03 Sep 20. Melrose is stuck making the best out of a bad situation. GKN’s attractions aren’t what they used to be. GKN, the aerospace and automotive group, is turning out to be an unexpectedly sour acquisition for turnround group Melrose to digest. At £5.5bn, Melrose’s market cap is little more than half what it was when it completed the hostile takeover two years ago. GKN wasn’t a lemon when Melrose bought it. The £8bn price was reasonable. But the downturn in the global aviation and car industries has drastically diminished the attractiveness of Melrose’s hard-won asset. The 13 per cent rise in Melrose’s share price on Thursday is a little sweetener after a 60 per cent fall so far this year. Half-year results showed Melrose is making lemonade where it can. It continued generating cash through the crisis, and reported a better than expected rebound in some of its businesses.
Reassuringly, it left margin targets in two major divisions — automotive and powder metallurgy — intact, arguing that further efficiency savings can make up for lower expected sales. The resilience of its Nortek air conditioning business, bought in 2016, helps too. It keeps a potential sale process on track for next year, which analysts reckon could net Melrose upwards of £2bn. The proceeds would further alleviate concerns around the debt, already eased after an August deal with lenders on covenant tests. None of that is enough to mask the sector-wide problems that face the aerospace division, though. The unit accounted for more of Melrose’s profits than any other in 2019. Now Melrose has trimmed margin targets for the business below the level achieved last year, reflecting the years-long road to recovery for the aviation sector. Its woes account for much of the decline in Melrose’s share price this year. RBC analyst Mark Fielding estimated in November that the aerospace division could be worth about £6.5bn. Now, with that slow recovery in mind, he pegs it closer to £4.3bn. Melrose’s management has a reputation for extracting good value from the assets they own. They will probably do as well as anyone could with what they’ve got. But that doesn’t mean Melrose’s portfolio looks appetising. (Source: FT.com)
03 Sep 20. Melrose shares jump as it reports large loss and major job cuts. The company sees “some early signs of recovery in certain geographies”, although the aerospace business still faces much market uncertainty. Melrose Industries PLC (LON:MRO) reported a large loss for the first half of 2020 and said it was making “significant” job cuts to its aerospace business even though trading has improved in recent months.
Statutory pre-tax losses swelled more than fourfold to £560mln for the owner of automotive and aerospace engineer GKN and ventilation and cooling specialist Nortek in the first six months of the year.
Underlying operating profits shrank to £56mln from £541mln a year ago as revenue fell by 27% to £4.4bn.
But the FTSE 100-listed group said, “trading over the summer months has been at the higher end of the board’s expectations, particularly in automotive and key Nortek markets”.
It also highlighted £213mln of free cash flow generation in the period and, having recently arranged tweaks to its banking arrangements, said it expects around a further £300mln of efficiency improvements in working capital in coming months, with other restructuring projects “well underway” to improve underlying performance by over £100mln next year.
“More cost-saving projects are to come and there are substantial margin improvement opportunities across the GKN businesses,” the company said, adding that consultations are already underway with GKN Aerospace employees as a “significant reduction in the worldwide workforce is inevitable in the second half of the year”.
The group said its board saw “some early signs of recovery in certain geographies” for automotive and with Nortek’s demand remaining robust, although the aerospace business still faces much market uncertainty.
Although a dividend is felt to be inappropriate in light of the “importance of retaining cash within the group” to ensure net debt of £3.4bn is kept under control whilst also funding the necessary restructuring of the group, looking out to 2021 and beyond, the board insisted the future is “likely to bring acquisition opportunities”.
Confirming that the market still loves to hear about job cuts even in the face of looming mass unemployment, Melrose shares rose 13% to 113.11p on Thursday morning, though they are still at less than half the level where they started the year.
Analyst Nicholas Hyett at Hargreaves Lansdown said: “That coronavirus has hit Melrose hard is no surprise – its automotive and aviation markets have always been very cyclical and many factories shut down altogether at the peak of the pandemic. However, managing industrial businesses through difficult market conditions is what the Melrose team pride themselves on, and despite the shocking fall in profits there’s actually a fair bit of good news.”
He said the balance sheet work in recent months gives the board considerable financial headroom to play with, which will be much needed as a sustained recovery in aerospace looks unlikely in the near term, with redundancies bringing upfront cash costs.
“It’s hard to overstate the hurdles ahead, but the nitty gritty of improving efficiency is what Melrose’s management team does best and that should provide some reassurance in the longer term,” Hyett concluded. (Source: proactiveinvestors.co.uk)
03 Sep 20. Melrose Industries PLC today announces its interim results for the six months ended 30 June 2020 (the “Period”).
* The Group made an adjusted1 operating profit of £56m in the Period. The statutory operating loss was £581m; of the £637m adjusting items, only £99m are cash related
* Trading over the summer months has been at the higher end of the Board’s expectations, particularly in automotive and key Nortek markets
* Cash generation has been strong in the Period with £213m of adjusted1 free cash flow2
* In addition to the significant working capital inflow in H1, the Group expects a further c.£300 m of efficiency improvements in working capital to be delivered
* Net debt1 has been reduced by £93m and the committed bank facility headroom has increased to nearly £1.2bn at 30 June 2020 excluding the c.£300m of cash in hand
* Improved banking terms have been unanimously agreed with the Melrose lending bank syndicate, giving the flexibility if required over the medium-term to continue to improve the businesses
* Restructuring projects are well underway that will improve the Group’s trading performance by over £100 m next year. More cost saving projects are to come and there are substantial margin improvement opportunities across the GKN businesses
* Investment in ground-breaking, energy efficient technology has been maintained, including electric and hydrogen powered aircraft technology; eDrive automotive systems; advanced 3D printing capabilities; and Nortek Air Management’s revolutionary StatePoint Technology®
* Whilst the Melrose Board understands the importance of dividends to shareholders and is encouraged by the strong cash performance, it does not consider it appropriate to pay an interim dividend to shareholders this year
* A substantial reduction of the Aerospace cost structure is underway, to significantly improve the business performance in 2021 without relying on sales growth. Sales in Aerospace reduced by 18% in the Period3; however, Defence, which equates to around a third of the business, continued to grow
* There are a number of encouraging signs of recovery in Automotive and Powder Metallurgy with recent trading in China ahead of last year; North America is also improving quickly and there are some positive signs in Europe, although the full speed and shape of improvements still remains uncertain. Automotive and Powder Metallurgy sales were down 36% in the Period3
* Nortek Air Management is trading well; its performance has been less impacted by COVID-19 and sales in July and August were up 13% on last year3. New business wins are proving to be significant and are both enhancing the quality of the business and giving a strong order book into next year
Justin Dowley, Chairman of Melrose Industries PLC, today said:
“These are extraordinary times which we have addressed with rigorous cash management and decisive restructuring actions; recently, and encouragingly, we have started to see trading improving in some key end markets. Crucially, we own good businesses with significant improvement opportunities and have an experienced management team with an excellent track record. We have delivered good returns in tough times before and as we continue to make the strategic changes needed to position our businesses within their changed market environments, we are confident of doing so again.”
- Considered by the Board to be a key measure of performance. The adjusted results are described in the glossary to the Interim Financial Statements
- Adjusted free cash inflow excludes the one-off pension contributions, restructuring spend and cash used in discontinued operations
- Growth is calculated at constant currency against 2019 results
03 Sep 20. SAIC (SAIC), BUY, $84.93 PT: $105.00. Insights. FQ2 Recap – Revenue Slight Miss, Margins Better. FQ2:21 (July) Adj. EPS of $1.63 beat our est./cons. of $1.35/$1.44 and benefited from a $0.22 contribution from a legal settlement/contract resolution. GAAP EPS was $0.87, including $0.76 of integration/amortization expense. Revs grew 11% y-o-y, but were 1% below our expectations (down 0.7% orgam revenue impact from COVID, sales were up 3.4%.
FY21 EPS Guidance of $5.80-$6.10 Reaffirmed (Cons. of $6.13), Lower High End of Rev Guide. Mgmt. expects FY21 sales of $7.1-7.2bn, down 1% at the mdpt from $7.1-7.3bn prior, incorporating an add’l $100m of COVID impact for a total of $250m in sales (3% of FY21E) and $35m of adj. EBITDA lost (6%), primarily within the supply chain and intel business. The COVID impact in FH1 was $98m of sales/$16m of adj. EBITDA. Q2 EBITDA was $167m w/ margins of 9.5% up 110 bps y-o-y and 140 bps above our est; this included a $8m negative COVID impact in addition to a $17m benefit from a legal settlement. Ex these items, margins of 8.6% were better than our 8.1% estimate.
Revenue Build Points to Improved Outlook in FY22. We forecast volumes will expand 12.4% in FY21 to $7.17BB, which includes a ~$700MM contribution from Unisys (closed March 13th). Organic growth of 1.5% for the year is bolstered by new wins (Ex. 4) offset by a 400 bps COVID headwind. With strong bookings, we believe there is line of sight for accelerating growth in FY22, given recent wins, including EDIS, Cloud One, and FSG 80, which combined contribute 2 pts/1 pt to FY21/FY22 growth and the recapture of COVID lost revenue, which could be a 2 pt tailwind to FY22.
Building Pipeline. SAIC captured a B2B of 2.6X in the Q. The pipeline of $20.6bn was up from $15.6BB in FQ1. 80% of the pipeline is potential new business. If we assume a 10% win rate and 5-yr contract duration, this would represent ~$330m of incremental sales or 5 pts of growth off of the $7.2bn base in FY21.
Post Unisys acquisition, mgmt has shifted its strategy to debt paydown. SAIC is set to generate >$1bn in FCF over FY21-22. NT cap deployment will focus on involuntary and voluntary debt paydown ($800m in FY21-22), including $142m in FQ2 and $100m repaid in August, and dividend (1.7% divi yield). SAIC’s leverage was 4.5X at Unisys Federal close and expected to decline to 3.7X by year end and <3X by the end of FY22. This compares to <4X at the end of Q2.
FCF Momentum but Only Embedding MSD Core Business Growth. On our estimates on FY22 SAIC trades at a 10.6% FCF yield and 7.9% on FCF to EV (20% discount to peers). We forecast FCF of $506m and $525m in FY21 and FY22, respectively. FY21 FCF guidance was reiterated at or above $500m, implying $252m in H2. (Source: Jefferies)
01 Sep 20. AMERGINT Technologies Holdings, Inc. (ATH) has completed the acquisition of Raytheon Technologies’ electro-optics technology business headquartered in Danbury, Connecticut, which will be renamed Danbury Mission Technologies (Danbury). Previously a division of Raytheon Technologies’ Collins Aerospace unit, Danbury is a leading technology provider of electro-optical systems for national security space missions and defense survivability needs. With the addition of Danbury’s preeminent capabilities, AMERGINT furthers its mission to deliver next-generation solutions to manage the capture, processing, transport and exploitation of vital mission information to support the nation’s decision makers and warfighters.
“We are extremely proud to welcome the Danbury team,” says Larry Hill, CEO of AMERGINT Technology Holdings. “Renowned for designing, developing and producing optical systems that have enabled the U.S. to observe Earth from space, Danbury Mission Technologies has been integral in supporting national security space programs designed to protect U.S. interests. Combining our expertise, we are empowered to build a generational asset that focuses on delivering high-performance national security space technologies for the present and future.”
For decades, high-performance optical systems have been central to helping the U.S. achieve its national security and space exploration objectives, with technological contributions from private sector partnerships essential.
“We look forward to working with government and industry leaders to continue to deliver advanced solutions that support the cutting edge in the space and defense mission areas,” says Andreas Nonnenmacher, President of Danbury Mission Technologies, who will concurrently assume responsibilities as President of ATH. “Joining a leading provider of software-defined technology for military, intelligence and commercial applications, Danbury becomes a key part of a greater force that will create some of the most exciting and potentially game-changing opportunities ever seen for advancing U.S. capabilities.”
Simpson Thatcher & Bartlett LLP acted as legal advisor to AMERGINT Technology Holdings. BofA Securities acted as financial advisor. (Source: BUSINESS WIRE)
31 Aug 20. Architect Equity Acquires the Aerospace Composites Division of AAR; Business Renamed Aeromatrix Composites.
Architect Equity (“Architect”) announced today that it has acquired the Aerospace Composites Division of AAR Corporation. The division is now doing business as Aeromatrix Composites but will continue to be based in Clearwater, Florida. Aeromatrix designs, fabricates and assembles composite products and solutions for customers in the commercial aerospace and defense industries.
Dionisio Lucchesi, Managing Director of Architect Equity, said, “We are pleased to complete the acquisition of Aeromatrix Composites and we are excited to partner with the management team. Architect looks forward to bringing our financial and operational resources to fully support the company’s growth plans.”
Ben Vargas, CEO of Aeromatrix Composites, commented, “We are excited to enter this next phase with Architect Equity to build upon the company’s successful history of designing and manufacturing complex aerospace products. We remain very committed to delivering solutions to our long-standing customer base and to pursue new opportunities in the composites manufacturing space to drive additional growth.”
“Architect was a valued partner throughout the process,” said Brian Sartain, Senior Vice President of Repair & Engineering at AAR. “The company’s corporate divestiture expertise and ability to execute with speed and certainty allowed for a smooth transaction. The spirit of teamwork with which the transaction was carried out will ensure that Aeromatrix Composites continues to seamlessly serve its customers.”
Architect Equity is a private investment firm comprised of an integrated team of investors and operators that provide immediate liquidity solutions to public and private business owners. Under Architect’s ownership, target companies benefit from industry relationships, operational resources and an M&A platform to support further company growth.
About Aeromatrix Composites
Aeromatrix Composites is a leading aerospace & defense composites supplier with capabilities to support complex customer requirements throughout all phases of design, engineering, manufacturing and aftermarket support. Aeromatrix Composites supports both the commercial and defense industries in the fixed and rotor-wing aircraft market, supplying Engineering solutions and manufactured products for interiors and structural components. Aeromatrix Composites employees roughly 170 employees and is headquartered in Clearwater, Florida. The business was originally founded in the mid-1980’s, known as ATR (Advanced Technology & Research).
To learn more about Aeromatrix Composites, please visit www.aeromatrixcomposites.com.
About AAR Corporation
AAR is a global aerospace and defense aftermarket solutions company with operations in over 20 countries. Headquartered in the Chicago area, AAR supports commercial and government customers through two operating segments: Aviation Services and Expeditionary Services. AAR’s Aviation Services include Parts Supply; OEM Solutions; Integrated Solutions; and Maintenance, Repair and Overhaul (MRO) Services. AAR’s Expeditionary Services include Mobility Systems and Composites Manufacturing operations. (Source: BUSINESS WIRE)
25 Aug 20. Analyst States Amazon’s Project Kuiper Is A “Seismic Jolt” +and Trustee Objecting To Intelsat Bankruptcy Scheme. The Jeff Bezos-backed Project Kuiper will see investment topping $10bn, said Chris Quilty, senior researcher at Florida-based Quilty Analytics, in the firm’s latest Satcom Quarterly Briefing — the end result, for broadband consumers, could be impressive.
Quilty is blunt, saying that Amazon’s involvement in the plan to launch 3236 satellites to LEO is a “seismic jolt for the SATCOM and space industry. In addition to Kuiper, we have seen in recent weeks OneWeb’s likely emergence from bankruptcy backed by Bharti of India and the UK government, SpaceX affirming it will invest $10bn on Starlink, and SES contracting for four more O3b mPOWER satellites at $566m. The industry has now made combined commitments to new/expanded NGSO broadband constellations exceeding $20bn – a spectacular level of financial support for businesses that have zero revenue today except for O3b which began service in 2014.”
Quilty drills down into the extra costs likely over and above the initial Capital Expenditure, adding, “For each $1bn in Capex, these systems will likely need to generate ~$600m in ‘average peak year revenue’ to realize an attractive Return on Investment (ROI), equating to sustained revenue in the outer years of our financial model comprising ~60% of total Capex. This is based on planned satellite lifetimes and favorable OpEx assumptions (EBITDA margins). For $20bn in Capex, the ‘average peak year revenue number’ would be ~$12bn.”
Chris Quilty puts this sort of expenditure into context, noting, “[We] estimate the entire SATCOM industry generates ~$6bn in wholesale capacity revenue supporting broadband data services – a number that has been fairly stable in recent years but is expected to decline in 2020 due to Covid-19. New LEO systems in the aggregate could face the challenge of having to triple this revenue by the end of the decade to realize an attractive ROI.”
As to the target users of all this bandwidth, Quilty added that “SpaceX Starlink and Amazon’s Project Kuiper are mostly targeting Consumer Broadband. We believe their plans will be focused on competing directly with terrestrial broadband (e.g., cable) versus just pursuing rural and remote markets or customers in developing regions. If Starlink and Kuiper can match the terrestrial broadband experience and price – big commercial and technical hurdles but ones they must surmount in almost any “major success scenario” – then the rest is mostly business execution at which Amazon, in particular, has proven to be unmatched.”
However, Quilty cautions that the (current) major satellite players, such as Intelsat and SES, are likely to play a declining role in this new environment: “[Geostationary] operators will be bolstered by new VHTS (very high throughput satellite) capacity but are still likely to play an increasingly smaller role in broadband while remaining relevant in video distribution as linear TV viewing continues its slow decline. We believe this video assessment was a factor in Intelsat and SES’s recent order of a combined 12 C-band satellites to serve US broadcast markets and meet FCC’s C-band spectrum clearing deadlines supporting US 5G implementation.”
Journalist Chris Forrester is also reporting that the US Trustee, a division of the US Justice Department, has applied to Intelsat’s bankruptcy court asking for the court to rule that the “hundreds of millions” being held in associated locations, companies and banks must be added to Intelsat’s bankruptcy pile.
The Trustee is objecting to the current scheme. Intelsat has been approved to act as a “debtor in possession” while its Chapter 11 bankruptcy is managed. The Trustee wants to ensure that Intelsat’s funds held in Foreign Deposit Accounts are recognised as part of Intelsat’s overall assets in the bankruptcy.
The sums involved are not insignificant. The US Trustee says they total more than $869m.
The Trustee’s filing to the court stated, “The Debtors argue that the money market funds are ‘exceedingly low-risk’ but that does not mean no risk. Money market funds have failed before. Given the amount of money in the Investment Accounts, ‘low-risk’ represents a remarkable risk.” (Source: Satnews)
27 Aug 20. Gogo Going To Intelsat? There are unconfirmed reports that indicate satellite giant Intelsat – despite being in Chapter 11 bankruptcy – is looking to buy the commercial aviation portion of in-flight connectivity specialist Gogo.
Gogo announced a few weeks ago that it was looking to sell its commercial aviation division. Gogo said it would retain its private aviation business. Gogo’s share price rocketed 16.2 percent on August 26th on that news. Bloomberg is reporting that Intelsat could spend up to $500m on the purchase. Intelsat already has a relationship with Gogo and supplies that company with some satellite coverage and connectivity to Gogo-equipped aircraft around the world.
However, the Covid-19 virus has hurt Gogo quite badly. Gogo’s half-year report reported that the firm’s commercial aviation division suffered revenues down 72 percent over North America and 67 percent over the rest of the world. (Source: Satnews)