2020 would decrease by 20 per cent. This came amid the halt in production of Boeing’s (US:BA) 737 Max jet due to safety issues and Senior’s decision not to renew certain contracts producing lower returns. But aerospace sales tumbled by 31 per cent in the first half, with a 40 per cent decline in the second quarter.
With airlines cutting capacity, retiring older aircraft and looking to defer new orders, plane and engine makers have curbed their production rates. This has had a knock-on impact throughout the supply chain, including for Senior. The group expects that lower production rates will continue into 2021.
However, Covid-19 disruption has not been isolated to civil aerospace. Senior’s ‘flexonics’ business – which make products for vehicle emissions and thermal management – has seen customers curb output, with North American truck production down more than 50 per cent in the first five months of the year. Flexonics sales dropped by 27 per cent in the first half and the market is not forecasted to improve across the remainder of 2020.
In response to the challenging environment, Senior is cutting 12 per cent of its workforce. It had already trimmed 5 per cent of jobs in the second half of last year as part of its restructuring programme. Alongside transferring more work to South East Asia, the group now aims to deliver £35m of savings this year – up from previous expectations of £23m – although it will cost the same amount to deliver these efficiencies. There will also be an associated cash outflow of up to £25m.
Despite the turmoil from the pandemic, Senior did generate a £3m net cash inflow in the first half thanks to reduced capital expenditure and tighter inventory management. Net debt has also remained relatively stable since the December year-end at £239m. But the rest of the first half numbers will not be pretty – the group has flagged that it will likely see “significant” non-cash impairments as it reduces the carrying value of some intangible assets. Looking beyond that, much like Rolls-Royce (RR.), Senior is staring down difficult conditions for potentially years to come. Sell at 59p.
Last IC View: Sell, 147p, 04 Mar 2020. (Source: Investors Chronicle)