Sponsored by TCI International Inc.
13 Feb 22. Lockheed Martin Terminates Agreement to Acquire Aerojet Rocketdyne. Lockheed Martin Corporation (NYSE: LMT) today announced it has terminated its agreement to acquire Aerojet Rocketdyne Holdings, Inc. (NYSE: AJRD). The decision to terminate the agreement follows the U.S. Federal Trade Commission’s (FTC) lawsuit filed late last month seeking a preliminary injunction to block the acquisition.
“Our planned acquisition of Aerojet Rocketdyne would have benefitted the entire industry through greater efficiency, speed, and significant cost reductions for the U.S. government,” said Lockheed Martin Chairman, President and CEO James Taiclet. “However, we determined that in light of the FTC’s actions, terminating the transaction is in the best interest of our stakeholders. We stand by our long heritage as a merchant supplier and trusted partner and will continue to support Aerojet Rocketdyne and other essential suppliers in the Defense Industrial Base still overcoming the challenges of the pandemic.
“Moving forward, we will maintain our focus on the most effective use of capital with the highest return on investment, including our ongoing commitment to return value to shareholders. We remain confident in our company’s strong foundation and growth potential as several exciting projects enter production.
“Finally, I’m proud of the 114,000 patriotic men and women of Lockheed Martin. They have a principled commitment to deliver the highest quality and most effective solutions to our customers. We will continue to support the United States and its allies through our industry leadership and developing the technologies to ensure effective threat deterrence for decades to come.”
11 Feb 22. Saab Year-End Report 2021: A year with growth and strong cash flow generation.
Saab presents the year-end results for 2021.
Key highlights Q4 2021
- Order intake of SEK 12,218m with strong growth in small and medium orders of 41% and 50%, respectively. Order backlog amounted to SEK 105bn (100).
- Sales amounted to SEK 11,943m (12,491) with continued good activity in the defence business while civil aviation business remained weak.
- EBITDA showed an improvement and amounted to SEK 1,587m (1,229), corresponding to a margin of 13.3% (9.8). EBITDA also improved compared to adjusted EBITDA of 1,544 in Q4 2020 with a margin of 12.5%.
- Operating income amounted to SEK 1,076m (766), and corresponded to a margin of 9.0% (6.1). The operating margin improved compared to the adjusted operating income of 8.8% in Q4 2020.
- Operational cash flow in the quarter was SEK 1,522m (2,901) and came in at SEK 3,276m (2,773) for the full year.
- The Board proposes a dividend for 2021 of SEK 4.90 (4.70) per share.
- Outlook 2022: organic growth to be around 5%, an operating income improvement between 8-12% and operational cash flow to be positive for 2022, however at a lower level than in 2021.
Statement by Micael Johansson, President and CEO, Saab: “In 2021, we strengthened our platform for future growth by continuing to grow our order intake. This was despite the fact that the HX-fighter campaign in Finland favoured a U.S. capability over a strong Swedish offer. With a consistent focus on improved project execution and efficiency, we delivered on our targets for 2021. We achieved sales growth of 11%, an improvement in earnings, corresponding to an operating margin of 7.4% and we continued to deliver strong positive cash flow for the second year in a row. In contrast to 2020, Saab’s financials were not affected by items affecting comparability in 2021.
In the fourth quarter, demand for our products remained high with small and medium sized orders growing 41% and 50%, respectively. Order intake was particularly strong in Sweden and Europe in the quarter. This added to our order book, which is now amounting to SEK 105 billion (100). Key orders during the quarter was the Gripen E new equipment contract to Sweden, several Carl-Gustaf orders including the next generation round to Sweden and a launch contract for the new G1X radar in the air defence segment.
Sales declined in the fourth quarter and was down -4%, in line with our outlook. Aeronautics and Kockums reported growth while Dynamics and Surveillance had lower sales. In Surveillance, sales declined mainly due to the strong volumes related to GlobalEye in Q4 2020 and in Dynamics due to a more even sales pattern in 2021. Looking ahead, capitalizing on the strong market, executing on our backlog and work to restore stability in the civil aviation business will continue to be our key focus. For the full year 2022, we expect organic sales growth to be around 5%.
Operating income amounted to SEK 1,076m in the quarter, corresponding to a margin of 9.0%. Even though sales in the quarter was lower, operational performance contributed to improved gross margin. For 2022, we expect continued growth and higher efficiency, which will support earnings growth. We expect EBIT to grow between 8% and 12% for the full year 2022.
Operational cash flow in the quarter amounted to SEK 1.5bn (2.9). For the full year operational cash flow was positive and came in strong at SEK 3.3bn (2.8). This was mainly due to higher EBITDA and cash flow from large milestone payments during the year. Looking ahead, we estimate operational cash flow to continue to be positive, however at a lower level than in 2021 for the coming two years. Based on Saab’s financial results and future outlook, the Board proposes an increase of the dividend to SEK 4.90 (4.70) per share for 2021.
The risks related to the global pandemic remains to some extent, and there is a continued risk for resource and supply chain shortages. We proactively manage the challenges by new ways of working, which we learned and implemented during the pandemic. By this, we have largely mitigated the impact on our business. We continue to be cautious in our planning and have a close dialogue with our suppliers to mitigate potential future effects.
We are accelerating our sustainability agenda and firmly believe that defence and security capabilities are prerequisites for peace, security and stability. We are especially reminded by this in times where geopolitical tensions and security threats are increasing. Our sustainability commitment is based on Saab’s mission to keep people and society safe, and we contribute to the global community by focusing on key UN goals for sustainable development identified in our strategy. During the period, we made further progress in our work to manage sustainability risks and decided to implement a Responsible Sales Policy. Saab is committed to work with future sustainability challenges, including driving corporate climate action by setting Science-Based Targets and through transparent reporting. I am confident that this journey will support long-term value creation for all our stakeholders.”
11 Feb 22. Cobham Aviation Services Australia to be sold – report. Boston-based private equity firm Advent International is moving to sell off specialist operator Cobham Aviation Services Australia – Regional (JTE, Adelaide) and has hired investment bank Macquarie Capital to oversee the sale and seek out potential buyers, sources have told The Australian Financial Review. A deal could be worth in excess of AUD1.5bn Australian dollars (USD1.1 billion), the insiders said. Advent, which also owns the Australian carrier’s parent, the British defence and aerospace company Cobham Group, would conduct an auction in two parts over the coming months, the sources claimed without elaborating. Advent acquired Cobham in January 2020. Cobham Aviation Services Australia – Regional, formerly JetEx, has both a charter business and fly-in fly-out (FIFO) and special missions operations, and it is understood that it is the special missions ops, including airborne surveillance and search and rescue, that are the most lucrative. Bankers at Macquarie Capital have reportedly sent a sale flyer to interested parties pointing to the business’s apparent resilience and its exposure to essential services. Cobham Aviation Services Australia Pty Ltd posted AUD368m (USD265m) in revenue and AUD87.2m (USD62.8m) in earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the year to December 2020, with assets worth AUD407m (USD293million), according to accounting data. The ch-aviation fleets advanced module shows that Regional currently operates four ARJ-100s, one ARJ-85, one BAe 146-300, five DHC-8-Q400s, three ERJ 190-100ARs, and one ERJ 190-100LR, all of which are wet-leased to Cobham Aviation Services Australia – Airline Services, a former Cobham Group unit which was acquired by Qantas Group in 2020. Regional also operates four BAe 146-300(QT)s on behalf of Qantas Freight. All of the aircraft are dry-leased except for the BAe Systems equipment. (Source: Google/https://www.ch-aviation.com/portal/news)
11 Feb 22. Kitron: Q4 2021 – Acquisition and strong demand supporting growth outlook. Kitron today reported fourth-quarter results showing very strong demand, but also revenue constraints due to the component supply and covid lockdown in China. A record order backlog and the acquisition of BB Electronics support revenue growth in 2022.
Kitron’s revenue for the fourth quarter was NOK 949m, compared to NOK 992 m last year. Demand is very strong, but revenue growth was limited by ongoing component shortages and a lockdown of Kitron’s facility in Ningbo, China, due to an outbreak of COVID-19 in the area, as previously reported. More than NOK 160 m of demand in the quarter has been delayed into 2022. Nevertheless, there was strong growth within the Connectivity market sector. Adjusted for foreign exchange effects in consolidation, revenue is at the same level as last year.
Profitability expressed as EBIT margin was 5.5 per cent in the fourth quarter, compared to 7.6 per cent in the same quarter last year. The EBIT margin in the quarter is affected by inefficiencies caused by the component situation and the lockdown in China.
The order backlog ended at NOK 2 827 m, an increase of 41 per cent compared to last year. The order backlog increased within all market sectors except Defence and Aerospace.
Peter Nilsson, Kitron’s CEO, comments:
“Two forces dominated the fourth quarter: on the positive side, excellent demand and a record order backlog, on the negative challenges caused by lack of components and the covid pandemic. The highlight of the fourth quarter was the acquisition of BB Electronics. I was convinced about the merits of this deal before we announced it, and my conviction has grown even firmer as we have worked with the BB team on common plans. This strengthens my positive view of the coming quarters and years.
Fourth-quarter operating profit (EBIT) was NOK 52.3 m, compared to 75.7m last year. EBITDA was NOK 78.4m, compared to 102.2 m last year.
Profit after tax amounted to NOK 40.4m, compared to 47.1m in the same quarter the previous year. This corresponds to earnings per share of NOK 0.20, down from 0.26 last year.
Solid full-year results
Full-year revenue of NOK 3 711m gave an overall decrease in revenue of 6 per cent for the year, where 3% is due to currency. The decrease is explained by the exceptional Corona-related volumes within Medical devices being normalized from 2020 to 2021, as previously indicated.
Operating profit (EBIT) for the year ended at NOK 240.8m, compared to NOK 312.6 m in 2020, resulting in an EBIT margin of 6.5 per cent, compared to 7.9 per cent. Profit after tax was NOK 152.8m, down from NOK 213.1m, corresponding to NOK 0.78 earnings per share, compared to NOK 1.19 in 2020.
Dividend policy and dividend
The Kitron board has as a consequence of the investment in BB Electronics and the future capital needs of the company decided to change the Kitron dividend policy into:
“Kitron’s dividend policy is to pay out an annual dividend of 20 to 60 per cent of the company’s consolidated net profit before non-recurring items. When deciding on the annual dividend the company will take into account the company’s financial position, investment plans as well as the needed financial flexibility to provide for sustainable growth
The board proposes an ordinary dividend of NOK 0.25 per share (NOK 0.70).
Ratios affected by constraints in supply chain
Operating cash flow was NOK 9.0m, compared to NOK 132.2m in the fourth quarter of 2020.
Net working capital was NOK 1 228m, an increase of 15 per cent compared to the same quarter last year. Net working capital as a percentage of revenue was 31.7 per cent compared to 26.3 per cent last year. Capital efficiency ratios are heavily affected by the supply situation, with material decommitments and new delivery dates. The material constraints continue to be difficult. Our focus going forward is on balancing demand with the constraints in supply, executing demand into deliveries and improving cash flow.
Acquisition of Danish EMS provider
In December, Kitron announced an agreement to acquire the Danish EMS company BB Electronics A/S, which has production facilities in Denmark, China and the Czech Republic. The deal is clearly earnings accretive and adds significant shareholder value. BB Electronics is a full-service EMS (Electronics Manufacturing Services) provider based in Horsens, Denmark. The group had revenues of about DKK 1,000m in 2021 and about 750 employees. It has over the past years grown significantly, both organically and through M&A. The customer base is concentrated within connectivity and industry. The acquisition was completed early in January 2022.
For 2022, Kitron expects revenue between NOK 5 200 and 5 800m, including BB Electronics. Operating profit (EBIT) is expected to be between NOK 330 and 430m. Growth is driven by the Electrification, Connectivity and Industry market sectors. Currently, the growth is constrained by the material supply situation.
Enclosed in PDF are the quarterly report and the presentation. The interim report is presented today at 08:30 a.m. CEST. The presentation will be given in English by CEO Peter Nilsson and CFO Cathrin Nylander, and will be webcast at the following link: https://channel.royalcast.com/hegnarmedia/#!/hegnarmedia/20220211_5
10 Feb 22. Could Avon Protection go the way of Ultra Electronics? A new US contract could provide reassurance over the relationship with the US Department of Defense Midway through 2020, Avon Protection (AVON) hived off its Milkrite InterPuls business to DeLaval Holding for around £180mn on a cash and debt-free basis. Bosses had determined that a move away from the production of artificial ruminant teats would enable the group to become further entrenched in military and first responder markets, aided by an intensified focus on respiratory and ballistic protection. They may have had a point. Military contracts are generally predictable, multi-year affairs, providing greater clarity on sales and cash flows. Higher-tech kit usually generates decent margins and the US military doesn’t usually scrimp on protective gear for its service personnel.
The Wiltshire-based group has been trading for 137 years, ironically coming into existence in the same year that Gottlieb Daimler was granted a German patent for his single-cylinder water-cooled engine design, and King Leopold II of Belgium established the Congo Free State as a personal possession, both of which were highly significant developments for the rubber industry. At various points along the way, Avon has manufactured everything from conveyor belts to diving suits, so the move could be viewed as part of an evolutionary process – companies have always repurposed their manufacturing capabilities to suit end-markets. And you could even say that Avon’s central input over the years had provided a degree of flexibility.
Avon has determined that its growth prospects are best served by the military alone, but in the age of specialisms it’s sometimes worth remembering that having different products can spread risk between markets. At the end of last year, the board took the decision to shut down the body armour business following news that its Vital Torso Protection plates had failed initial US Army tests.
The closure fed through to a $46.8mn (£35.3mn) impairment in its full-year 2021 accounts, and a consequent net earnings loss, so the shares duly headed south. You can now pick them up at about a third of their 12-month high of 3,660p recorded in April 2021. Nonetheless, it would be dishonest to suggest that the decision to streamline the business model was wholly ill-conceived, especially given that it came on the heels of two new contracts from the US Department of Defense worth in the region of $66mn.
The Milkrite InterPuls arm had generated 28 per cent of sales in the group’s half-year results published shortly before the decision to divest. It also accounted for the entire statutory half-year operating profit of £3m, after the Protection segment was lumbered with increased depreciation and amortisation charges. Perhaps the rationale may become clearer when you consider that the Protection order backlog was 22 times larger than that of the dairy-supply business, although that is largely attributable to the nature of the typical contractual arrangements for both segments.
Whatever the reasoning behind the move, it has been a sobering experience for investors. But respite is at hand – or at least partial respite. Avon Protection has announced the award of a contract to supply the US Defense Logistics Agency with the second-generation Advanced Combat Helmet. It is worth a maximum of $204mn over a five-year period, being a one-year base period with a maximum value of $46mn plus four further one-year extension options. As mentioned, the typical long-dated nature of these deals is certainly a plus point, and analysts at Jefferies believe that it “will also (hopefully) put to bed any concerns that investors will have surrounding Avon’s relationship with the US Department of Defense”. The broker does not expect any change to consensus, but the contract “helps to underpin longer-term forecasts”.
If anything, the failure of the Vital Torso Protection plates could highlight the dangers of being a small fish in a very capital-intensive pond. It is not as if the likes of BAE Systems (BA.) and Lockheed Martin (US: LMT) don’t botch defence contracts from time to time. Yet they are better able to wear set-backs simply due to their scale – not too many eggs in one basket, to mix in another unwanted metaphor.
Jefferies may be right about investor perceptions over Avon’s relationship with the Pentagon, but that could open it up to the attentions of bigger pond dwellers. The recent experience of Ultra Electronics (ULE) and, indeed, Cobham before it, show that UK contractors remain on the menu. Avon’s share price cratered once doubts over body armour business emerged, but it closed out FY 2021 with net cash (ex-lease liabilities) of $26.8mn and a residual order book of $117mn. You have got to imagine that it’s in play. (Source: Investors Chronicle)
10 Feb 22. Babcock International has this morning confirmed that it has completed on the sale of 15.4% stake in Air Tanker Holdings Completion of the sale of stake in AirTanker Holdings Ltd to Equitix Investment Management Limited for a cash consideration of £95m, net of shareholder loans. AirTanker Holdings is an asset joint venture with Airbus, Thales and Rolls-Royce, as has ownership of fourteen RAF A330 Voyager aircraft that support UK and allied military air-to-air refuelling, air transport and ancillary services for UK Ministry of Defence. Babcock International will retain the 23.5% shareholding that it has in AirTanker Services Limited, the separate company that operates these aircraft from their base at RAF Brize Norton.
AirTanker Holdings has been part of Babcock’s Aviation sector and has been accounted for by the company as an associate. For the year ended 31 March 2021, Babcock Internationals share of associate income on an underlying basis was £2.8m and interest income of £2.1m was included within the Group’s net finance costs. At 31 March 2021, AirTanker Holdings had gross assets of £2.7bn. Rolls-Royce plc has also agreed to sell its 23.1% stake in Air Tanker Holdings to Equitix for £189m and has similarly announced completion of sale this morning. For Babcock International the disposal marks the fourth that it has now completed within its previously announced disposal strategy Sale of the stake in Air Tanker Holdings has been part of a wider targeted disposal programme and the announcement this morning marks the fourth planned disposal that Babcock has now completed and brings gross disposal proceeds generated to date since the plan was first announced to £448m. Equitix now joins Thales and Airbus as the joint owners of the 14 Airbus A330 RAF Voyager aircraft but Thales and Airbus both retain pre-emption rights over the shares be sold on by Equitix. Babcock International has had a rough time since David Lockwood took over as CEO from Archie Bethel in September 2020. Adjusting to a new world order had required a radical shake up of the organisation and a top to bottom thinning out as the restructuring progressed. While not yet complete suffice to say that Babcock International is in a much better place than it was a year ago and I notice this morning that Barclays investors are now suggesting upside in the shares, J Morgan Chase has recently re-iterated an overweight recommendation and Peel Hunt reaffirmed a ‘Hold’ recommendation.
Babcock International has a wide spread of activities spread through defence maritime, defence air and defence land, aerospace support, nuclear, security and other areas. The company may best be described as an international aerospace, defence and security company that provides value added services across the UK, France, Canada, Australasia, and South Africa. Examples include since 2003 the company has through a partnership with Lockheed Martin supported the maintenance of RAF Hawk T” trainer jets, owns both Davenport and Rosyth Royal Naval Dockyards, has an important submarine support contract with the Royal Canadian Navy, is the Royal Navy’s largest surface and subsea maintenance, through life support and refit operation, was in 2019 selected by the MOD to build a fleet of new Type 31 frigates for the Royal Navy, owns Defence Support Group, a company supporting Army land vehicles, has substantial air firefighting and emergency assets spread across the globe within its Babcock Mission Critical Services and importantly, in 2017 the company won a substantial order from the French military to train its pilots, Sustainability plays a big part in David Lockwood’s forward strategy and rightly so. He says that “The company believes that sustainability is now a fundamental part of the responsible management of any business. It’s what all our stakeholders, from customers to investors to our own people, demand and rightly so”. David Lockwood says that “This isn’t about paying lip-service to the notion of responsible business; it’s about being a business that we are proud to be a part of, one which enables us to live our purpose: to create a safe and secure world together, adding that “last year we developed an ESG strategy, and this year we are building on it. We are still at the start of our journey but we’re developing the targets that we want to be measured by as we make progress along the route. Our commitment to addressing the global climate crisis by delivering net-zero emissions by 2040 is just one example. One thing is clear, there is no chance that we will turn back.’ In an interesting interview in the Financial Times recently David Lockwood also banged the drum over his fears that the anti-defence lobby is hijacking the ethical investment agenda. for their own aims. He believes that industry needs to be more robust about the important role that it plays in protecting democracy”. He goes on to say “that a fundamental part of the responsible management of any business. It’s what all our stakeholders, from customers to investors to our own people, demand. And rightly so”David Lockwood’s view is one that I very much share. He goes on to say in the article “that this isn’t about paying lip-service to the notion of responsible business; it’s about being a business that we are proud to be a part of, one he say enables us to live our purpose and to create a safe and secure world, together. Last year Babcock developed its ESG strategy and this year we are building on it. He say that “We are still at the start of our journey but we’re developing the targets that we want to be measured by as we make progress along the route. Our commitment to addressing the global climate crisis by delivering net zero emissions by 2040 is just one example. One thing is clear” he says “there is no chance that we will turn back”’ (Source: Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.)
09 Feb 22. Triumph Group, Inc. (NYSE: TGI) (“Triumph” or the “Company”) today reported financial results for its third quarter fiscal year 2022, which ended December 31, 2021.
Third Quarter Fiscal 2022
- Net sales of $319.2m
- Operating income of $28.2m with operating margin of 9%; adjusted operating income of $32.8m with adjusted operating margin of 10%
- Net income of $7.2m, or $0.11 per diluted share; adjusted net income of $13.8m, or $0.21 per diluted share
- Cash flow provided by operations of $15.5m; free cash flow of $7.2m
Full-Year Fiscal 2022 Guidance
- Net sales of approximately $1.5bn
- GAAP earnings per diluted share of between ($0.10) – $0.00
- Adjusted earnings per diluted share of between $0.80 – $0.90
- Cash flow used in operations of approximately $125.0m and free cash use of approximately $150.0m
“Triumph’s third quarter results are in line with our expectations and reflect year over year improvement,” stated Daniel J. Crowley, Triumph’s chairman, president and chief executive officer. “Our increased margins and cash flow were enabled by strengthening operational performance which helped to offset the short-term deferral of 787 sales. Triumph’s broad portfolio gives us a competitive advantage, and the expected recovery in commercial narrow body production rates will drive top line growth.”
Mr. Crowley continued, “We secured over $2.0bn in new contracts this fiscal year and completed two important portfolio milestones: the exit of our last 747-8 production facility and the announced sale of our Stuart, Florida operation. Winning new IP-based business and exiting build-to-print structures are at the core of our path to value and set the stage for enhanced value creation.”
Third Quarter Fiscal 2022 Overview
Excluding divestitures and sunsetting programs, sales for the third quarter of fiscal year 2022 were down 5% organically from the prior year period due to declines in commercial widebody production and deferrals of military OEM orders and maintenance, repair and overhaul work, partially offset by increases in commercial narrow body production.
Third quarter operating income of $28.2m includes $4.6m of restructuring costs related to our structures facility exits. Net income for the third quarter of fiscal year 2022 was $7.2 m, or $0.11 per diluted share. On an adjusted basis, net income was $13.8m, or $0.21 per diluted share.
Triumph’s results included the following:
The number of shares used in computing diluted earnings per share for the third quarter of 2022 was 65.1m.
Backlog, which represents the next 24 months of actual purchase orders with firm delivery dates or contract requirements, was $1.95bn, up 4% year to date, primarily on commercial narrow body platforms.
For the third quarter of fiscal year 2022, cash flow provided by operations was $15.5m.
Based on anticipated aircraft production rates and excluding the impacts of any potential divestitures, the Company expects net sales for fiscal year 2022 will be approximately $1.5bn.
The Company is updating its expected GAAP fiscal year 2022 earnings per diluted share of ($0.10) to $0.00 and expects adjusted earnings per diluted share to $0.80 to $0.90.
The Company expects fiscal year 2022 cash used in operations of approximately $125.0m and free cash use of approximately $150.0m. (Source: PR Newswire)
09 Feb 22. Héroux-Devtek Inc. (TSX: HRX) (“Héroux-Devtek” or the “Corporation”), a leading international manufacturer of aerospace products and the world’s third-largest landing gear manufacturer, today reported its financial results for the third quarter ended December 31, 2021. Unless otherwise indicated, all amounts are in Canadian dollars.
“In the final weeks of the quarter, we faced supply chain and production system disruptions brought on by the generally challenging environment, mostly due to the Omicron variant of COVID-19, resulting in lower throughput than anticipated, particularly for aftermarket products. While we expect these factors to continue to affect the fourth quarter as well, we are confident in our ability to recover the lower throughput in the quarters ahead,” said Martin Brassard, President and CEO of Héroux-Devtek.
“We are moving forward with prudent optimism in our approach and strategy as our fundamentals remain strong. Our OEM deliveries are on schedule, our order book is strong and unimpacted, and our sales portfolio spans a multitude of clients, segments and geographies,” added Mr. Brassard.
THIRD QUARTER RESULTS
Consolidated sales decreased 12.7% to $131.1m, from $150.3m last year, mainly relating to delayed deliveries resulting from supply chain and production system disruptions related to the current environment. Excluding the negative impact of foreign exchange fluctuations year-over-year, consolidated sales decreased 9.9%, or $14.9m.
Excluding foreign exchange fluctuations, defence sales were down 3.9% to $94.6m from $101.8m, due to the more severe supply chain and production system disruptions experienced at the Corporation’s U.S. production sites in the quarter. Civil sales decreased 22.4% to $36.5 m from $48.5 m, as OEM demand in the large civil sector was lower than in the corresponding quarter last year when the full impact of the COVID- 19 pandemic had not fully materialized. The decrease also resulted from the repatriation by customers of certain Tier-2 contracts for large civil programs, partly offset by higher deliveries for business jet programs.
Gross profit as a percentage of sales decreased from 18.7% last year to 16.3%, mainly due to lower throughput resulting from the disruptions mentioned above, as well as higher quality costs.
Operating income decreased to $10.5m, or 8.0% of sales, from $13.4m, or 8.9% of sales last year. Adjusted EBITDA, which excludes non-recurring items, decreased at $19.7 m, or 15.0% of sales, from 15.8% a year ago.
Earnings per share decreased from $0.24 last year to $0.18 this year, due to the factors stated above. Adjusted EPS reached $0.18, down from $0.26 last year.
Consolidated sales decreased 6.5% to $388.6m over the first nine months of Fiscal 2022, from $415.7m for the corresponding period last year.
Net of foreign exchange fluctuations, defence sales were up 7.8% as a result of ramp-up of deliveries under the Sikorsky CH-53K, Boeing F-18 and MQ-25 programs, partially offset by lower aftermarket sales, while civil sales decreased 19.6% due to the same factors as for the third quarter.
Gross profit as a percentage of sales remained stable at 16.8% as the negative effects of the quarter were offset by the positive effect of restructuring initiatives on the Corporation’s cost structure, including lower depreciation.
Operating income grew to $33.3m, or 8.6% of sales, from $21.9m, or 5.3% of sales last year. Adjusted EBITDA, which excludes non-recurring items, stood at $60.9 m, or 15.7% of sales, compared with $63.3m, or 15.2% of sales last year.
EPS increased from $0.31 last year to $0.58, while adjusted EPS increased to $0.58 from the $0.52 recorded in the same period last year.
Cash flows related to operating activities reached $17.5m in the third quarter and $53.2m in the first nine months of the year, down from $26.7m and $57.6m in the corresponding periods last year. The decrease in cash flows related to operating activities is mainly the result of lower throughput combined with last year’s inventory reductions, while the decrease over the nine-month period mainly results from lower throughput. As at December 31, 2021, net debt stood at $158.6m, compared to $157.5m as at March 31, 2021, mainly as a result of cash flow generation, net of share repurchases under the NCIB. The net debt to adjusted EBITDA remained stable compared to nine months earlier at 1.8x. (Source: PR Newswire)
09 Feb 22. Exterity rebrands as VITEC in key integration milestone and Next Generation Transcoding platform announced. Exterity is now officially VITEC, marking a key milestone in the successful integration of both companies following the acquisition of Exterity in April 2021. VITEC is a market-leading provider of IPTV, Video Streaming and Digital Signage Solutions that helps organisations harness the power of video to engage, empower and evolve. The strengthened organisation will continue to deliver a wide range of best-in-class solutions across its markets, leveraging the expertise of the combined teams to best serve customers and partners around the globe. The move has been further signified by new branding, incorporating the distinctive Exterity orange into the VITEC logo, giving a fresh new look to accompany the change.
“Since the acquisition, a lot of work has been going on behind the scenes – integrating business processes, gaining deeper understanding of the combined product range, and bringing our teams together,” says Colin Farquhar, Senior Vice President of Sales at VITEC and former Exterity CEO. “We have been focussed on coming together as ‘one VITEC’, exploring product integrations and shared technologies to best serve our customers. We couldn’t be prouder to be part of the VITEC team, and we look forward to an exciting future.”
The combined company now has 375 employees across 16 countries, and work is ongoing towards maintaining and expanding upon the investment in Exterity staff and locations. VITEC has acquired the previously leased Exterity HQ building in Dalgety Bay, Fife, Scotland, with a view to further expanding operations in 2022. Furthermore, the team based in Dubai is moving to newly purchased premises in the Indigo Icon Tower in the DMCC Free Zone, at the centre of Jumeirah Lake Towers district. VITEC will also be looking to expand the team in the Middle East region, which it sees as a key growth market.
Early 2022, VITEC will launch its first jointly developed product; a next generation transcoder, bringing the best of Exterity and VITEC transcoder technology into the VITEC Prism transcoder product. Prism is a high-performance IP transcoder that enables IP video content to be easily converted into the right format to suit a wide range of devices and applications.
“When we acquired Exterity, our intention was to accelerate growth and strengthen our leadership position as IPTV, video streaming and digital signage provider for Corporate, Government, Military, Venues, Hospitality, and Broadcast customers,” says Philippe Wetzel, CEO, VITEC. “We knew the many natural technology and customer synergies between the two companies would enable us to extend our reach into new geographies, market verticals and partners. We have enjoyed the collaborative process of finding out more and learning from each other over recent months. It is clear that the strategic acquisition will be hugely beneficial, and I’m delighted that we are now all one VITEC, working together to achieve our goals.”
The newly launched VITEC website will now cater to both VITEC customers and legacy Exterity customers and channel partners.
08 Feb 22. TransDigm Group Reports Fiscal 2022 First Quarter Results. TransDigm Group Incorporated (NYSE: TDG), a leading global designer, producer and supplier of highly engineered aircraft components, today reported results for the first quarter ended January 1, 2022.
First quarter highlights include:
- Net sales of $1,194m, up 8% from $1,108m in the prior year’s quarter;
- Income from continuing operations of $163m, up 226% from $50m in the prior year’s quarter;
- Earnings per share from continuing operations of $1.96, up from a loss per share from continuing operations of $(0.42) in the prior year’s quarter;
- EBITDA As Defined of $565m, up 19% from $474m in the prior year’s quarter;
- EBITDA As Defined margin of 47.3%, up 450 basis points from the prior year’s quarter;
- Adjusted earnings per share of $3.00, up 52% from $1.97 in the prior year’s quarter; and
- Strong operating cash flow generation of $279m.
The Company’s full fiscal 2022 guidance remains suspended at this time as a result of the continued disruption in our primary commercial end markets. Refer to the “Fiscal 2022 Outlook” section below for further information.
Net sales for the quarter increased 7.8%, or $86m, to $1,194m from $1,108m in the comparable quarter a year ago. Organic sales growth was 8.7%.
Income from continuing operations for the quarter increased $113m, or 226.0%, to $163m from $50m in the comparable quarter a year ago. The increase in income from continuing operations primarily reflects the increase in net sales described above, favorable sales mix, and lower COVID-19 restructuring costs and stock compensation expense, partially offset by a higher effective tax rate.
GAAP earnings per share were reduced in the first quarter of fiscal 2022 and 2021 by $0.77 per share and $1.32 per share, respectively, as a result of dividend equivalent payments made during each quarter. As a reminder, GAAP earnings per share are reduced when TransDigm makes dividend equivalent payments pursuant to the Company’s stock option plans. These dividend equivalent payments are made during the Company’s first fiscal quarter each year and also upon payment of any special dividends.
Adjusted net income for the quarter increased 53.9% to $177m, or $3.00 per share, from $115m, or $1.97 per share, in the comparable quarter a year ago.
EBITDA for the quarter increased 38.1% to $522m from $378m for the comparable quarter a year ago. EBITDA As Defined for the quarter increased 19.2% to $565m compared with $474m in the comparable quarter a year ago. EBITDA As Defined as a percentage of net sales for the quarter was 47.3% compared with 42.8% in the comparable quarter a year ago.
“The continued improvement in global air traffic despite the emergence of a new COVID-19 variant in late 2021 is encouraging. It further demonstrates the pent-up demand for air travel that exists and bodes well for the momentum of the commercial aerospace recovery as we continue into 2022,” stated Kevin Stein, TransDigm Group’s President and Chief Executive Officer. “I am also pleased to see another quarter of sequential improvement in our commercial aftermarket revenues and even more significant improvement in our commercial aftermarket bookings. The commercial aftermarket continues to lead the recovery of our commercial aerospace revenues, and we expect that trend to continue throughout our fiscal 2022 barring any significant disruption in the commercial aerospace industry. As always, we remain focused on executing our operating strategy and managing our cost structure as we continue on this journey to a full recovery of the commercial aerospace industry.”
The effective tax rate in the current quarter of 15.7% was favorably impacted by the discrete impact of excess tax benefits associated with share-based payments. For the full 2022 fiscal year, the Company expects the effective tax rate to be in the range of 21% to 23% and the adjusted tax rate to be in the range of 26% to 28%. (Source: PR Newswire)
09 Feb 22. TransDigm Group Incorporated (TDG)- BUY. TDG reported FQ1:22 (Dec Q) Adj. EPS of $3.00 vs. our/cons. of $2.93/$3.14. Revs improved 8% y-o-y, but were 3% below our est. Adj. EBITDA of $565m was up 19% y-o-y, but 1% below our est. w/ EBITDA margins of 47.3%, 120 bps ahead of our est. and up from 42.8% a year ago. TDG raised its FY22 framework to slightly north of 47% EBITDA as Defined margins up from 47% before.
FQ1:22 Revs Grew 8% Y-o-Y but 3% Below our Ests. TDG reported FQ1:22 revs of $1.19bn advanced 8% (9% organically) and were 3% shy of our est due to Defense (and cons. of $1.23BB). Comm’l AM rose 49% (vs. our est. +33%) with Comm’l Transport (85% of AM) revs up 55%, while Biz Jet/Helo revs were up 33% y-o-y. Comm’l OE rose 13% (vs. our est. of a 9% increase) driven by Commercial Transport (75% of OE portfolio) up 9%, while Biz Jet/Helo revs were up 22%. Bookings were ahead of shipments in both OE and AM. Defense vols fell 12% y-o-y (vs. our est. of a 3% increase) due to supply chain-induced delays.
Profitability – Margins of 47.3% 120 bps Above Our Estimates of 46.1%. FQ1 EBITDA As Defined was $565m vs. our est. of $570m and consensus of $580m. For FQ1, EBITDA As Defined margins were 47.3% vs. our est/cons of 46.1%/47.0%. EBITDA margins contracted 240 bps sequentially, but were up 450 bps y-o-y. Margins benefited from favorable AM vs. OE mix as well as lower restructuring expense, combined with pandemic-related cost mitigation efforts and lower non-cash stock comp expense. EBITDA grew 19% from the prior year on an 8% increase in sales, or a 106% incremental.
Still No Full FY22 Guidance, but Defense +LSDs with EBITDA Margins Matching Expectations; Interest and Taxes a Headwind. TDG guidance remains suspended outside of a partial framework. There were two changes to the framework: 1) Adj EBITDA slightly north of 47% vs 47% prior. This adds ~$15m EBITDA (or about 15c); this compares to est./cons. of 46.9%/47.9%; 2) Non-cash stock compensation expense was raised to $140 to $155m up $47m from the midpoint from $90 to $110m. This is a headwind to GAAP EBITDA, but gets added back for EBITDA as Defined. Full-year net interest is expected at $1.08bn (vs. our est $1.08BB) and adj. effective taxes at 26-28% (vs. our 27%). Implied Adj. EPS guidance of ~$14.70, which compares to est./cons. of $14.55/15.92.
Revenue Outlook Unchanged but Defense Ramp. TDG reiterated partial FY22 revenue guidance with Defense expected to grow LSD (vs our est. +3%), implying 5.5% average growth (vs our est of 5.6% from FQ2-4) in the remainder of FY22 following a 12% decline in FQ1. Commercial AM was last stated to be up 20-30% (our est +24% and 49% in FQ1) with OE up significantly (our est +20% and 13% in FQ1).
OCF of $279m in FQ1. TDG generated OCF of $279m in FQ1, down sequentially from $289m in FQ4:21 but up 2% vs. $274m a year ago. FQ1 OCF was 29% of our full year est.
6.7X ND/EBITDA at End of Q. TDG ended FQ1 w/ $4.8bn in cash. Total debt ended the Q at $19.9bn w/ Net Debt of $15.1bn w/ no debt coming due until 2024. Full year net interest expense is expected to be $1.08BB for FY22. (Source: Jefferies)
07 Feb 22. Fairbanks Morse Defense eyes more acquisitions. Fairbanks Morse Defense (FMD), which has purchased a host of companies during the past 13 months, is still in the acquisition market, according to the US naval supplier’s chief executive officer George Whittier.
“We’re always talking to folks” about potential acquisitions, Whittier told Janes in an interview. “It won’t surprise me if we do a couple more [deals] in 2022.”
FMD is particularly interested in companies that could benefit from its extensive service capabilities. “For example, we wouldn’t necessarily buy a company that makes doors or hatches because you don’t really do a lot of maintenance on doors and hatches,” Whittier said. (Source: Janes)
07 Feb 22. Graham Corporation Reports Third Quarter Fiscal 2022 Results.
- Revenue of $28.8m, up 6% over prior-year period; Fiscal year-to-date revenue
- Diluted loss per share of $0.35 primarily due to Navy project labor and material cost overruns at Batavia facility
- Added more contract resources in Batavia, NY to ensure timely execution of defense projects; significantly contributed to third quarter loss
- Suspended dividend; obtained waiver of financial covenants and is working with lender to amend credit facility in fourth quarter
- Defense industry revenue and order backlog validate success of strategy to diversify beyond refining and petrochemical industry
o Defense revenue in quarter of $16.6m represents 58% of total revenue
o Record backlog of $272.6m comprised of 77% from defense industry
o Orders of $68m in the quarter included $37.3m of orders received by BN
- Barber-Nichols (“BN”) performance to date exceeding expectations
Graham Corporation (NYSE: GHM), a global business that designs, manufactures, and sells critical equipment for the defense/space, energy/new energy, and chemical/petrochemical industries, today reported financial results for its third quarter and nine months ended December 31, 2021, of the fiscal year ending March 31, 2022 (“fiscal 2022”). Financial results include those of Barber-Nichols (“BN”) from the date it was acquired on June 1, 2021.
Daniel J. Thoren, President and CEO, commented, “While we are executing on our diversification strategy to increase our participation in the defense industry and more than half of our revenue in the third quarter was generated from tier one defense contractors, there are clearly challenges within our Batavia, NY defense operations. We understand the issues and we are aggressively taking steps to resolve them.”
He noted, “The current high volume of defense work has exceeded the labor capacity of our Batavia facility, as its growth inflection coincided with the COVID-19 pandemic onset. To maintain critical schedules on two major Navy projects, we chose to incur substantial additional costs, primarily through the use of contract welders and outsourcing commercial work where possible. This led to significant cost overruns and drove the disappointing results in the quarter, the breach of our financial covenants under our term loan and revolving credit facility, and the need to suspend our dividend. We believe the long-term benefit of maintaining our position with our defense customers outweighed the short-term cost. We expect the need for these extraordinary additional costs for these two large U.S. Navy projects will be largely behind us after the first half of fiscal 2023.
“To ensure we meet delivery requirements for all customers and improve long-term margins, we are moving quickly to address the labor capacity and operational issues in Batavia by expanding our skilled labor force via training investments, reducing the use of contract labor and adding a dedicated business leader for even greater focus on our Navy channel. Additionally, to drive profitability for repeat Navy projects, we are improving documentation of build processes and reviewing current and new contract pricing models.”
Mr. Thoren concluded, “Our short-term challenges are real and we are addressing them head-on. That said, I remain enthusiastic about the future of the Company. We have positive momentum with our diversification strategy and BN is on track to deliver above expectations on our acquisition plan. We have record backlog and had several significant defense industry wins in the quarter. In our refining and chemical/petrochemical business, demand in our aftermarket business has accelerated, which is typically a leading indicator of recovery in those markets. We believe we are also well positioned in new energy as well as our traditional commercial markets. As we look out over the next three years, we believe our strategy will result in a stronger business with materially expanded margins and high single digit to low double digit top-line growth.”
Third Quarter Fiscal 2022 Sales Summary (All comparisons are with the same prior-year period unless noted otherwise.)
Net sales of $28.8m increased 6%, or $1.6m, as the $12.0m in BN sales more than offset declines in the refining and chemical business. Sales to the defense industry were $16.6m, up from $4.5 m while sales to the refining industry were $4.0m, down from $16.5m. Space, a new industry for the Company resulting from the BN acquisition, contributed $1.5m in revenue. See the accompanying financial tables for a further breakdown of sales by industry and region.
Fluctuations in Graham’s sales among geographic locations and industries can vary measurably from quarter-to-quarter based on the timing and magnitude of projects. Graham does not believe that such quarter-to-quarter fluctuations are indicative of business trends.
Third Quarter Fiscal 2022 Performance Review (All comparisons are with the same prior-year period unless noted otherwise.)
The significant decline in gross profit and contraction of gross margin reflected the higher-than-expected costs related to the defense business at Graham’s Batavia operations. Resources have been redirected to ensure critical defense orders meet customers’ delivery expectations. In addition, higher cost contracted labor has been employed to address the Company’s U.S. Navy business requirements.
Selling, general and administrative (“SG&A”) expenses in the third quarter of fiscal 2022 were $5.0m, up $0.1m primarily as a result of acquisition amortization expense. SG&A expenses related to BN was $1.2m, including intangible asset amortization. The prior-year period included higher incentive compensation and costs related to the BN acquisition.
Net loss and loss per diluted share were $3.7m and $0.35, respectively. On a non-GAAP basis, which excludes intangible amortization, other costs related to the acquisition, and other nonrecurring (income) expenses, adjusted diluted loss per share was $0.27.
YTD Fiscal 2022 Performance Review (Compared with the prior-year period unless noted otherwise)
Net sales for the first nine months of fiscal 2022 were $83.1m, up $11.3m, or 16%, driven by sales of $31.9m from the BN acquisition. Sales to the defense industry increased $26.1m to $43.5m, representing 52% of total revenue. The expansion in defense was partially offset by declines in the commercial refining markets, primarily in Asia.
Sales in the U.S. increased $27.4m, or 73%, to $64.8m and was 78% of total sales in the first nine months of fiscal 2022. International sales, which accounted for 22% of total sales, decreased by $16.1m, or 47%, to $18.3m.
Gross profit and margin were down compared with the prior-year period due to the same factors which impacted the quarter. The impact of the low margin defense projects and related cost overruns in the Batavia operations are expected to lessen over the next few quarters and be largely behind us after the end of September 2022. The BN acquisition has helped to offset those losses.
SG&A expenses in the first nine months of fiscal 2022 were $15.2m, including intangible amortization of $0.6m, an increase of $2.1m, compared with SG&A expenses of $13.1m in the first nine months of fiscal 2021. The increase was due to the addition of the BN business which has added $3.1m in incremental expenses, including $0.6m of intangible amortization. Offsetting this increase were reduced costs associated with acquisition activities and incentive compensation.
Cash Management and Balance Sheet
Cash, cash equivalents and investments at December 31, 2021, were $14.0m compared with $16.5m at September 30, 2021.
Net cash used by operating activities for the first nine months of fiscal 2022 was $14.6m compared with $0.7m of cash generated for the first nine months of fiscal 2021. The increase in cash used was primarily due to operating losses and timing of working capital requirements.
Debt at the end of the quarter included $19m principal on the $20m term loan and $9.75m drawn on the $30m revolver. The third quarter loss resulted in the Company being out of compliance with two financial covenants under the term loan and revolver for which the Company subsequently obtained a waiver. The Company was in compliance with its fixed asset coverage ratio at the end of the third quarter. Graham is working with its lender to execute an amended credit facility in the fourth quarter of fiscal 2022.
The Board of Directors also has suspended its dividend subject to the Company’s analysis of capital allocation priorities and any requirements of a revised lending agreement.
Jeffrey F. Glajch, Chief Financial Officer, commented, “We believe we have sufficient liquidity between our cash generated from operations and cash on hand for the foreseeable future. In fact, in the month of January 2022, we paid down nearly $4m on our revolver with cash generated from operations. Unfortunately, the unexpected extended period of significant losses incurred at our Batavia operations impacted our ability to meet our financial covenants and required a waiver. We have been proactively working with our lender with the goal to have an amended lending agreement in place by fiscal year end.”
Capital expenditures in the quarter were $0.7m and fiscal year-to-date were $1.9m. The Company now expects capital expenditures for fiscal 2022 to be between $2.5m to $3.0m.
Orders and Backlog
Orders for the three-month period ended December 31, 2021, were up $6.2m, or 10%, to $68.0m compared with $61.8m for the same period of fiscal 2021. BN orders in the quarter were $37.3m.
Defense industry orders were $45.6m in the quarter. Included in the defense industry awards was a contract to provide alternators and regulators for the MK 48 MOD 7 heavyweight torpedo over a multi-year period. This order also includes possible option awards for an additional six years. Other defense orders included Block V Virginia-class Submarine torpedo ejection pumps and heat exchangers for the submarines.
After-market and small parts orders for the refining and chemical/petrochemical markets were approximately $7m in the third quarter. The Company also received an order to supply ejectors and condensers for a new refinery in China.
Backlog at December 31, 2021, was $272.6m, compared with $233.2m at September 30, 2021, a 17% increase, and $137.6m at March 31, 2021. Approximately 40% to 50% of orders currently in our backlog are expected to be converted to sales within one year. Most of the orders that are expected to convert beyond twelve months are for the defense industry, specifically the U.S. Navy.
Backlog by industry at December 31, 2021, was approximately:
- 77% for defense projects
- 11% for refinery projects
- 5% for chemical/petrochemical projects
- 3% for space projects
- 4% for other industrial applications
Fiscal 2022 Guidance
Revenue in fiscal 2022 is now expected to be $120m to $125m which implies revenue of $37m to $42 m in the fourth quarter. Fiscal 2022 revenue expectations include BN’s anticipated 10-month revenue contribution for the fiscal year of approximately $45m to $48m in revenue. Adjusted EBITDA* is expected to be a loss of approximately $5m, which implies breakeven adjusted EBITDA in the fourth quarter of fiscal 2022. The Company adjusted its expectations for gross margin for fiscal 2022 to now be approximately 8% to 10% and for SG&A expenses to be approximately 16% to 17% of sales. The expected effective tax rate for fiscal 2022 is approximately 18% to 20%. (Source: BUSINESS WIRE)
07 Feb 22. Breakthrough deal sees global cyber specialists Proofpoint acquire AI front-runners Dathena. Claire Trachet, CEO and Founder of Trachet, discusses what the deal means for the sector and the firm’s role in facilitating the ground-breaking acquisition. AI driven data protection specialists Dathena have been acquired by USA-based Proofpoint, a global leading cybersecurity and compliance company following the help of Trachet’s M&A advisory counsel. Amidst many previous approaches of M&A opportunities for Dathena in the past, Trachet has played an instrumental role in the successful outcome of this landmark deal for the cybersecurity sector, helping to facilitate the acquisition after working with Dathena since mid 2020. Assuming a critical role within the business, the female founded advisory firm was able to leverage an in-depth understanding of the working culture of Proofpoint (recently de-listed after a $12.3bn acquisition from Tomas Bravo) and the compatibility of not only both entities’ technological fit, but the cultural alignment as well.
The Trachet advisory team has been helping founders accelerate growth since 2016 by utilising decades of cross-industry experience as one of the only female led teams in the sector, they also firmly believe in the importance of sourcing and matching the right buyers for their clients. Their people first approach ensures that the businesses and founders they work with are able to secure finance or complete deals in a way that allows the company to achieve their commercial growth goals while fulfilling their mission.
In the case of this transaction, they began to collaborate as Dathena required a business plan for their new offer, but as their relationship evolved, and Trachet began to share their expertise, CEO Chris Muffat and the Board requested to broaden the scope of the relationship. This is where Trachet brings real value as an advisor, comfortably fitting into all roles the client needs. Trachet successfully took on the role of CFO, designing and implementing a 360-company strategy for the new version of the platform being launched, pitched to potential new investors for an extension of Series A. Consequentially they assumed the role of COO/CFO and advisor and in March of last year had to step in for the founder after an accident, in which they led the company in close cooperation with the key executives, remotely, before executing the M&A with Proofpoint remotely across 3 continents.
Claire Trachet, founder of Trachet said: “We are incredibly proud to have played such a vital role in the acquisition by Proofpoint which will undoubtedly allow Dathena to achieve the kind of growth and success that they deserve. We are people first and that’s what differentiates us from traditional investment bankers or advisory firms and that was clear in this deal, with the compatibility of company cultures being crucial to the eventual deal. We have all really enjoyed our work with Dathena and can’t wait to see how the future growth of the company pans out.”
Christopher Muffat, CEO of Dathena, said: “The Dathena team are incredibly grateful to Trachet, who were instrumental in the completion of this deal from start to finish. Over the last nine months Claire and the team have provided vital support, advice, and expertise on a wide range of issues and opportunities, critical to the success of the business. I’m incredibly proud of what we have achieved as a team through our unique technology and many innovations enabling better data protection. Working together with Proofpoint we will reach thousands of new customers, while further building trust in a digital world.”
Christophe Aulnette, Executive Chairman of Dathena, said: “Dathena acquisition by Proofpoint, a world leader in Cybersecurity, is a clear recognition of its unique value proposition and opens for the team huge opportunities to expand globally and contribute to improving trust in the digital world. I’m extremely grateful to Claire Trachet and the Trachet team for the hard work and professionalism during the whole process to help make the transaction a reality. They’ve not only been critical resources on the deal execution but also on finance and operations front demonstrating in depth business understanding.”
07 Feb 22. TKMS at the Crossroads As A Divided German Naval Industry Searches for Credibility and Competitiveness. As Germany’s naval industry is currently fragmented among several competing/partnering shipbuilders (Thyssenkrupp Marine Systems, German Naval Yards Kiel, Lürssen, Fassmer), the consolidation of the sector, in order to create a German naval champion able to better compete on export markets, is an old and much debated issue.
And that necessity became even more pressing in 2020, when the German government selected the Dutch Damen shipyard for the German Navy’s F126 frigate program, instead of a domestic shipbuilder. Although Damen has partnered with German shipyards for the production of the vessels, the harsh reality remains: the design of the F126 will not be German, but Dutch. This in itself is a blow to the credibility of the German shipbuilding industry.
However, while local unions and even some of these companies regularly call for consolidation, and demand that the German federal government play a role in the process, it appears that such a project is entangled, despite the numerous expressions of goodwill. Bremen-based Lürssen and GNYK (itself the pooling of three shipyards in the Kiel region) announced in May 2020 an agreement to merge their naval activities under a single entity, following discussions with the German government.
Alarm bells are ringing on the largest German shipyard TKMS. According to reports from trade union circles, the Thyssenkrupp Group is planning a quick sale of the marine division with the locations Kiel, Hamburg, Bremen and Emden. (Twitter translation)
However, the details of this merger remain to be worked out, but it is to be noted that Lürssen launched a spin-off in October 2021: NVL (Naval Vessels Lürssen), a new entity designed to house all its naval activities. Such a move hints that Lürssen is positioning itself for a coming consolidation of the German naval shipbuilding sector.
Thyssenkrupp considers, once again, to part with TKMS
However, the fate of TKMS, the German shipbuilder holding the country’s strategic expertise in submarine technologies, could represent the tipping point of this long-awaited consolidation.
Indeed, while the Thyssenkrupp group has made several statements these past years about a possible divestment from its naval subsidiary TKMS, but never actually moved this way, the German consortium declared on December 2nd 2021 it was considering several options for TKMS. And the latest statement from Thyssenkrupp differs from the previous as the group now publicly acknowledges it could merge TKMS with a European shipyard as “a way of strengthening the position of German and European shipyards in the global market”.
This also echoes the fact that TKMS seems to remain on the sidelines of the discussions currently held between the rest of German naval shipyards. However, the group adds that its review of TKMS’ future is still at an early stage.
But the recent signature of a major €3bn contract with Israel for 3 new-generation submarines, on January 20 2022, could speed up Thyssenkrupp’s plans, as this new order allows TKMS to boast a serious – and attractive – order book. Furthermore, recent information about talks with Indonesia for Type 209/1400 or Type 214 submarines also reinforces the attractiveness of TKMS, while the inking of the Type 212CD (Common Design) program with Norway and Germany last year also adds to TKMS positive trend.
On the other hand, however, the launch on January 23 of an Israeli state commission to investigate suspicions of corruption related to past contracts with TKMS could also hinder Thyssenkrupp’s attempts to divest from TKMS.
Furthermore, the new coalition in power in Germany has announced a tightening of its export control policy, especially regarding non-EU, non-NATO countries… This could frighten potential partners and investors alike.
Which European partner for TKMS?
Let’s address right away the elephant in the room: while Naval Group’s previous CEO, Hervé Guillou, was openly in favor of a rapprochement with TKMS, this scenario seems highly unlikely today. Firstly, for political reasons: the French-German “tandem” faces major disagreements and challenges on strategic issues (such as the current Ukrainian crisis, but more broadly on the place of an EU’s strategic autonomy alongside NATO).
Secondly, current industrial cooperation between Germany and France is not running smoothly (negotiations on the FCAS program are tough, Germany has shut the door on France’s proposal for maritime patrol aircraft in favor of an off-the-shelf purchase of Boeing’s P-8 Poseidon, and the future battle tank MGCS is moving at very slow pace…).
And lastly, from an industrial point of view, the complementarity between TKMS and Naval Group is far from obvious. Both companies offer roughly the same range of products, and if one could imagine a “natural” division of tasks such as a specialization of TKMS in submarines and a specialization of Naval Group in surface vessels, it would be omitting that Naval Group produces submarines for one strategic reason: ensuring France’s nuclear deterrence.
Submarine and naval shipbuilding as a whole are key national technologies. A potential buyer or majority shareholder can only come from Germany. (Twitter translation).
In another vein, Kockums, now owned by Saab, is obviously out of the equation, considering how its takeover by TKMS ended in 2014. Navantia’s finances and business prospects do not seem to allow the Spanish shipbuilder to pursue such an ambition. Indeed, the Spanish public company has registered a total loss of more than €1.1bn in the last ten years, and struggles to secure substantial export orders. Furthermore, Navantia has just inked a MoU with Fincantieri to join force on common project and technologies, such as new-generation air defense destroyers.
Other European shipyards appear as more suitable suitors for a merger with TKMS. Fincantieri, to start with, has been reportedly in talks with TKMS, considering a rapprochement with the German shipyard. Furthermore, the two companies have been working together for years now to address the needs of the Italian submarine force, firstly with the Type 212A, and now with the Type 212NFS (Near Future Submarine) project.
Such a merger would fit well within Fincantieri’s current strategy to strengthen its activities in the military market, in order to balance the fall of the cruise market the Italian shipbuilder relied on for years for its development. Furthermore, a TKMS/Fincantieri merger would be part of a broader process of bringing together the Italian and German defense industries. Indeed, Leonardo completed on early January the acquisition of a 25.1% stake in Hensoldt from US private equity firm Kohlberg Kravis & Roberts, for €606m in cash.
Nonetheless, there are real obstacles in the way to a Fincantieri/TKMS merger. Especially regarding Fincantieri’s own submarine ambitions. While, indeed, Fincantieri has relied in the past on transfers of technologies and technical assistance from TKMS to regain expertise in this area and build Type 212As, the Italian shipbuilder has been openly pursuing the goal to achieve strategic autonomy in the field of submarines. This ambition materializes itself in the Type 212NFS program, for which Fincantieri has made great efforts to emancipate itself from TKMS. It seems unlikely that the two shipbuilders would merge, and all the more so since there is currently no common project between the German and Italian Navy, which could serve as a building-block program.
In fact, the best partner for TKMS could be… Damen. Indeed, as previously mentioned, Damen is already the prime contractor for the German Navy’s future F126 frigates, and hs entrusted production to Lürssen. Moreover, Germany and the Netherlands inked on December 2020 an agreement to jointly develop their next generation air defense destroyers, to replace the F124-class (for Germany) and the De Zeven Provinciën-class (for the Netherlands).
Furthermore, Damen and TKMS activities are, for the most part, complementary, as the Dutch shipbuilder does not design nor produce submarines while TKMS already outsources part of the construction of surface vessels to other yards.
However, one would argue that, in the competition to build four new submarines for the Royal Netherlands Navy, TKMS currently competes against Damen, which has partnered with Saab Kockums for this contract. Moreover, according to Damen’s commercial manager for the Americas, Horacio Delgado Bravo, quoted by InfoDefensa on October 28 2021, Damen and Saab’s partnership regarding submarines is not limited to the Dutch tender. The two companies keep exploring jointly commercial opportunities in Latin America (but not only) for Saab Kockums’ A26, suggesting that Saab benefits from Damen’s commercial network.
Thus, all things considered, this partnership would be much deeper and stronger than previously thought, and would not be easy to break to make room for a Damen/TKMS merger.
Nonetheless, it must be pointed out that the Dutch Walrus-class replacement program is facing major hurdles. Last October, the Dutch MoD confirmed that the selection process would be delayed, and that thus the program was facing new delays, jeopardizing the (already ambitious) schedule of the whole project, the current Walrus-class submarines nearing the end of their service life.
In this context, a merger between Damen and TKMS would be an opportunity for the Dutch government to end the current competition in order to award a submarine order directly to the new Damen/TKMS entity. Such a radical move would make waves, but Canberra’s abrupt U-turn on its submarine plans with the AUKUS agreement has proven that it is possible.
The Type 212CD would make sense, in such a context: design and contractual works have reached an advanced stage, allowing the Dutch MoD to save much-needed time on its own program. And by bringing up the number of hulls in the class to 10 (4 for Norway, 2 for Germany and 4 for the Netherlands), economies of scale could bring costs down.
While, at this stage, the Dutch MoD does not open the door to such a move, it is to be noted that Vice-Admiral Arie Jan de Waard, director of the Defence Materiel Organisation (DMO), stated in an interview with Marine Schepen published on January 28 that he would welcome a consolidation of the Dutch and German naval industries, citing, among others,… Damen and TKMS! (Source: https://www.defense-aerospace.com/)
07 Feb 22. Revenue Ghosts MRCY Until FQ4. Mercury Systems (MRCY). BUY, $53.38 PT: $62.00. MRCY’s FQ2 (Dec Q) results came in below expectations. FQ3 revenue guidance (organic revenue -9%) implies a steep FQ4 acceleration to +14% organic and low-30 EBITDA margins to reach the low end. MRCY will remain a show-me story until bookings and organic growth inflect w/ activist involvement. Our forecasts assume MRCY returns to growth w/ 3% and 8% in FY23 and FY24, respectively.
Lowering Estimates by 7%. Our FY22 and FY23 (June YE) Adj. EPS ests are $2.50 and $2.70 from $2.55 and $2.90 prior. Our FY22 and FY23 FCF ests. are $44m (20% conversion on Adj. EBITDA) and $96m (41% conversion). This compares to mgmt guidance in FY22 of $2.51-$2.60 and 15-20% conversion.
FY22 Growth Constrained, with Q4 a Show-Me Story. FQ2 revs expanded 5% (-13% organically). Revs compare to defense suppliers who have contracted 10% this Q (Ex. 3). FQ3 guidance of revenue down 9% implies a 14% organic growth rate in FQ4. FQ4 revs and EBITDA accounts for over 30% and 40% of full year revenue and EBITDA, respectively. The NT story has been challenged on timing of key programs (F-35 (4.5% of sales; 1-pt impact to FY22), SEWIP (4%; 2-pts), and LTAMDS/Ghosteye (3.5%; 2-pt), which combine for a 5.5-pt impact to FY22E. These programs are expected to reverse in H2, with bookings and Q4 revs driven by F-35 TR3, SEWIP, F-18, and FMS (Ex 1). This includes 70% of expected Q4 revenues in backlog today, with >80% expected by FQ3. We see organic revenue expanding by 3% in FY23 (vs our prior forecast of 6%), led by LTAMDS and F-35 as bookings begin to flow in through H2:22 and a return to the HSD growth target in FY24.
Cutting 2022 Rev on Timing of H2 Ramp. Given defined headwinds and reliance on NT orders for the FQ4 revenue ramp, we take a slightly more conservative view. Our FY22E rev of $988m is down from $1.02BB and slightly below guidance ($1.00BB to $1.03bn). This implies H2 revenue up 7% but up just 1% organically.
Profit Bridge in H2 Dependent on Mix and Op Leverage. Margins in H2 are predicated on op leverage and improved mix, led by a number of ramping programs, including LTAMDS, F-35 TR3, and rugged servers. H1 EBITDA margins of 17.2% and FQ3 guidance of ~20.5% imply ~31% margins in FQ4 to reach the full year target of 22%. Our Adj. EBITDA of $219.6MM (vs. guidance of $220m to $227m) includes 65% generated in H2 (42% in Q4). There is some support from initiatives such as 1MPACT, which is expected to drive $22m of incremental savings in FY22, including $12m (220 bps) in H2. We see just 50 bps of margin expansion in FY23 to 22.7%. MRCY has expanded revenues by 4.4X since FY14, w/ EBITDA expanding by 9.2X, although revenue has expanded at a 23% CAGR since FY17 vs. EBITDA expanding at a 21% CAGR (Ex. 2).
FCF Improves as Capex and W/C Build Subside. MRCY has used $8.6m of FCF in H1 with $42.5MM use of w/c. We forecast FCF of $44m in FY22 including $68m of w/c usage with conversion of 20% of Adj. EBITDA.
MRCY trades at 12X EV/EBITDA, a 5% Discount to the Market Compared to a Historical 45% Premium. Our PT of $62 is based on a 50% disct to historical mkt premium. (Source: Jefferies)
07 Feb 22. L3Harris Technologies (LHX), BUY, $209.92 PT: $260.00. LHX’s outlook points to NT headwinds around supply chain and lack of a budget that drive LSD growth in 2022. Mgmt is guiding to revs in the +1-3% range for ’22 vs prior expectations of 2-4%. The 1% delta ($0.07 to EPS) is impacted by Airborne (12% of sales) within SAS and the F-35 (-$150m). LHX is set to generate $2.88BB in FCF in 2022 (ex. R&D tax) up 5% from 2021. LHX FCF/Share CAGR from 2021-2024 is 9% vs 6% for peers. Shares trade at a 7.0% 2022 FCF yield. (Source: Jefferies)
07 Feb 22. New CEO to prepare Sparton to end sonobuoy joint venture. At US naval electronic systems producer Sparton Corporation, a priority for its new chief executive officer (CEO) is preparing the company for a shift in how it supplies sonobuoys, one of its main products, to a key customer. Sparton and UK-based Ultra Electronics have been producing sonobuoys for the US Navy (USN) through a 35-year-old joint venture (JV) called the Expendable Reliable Acoustic Path Sonobuoy Company (ERAPSCO). However, in response to the US Department of Justice’s concerns about a lack of competition for the air-launched, submarine-tracking devices, Sparton and Ultra are supposed to dissolve the JV and begin bidding for USN sonobuoy contracts separately.
“That’s going to be sea change for us as we move forward,” said Tracy Howard, who became Sparton’s president and CEO in December 2021. “We’re working through that with the navy now. Ultimately, we’re both going to be needed by the navy to supply the volume of the sonobuoys they need,” he added. (Source: Janes)
03 Feb 22. Honeywell (NASDAQ: HON) today announced results for the fourth quarter and full year 2021 that met or exceeded the company’s guidance despite an extremely challenging operating environment. The company also provided its outlook for 2022.
The company reported a fourth-quarter year-over-year sales decline of 3%, down 2% on an organic basis, due to supply-related constraints, a tough comparison versus 2020 due to lower COVID mask volumes, and six fewer days in the quarter. Demand remained strong, with orders up high-single digits. Closing backlog was $28bn, up 7% year over year. Fourth-quarter operating margin declined 130 basis points to 17.5% and segment margin expanded 30 basis points to 21.4% as a result of the company’s commercial excellence efforts. Honeywell delivered fourth-quarter adjusted earnings per share of $2.09, above the midpoint of the company’s guidance.
For the full year, sales increased by 5%, or 4% on an organic basis, and operating margin expanded 50 basis points with segment margin expanding 60 basis points. The company reported full-year adjusted earnings per share5 of $8.06, above the high end of its initial guidance of $7.60 to $8.00.
“Honeywell had a strong finish to another challenging year. We remained resilient, focusing on operational excellence to deliver the commitments we made to our shareowners,” said Darius Adamczyk, chairman and chief executive officer of Honeywell. “Our focus on differentiated solutions drove double-digit organic sales growth in 2021 in our warehouse and workflow solutions, productivity solutions and services, business and general aviation, advanced materials, and recurring connected software businesses. Our disciplined cost management, swift pricing actions to stay ahead of the inflation curve, and improved productivity resulted in 60 basis points of segment margin expansion for the year. As a result, our full-year adjusted earnings per share5 increased by 14% year over year. We also were strong cash generators in 2021, delivering $6.0bn in operating cash flow with 109% conversion and $5.7bn of free cash flow with 102% adjusted conversion and free cash flow margin of 17%.”
Adamczyk continued, “Our balance sheet remains strong, and we maintained our focus on executing our capital deployment strategy, including investing in high-return capital expenditures, repurchasing $3.4bn of Honeywell shares, completing four acquisitions, and increasing the dividend for the 12th time in the past 11 years. We deployed capital in excess of our operating cash flow and will continue to follow this playbook in 2022.”
Adamczyk concluded, “I am proud of the way Honeywell continues to respond to the challenging macroeconomic environment. We quickly took action to mitigate supply chain challenges and inflation by bringing on alternate suppliers, redesigning parts and implementing pricing actions. We also remained focused on growth, investing in new markets and technologies such as our environmental, social and governance (ESG) enablement solutions and the creation of Quantinuum, the world’s largest, most advanced integrated standalone quantum computing company. We entered 2022 with positive momentum and a strong backlog, and I am confident we are well positioned to continue to perform for our shareowners, our customers, and our employees in the short and long term.”
Honeywell also announced its outlook for 2022. The company expects sales of $35.4bn to $36.4bn, representing year-over-year organic growth of 4% to 7%, or 5% to 8% excluding the impact of COVID-driven mask sales declines; segment margin expansion of 10 to 50 basis points, including the (30) basis point impact of its newly combined Quantinuum business; earnings per share5 of $8.40 to $8.70, up 4% to 8% adjusted; operating cash flow of $5.7bn to $6.1bn, and free cash flow of $4.7bn to $5.1bn.
Honeywell sales for the fourth quarter were down 3% year over year on a reported basis and down 2% year over year on an organic basis.
Aerospace sales for the fourth quarter were down 3% year over year on an organic basis. Business and general aviation original equipment, business and general aviation aftermarket, and air transport aftermarket all grew double digits as build rates and flight hours improved, offset by lower U.S. defense volumes which were impacted by supply chain constraints and lower demand. Commercial aviation aftermarket sales were up over 16% year over year, demonstrating momentum in the aftermarket recovery. Segment margin expanded 140 basis points to 29.0% driven by pricing and productivity, partially offset by higher cost of materials.
Honeywell Building Technologies sales for the fourth quarter were down 1% on an organic basis year over year due to lower projects volume and continued supply chain constraints in the products businesses. Orders were up 4% as a result of demand for fire products, building management systems, and building projects. Building solutions backlog grew double digits year over year, positioning the business for growth in 2022. Segment margin contracted 30 basis points to 21.1% driven by lower volume leverage and cost inflation, mostly offset by favorable pricing.
Performance Materials and Technologies sales for the fourth quarter were up 2% on an organic basis year over year, driven by petrochemical catalyst and gas processing shipments in UOP, continued growth in advanced materials, and demand for thermal solutions within process solutions, partially offset by delayed projects recovery and softness in smart energy. Orders grew 10% year over year driven by double-digit growth in both UOP and process solutions projects, a positive indicator for 2022 and beyond. Segment margin expanded 430 basis points to 23.0% driven by favorable pricing and productivity, net of inflation.
Safety and Productivity Solutions sales for the fourth quarter were down 6% on an organic basis year over year, driven by lower personal protective equipment volume, partially offset by double-digit growth in productivity solutions and services and advanced sensing technologies. Backlog remained strong at over $4bn dollars as declines in COVID-related mask demand were mostly offset by growth in advanced sensing technologies, productivity solutions and services, and gas detection. Segment margin contracted 450 basis points to 10.8% driven by lower volume leverage and Intelligrated project inefficiencies, partially offset by favorable pricing. These results exclude a $105m charge (in Repositioning and Other) for certain long-term contract labor cost inefficiencies due to severe supply chain disruptions (attributable to the COVID-19 pandemic) related to the warehouse automation business. (Source: PR Newswire)
03 Feb 22. AMETEK Announces Record Fourth Quarter and Full Year Results. AMETEK, Inc. (NYSE: AME) today announced its financial results for the fourth quarter ended December 31, 2021. AMETEK’s fourth quarter 2021 sales were a record $1.50bn, a 25% increase compared to the fourth quarter of 2020. Operating income in the quarter was a record $361.2m, up 21% versus last year’s fourth quarter, and operating margins were 24.0% in the quarter.
On a GAAP basis, fourth quarter earnings per diluted share were $1.21. Adjusted earnings in the quarter were a record $1.37 per diluted share, up 27% from the fourth quarter of 2020. Adjusted earnings adds back non-cash, after-tax, acquisition-related intangible amortization of $0.16 per diluted share.
“AMETEK completed an outstanding year with record results in the fourth quarter,” said David A. Zapico, AMETEK Chairman and Chief Executive Officer. “Our businesses again delivered strong organic sales growth ahead of expectations and excellent operating performance resulting in record adjusted earnings per share in the quarter.”
“End demand remains strong across our diverse end markets resulting in robust orders growth and a record backlog. Additionally, our flexible operating model allowed us to successfully navigate a difficult and uncertain operating environment and deliver strong core margin expansion in the quarter,” noted Mr. Zapico.
For the full year, AMETEK’s sales were a record $5.55bn, an increase of 22% over 2020. Operating income was $1.31bn and operating income margins were 23.6%, both full year record results.
On a GAAP basis, full year 2021 earnings were $4.25 per diluted share. Full year adjusted earnings were $4.85 per share, an increase of 23% over 2020’s comparable adjusted earnings of $3.95 per share.
Electronic Instruments Group (EIG)
EIG sales in the fourth quarter were a record $1.06 bn, up 29% from the fourth quarter of 2020. EIG’s operating income in the quarter increased 18% to a record $279.5m and operating income margins were 26.4%.
“EIG performed exceptionally well in the fourth quarter and for the full year, delivering outstanding sales and operating profit growth,” noted Mr. Zapico. “The sales growth was driven by very strong and broad-based organic sales and the contributions from the five acquisitions completed during the year.”
Electromechanical Group (EMG)
Sales for EMG in the fourth quarter were $446.7m, up 18% from the same quarter in 2020. EMG’s fourth quarter operating income was $105.3m, up 32% versus the prior year, while operating income margins were 23.6%, up 260 basis points year over year.
“EMG delivered exceptional operating results in the quarter. Strong organic sales growth combined with excellent operational execution drove superb operating profit growth and margin expansion,” added Mr. Zapico.
“While this past year once again brought significant challenges, our colleagues stepped up and delivered results that exceeded expectations. I could not be prouder of our team and our accomplishments over the past year,” continued Mr. Zapico.
“As a result of these efforts, AMETEK is well positioned as we enter 2022. Our businesses are operating at a very high level and demand remains strong across our niche markets. While the supply chain remains challenging, we are actively managing these issues. Additionally, our balance sheet and cash flows provide us meaningful opportunity to invest in our businesses and deploy capital on strategic acquisitions,” commented Mr. Zapico.
“For 2022, we expect overall sales to be up approximately 10% compared to 2021. Adjusted earnings per diluted share are expected to be in the range of $5.30 to $5.42, an increase of 9% to 12% over the comparable basis for 2021,” he added.
“For the first quarter of 2022, overall sales are expected to be up approximately 20% compared to the same period last year. Adjusted earnings in the quarter are anticipated to be in the range of $1.24 to $1.28 per share, up 16% to 20%,” concluded Mr. Zapico. (Source: PR Newswire)
TCI International, Inc., is a wholly-owned subsidiary of SPX Corporation. TCI provides turn-key solutions for spectrum management and monitoring, direction finding, geolocation and communications intelligence to civilian, government, military and intelligence agencies as well as antennas for communications and high-power radio broadcasting. TCI is headquartered in Fremont, California, USA. For more information, visit www.tcibr.com.