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30 Jul 20. Leonardo: responding robustly to the pandemic also benefitting from military/governmental business. 1H 2020 resilient performance, with Orders at €6.1bn. FY 2020 New Guidance and confidence in medium-long term fundamentals.

Responding robustly to COVID-19

  • Quick and effective action plans protecting employees, business and supporting customers
  • Business has held up operationally
  • Positive mitigating actions and recovery plans in place

Benefitting from business mix with strong military/governmental weighting, although seeing impact on civil side

  • Military/governmental proving very resilient
  • Strategic relevance in domestic markets
  • Impact on civil segment and JV’s
  • Short-term impact on civil deliveries, programme execution and productivity

Resilient 1H 2020 Results in face of unprecedented challenges

  • Strong commercial performance: New Orders at €6.1bn
  • Solid Revenues at €5.9bn
  • EBITA at €292m, reflecting COVID impact
  • FOCF negative €1.9bn, in line with expected seasonal trends and partially affected by COVID-19

Robust response to COVID-19 and business resilience gives confidence in New FY 2020 Guidance (assuming no virus resurgence and no further lockdowns)

  • Order Intake at €12.5-13bn
  • Revenues at €13.2-14bn
  • EBITA at €900-950m
  • The Group has the objective to reach a neutral FOCF
  • Group Net Debt at €3.3bn

Proven medium-longer term fundamentals and strengths

  • Significant backlog of €36bn
  • Strength of products and technologies
  • Confidence in markets, customers
  • Support of key stakeholders

Leonardo’s Board of Directors, convened today under the Chairmanship of Luciano Carta, examined and unanimously approved the results of the first half 2020.

Alessandro Profumo, Leonardo CEO stated “I want to express my thanks to all our people at Leonardo for the commitment and effort during these trying times. The first half results showed that we have remained resilient in the face of extreme market conditions, with a strong military/governmental domestic commercial performance. We have responded quickly and robustly to COVID-19 crisis and to the new scenario proving that Leonardo has strong foundations to leverage on. We continue to actively manage the situation well with mitigating actions and recovery plans in place. Our robust response and business resilience give us confidence in FY 2020 New Guidance. Despite pandemic challenges, the medium-long term fundamentals of our business remain unchanged and we remain confident in executing our Industrial Plan to create value for all our stakeholders”.

The results recorded in the first half-year of 2020 underline the Group’s resilience in a context without precedent, with a commercial performance that confirms the same levels as in the last year benefitting from orders in the government/military sphere from national clients against certain postponements of the export campaigns and the drop in the civil sector demand.

Revenue volumes are basically in line with those of the half-year 2019, supported by a solid Backlog and the growth of the EFA Kuwait programme and of Leonardo DRS, which have been able to offset the slowdowns caused by the pandemic.

The industrial performance, even if affected during this half-year by the effects of the COVID-19, has begun to highlight the first signs of stabilization also as a result of initiatives implemented to guarantee the full business operations. The profitability is affected also by a lower contribution from the JVs and a mix of activities characterised by programmes under development or in which the Group operates as a prime contractor, with profit margins below the average but which are essential to the current and future positioning of the Group’s products and technologies.

The cash flows, in addition to being affected by the usual interim performance characterised by significant outflows in the first part of the year, were partly affected by some critical issues that arose mainly in the second quarter due to the COVID-19 pandemic, which entailed an increase in working capital with a consequent cash absorption.

Following the solid results recorded in terms of sales and manufacturing at the beginning of the year, the Group’s performance for the first half-year of 2020 began to be affected by the effects of the COVID-19 pandemic from March. In particular, the following effects were reported:

  • A slowdown in production activities following the actions taken to protect the health of workers in line with the Italian Government’s recommendations (revision of manufacturing processes and work organisation to ensure social distancing, sanitisation of premises). This slowdown led to a reduction in production hours developed with related lower efficiency, in particular in March and April, with a gradual recovery from May. The half-year saw an average drop of 13% in production hours compared to expectations that, although mitigated by the initial effects of the measures aimed at recovering adequate productivity levels, was more marked at the entities with a greater incidence of manufacturing activities, such as those of the Aerostructures, Helicopters and Aircraft Divisions
  • Less progress in the programmes, especially in the European component of the Defense & Security Electronics division, in the Aircraft division and to a lesser degree in Helicopters, as a result of the aforementioned slowdown, restrictions on the movement of resources and the impossibility of accessing our customers’ sites, as well as of an initial lower efficiency due to the reorganisation of some activities in smart working mode
  • The first effects of a decline in demand in the civil market due to the dramatic slowdown in the global transport sector, which is now having an impact on aircraft manufacturers and which consequently affects Aerostructure production volumes, as well as sales forecasts for civil helicopters and ATR aircraft. This factor, together with the impossibility of our customers to carry out the testing and acceptance tests of the machines, led to the postponement of deliveries, particularly with regard to ATR aircraft and civil helicopters, as well as a decrease in the production rates of the Aerostructures Division, particularly on the B787 and ATR programmes
  • Negligible effects at the reporting date on the supply chain, which nevertheless remains deserving of the utmost attention

As already highlighted in the results as at 31 March 2020, The Group reacted promptly to the new scenario by implementing a series of measures primarily aimed at guaranteeing the full protection of the workers’ health and safety, while preserving the continuity of its production. From an operational point of view, the initiatives include actions aimed at recovering adequate productivity levels through the gradual increase of the workers’ presence in the sites in safe conditions. In parallel, the Group is carrying out a profound review of its cost base and investment level, reducing or delaying all initiatives and expenses not strictly necessary or strategic, saving controllable and labour costs, in order to mitigate the effects of COVID-19 on the results of the year.

The primary changes that marked the Group’s performance compared with that of the previous year are described below:

  • New Orders, amounted to EUR6,104m, remained substantially in line with the first half of 2019. Specifically, the significant increase in the Helicopters sector (48%) was offset by a decline recorded in the Defense & Security Electronics and Aeronautics sectors, which had benefitted from major new orders during the first half of 2019
  • Backlog, amounted to EUR35,920m, ensures a coverage in terms of equivalent production equal to about 2.5 years
  • Revenues, amounted to EUR5,878m, remained in line with the first half of 2019 (€ 5,962 bn), showing a decline in the Helicopters sector, mainly due to fewer deliveries attributable to the abovementioned effects of the COVID-19 pandemic, which was offset by higher volumes on the EFA Kuwait programme of Aircraft and at Leonardo DRS
  • EBITA, amounted to EUR292m, (with a ROS of 5.0%) showed a decrease of €195m compared to the first half of 2019, which was mainly due to the abovementioned effects of the COVID-19 pandemic
  • EBIT, amounted to EUR227m; showed, compared to the first half of 2019 (€462m), a reduction of €235m (-50.9%), mainly due to a decrease in EBITA, the recognition of costs incurred to comply with the Government’s guidelines on COVID-19, including those for the protection of workers’ health and to support the Governmental bodies in managing the emergency, as well as to some external costs incurred because of the difficulty in stopping the performance of some specific services
  • Net Result before extraordinary transactions, amounted to EUR59m, was affected by a fall in EBITA, as well as by the higher impact of financial costs for the period, associated with exchange rate hedging
  • Net Result amounted to €60m included the effects of the space business of Vitrociset, classified among Discontinued Operations
  • Free Operating Cash Flow (FOCF), negative EUR1,889m (against a negative value of €1,050m in the first half of 2019). While confirming the usual interim performance characterised by significant outflows in the first part of the year, this trend was partly affected by issues that arose mainly in the second quarter as a result of the COVID-19 pandemic, which entailed a significant increase in working capital with a consequent cash absorption
  • Group Net Debt, of EUR5,074m, showed an increase compared to 31 December 2019 (€2,847m), mainly as a result of the negative performance of FOCF, as well as of the impact of the following main events on the net financial position:

o Acquisition of Kopter Group AG in April with an impact of €198m on the Net financial position)

o Acquisition of an additional amount of Avio shares in June for €14m

o Payment of a dividend of €81m in May

o Increase in new leases for €54m

Guidance 2020

The regular and ordinary performance of the Group’s business activities is being impacted by the COVID-19 crisis, in a global context of serious economic recession and high uncertainty. Even in this context, Leonardo confirms its resilience, based on a solid Order Backlog and on the ability to react promptly to this new scenario, and it remains confident in its business fundamentals.

In summary, the effects of COVID-19 are expected to show an impact on 2020 performance – compared to expectations before the outbreak of COVID-19 – as described below:

  • slowdowns of activities aimed at finalising commercial negotiations, mainly due to travel bans, leading to the postponement of the acquisition of some orders, mainly in the export component, with a consequent impact on production volumes and related margins
  • drop in demand in the civil market, which is expected to continue well beyond the end of the year, leading to lower new orders, revenues and margins
  • slowdown on programme execution, following the slowdowns in production activities caused by actions taken to protect the safety of workers, travel bans and the inability to access customer sites, impacting Group revenues and consequently margins
  • reduction of productive hours resulting from lower presence and lower efficiency, (although mitigated by the actions aimed at recovering adequate productivity levels in the second half of the year) leading to a lower absorption of fixed costs with consequent impact on EBITA

These effects are expected to be partially offset by actions promptly implemented by the Group. In addition to the progressive recovery of adequate productivity levels, these actions aim to achieve savings on controllable costs and on labor costs as well as a reduction in net investments. Actions taken are progressing according to plan and are on track to deliver the expected positive effects.

Based on first half results and the review of the projections for the second half, and assuming no covid-19 resurgence and no further lockdowns, Leonardo expects for full year 2020:

  • Orders in the range of 12.5-13.5bn, this estimate reflects the downsizing of demand in the civil market and some postponements of export campaigns due to the effects of the pandemic, and it confirms the important orders in the military/governmental business, mainly by domestic customers
  • Revenues in the range of 13.2-14bn, substantially in line with 2019 despite the effects of the decline in the civil market, which has affected deliveries in Helicopters and the production rates in Aerostructures, and lower activities on programmes caused by COVID-19; this also reflects the expectation of an acceleration of activities in the second half of the year and confirms the Group’s resilience, leveraging on a solid Order Backlog and the high exposure to the military/governmental business
  • EBITA in the range of 900-950m, confirms the solidity of the business fundamentals despite this particularly challenging context, affected by the aforementioned impact of COVID-19 on volumes, deliveries and absorption of fixed costs, partially mitigated by savings associated with the reduction of controllable costs and labor costs
  • The Group has the objective to reach a neutral FOCF , thanks to a constant focus, even stronger today, on the achievement of invoicing milestones on programmes together with optimisation of working capital and investment levels; this is expected to offset the lower collections associated with the postponement of cash-ins related to milestones and deliveries, as a result of COVID-19 as well as the lower cash advances associated with delays in export order acquisition

30 Jul 20. Aerospace supplier Safran’s core profit drops by half. Safran’s (SAF.PA) core profit tumbled in the first half of the year, but the drop was not as bad as expected as the jet engine maker went into the coronavirus crisis propelled by the momentum from a strong first quarter.

The world’s third largest aerospace supplier reported a recurring operating profit of 947m euros (855.8m pounds), down 49.7%, as revenues fell 28% to 8.767bn.

Analysts had expected operating profit of 840m euros on revenues of 8.5bn, according to Refinitiv data.

Safran said it expected a 35% drop in revenue and an operating margin of around 10% for the full year, and positive free cashflow in the second half.

In the first half, the margin slid to 10.8% from 15.6% a year earlier when aerospace companies were enjoying record output.

Safran’s shares rose around 4%.

Air travel has collapsed since the pandemic spread widely in March, depriving Safran and other contractors of revenues from the sale of new equipment as well as maintenance and spare parts that depend heavily on the number of hours jets spend flying.

Safran co-produces engines for the grounded Boeing 737 MAX and around half of Airbus’s competing A320neo fleet.

Civil aftermarket revenues fell 34.4% in dollar terms and Safran said it expected these to fall 50% for the full year.

It predicted 800 LEAP engine deliveries in 2020.

Chief Executive Philippe Petitcolin described the crisis as “devastating” for the aerospace industry, which had previously enjoyed a bull run for the best part of a decade.

But he said Safran was remoulding itself in order to emerge stronger from the crisis when air travel eventually recovers.

Safran said it had signed a deal with unions in France capping pay and profit-sharing and targeting 3,000 early retirements by offering incentives. The deal will help improve Safran’s finances from the second half, the company said.

Petitcolin said Safran’s own supply chains were producing at roughly the required levels with few delays but that concerns remained about the financial health of some suppliers.

Safran has contributed 58m euros to a new French support fund which earlier this week said it had raised an initial 630m euros.

The crisis has hit cabin suppliers such as Zodiac Aerospace which Safran recently acquired. That is because wide-body jets, which have the most customised cabins, are facing a deeper recession than smaller models on domestic routes, which are expected to recover first.

Petitcolin said he had no regrets about taking over the French company, noting that it also supplied aircraft systems and equipment that were faring comparatively well. (Source: Reuters)

30 Jul 20. Ultra Electronics Shares Break Out After Firm Signals ‘Very Good Visibility’. Ultra Electronics resumed dividend payments after recovering “very good visibility” for the back half of the year.

The defence and security specialist grew both its top and bottom lines, while sharply improving its cash conversion and order book.

Chief executive officer, Simon Pryce, said the company’s major markets remained stable, although the headwind from commercial aerospace was expected to intensify over the remainder of the year.

So too, the tailwind from lower selling, general and administrative costs was expected to fade as those stabilised.

“Despite this, we remain confident that 2020 will, as anticipated, be a year of good progress for Ultra,” he added.

The order book fattened by 15.7% on a reported basis to reach £1,173.2m. with sales ahead by 6.7% to £413.1m.

Significant contract wins during the period included a $101m order for sonobuoys and another $45m order for its MK54 lightweight Torpedo array.

It was also awarded a contract to provide software for the US Marine Air Defense Integrated System against drones and another to help secure America’s Link 16 network over the Alaskan air space.

To take note of, defence spend in all of the company’s key “five-eyes” markets was described as “robust”.

In turn, underlying profits before tax rose 3.0% to £47.9m for earnings per share of 54.7p.

On a statutory basis however, profits before tax dropped 21.4% to 29.8p due to losses on its foreign exchange contracts as Sterling weakened.

Management also indicated that some of the initiatives under its ONE Ultra transformation programme to optimise the organisation might be accelerated in the back half of the year.

The company’s cash conversion jumped from 25% to 98%, resulting in an increase in its operating cash flow from £14.0m to £61.3m.

As a proportion of earnings before interest, taxes, depreciation and amortisation net debt fell from 1.96 times to 1.20.

Following the “strong” first half performance and expected full-year outcome relative to their scenario modelling for Covid-19, the board decided to undertake an additional interim dividend of 39.2p per shares which would equal the postponed final payout for 2019.

The regular interim dividend meanwhile was raised by 2.7% to 15.4p.

But the company said the proposed amount for the interim payout had been influenced by remaining cautiousness due to the pandemic.

As of 0905 BST shares of Ultra Electronics were breaking out to fresh record highs, jumping by 9.14% to 2,388.0p.

Stock in Ultra Electronics was changing hands on a price-to-earnings multiple of 22.8 but on a price-to-sales ratio of just 2.0.

(Source: Sharecast)

Investors Chronicle Comment: Ultra Reports earnings. Underlying pre-tax profit rose by 3 per cent to £47.9m in the six months to 30 June, aided by higher sales of its Orion radio systems to the US Department of Defence. Statutory pre-tax profit dropped by more than a fifth to £29.8m due to a loss on forward foreign exchange contracts. The interim dividend has been increased to 15.4p and the 39.2p final dividend for 2019 will now also be paid. (Source: Investors Chronicle)

30 Jul 20. Airbus trims A350 output amid larger-than-expected second-quarter loss. Europe’s Airbus (AIR.PA) announced a new cut in production of its marquee A350 jet on Thursday as it swung to a larger-than-expected second-quarter loss in the face of global pandemic. The planemaker also said it hoped to avoid consuming cash before M&A and customer financing in the second half of the year after a quarterly outflow of 4.4 bn euros as deliveries tumbled because of the coronavirus collapse in air travel.

Airbus posted an adjusted second-quarter operating loss of 1.226bn euros (1.11bn pounds) as revenues slid 55% to 8.317bn. Analysts expected a loss of 1.027bn on revenues of 8.552bn, according to a company-compiled consensus. Adjusted losses include 900m euros of balance sheet impairment charges related to the industry’s worst crisis. Airbus said it had cut A350 production to five jets a month, after bringing the monthly rate down from 9.5 to six in April. The move came a day after U.S. rival Boeing (BA.N) said it was making further cuts in output of its 787 and 777 jets, which compete with the A350 on long-haul networks. Airlines were already facing a glut of the industry’s biggest jets before the COVID-19 crisis and those models are expected to be the slowest to recover once demand returns to normal levels, which Airbus says could take until 2023 or 2025. Like many large companies wrestling with the uncertainty of border restrictions and lost demand, Airbus suspended its financial forecasts earlier this year. Airbus is shedding up to 15,000 jobs or 11% of its workforce to cope with the crisis, which it expects to hold output down by 40% for some two years compared with pre-crisis levels. It said it expected to make later restructuring provisions between 1.2 bn and 1.6 bn euros related to the plan. (Source: Reuters)

30 Jul 20. Airbus reports Half-Year (H1) 2020 results.

  • Industrial system adjusted to new production levels, cash containment and business resizing on track
  • H1 financials reflect COVID-19 impact mitigated by adaptation measures
  • Revenues €18.9 bn; EBIT Adjusted €-0.9bn, including €-0.9 bn COVID-19 related charges
  • EBIT (reported) €-1.6bn; loss per share (reported) €-2.45
  • Free cash flow before M&A and customer financing €-12.4bn, € -4.4bn in Q2
  • Strong liquidity underpins business resilience and flexibility

Airbus SE (stock exchange symbol: AIR) reported consolidated financial results for the Half-Year (H1) ended 30 June 2020.

“The impact of the COVID-19 pandemic on our financials is now very visible in the second quarter, with H1 commercial aircraft deliveries halving compared to a year ago,” said Airbus Chief Executive Officer Guillaume Faury. “We have calibrated the business to face the new market environment on an industrial basis and the supply chain is now working in line with the new plan. It is our ambition to not consume cash before M&A and customer financing in H2 2020. We face a difficult situation with uncertainty ahead, but with the decisions we have taken, we believe we are adequately positioned to navigate these challenging times in our industry.”

Net commercial aircraft orders totalled 298 (H1 2019: 88 aircraft), including 8 aircraft in Q2, with the order backlog comprising 7,584 commercial aircraft as of 30 June 2020. Airbus Helicopters booked 75 net orders (H1 2019: 123 units), including 3 H145s, 1 Super Puma and 1 H160 during the second quarter alone. Airbus Defence and Space’s order intake increased to €5.6bn.

Consolidated revenues decreased to €18.9bn (H1 2019: €30.9bn), driven by the difficult market environment impacting the commercial aircraft business with around 50% fewer deliveries year-on-year. This was partly offset by more favourable foreign exchange rates. A total of 196 commercial aircraft were delivered (H1 2019: 389 aircraft), comprising 11 A220s, 157 A320 Family, 5 A330s and 23 A350s. Airbus Helicopters reported stable revenues, reflecting lower deliveries of 104 units (H1 2019: 143 units) partially compensated by higher services. Revenues at Airbus Defence and Space were impacted by lower volume and mix, in particular at Space Systems, as well as delays in some programmes caused by the COVID-19 situation.

Consolidated EBIT Adjusted – an alternative performance measure and key indicator capturing the underlying business margin by excluding material charges or profits caused by movements in provisions related to programmes, restructuring or foreign exchange impacts as well as capital gains/losses from the disposal and acquisition of businesses – totalled €-945 m (H1 2019: €2,529m).

Airbus’ EBIT Adjusted of €-1,307m (H1 2019: €2,193m(1)) mainly reflected the reduced commercial aircraft deliveries and lower cost efficiency. Steps have been taken to adapt the cost structure to the new levels of production, the benefits of which are materialising as the plan is executed. Also included in the EBIT Adjusted is €-0.9bn of COVID-19 related charges.

Commercial aircraft are now being produced at rates in accordance with the new production plan announced in April 2020, in response to the COVID-19 situation. The current market situation has led to a slight adjustment in the A350 rate from 6 to 5 aircraft a month for now.

On the A220, the Final Assembly Line (FAL) in Mirabel, Canada, is expected to progressively return to pre-COVID levels at rate 4 while the new FAL in Mobile, US, opened as planned in May. At the end of June, around 145 commercial aircraft could not be delivered due to COVID-19.

Airbus Helicopters’ EBIT Adjusted increased to €152m (H1 2019: €125m), reflecting a favourable mix, mainly in military, and higher services partially offset by the lower deliveries. The five-bladed H145 and H160 helicopters were recently certified by the European Union Aviation Safety Agency.

EBIT Adjusted at Airbus Defence and Space decreased to €186m (H1 2019: €233m), reflecting the COVID-19 impact, mainly in Space Systems, partly offset by cost reduction measures. The Division’s restructuring plan was updated to also reflect the impact of the coronavirus pandemic.

Three A400M transport aircraft were delivered in H1 2020. The certification of automatic low-level flight capability and simultaneous paratrooper dispatch were achieved in H1 2020, marking major milestones towards the aircraft’s full development. A400M retrofit activities are progressing in close alignment with customers.

Consolidated self-financed R&D expenses totalled €1,396m (H1 2019: €1,423m). Consolidated EBIT (reported) was €-1,559m (H1 2019: €2,093m), including Adjustments totalling a net € -614 m. These Adjustments comprised:

  • €-332m related to A380 programme cost, of which €-299m was in Q2;
  • €-165m related to the dollar pre-delivery payment mismatch and balance sheet valuation, of which €-31m was in Q2;
  • €-117m of other costs, including compliance, of which €-82m was in Q2.

The consolidated reported loss per share of €-2.45 (H1 2019 earnings per share: €1.54) includes the financial result of €-429 m (H1 2019: € -215m). The financial result reflects a net €-212m related to Dassault Aviation as well as the impairment of a loan to OneWeb, recorded in Q1 2020 for an amount of €-136m. The consolidated net loss(2) was €-1,919m (H1 2019 net income: €1,197m).

Consolidated free cash flow before M&A and customer financing amounted to €-12,440m (H1 2019: €-3,981m) of which €-4.4bn was in Q2. The corresponding figure for Q1 2020 excluding the penalty payments – related to January’s compliance settlement with the authorities – was also at €-4.4bn, demonstrating that cash containment measures including the adjustment of incoming supply started to become effective. These measures partially compensated for the reduced cash inflow from the low number of commercial aircraft deliveries in Q2.

Capital expenditure in H1 was stable year-on-year at around €0.9bn with Full-Year 2020 capex still expected to be around € 1.9 bn.  Consolidated free cash flow was €-12,876m (H1 2019: € -4,116 m). The consolidated net debt position was €-586m on 30 June 2020 (year-end 2019 net cash position: €12.5bn) with a gross cash position of €17.5bn (year-end 2019: €22.7bn).

The Company’s Full-Year 2020 guidance was withdrawn in March. The impact of COVID-19 on the business continues to be assessed and given the limited visibility, in particular with respect to the delivery situation, no new guidance is issued.

Key post-closing events

In the frame of COVID-19, discussions are progressing with social partners. A restructuring provision is expected to be recognised once the necessary conditions are fulfilled. The amount is expected to be between €1.2bn and €1.6bn.

The UK Serious Fraud Office (SFO) has requisitioned GPT Special Project Management Ltd (GPT) to appear in court for prosecution on a single corruption-related charge. GPT is a UK company that operated in Saudi Arabia which was acquired by Airbus in 2007 and ceased operations in April 2020. The SFO’s investigation related to contractual arrangements originating prior to GPT’s acquisition and continuing thereafter. A resolution of GPT, whatever its form, will not affect the 31 January 2020 UK Deferred Prosecution Agreement and a value has been provisioned in the Airbus accounts(3).

On 24 July 2020, the Company announced it had agreed with the governments of France and Spain to make amendments to the A350 Repayable Launch Investment (RLI) contracts to end the long-standing World Trade Organisation (WTO) dispute and remove any justification for US tariffs. After 16 years of litigation at the WTO, this final step removes the last contentious point by amending the French and Spanish contracts to what the WTO considers the appropriate interest rate and risk assessment benchmarks(3).

30 Jul 20. Airbus Group NV (AIR FP). Spinning Plates. In terms of the 1H20 results, we believe lower-than-expected EBIT will likely be neutralised by a smaller-than-expected FCF outflow. Inventory rose by much less than we expected, which augers well for 2H20, in our view. We believe Airbus is trying to balance support for its customers, supply chain, and employees, with generating an acceptable performance for shareholders. It should leave Airbus well-positioned come FY22/FY23, so we support the strategy.

Insights

2Q20 results in brief. Airbus delivered 74 large commercial aircraft in 2Q20, down from 227 in 2Q19. Airbus Commercial revenue fell from €14,346m to €4,964m (Company-sourced Consensus €5,080m) while EBIT Adjusted swung from a profit of €1,730m to a loss of €1,498m (Cons loss €1,080m). Helicopters revenue fell from €1,364m to €1,131m (Cons €1,182m) and EBIT fell from €110m to €99m (Cons €65m). Defence and Space revenue fell from €2,903m to €2,440m (Cons €2,546m) and EBIT rose from €132m to €171m (Cons €92m). In truth, the focus is likely to be upon FCF before M&A and customer financing – an outflow of €4,410m (Cons outflow €5,490m). For context, the 1Q20 operating FCF outflow was €4,432m, plus financial penalties of €3,598m, for a total outflow of €8,030m.

Tidying the house. The A350 production rate has reduced from 6/month to 5/month, but we believe this was widely anticipated. In terms of 2Q20 FCF, there was probably around a €3bn reduction in trade payables. The positive news was the much smaller increase in inventory than we expected and the reslience of contract liabilities. We’re not sure the latter can endure, but we look at working capital in more detail below.

Working capital. We have little detail on working capital. In 1Q20, the balance sheet inventory movement (may be impacted by FX) was an increase of €4,405m, driven by an increase of €3,926m at Airbus Commercial. In 2Q20, inventory rose by a further €1,569m, of which €1,307m was at Airbus Commercial, making the total 1H20 increase at Airbus Commercial around €5,233m in. If one regards that as cash temporarily stuck in Airbus Commercial inventory, the 1H20 operating FCF outflow of €8,842m might be viewed as a net outflow of €3,609m. Even if the inventory takes up to 24 months to be released, the cash comes back. Where we struggle is with contract liabilities, which include aircraft PDPs. We must work from the numbers on the balance sheet. Between end 1Q20 and end 2Q20, they rose by €1,243m. As airlines re-phase aircraft deliveries, we believe PDPs must decline.

Spinning plates. Airbus ended 2Q20 with net debt of €586m. Add back the increase in inventory (COVID prevented delivery of 145 aircraft at end 1H20), and pro-forma net cash is €4,647m. That’s how we view it. We suspect 3Q20 will see another FCF outflow, but not like that in 2Q20. Getting to around FCF neutral in 4Q20 must be important in terms of steadying nerves. At the 1Q20 stage, Airbus seemed determined upon that; we are keen to see that commitment re-iterated today. In these exceptional times, we are arguing an equity story that is also exceptional in its way. The plates may wobble from time to time, but the end outcome still has significant appeal, in our view. (Source: Jefferies)

30 Jul 20. BAE SYSTEMS Announces 2020 Half Year Results. Charles Woodburn, Chief Executive, said: “We have delivered a robust performance in the first half of the year, thanks to the efforts of all of our employees. We started the year from a strong position and we have taken actions to enhance our resilience, ensuring we continued to deliver against our customer priorities, whilst keeping our employees safe.

“Assuming no significant COVID-19 resurgence, we expect a good second half to the year. Demand for our capabilities remains high and we recognise our role not only in supporting national security, but also in contributing to the economies of the countries in which we operate.”

Air Highlights.

BAE Systems employs around 12,500 in its Air sector at sites across the UK including: Warton and Samlesbury in the North West of England; Brough, RAF Coningsby and RAF Marham in the East of England; and Christchurch, Frimley and Yeovil in the South of England.

Guidance for 2020

Whilst the Group is subject to geopolitical uncertainties and there remains considerable uncertainty in respect of COVID-19, the following guidance is provided on current expected operational performance under new working practices introduced in recent months.

Including the two acquisitions, we expect the Group’s sales to increase by a low-single digit percentage compared to last year, as we see increased volumes in F-35, Combat Vehicles and growth in the electronic defence portfolio, offsetting the shortfall in commercial businesses.

We expect the Group’s underlying earnings per share to be a mid-single digit percentage lower than last year’s 45.8p, assuming a US$1.25 to sterling exchange rate and at a tax rate now expected to be 19%, in line with last year. The final rate is dependent on the geographic mix of profits.

In 2020 the Group now expects free cash flow as defined by the Group, excluding the £1bn pension payment, to be approximately £800m for the full year, close to our original guidance allowing for the lower earnings.

The guidance is based on the measures used to monitor the underlying financial performance of the Group. Reconciliations from these measures to the financial performance measures defined in International Financial Reporting Standards for the six months ended 30 June 2020 are provided in the Group financial review.

Financial highlights

Financial performance measures as defined by the Group

  • Sales increased by 4% on a constant currency basis and excluding the impact of acquisitions, to £9.9bn.
  • Underlying EBITA of £895m decreased by 11% on a constant currency basis and excluding the impact of acquisitions.
  • Underlying earnings per share decreased by 15% to 18.7p, excluding the impact in 2019 of the one-off tax benefit. The Group’s underlying effective tax rate for the first half of the year was 19%.
  • Operating business cash outflow of £880m, including the impact of the £1bn injection into the UK pension scheme.
  • Net debt at £2,038m (£743m at 31 December 2019) following the £1bn bond issuance to fund the UK pension deficit, and the acquisition of the Airborne Tactical Radios business for cash of £217m.
  • Order backlog has increased in the first half of the year to £46.1bn. Trading on multi-year, long-term contracts in the Air sector was offset by a 7% increase in our US business and a foreign exchange benefit.

Financial performance measures defined in IFRS

  • Revenue increased by 6% to £9.2bn.
  • Operating profit decreased by 10% to £808m.
  • Basic EPS decreased to 16.7p, down 33%.

Dividend

  • The directors have declared an interim dividend of 13.8p per share in respect of the year ended 31 December 2019, payable in September, being the value of the dividend proposed but subsequently deferred earlier in the year.
  • In addition, the directors have also declared an interim dividend of 9.4p per share in respect of the half year ended 30 June 2020. This dividend will be payable in November assuming that there are no major additional or unforeseen pandemic-related disruptions.

Post-employment benefits deficit

  • The Group’s share of the pre-tax accounting post-employment benefits deficit increased to £6.0bn (31 December 2019 £4.5bn). A £1bn payment was made by the Group into the UK scheme in April 2020.

Operational and strategic key points

COVID-19

Given the critical nature of the products and services that we provide to a number of nations, the important role we play in national economies and the local communities in which we operate, the Group has remained focused during the COVID-19 pandemic on its near-term priorities:

  • Protecting the well-being of our employees.
  • Meeting customer priorities as they face unique challenges.
  • Supporting our supply chain in dealing with pandemic-related disruption.
  • Preserving and protecting our capabilities and the strength of the Group’s business, which is underpinned by our c.£46bn order backlog and programme positions.
  • Ensuring that we maintain appropriate liquidity and balance sheet strength.

Air

  • The Qatar Typhoon programme achieved key milestones ahead of schedule.
  • Production of F-35 rear fuselage assemblies will ramp up to full rate by 2021. 50 assemblies have been delivered in the period.
  • The sector continues to work closely with industry partners and the UK government to continue to fulfil contractual support arrangements in Saudi Arabia on the key European collaboration programmes.
  • Negotiations for the transition through to mid-2022 to a reduced scope support solution for the Omani Typhoon fleet are ongoing and expected to conclude early in the second half of the year.
  • The next phase of the Tempest next-generation Future Combat Air programme continues.
  • In Australia the Hunter Class frigate programme is progressing to plan and ASC Shipbuilding has been integrated into our Australian operations.

Maritime and Land UK

  • The build phase of the River Class Offshore Patrol Vessel programme remains on target for completion in 2020, with the fourth vessel, HMS Tamar, accepted by the customer in the period.
  • Construction of the first two City Class Type 26 frigates for the Royal Navy continues to progress.
  • The fourth Astute Class submarine, HMS Audacious, was accepted and left our Barrow site in April to begin sea trials with the Royal Navy.
  • Construction of the first two Dreadnought Class submarines continues to advance.
  • An 18-month extension to the Maritime Support Delivery Framework (MSDF) to provide engineering and support services to Portsmouth Naval Base and the Portsmouth flotilla was signed in March.
  • Ship support maintained at Portsmouth Naval Base under challenging COVID-19 conditions.
  • RBSL is expected to secure the contract for its share of work on the Mechanised Infantry Vehicle programme in the second half of the year.

Electronic Systems

  • F-35 electronic warfare systems deliveries for Lot 12 completed, with over 650 electronic warfare systems delivered to date.
  • Successful demonstration of APKWS® ground-launch capability.
  • Terminal High Altitude Area Defense (THAAD) seeker is executing at full rate production and received an additional order to design and manufacture next-generation infrared seekers.
  • The business continues to experience growth in classified work.
  • Demand in the commercial business lines of Controls & Avionics Solutions, and Power & Propulsion Solutions, has been impacted by COVID-19.
  • Acquired the Airborne Tactical Radios business from Raytheon Technologies Corporation, expanding our full spectrum communications portfolio with multi-band radios and advanced cryptographic technologies.

Platforms & Services (US)

  • Implementation of process and automation improvements is under way in Combat Mission Systems production.
  • M109A7 vehicle consistently delivering at full rate production levels.
  • Armored Multi-Purpose Vehicle Low-Rate Initial Production under way, with the first vehicle to be completed in the second half of the year.
  • Amphibious Combat Vehicle Low-Rate Initial Production continues along with design development of two new mission variants.
  • Bradley award for $267m (£216m) received in June.
  • The US Ship Repair business received orders totalling $430m (£348m) in the period, including a $200m (£162m) award to service the USS Boxer in San Diego.
  • US Navy awards totalling $166m (£134m) for the production of missile canisters supporting the Vertical Launching System, with a maximum value of up to $955m (£773m) over five years if all options are exercised.

Cyber & Intelligence

  • The US-based Intelligence & Security business continues to increase its bid pipeline, perform on existing contracts and win new orders.
  • Exit from the loss-making UK-based Enterprise Managed Security Services business was completed.
  • Discussions regarding the sale of the Applied Intelligence US-based software-as-a-service business are continuing.
  • Applied Intelligence’s Government business continues to perform well, and the Financial Services business delivered growth in order intake in the period despite COVID-19 disruption.

Investors Chronicle Comment: Underlying operating profit dipped by 11 per cent at constant currencies in the six months to 30 June, to £895m. This came as the Covid-19 pandemic hit demand for certain electronic systems and delayed cost recoveries elsewhere. The interim dividend has been held steady at 9.4p and the deferred 13.8p final dividend for 2019 will now also be paid. Full year underlying EPS is guided to be a “mid-single digit percentage” below the 45.8p seen last year.

29 Jul 20. Rolls-Royce rumoured to plan £1.5bn rights issue.

FTSE 100 was hovering above the flatline, adding 12 points to 6,141.

Meanwhile, Rolls-Royce Holdings PLC (LON:RR.) is reportedly planning a £1.5bn fundraise to shore up its balance sheet amid a deep crisis in the aviation industry.

The engine maker is expected to pursue a rights issue for existing investors at a discount to market price, according to Reuters.

The company is in discussions with BNP Paribas, Morgan Stanley and Jefferies and may carry it out in September.

Rolls-Royce has been battered by the pandemic, factoring in a US$1.5bn cash hit from reducing a hedging position on future business by US$10bn to US$27bn.

Earlier this month it announced 9,000 jobs will be lost worldwide, of which 8,000 are at its aerospace arm. (Source: proactiveinvestors.co.uk)

29 Jul 20. GE loses less cash than expected even as pandemic pummels earnings. General Electric Co (GE.N) lost less cash than estimated in the second quarter even as the coronavirus pandemic pummeled demand in its aviation business, resulting in a wider-than-expected quarterly loss.

The Boston-based industrial conglomerate reported cash outflow of $2.1bn from industrial operations, a tad lower than a quarter ago and much below than its own estimate of between $3.5bn and $4.5bn for the quarter.

On an adjusted basis, GE reported a loss of 15 cents per share, compared with a profit of 16 cents a share last year. Analysts on average expected a loss of 10 cents per share, according to IBES data from Refinitiv.

Revenue declined 24% year-on-year to $17.7bn.

Shares were up 1.6% at $7 in premarket trading.

Aviation is GE’s largest, most profitable and most cash- generative business segment. The pandemic, however, has brought global travel to a virtual halt, exacerbating the troubles for the unit that was already struggling with the grounding of Boeing’s 737 MAX planes, for which it makes engines.

The unit reported a quarterly loss of $680m on the back of a 44% drop in revenues. Orders were down an annual 56% during the quarter.

While the company sees a slow recovery in the aviation business, it expects free cash flow to be better in the second half of the year and turn positive in 2021.

GE said it is launching a program to fully monetize its stake in Baker Hughes over about three years. (Source: Reuters)

28 Jul 20. Oceus Networks Announces Acquisition, Capital Infusion and New Leadership. Defense Leader Poised to Deliver on Untapped Potential for 5G Solutions and Beyond.

Oceus Networks, a leading technology innovator and integrator of mobile communications for government and enterprise customers worldwide, announced the recent acquisition by Battle Investment Group, and the restructuring of its leadership. Effective immediately, Jeff Harman will transition from COO to President, and Brad Antle will serve as Executive Chairman. The new leadership appointment follows additional capital funding and complements the acquisition by positioning Oceus Networks as an industry leader in providing advanced secure communications in the most challenging operational environments.

“It’s a privilege to be named President of Oceus Networks. I’m eager to leverage my experience to continue our mission of supporting warfighters with fast, reliable broadband connectivity in mission-critical operations focused on national security initiatives,” Harman said. “This infusion of capital gives us more opportunity to advance 5G systems and applications, contributing to expanded product development, enhanced cybersecurity architecture, and holistic communications solutions.”

In his new role, Jeff Harman will oversee executive leadership and company management with continued delivery of best-in-class 4G LTE solutions to the tactical edge. He will also spearhead a broadened corporate strategy to position Oceus Networks as the leading innovator and supplier of 5G network transformation systems to the Department of Defense and civilian agencies. Mr. Harman previously served as Oceus Networks COO for seven years and brings extensive experience delivering a range of enterprise IT, C4, and networking integration services and solutions to federal across Department of Defense, Department of Homeland Security and the Intelligence communities among others.

Brad Antle has assumed the role of Executive Chairman. A retired U.S. Navy Captain and entrepreneur, Antle has over three decades of experience leading, developing, and delivering technology-based solutions at General Electric, Lockheed Martin, and as CEO of SI International and Salient CRGT. He recently provided consulting services to government contractors and private equity firms as head of Antle Advisors.

With an esteemed reputation for delivering solutions ranging from peer-to-peer cybersecurity professional services for network deployment and software development for R.F. tactical management, Oceus Networks is well-positioned to lead the way in 5G platforms for both military and civilian applications. The restructuring in leadership will also support the company’s efforts to attract and retain top talent that will help support critical customer missions.

“This investment has prompted a new era for Oceus Networks. It is a direct result of Oceus Networks’ history of developing exceptional technology, focused leadership, and proven past performance in the defense and intelligence communities,” said Antle. “This is a testament to Oceus Networks people who bring high-level strategy and thinking to the future of 5G in support of our warfighters.”

In addition to supporting defense and civilian communities, Oceus Networks is an NSA Trusted Integrator for CSfC and provides end-to-end CBRS Private 4G/5G cellular networks with NSA-level security.

Additional Resources:

Oceus Networks Solutions:

  • Cyber Security
  • 5G/4G Broadband
  • RF Tactical Management Solutions

(Source: BUSINESS WIRE)

30 Jul 20. Orbital UAV details strong showing in FY20 results. Perth-based Orbital UAV has released its results for FY20, which outlined a strong showing in the year leading up to 30 June 2020 despite the effects of the coronavirus pandemic.

In a statement released to the public, the company said that it has been able to deliver $34m revenue and profit of $1.7m.

Even in the face of a global downturn in manufacturing, the unmanned aerial vehicle (UAV) market has continued to grow – with Orbital at the heart of Australian sovereign capability in the space.

Since the outbreak, the company has signed international supply agreements with Northrop Grumman as well as an undisclosed Singaporean customer.

In documents provided together with the FY20 results, the company has also released revenue guidance for financial year 2021 of between $40m and $50m.

Backed by 30 years of experience in the engine design space, Orbital is now the primary engine supplier to Boeing subsidiary Insitu – powering its entire fleet of tactical UAVs.

A closely-integrated international supply chain network and a patented heavy-fuel injection system has enabled the company to grow rapidly over the course of a few years, expanding into UAV-adjacent areas such as real-time propulsion system diagnostics.

Earlier this month, the company hosted Australian Minister for Defence Linda Reynolds. (Source: Defence Connect)

28 Jul 20. Raytheon CEO Projects Three-Year Coronavirus Downturn. It’s ‘a hell of a lot worse than what we originally projected,’ says the head of the new company formed by the United Technologies-Raytheon merger earlier this year.

Raytheon Technologies’ CEO issued a grim assessment Tuesday that the aerospace sector might not recover from the coronavirus pandemic until 2023.

The comments by Greg Hayes, who leads a new aerospace and defense behemoth created by the merger of United Technologies and Raytheon earlier this year, come as airlines continue to report a steep drop in passenger travel as the number of coronavirus cases surge across the United States.

“The effects of the pandemic on the economy and commercial aerospace has proven to be a hell of a lot worse than what we originally projected even a few months ago,” Hayes said Tuesday, during the company’s second quarter earnings call with Wall Street analysts. “For that reason, we now would expect it will take at least until 2023 for commercial air traffic to recover to 2019 levels. As a result, we’re evaluating what further actions and structural changes we need to make to our business to adjust for a prolonged recovery timeline.”

The company has already cut 8,000 jobs, Hayes said.

“Some of those will come back with volume, some of them will be permanently reduced,” he said

Just three months old, Raytheon executives are already looking at restructuring its aerospace enterprise.

“We need to take a look at some of the more structural costs that we have in our aerospace organization,” Hayes said. “That is costs in some high-cost manufacturing locations — what can we get after to restructure those businesses later this year.”

Pure defense companies, such as Lockheed Martin and Northrop Grumman, have been able to weather the pandemic better since they rely almost entirely on government funding that had already been approved by Congress.

Other companies, including Raytheon and Boeing, have had their commercial aerospace businesses decimated by the pandemic as passenger air travel has dropped to record lows and airlines are grounding planes and canceling orders for new ones.

“Advance bookings are not looking up right now, given what’s going on with the infection rate in this country and around the world,” Hayes said. “So, if anything, as we looked at this at the end of the second quarter we did that with keeping in mind that this is going to be a tough year for the commercial aerospace customers.

The hard-hit aerospace sector has been concerning Pentagon officials because military aircraft share much of the same supply chain as commercial planes. A strong commercial business could allow a company to place a competitive low bid when competing for Pentagon contracts and make larger investments in military-related research and development.

The Pentagon already has been bailing out companies like engine-maker General Electric, which has said it would lay off 25 percent of its workers. GE makes engines for military aircraft, including the F-16 Falcon and F/A-18 Super Hornet and the P-8 Poseidon. (Source: Defense One)

27 Jul 20. End of an era, DSG is confined to history. On July 16th Babcock Plc. quietly issued a Resolution changing Babcock DSG Ltd. to Babcock Land Defence Ltd at Companies House. At that same time it is reported that Babcock undertook some clever accounting by moving £100m intra accounts. We see this as another write off of the £147m purchase price of DSG by Babcock. Babcock has yet to start negotiating the 5 year extension to the DSG contract as we reported BATTLESPACE UPDATE Vol.22 ISSUE 21, 25 May 2020, Babcock DSG Contract Extension) 20 May 20. FoI Request from Julian Nettlefold, BATTLESPACE.

Babcock DSG Contract Extension.

  1. The formal start of contract delivery by Babcock was 1/4/15.
  2. The 10 year base agreement expires in 2025.
  3. There were 5 potential 1-year extensions to take it to 15 years, with negotiation of each extension to be done 5 years before the extension is due to be used based on contract performance to that date.
  4. The extension from 2025 to 2026 should be in negotiation now.

Have negotiations to extend this to 2026 commenced?

Have Babcock performed as per their contract?

Dear Mr Nettlefold,

Thank you for your email of 25 April 2020 requesting the following information:

Babcock DSG Contract Extension

  1. The formal start of contract delivery by Babcock was 1/4/15.
  2. The 10 year base agreement expires in 2025.
  3. There were 5 potential 1-year extensions to take it to 15 years, with negotiation of each extension to be done 5 years before the extension is due to be used based on contract performance to that date.
  4. The extension from 2025 to 2026 should be in negotiation now.

Have negotiations to extend this to 2026 commenced?

Have Babcock performed as per their contract?

I am treating your correspondence as a request for information under the Freedom of Information Act 2000.

A search for the information has now been completed within the Ministry of Defence, and I can confirm that information in scope of your request is held and is as follows.

I can confirm that negotiations to extend the contract do not need to commence at the moment. The contract allows for flexibility in the negotiation and award of any future potential extension years.

Babcock’s performance is actively and regularly assessed. At the most recent review, Babcock were assessed to be performing to plan.

If you have any queries regarding the content of this letter, please contact this office in the first instance.

If you wish to complain about the handling of your request, or the content of this response, you can request an independent internal review by contacting the Information Rights Compliance team, Ground Floor, MOD Main Building, Whitehall, SW1A 2HB (e-mail ). Please note that any request for an internal review should be made within 40 working days of the date of this response.

If you remain dissatisfied following an internal review, you may raise your complaint directly to the Information Commissioner under the provisions of Section 50 of the Freedom of Information Act. Please note that the Information Commissioner will not normally investigate your case until the MOD internal review process has been completed. The Information Commissioner can be contacted at: Information.

This change of name could herald a move to divest DSG either back into the MoD as is the wish of the Unions or to another company such as RBSL which is now the main custodian of the UJK’s armoured fleet. With fleet reductions rumoured such as disposal of FV432 and CVR(T)the level of work at DSG will be dramatically reduced and given that DSG has only made a profit once, in 2018, under Babcock’ ownership , then retaining DSG would just lead to more losses. In addition, DSG’s sole source position as the integrator for the Warrior WCSP requirement has yet to be confirmed, that would be a big hit as the chosen integrator would likely be the support partner for LMUK. The new broom David Lockwood is likely to take a long look at DSG which was purchased to add Land to the Maritime and Air operations of Babcock Plc. David Lockwood is likely to propose a more focused group possibly shorn of all land operations including the White Fleet. Watch this space!

28 Jul 20. Remington, America’s Oldest Gunmaker, Files for Bankruptcy as Firearms Sales Soar. Remington Arms, the nation’s oldest gunmaker, declared bankruptcy late Monday for the second time in as many years at a time when U.S. firearms sales are soaring. Founded in 1816, the privately held maker of rifles, pistols, shotguns and ammunition listed assets of $100m to $500m, according to its filing in U.S. Bankruptcy Court in the Northern District of Alabama. It put its liabilities in the same range, and said it had from 1,000 to 5,000 creditors. It said it owes its two largest creditors — munitions company St. Marks Powder and Eco-Bat Indiana, a lead producer and recycler — $3.5m combined. It also lists the states of Alabama, Arkansas and Missouri, and the city of Huntsville, Ala., as creditors with undetermined claims after taking development incentives in each jurisdiction. The Huntsville, Ala.-based manufacturer is trying to find a buyer after negotiations with the Navajo Nation unraveled over financing questions earlier this month. Navajo Nation Council Delegate Jamie Henio pulled his name off legislation to back to the purchase and the proposal did not find more backers in the Nation’s government. The Nation had been prepared to spend more than $300m to complete the sale, intent on moving Remington’s manufacturing facilities to its territory in parts of Arizona, Utah and New Mexico, for a type of jobs program. (Source: glstrade.com/Washington Post)

28 Jul 20. Aerojet Rocketdyne Holdings, Inc (AJRD). Solid top and bottom line performance in Q2 was boosted by missiles. Q2 revs increased 6% y-o-y and were 1% above our est. due to advances for defense, mainly MRBM and GMLRS. Mix hampered margins, w/A&D margins ex-items of 13.7% down 230 bps y-o-y, but margins were 110 bps ahead of our forecast on better productivity. With backlog up 31% q-o-q and a 5% rise in NTM backlog, we view NT prospects for AJRD as attractive w/ added firepower from FCF optionality.

Insights

Missiles Revenues Take Flight. Q2 revs of $512MM increased 6% y-o-y & were 1% ahead of our est. The increase was due to defense, mainly GMLRS & MRBM (Medium-range ballistic missile target). The offset was lower ULA revenues down an estimated ~15%. However, we estimate space was flat overall with an offset from the RS-25 program (19% sales) up 18%. Next-12-month backlog of $2.1BB was up 5% sequentially supported by a 48% y-o-y rise in backlog. Recent awards for SM-3, RS-25 & THAAD among others solidify the NT outlook. Potential upcoming awards over the next several Qs include GBSD following NOC’s award from the DoD. For 2020, we estimate revs of $2.05BB, up 4% vs. a year ago, with potential upside from recent awards & short cycle work.

Margins Step Back with Mix a Headwind, but Better than Expected. AJRD reported A&D margins ex-items of 13.7%, down 230 bps from the prior year. However margins were 110 bps better than our expectations and up 260 bps sequentially. EACs were a $15.7m benefit, (avg. +$12MM previous seven Qs), but partially offset by costs from the new Standard Missile MY. Margins ex-EACS of 11.4% were up from 11.3% a year ago pointing to underlying productivity within base margins. Given mix of new programs (GBSD, hypersonics, new SM multi-year) we forecast A&D margins ex-items of 12.6% flat with 2019 levels.

FCF Optionality w/ 30%+ Accretion. Q2 FCF was $131.5m up sharply from $43.5m a year ago with working capital a $68m benefit vs. a use of $34m a year ago. Taxes were a tailwind. We expect 2020 FCF of $174m (115% conversion), with H1 FCF of $111.4m. We continue to see considerable FCF optionality for AJRD given a net cash position ($1,004MM cash to end the quarter vs $632m of debt). M&A could be a major lever, but targets that align with AJRD’s business are tougher to gauge. Share repurchases could drive >30% accretion (Ex. 8)

Space, GBSD and Hypersonics NT Opportunities. In the Q, AJRD was awarded a $1.79BB contract for 18 RS-25 engines to power NASA’s Space Launch System. With deliveries planned to begin in 2023, the award provides continuity, with RS-25 19% of total revenue today. Previously, AJRD was selected to provide a solid rocket motor system and post-boost propulsion system on NOC’s GBSD team. We think the opportunity could contribute $100s of $millions of annual revenues toward the middle of next decade with an award from NOC over the next couple of quarters. For Hypersonics, momentum continues with recent positive data points around OpFires, a DARPA program for ground-launched hypersonic missiles. We estimate AJRD’s hypersonic revs are in the $100m range and could double over the next 3-4 years. (Source: Jefferies)

27 Jul 20. Trive Capital Partners with Field Aerospace, Inc. through Structured Capital Investment. Trive Capital (“Trive”), the Dallas-based private equity firm, is excited to announce the recent partnership with Field Aerospace (“Field” or the “Company”).  Field operates out of three facilities located in the US and Canada, specializing in aircraft integration, engineering, modification, and support services for government, aerospace, and defense customers. The Company has a 70+ year operating history in aircraft modification and parts manufacturing with a focus on special-mission aircraft including the DHC-8, Challenger, and Gulfstream platforms.  As part of the transaction, Trive provided a structured capital solution to buy out minority shareholder and former Chairman, Dan Magarian, and to support future growth initiatives of the business.

“The directors and shareholders of Field are delighted to welcome Trive” said Field president and CEO John Mactaggart. “When we purchased Field Aviation in 2012 and ASES in 2015, we planned further acquisitions to enhance the organic growth of Field. Trive not only adds welcome expertise to the leadership of the Company but will bring a fresh perspective to Company growth and open further acquisition opportunities. The remaining original shareholders see this as a logical step in the growth of Field.”

Dan Magarian noted, “Field is a differentiated business with highly specialized engineering services that has experienced significant growth over that past decade.  I am proud of the Company’s accomplishments during this time and am eager to watch its continued success and expansion with Trive’s involvement.  The shareholder group chose to partner with Trive based on the team’s experience in the sector, flexible capital solution, and ability to transact in challenging economic conditions.”

“Trive has deep experience investing into aerospace and defense businesses and was fortunate to have developed a relationship with the Field ownership team over several years.  Field has built an impressive set of capabilities that position it to capitalize on increased spending for modified, special mission aircraft used in ISR data collection,” stated David Stinnett, Partner at Trive Capital.  “Moreover, our ability to facilitate an innovative structured capital solution and quickly close this complex transaction in the middle of challenging macro-economic conditions, demonstrates Trive’s ability to creatively deploy capital in the current market.”

The transaction also represents Trive’s most recent investment for its Structured Capital Strategy. Trive is actively seeking additional Structured Capital investment opportunities where the firm can tailor bespoke debt and equity structures for strategically viable, middle market companies through a collaborative and operational approach. Trive’s Structured Capital Strategy targets opportunities across a variety of situations including growth capital, management buyouts, minority recaps, special situations, and acquisition financing.