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02 Mar 23. Signia Aerospace Acquires Lifesaving Systems Corp. Signia Aerospace, a portfolio company of Arcline Investment Management, today announced the acquisition of Lifesaving Systems Corp. (“Lifesaving Systems” or “LSC”). Based in Florida, Lifesaving Systems is a premier global supplier of helicopter and maritime rescue and survival equipment.
“Lifesaving Systems is a leader in maritime rescue equipment and will be an excellent addition to our Signia Mission Systems business segment alongside Onboard Systems,” said Norman Jordan, Chief Executive Officer of Signia Aerospace. “Together, our products will continue to play a significant role in rescue and disaster relief operations worldwide.”
Cory VanBuskirk, President of Signia Mission Systems, will oversee both Onboard Systems and Lifesaving Systems. Mario Vittone, LSC General Manager, will continue in his role leading growth, development, and operations at Lifesaving Systems.
“We are very impressed with LSC’s dedication to safety and quality in their rescue equipment, which perfectly aligns with Onboard System’s core values,” VanBuskirk said.
Mario Vittone added, “Every hour of every day, something built at Lifesaving Systems is on or over the waters of the world, being used to save lives. We know the importance of what we are making; we know how and where it will be used — and we know that it absolutely cannot fail when it’s needed. The entire team at Lifesaving Systems is looking forward to the progress and passion that Signia Aerospace will bring to our mission as we continue to save lives, one product at a time.”
About Signia Aerospace
Signia Aerospace is a global, integrated provider of high-performance systems and specialized components for the aerospace industry. Signia currently operates two complementary business segments: Thermal Management (key brands include ACE Thermal Systems and Mezzo Technologies) and Mission Systems (key brands include Onboard Systems International and Lifesaving Systems Corp.). The Signia brands are leaders in their respective markets and provide a compelling value proposition to both aerospace and defense OEMs and end-users. For more information visit www.signiaaerospace.com.
About Lifesaving Systems
Lifesaving Systems Corp. is an innovator and leader in the world of maritime rescue and survival equipment. For over 40 years, Lifesaving Systems designs and manufactures the equipment that helicopter and maritime rescue teams use to save lives in some of the harshest environments on earth. From rescue hooks and personnel harnesses, to titanium ladders and rescue litters, and to the strobe lights used to signal for help and the rescue strops that pull people to safety, Lifesaving Systems makes the gear rescuers need to stay alive while saving others. For more information visit www.lifesavingsystems.com. (Source: PR Newswire)
02 Mar 23. Melrose picks up pre-split pace. Adjusted margins improve in both aerospace and automotive.
- Restructuring and intangibles charges lead to pre-tax loss
- Double-digit revenue growth forecast for aerospace arm
Turnaround specialist Melrose’s (MRO) restructuring of GKN has been its longest and most painful to date.
Although the company’s board is hoping the forthcoming split between its aerospace and automotive arm will lead to the market reassessing the value of each business, it still has some way to go to make back the £8bn it paid for GKN in 2018, let alone achieve the type of return on its investment that previous deals have made.
There have been definite signs of progress, though, with the company’s revenue, adjusted profit and cash flow figures for 2022 all beating analysts’ expectations – although it still declared a £307mn statutory pre-tax loss (from a £660mn loss in 2021), as it amortised £458mn of goodwill and incurred a further £144mn of restructuring costs.
Melrose’s board had previously argued that the benefits of the restructured aerospace business would become apparent through operational leverage as activity in the sector picked up. A 51 per cent gain in adjusted operating profit on an 11 per cent increase in revenue suggests this is indeed the case. More of the same should follow, with the company forecasting double-digit revenue growth for this year on the back of stronger civil aerospace and defence markets.
There have also been improvements in the automotive arm, which will be spun out alongside the powder metallurgy and hydrogen arms as a separate listed entity next month, known as Dowlais (details will be published in a circular on 3 March). The automotive business grew revenue by 7 per cent, with adjusted operating profit up 24 per cent as its adjusted operating margin widened to 6.3 per cent, from 5.4 per cent.
Melrose argued the Dowlais business had been “transformed” under its ownership. It has extricated itself from more than £300mn of “low margin or lossmaking” contracts, replacing this with more profitable work, with better long-term prospects – 42 per cent of the £5bn of automotive orders won last year related to electric vehicles.
The valuation case is made somewhat murky by the demerger. Focusing on the restructured aerospace arm, which will be a £3bn-turnover company post-split, our buy recommendation is predicated around the influx of cash flows (the company is forecasting around £18.5bn-worth by 2060) expected on revenue-sharing deals based on future jet engine flying hours, for which the company says most of the heavy lifting in capital expenditure terms has already been done.
We’ll await the circular before making any judgement on Dowlais, though.
Last IC View: Buy, 131p, 08 Sep 2022. (Source: Investors Chronicle)
02 Mar 23. Steady increase in Armscor funding. State-owned defence and security materiel agency Armscor is being allocated more money over the next three years to carry out its mandate, as per the latest defence budget vote. Armscor, owner of the building housing SA National Defence Force (SANDF) headquarters as well as the defence ministry and secretariat, receives the majority of its funding (68%) by way of transfers from the Department of Defence (DoD). The latest Estimates of National Expenditure (ENE) reveal that Armscor is getting R1.5bn in 2022/23 and R1.6 bn in 2025/26 from DoD transfers, with the remainder derived through interest from investments. This will go to finance operational expenditure, administrative expenses, training, building maintenance as well as other goods and services.
Armscor’s total budget for 2023/24 is R2.2bn, rising to R2.3bn in 2024/25 and R2.4bn the following year. Its budget was R1.98bn in 2022/23.
Personnel and their costs have long been a major component of Armscor expenditure and efforts to stay “within the ceiling for compensation of employees (CoE)” saw 109 employees leave via voluntary severance packages (VSPs) in 2021/22. Vacant posts created by the VSPs will not be filled as they are seen to be not critical to core functions meaning, according to the Defence ENE, there will be no detrimental impact on performance.
“Critical posts will be filled. Spending on CoE is set to increase nominally, at an average annual rate of 6.4%, from R1.1bn in 2022/23 to R1.3bn in 2025/26.”
Looking to the medium term, the Defence ENE has it Armscor will continue to meet the acquisition, maintenance and disposal needs of the DoD and other clients for defence materiel and related products and services.
“In this way, the corporation maintains strategic capabilities and technologies and promotes the local defence‐related industry, ensuring the SA National Defence Force (SANDF) receives quality equipment to carry out its mandate.
“Over the medium term, the corporation will continue to focus on meeting DoD materiel requirements, as well as requirements pertaining to technology, research, development, analysis, tests and evaluation. To meet these requirements, Armscor will aim to ensure 95% of the department’s capital and technology requirements over the medium term are converted into orders placed and executed.
“To achieve these targets, spending is projected at R1.5bn over the medium term,” the Defence budget vote released late in February reads.
One Armscor function is to manage research and development on behalf of the DoD and Defence Research and Development Board (DRDB) funding is allocated by the DoD for this. No funding was received in 2021/22 due to defence budget cuts, with R133m available to Armscor divisions for 2022/23 (Institute for Maritime Technology R65m; Protechnik R35m; Ergotech R20m; Flamengro R7.5m; and Armour Development R4.7m).
These divisions, along with Alkantpan test range and Gerotek test track, earn commercial and DoD revenue for Armscor. In 2021/22 commercial revenue from these entities amounted to R98 m and DoD revenue R86m, down on previous years. (Source: https://www.defenceweb.co.za/)
02 Mar 23. Defence companies rush to ramp up production. Ammunition and other key defence materials are being used faster than they are produced. The efforts made by Nato allies to make sure Ukraine has enough firepower to fend off Russian troops has meant their own ammunition stocks are running low. The conflict has consuemed “an enormous amount of ammunition and depleting allied stockpiles”, Nato secretary-general Jens Stoltenberg warned in a recent address. Ukraine is currently firing ammunition at a rate that is “many times higher than our current rate of production”, he added. “We need to ramp up production and invest in our production capacity.”
Countries are aware of the problem and are allocating more of their defence budgets to restocking ammunition. The US and France have both recently signed multi-year contracts with defence companies that will allow them to ramp up capacity, Stoltenberg said.
BAE Systems (BA.), which provides munitions to the Ministry of Defence, has been increasing production at its existing facilities since last year by adding more shifts and taking on more people, chief executive Charles Woodburn told Investors’ Chronicle. It is also adding capacity by bringing in new production lines, plant and forges, but this has “a lead time associated with it” which means that although work started in mid-2022 it will be either later this year or early next year before much of this is ready.
Morten Brandtzæg, chief executive of Nammo, a Norwegian munitions maker, recently told the Financial Times that Ukraine has been firing 5,000-6,000 artillery shells per day, which is similar to the amount a smaller European nation would typically order in a year. As a result, the waiting time for large-calibre ammunition has recently increased from 12 to 28 months, according to Stoltenberg.
At the same time, the US has been decreasing its spending on artillery ammunition – particularly for 155mm artillery rounds – for several years and at current production rates its stocks “would at best last for 10 days to two weeks of combat in Ukraine”, former Lt Col Alex Vershinin said in a recent blog post for the Royal United Services Institute.
BAE Systems also has exposure to the US, where it runs two ‘GoCo’ (government-owned, contractor-operated) facilities that make the ‘energetics’ that go into munitions. But munitions are not a huge part of its overall business.
The stockpile picture is worse for European nations. The UK’s ammunition stocks would only last for eight days of “high intensity combat”, while France’s would run out in four days and Germany’s in two, according to UBS. The Nato standard is meant to be30 days. Woodburn said he could not quantify the scale of BAE’s production for confidentiality reasons.
However, it forms part of BAE’s short-cycle revenue stream that makes up around 10 per cent of its business. This also includes some revenue from MBDA – the missile systems partnership with Airbus (FR:AIR) and Leonardo (IT: LDO) – and flying hours from its Typhoon programme.
UBS analysts said ex-US defence spending is likely to increase to a compound annual rate of 12 per cent between now and 2030, up from 7.5 per cent before Russia’s invasion. They expect European and South Korean arms manufacturers to take more market share as both the US and Russia restrict exports. UBS has buy ratings on BAE and France’s Dassault Aviation (FR:AM), stating that both are currently priced only on orders already announced, but that these should increase once the UK, France, Australia and Japan publish updated defence reviews. (Source: Investors Chronicle)
02 Mar 23. Demerger of Melrose automotive business on track. Melrose Industries is to press the button on the demerger and separate listing of the automotive business of GKN after reporting a sharp recovery in the operations in 2022.
The future of the separate GKN aerospace business, which will for the time being remain in Melrose, is less certain as the government has previously expressed national interest concerns about keeping the business and its 4,000 UK workers in Britain.
The company expects to begin marketing the aerospace business for sale after another 12 months of restructuring.
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Melrose is a FTSE 100 conglomerate with the “buy-improve-sell” mantra of acquiring poorly performing industrial businesses, shaking them up, often with large numbers of redundancies, and then disposing of them and banking returns for its shareholders. In 2018 it went through one of the most contentious of industrial takeovers in recent years forcing through an £8 bn merger with the engineer GKN.
Five years on and the automotive business making drivelines for conventional cars and power distribution systems for electric vehicles is to list as a separate company renamed Dowlais, a nod to the Welsh ironworks from which GKN sprung at the dawn of the industrial revolution.
A prospectus for the listing of Dowlais will be published tomorrow and it is expected that trading on the London Stock Exchange will begin next month. Shareholders in Melrose are to get shares in Dowlais commensurate with their holding in Melrose. The new company is expected to attract a stock market value of at least £3 bn.
For 2022 the constituent parts of Dowlais — GKN Auto and the powder metallurgy business of GKN making precision components mainly for the automotive sector — reported a 7 per cent increase in underlying revenues to £5.2bn. With profit margins rising to 6.3 per cent from 5.4 per cent, operating profits jumped 24 per cent to £332m. The business said it expected the market to grow by 3 per cent during 2023.
With Dowlais soon to be exiting the building, the marketing for future sale by Melrose of the GKN aerospace business has begun. The aerospace business makes engine parts for GE and Pratt & Whitney and to a lesser extent Rolls-Royce and takes an average 5 per cent share of the revenue from the sale of a passenger aircraft engine, which tend to go for up to $15 m each. It makes wing components for Airbus and is on the Lockheed Martin F35 programme, which brings GKN in about $2.5m per fighter jet.
Stripping out foreign exchange turbulence, GKN aerospace revenues rose 11 per cent to £2.9bn in 2022 and its operating profits were 51 per cent higher at £186m. Profit margins have gone from 4.4 per cent 6.3 per cent. It expects revenues to grow at 15 per cent this year as the aerospace sector recovers from the pandemic.
“We consider [the] restructured aerospace business to be one of the best businesses Melrose has ever owned,” Justin Dowley, the company’s chairman, said. “We are confident that a combination of a restructured and refocused high-class engines and structures businesses and overall aerospace market recovery, positions these businesses for a significantly better-than-expected performance in 2023 and beyond.”
There is no news on ministers’ thinking on the future ownership of the GKN aerospace business. When Melrose made the original deal in 2018, with thousands of UK jobs at stake, it had to give the Theresa May-led Conservative government assurances that it would not seek to sell on the business for five years. That commitment expires next month.
Simon Peckham, Melrose’s chief executive, said the company was “well aware of its obligations” under national security and competition legislation and that it would only be able to sell to “an appropriate buyer”. Melrose shares rose 1½p, or 0.9 per cent, to 155½p. (Source: The Times)
01 Mar 23. Altamira Technologies Corporation Has Acquired VaST. Altamira Technologies Corporation announced it has completed the acquisition of Virginia Systems & Technology, Inc. (VaST), a Warrenton, Virginia-based signals intelligence mission company.
“The acquisition of VaST brings new SIGINT capabilities and core National Security Customers to the Altamira portfolio,” said Jane Chappell, CEO of Altamira. “VaST’s culture of marrying elite engineering with critical operations is a strong match with Altamira. We welcome them to the Altamira team.”
VaST, founded in 1999 on the principal of providing tip of the spear SIGINT mission execution expertise, implements a unique and innovative approach to the SIGINT mission by bridging the gap between Operations and Engineering with new capabilities. With the acquisition of VaST, Altamira adds new capabilities in end-to-end SIGINT tasking, collection, processing, exploitation, and dissemination (TCPED), National/Tactical SIGINT collaborative mission constellation management, and emerging threat identification.
“VaST is very excited to be joining such a like-minded company and looks forward to a combined opportunity to make larger and more impactful contributions to the defense of our nation,” said Jay Hebert, President/CEO of VaST.
“We are excited about the combination of Altamira and VaST. Adding VaST’s capabilities to the Altamira platform should enable Altamira to grow faster with customers,” said Bernard Noble, Managing Director at ClearSky.
The acquisition adds talent in every SIGINT vertical including software developers, data scientists, operations specialists, mission integrators, and analysts to Altamira’s workforce.
Mintz served as legal advisor to Altamira. Holland & Knight served as legal advisor and KippsDeSanto & Co. served as financial advisor to VaST.
Altamira Technologies is a McLean, VA based defense contractor supporting critical defense and national missions for 20 years. Founded in 2003, Altamira has been a trusted partner providing expert-driven, data-accelerated analytic and engineering solutions for space, cyber, air, and intel missions.
ClearSky is a venture capital/growth equity group that invests in innovative companies, with a special focus on (i) disruptive solutions for cybersecurity in information technology, industrial and critical infrastructure, and the defense industry, (ii) technologies driving the energy transition, climate related technologies, and sustainability, and (iii) the digital transformation of enterprise customers’ operations and communications. Altamira is a portfolio company of ClearSky. (Source: BUSINESS WIRE)
01 Mar 23. Ricardo weighed down by automotive division impairments.
A&I Established is dragging on financial performance.
- Record order book of c£410m
- £18.7mn in impairment and restructuring charges
Ricardo (RCDO) closed out its half-year period with a record order book of around £410mn, with new orders of £293m from continuing operations, up by a third on the preceding six-month period.
But the market was less than impressed by the engineering and environmental consultancy’s earnings loss, which was due to £18.7m in impairment and restructuring charges. It was largely a non-cash measurement that stemmed from faltering performance at the Automotive and Industrial Established Mobility (A&I Established) operating segment. Management cited “increased economic uncertainty and the continuing shift in the technological landscape in the automotive sector”, although you would intuitively think that the latter point would be advantageous to the group’s business model. The operating loss at A&I Established, including one-off charges, came in at £23.5m, but further restructuring measures, including reduced staffing numbers, are in train, so we can expect further related costs over the second half.
Rail revenue and underlying operating profit both pulled back through the period, largely due to the timing of big projects ending and new project wins and extensions commencing. Order intake was broadly flat on the prior year.
Overall performance was in line with management expectations, with sales up 12 per cent on a constant currency basis. Ricardo received £13.1mn of proceeds (net of cash disposed) for the sale of Ricardo Software. A further £2.4m is receivable contingent on Ricardo Software achieving certain revenue targets in the 12-month period post-sale.
The deal contributed towards a net cash inflow of £4.0m, although that reverts to an outflow when various adjustments are taken into consideration. Underlying working capital was “broadly neutral”, with reported cash conversion running at 60 per cent. Net debt at £31.4m is down by 11.3 per cent on June’s fall-year comparator. The adjusted leverage ratio (net debt over Ebitda for the past 12 months, excluding lease liabilities) came in at 0.8 times – well inside the maximum of 3.0. And despite a turbulent year for capital markets, the fair value of Ricardo’s pension scheme’s assets at the end of the period was £109m, set against obligations of £96.3mn.
Ricardo’s chief executive, Graham Ritchie, highlighted energy transition services and the group’s established US Department of Defense programme as central to growth prospects. For the time being, however, the remedial measures at A&I Established will drag on financial performance, but a forward rating of 16 times forecast earnings isn’t overly frothy given long-term structural drivers. Buy. Last IC view: Buy, 428p, 22 Sep 2022. (Source: Investors Chronicle)
01 Mar 23. Turkey’s Aselsan reports 75% rise in revenue for 2022. Turkey’s largest defense company saw a 75% increase in revenue in 2022 from the year prior, Aselsan announced Tuesday. The state-controlled military electronics specialist is listed on the Istanbul stock exchange, and is the 49th largest defense company in the world, per the Defense News Top 100 list. The company said its total sales that year reached 35.3 bn liras (U.S. $1.9 bn), and that its pre-tax depreciation and interest profit was 9.5 bn liras, a 77% rise from 2021. Its net profit in 2022 rose by 70% to 11.9 bn liras. In a statement, Aselsan said its export orders in 2022 were worth a total of $1 bn. The company added that it did business last year in three new export markets, although it declined to identify them for Defense News. It said the number of export customers has now reached 81. The company said its procurement from local industry subcontractors last year amounted to 23.4 bn liras, which accounts for 70% of Aselsan’s annual procurement from all sources. The Turkish firm also said that, during financial year 2022, it successfully “localized/nationalized” a total of 160 systems, meaning the business indigenously produced technology that the country was previously importing. Overall, the company boasts to have done so for a total of 670 systems. (Source: glstrade.com/Defense News)
01 Mar 23. Denel belatedly submits financial statements for auditing. The audit of state-owned defence conglomerate Denel’s financial statements is two years behind, as the company only submitted its 2021/22 financial year statements to the Auditor General of South Africa at the end of January, nearly a year late.
In a Standing Committee on Public Accounts (SCOPA) briefing note on Denel and its subsidiaries, the Auditor General of South Africa (AGSA) on 28 February gave an overview of the status of the external audit of Denel.
The AGSA noted that the audits of two consecutive years are outstanding (2020/21 and 2021/22). “Denel did not timeously submit the annual financial statements (AFS) for auditing for the 2020/21 and 2021/22 financial year. The financial statements for the 2020/21 financial year were due on 31 May 2021 but were only submitted 18 months later on 30 November 2022. The financial statements for the 2021/22 financial year where due on 31 May 2022, but they were only received on 31 January 2023 (8 months later).”
These delays were due to continued operational and solvency challenges faced by the company, which caused an exodus of skills across the entity. As a result, the company did not have capacity to produce a credible set of financial statements, the AGSA said.
The latest available audited financial statements are for the year ended 31 March 2020, on which a disclaimer opinion was issued (similar to the previous two years).
The AGSA hopes to complete the 2020/21 and 2021/22 audits in July this year, while Denel hopes to submit its 2022/23 financial statements by the end of May.
Standing Committee on Public Accounts chair Mkhuleko Hlengwa said the late submission of annual financial statements by SOEs such as Denel, South African Airways, and Alexkor is “the highest level of disdain in terms of doing the right things and it’s the absence of consequence management to the powers that be…that is of concern.”
Hlengwa said that auditing “must not be at the pleasure and comfort of the auditee,” and added that “something is rotten in the state of SOEs. I hope the AG doesn’t fall into the trap of this being normalised.” Although the Public Finance Management Act (PFMA) allows for delays in submissions, Hlengwa said there needs to be tighter regulations in allowing delays.
Denel is trying to implement its new 5.Y turnaround plan, and the state has committed to implementing strategic initiatives to strengthen the governance of state-owned entities (SOEs) but the AGSA noted that “there is slow progress in the implementation of key SOE reforms announced by government e.g. shareholder management bill, funding criteria for SOE, etc. This creates policy uncertainty in the SOE environment with SOEs struggling to deliver on their mandates.”
The AGSA urged the Denel board together with the shareholder representative (the Department of Public Enterprises) to ensure that measures planned for the turnaround plan are implemented and monitored timeously to turn around the entity and to avoid its total collapse.
Denel has received several bn rand in government bailouts, but is still struggling to pay salaries or manufacture anything. During the 2021/22 financial year, Denel was allocated R3 bn for the settlement of guaranteed debt and interest, reducing Denel’s government guaranteed debt to R290m as at end of March 2022.
A further R204.7m was allocated to Denel during the 2022/23 financial year to settle a portion of the remaining government guaranteed debt plus interest. The remaining government guaranteed debt is R100 m which is maturing on 23 September 2023. These remaining bonds are held by Aluwani Capital Partners.
In February 2022, Denel’s listed bonds were suspended from the Johannesburg Stock Exchange (JSE) because it failed to submit annual financial results for the 2020/21 financial year. The suspension means the bondholders cannot trade Denel’s bonds on the JSE, nor can Denel sell more debt. Should the remaining investors call on their bonds, it will be against the government guarantee.
Last year Denel was allocated R3.4bn from the medium-term budget to pay off debt and complete the implementation of its turnaround plan. The company needs an estimated R5.2 bn to implement its turnaround plan. An additional R990 m was received from the Denel Medical Benefit Trust, while another R1.8 bn is planned to come from the sale of non-core assets. (Source: https://www.defenceweb.co.za/)
01 Mar 23. Babcock International Group PLC (“Babcock” or “the Group”) announced the conclusion of its portfolio alignment programme with the completion of the sale of certain of its aerial emergency businesses (AES) to Ancala Partners. As announced on 19 July 2022, the AES businesses were sold for a cash consideration of €136.2m (c. £120m), before completion adjustments and transaction costs. The proceeds will be used to reduce debt. This follows the sale of part of Babcock’s civil training business to Inspirit Capital on 01 February 2023.
The completion of these two disposals concludes the Group’s programme of portfolio alignment designed to reduce complexity, focus the Group on its chosen markets and strengthen the balance sheet.
The programme, initially announced on 13 April 2021, has generated gross proceeds of c. £570 m and transferred leases of c. £340 m. As a result, defence now accounts for around two-thirds of Group revenue.
Babcock CEO David Lockwood said: “We’ve done what we said we’d do at the start of our turnaround: we’ve strengthened the balance sheet and reduced complexity. Around two-thirds of the Group is now focused on defence, and we are well positioned for future growth opportunities in our core markets. The AES and civil training businesses are both in good hands, and I wish their new owners every success in growing the businesses further.”
28 Feb 23. Lockheed Martin Ventures Invests in High Performance Electric Motor Manufacturer H3X. H3X Technologies today announced the completion of an investment by Lockheed Martin Ventures (LMV), the venture arm of Lockheed Martin Corporation (NYSE: LMT), a global security and aerospace company. H3X designs and manufactures advanced electric motors to enable sustainable aviation and other high-performance applications. This latest funding brings the total raised by H3X to $9m.
The investment will be used to accelerate technology development and commercialization of H3X’s HPDM family of integrated motor drives and the scale-up of their new headquarters facility in Louisville, Colorado for production.
“At H3X, we are building integrated motor drives from 30kW to 3MW that are unparalleled in performance in terms of specific power (kW/kg) and efficiency,” according to Jason Sylvestre, Co-Founder and CEO of H3X. “We are thrilled to have support from Lockheed Martin and are excited for the opportunity to work together and collaborate on next-generation defense technology using our motors.”
“H3X is working on scaling transformative technologies that we believe have the potential to provide our customer with viable options for electrifying legacy, all-domain systems and components,” said Chris Moran, vice president and general manager of Lockheed Martin Ventures. “Our investment in H3X reinforces Lockheed Martin’s commitment to developing predictive capabilities and scaling solutions that allow the U.S. and its allies to stay ahead of threats.”
H3X has made advancements in several different areas that enable them to reach continuous specific powers of >10kW/kg and best-in-class efficiency. These areas include electromagnetics, material science, power electronics, additive manufacturing, motor control, and thermals. H3X has invested heavily in vertical integration and does design, manufacturing, and testing in-house at their headquarters in Louisville, Colorado.
H3X originally developed this technology to enable compelling fully-electric and hybrid-electric aircraft with excellent range and payload capacity while also significantly reducing noise and operational costs. “When you look at the power density and efficiency requirements that are needed for electrifying narrow-body jets, there really isn’t anything out there that is sufficient,” said Jason Sylvestre. “The Megawatt-class systems that you can buy today still use technology from the last century and are far too large, heavy, and inefficient to meet the demanding requirements of electric aviation.” Additionally, H3X has found that there are a number of other markets that can also benefit from their technology including defense, marine, specialized ground vehicles, and power generation.
H3X currently has three base products, the HPDM-30, the HPDM-250, and the HPDM-3000. These three units all utilize the same core technology and range in power from 30kW to 3MW. Additionally, the core technology they’ve developed is scalable and modular and can be used to build highly integrated, aerospace-grade solutions that are tailored to match specific customer requirements.
Founded in 2020 by a team of multidisciplinary engineers, H3X is an advanced technology and electric motor manufacturing company based in Denver, Colorado. Their team brings together driven minds from automotive, aerospace, and motorsports with deep knowledge in electric machines and power electronics. The mission of the company is to become the world’s leading supplier of aviation-grade electric propulsion systems by 2030 to enable a large-scale revolution aircraft electrification and regional air mobility. For more information, visit www.h3x.tech/
About Lockheed Martin Ventures
Lockheed Martin Ventures makes strategic investments in companies that are developing cutting-edge technologies in core businesses and new markets important to Lockheed Martin. More than a source of capital, Lockheed Martin Ventures provides portfolio companies with access to our world-class engineering talent, state-of-the-art technologies, and research and access to the company’s international business relationships and supply chain. For more information visit: www.lockheedmartinventures.com (Source: BUSINESS WIRE)
27 Feb 23. Private Equity Fueling Growth of Defense Mergers. It was inevitable after pent-up pandemic demand drove mergers and acquisitions to record levels in 2021 that there would be a slowdown in 2022.
Still, mergers and acquisitions in the defense sector hit the second highest number of transactions ever in 2022, in large part because of growing private equity investment, according to a recent industry report.
There were 433 transactions in the aerospace, defense and government, or ADG, sector in 2022, according to market intelligence firm HigherGov’s report “Aerospace, Defense, and Government M&A Review.” While that was a 10 percent drop from 2021, the transaction volume continued an overall upward trend in transactions since 2018, the report said.
“If you took out COVID-19, I don’t know that  was really a decrease,” said Justin Siken, founder of HigherGov. The general trend is a growing demand for companies doing government business, he added.
And while the transaction volume dipped in 2022, aerospace, defense and government transactions beat the overall mergers and acquisitions market, which was down about 40 percent last year, he said.
“So, it’s definitely been much more resilient than the market as a whole,” he added.
There are several reasons for the resilience of these mergers and acquisitions, he said. One is the growth of global defense spending since Russia’s invasion of Ukraine.
Within ADG, transactions in the defense products and services sector jumped 12 percent, “driven by defense spending in the U.S. and Europe to counter expanding nation-state threats,” the report stated.
Space and cybersecurity have grown from niches into “major pillars of the sector and transaction volume,” the report said.
Another trend that continued in 2022 was a decreasing dollar value of mergers and acquisitions even as the number of transactions increased.
The dollar value of transactions peaked in 2015 at $197 bn. By comparison, the transaction volume in 2022 was $46 bn. And there were 10 transactions “with an enterprise value of greater than $1 bn” in 2022, down from 27 such transactions in 2021, according to the report.
Reasons for the decrease in value include rising interest rates — since larger transactions typically involve more debt financing — the pullback of the special purpose acquisition company, or SPAC, market and concerns raised by the Defense Department about the level of consolidation in the defense sector, the report stated.
The report noted that government opposition to Lockheed Martin’s attempted acquisition of Aerojet Rocketdyne, the Department of Justice’s unsuccessful effort to block Booz Allen Hamilton’s acquisition of EverWatch and Defense Department warnings about excessive consolidation have changed the “calculus of large M&A transactions.”
However, when it comes to smaller transactions, private equity is feasting. “Private equity has become a driving force in the ADG market after years of persistent growth and now accounts for 47 percent of transactions and 41 percent of deal value,” the report stated. Nearly 90 private equity firms completed transactions in the defense space in 2022, the report said.
Private equity firms are growing more comfortable with the defense sector and the nuances of Defense Department contracts and acquisitions timelines, Siken said.
“I think there’s just a greater recognition — despite the budgetary concerns on the defense side — these are five-year contracts,” he said.
In the commercial space, companies are facing budget cuts, and they don’t have multi-year contracts to help stabilize their businesses and make them appealing to acquire, he said.
“Here, you have people locked into five-year contracts. You have people that have been on defense platforms … that are decades old. And they’re pretty entrenched on there, and they’re one of two or three suppliers.”
Hence, private equity firms see those defense companies as having stable revenue streams, he said.
Plus, the private equity playbook makes sense in a defense sector where there are many small companies popping up, Siken said.
“One of the things [private equity firms] do is they buy a company … and they buy a bunch of smaller companies, and they try to get economies of scale,” he said. “They try to find sub-scales — companies that aren’t run very well — and run them better.”
A private equity firm will often buy four or five small companies and “roll them up,” he added.
Private equity firms have also become more aggressive in trying to grab companies earlier in their life cycles, he said.
“If you have a unique technology, people are so worried that someone else is going to get it before they do that they’re willing to go earlier and earlier in the corporate lifecycle,” he noted.
Plus, because of the nature of private equity where a fund doesn’t make money until it deploys its assets, “you are heavily incentivized to deploy your money as quickly as possible, because it just gives you more time to own that company in your portfolio,” Siken said.
Another reason for the increase in private equity investment is that firms have grown comfortable with the risk factors of the business. They recognize the “lottery ticket” nature of defense companies competing for a large contract and look for ways to reduce investment risk. One way is simply to buy more companies, thereby holding more lottery tickets, he said.
It is common now to see private equity firms buy a company that is competing for a Defense Department contract, Siken said.
“They will go out, they will make a couple of those small add-on transactions to try to increase their chances,” he said. “They will go and say, ‘Okay, here’s the capability my competitors have on this program that I don’t have,’ and so they will go out and they will buy those capabilities” to present a more complete solution.
Furthermore, the fact that cyber, space and other commercial technology companies are now selling to the Defense Department and government gives private equity firms that avoided makers of kinetic weapons an opportunity to enter the defense sector with less reputational risk, the report noted.
While many private equity firms are new to the aerospace, defense and government world, others like Veritas Capital, Sagewind and Spark Capital have been in the sector for a long time, Siken said.
“A lot of the time what they are buying, it might be a carve out or something that’s not focused on defense and doesn’t know how to run defense,” he said. There are a lot of small companies that are not run well that could benefit from the professional management private equity can provide, he said.
“I think the private equity playbook has changed a lot over the last 10 to 20 years,” he continued. “Whereas it used to sort of be — and I think they still have a little bit of the stereotype of — we come in and we slash a bunch of jobs and we shut down competition and all those sorts of things.”
That’s no longer the approach, he said. “They’re very much more about building franchise value and having companies be professionally run and adding value in those ways.”
Even so, the volume of transactions and the ongoing consolidation is raising concerns in the Defense Department, which last year released a report “State of Competition in the Defense Industrial Base.”
The report stated that in the 1990s, “the number of aerospace and defense prime contractors shrank from 51 to 5.”
“The trend toward consolidation has continued in the last five years, due to vertical and horizontal integrations and the entry of private equity firms performing roll-ups,” the report stated. As a result, the department is monitoring potential transactions and making recommendations to antitrust agencies.
The Biden administration is taking a stronger look across the board at acquisitions and consolidation than the previous administration did, Siken said. “I think the DoD in particular is getting concerned about just the number of cases where they have one customer — that one company that can do something — or there’s two companies that can do something and if they merge, there’s only one company that can do something.”
In the past, Defense Department concerns have focused on the consolidation of product makers, ending up with only one supplier of a component, he said.
“I think there’s also concern that the defense services base has gotten maybe too consolidated, or there aren’t enough people with the specialized skills to do some of these sort of niche things that are needed for things like hypersonics or robotics,” he said.
“There’s just a limited number of people who can do the services in that space to not just make the hardware,” he continued. “When you thought about antitrust or competition concerns in the DoD, it was really a product thing. I think now it’s a product and service concern.”
According to an email from a Defense Department spokesperson, the department has identified five critical focus areas where consolidation is of concern: “castings and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials and microelectronics.”
The department’s 2022 competition report included five recommendations for spurring competition in the defense base: strengthening merger oversight; addressing intellectual property limitations; increasing new entrants; increasing opportunities for small businesses; and implementing sector-specific supply chain resiliency plans.
“The department will confront the challenges posed by industry consolidation and work to ensure sufficient domestic capacity and capability,” the spokesperson said.
Siken said that there are private equity companies that are conscious of the impact of mergers on the defense base and national security.
“I think people legitimately — the investors in this space and the buyers in this space — as much as they want to make money, I think they do also want the defense base to be strong,” he said. “I think that people are thinking about that when they’re making acquisitions, both how it will be perceived and just, honestly, is this good or bad for the country on some level?” (Source: glstrade.com/National Defense)
28 Feb 23. Serco prospers in post-pandemic world.
- Another £90m buyback
- Profit to plateau next year
Serco (SRP) has allayed fears that it was a one-hit Covid wonder once and for all. Despite some positive signs last year, many worried that the government outsourcer would struggle to replace its lucrative Test & Trace contracts with new work, and these concerns were exacerbated when Serco lost a nuclear submarine contract at the end of 2020.
However, the company has proved resilient, growing revenues by 2 per cent in 2022 and nudging up its underlying profits. This wasn’t achieved without a bit of help: organic revenue declined by 4 per cent in the period, but a combination of acquisitions and favourable currency movements more than counterbalanced this. Meanwhile, Serco’s core business continued to benefit from growing demand for immigration services, more case management work in the US, and new UK government contracts.
There seem to be plenty more opportunities on the horizon. Serco’s order book is up 8 per cent year on year at £14.8bn, and management is confident that macro trends will keep driving growth. Labour shortages, for example, are expected to make it difficult for governments to recruit and retain staff, which should “put a premium on agility, mobilisation at scale, high productivity and effective management”.
There are a couple of things to keep an eye on. Serco’s book-to-bill ratio – which measures how well new orders compare with previous sales – has fallen to 93 per cent, compared with a five-year average of 112 per cent. Management blamed this on the “lumpy” nature of government contracting.
Meanwhile, there are £1.5bn-worth of contracts that need to be extended or re-bid for by the end of 2025. Some big jobs, including Serco’s Australian immigration contract, are even coming to an end this year. Analysts at Peel Hunt said the group is “well placed to retain the Australian immigration contract”, but it is impossible to be entirely confident.
Ultimately, however, Serco seems to have emerged from the pandemic in a significantly stronger position. It has increased revenue by 40 per cent since Covid struck, and almost doubled its underlying trading profit to £237m. Growth is expected to slow down significantly from now on, of course: revenue and underlying trading profit are expected to be pretty flat in 2023, and management expects to grow revenues at an average of 4-6 per cent a year over the medium term.
But demand for its services is strong, past scandals have been resolved, and shareholders are feeling the benefit: management has just announced a £90mn share buyback for 2023, following a £90mn buyback last year. Buy.
Last IC View: Buy, 190p, 4 Aug 2022. (Source: Investors Chronicle)
27 Feb 23. Senior makes up lost ground. Shares hit 12-month high as aerospace demand picks up.
- Operating margin and free cash flow double
- Return on capital strengthens
Last year represented a recovery of sorts for Senior (SNR), the engineering group that makes two-thirds of its sales from the aerospace sector.Revenue grew by almost 30 per cent to £848mn and operating profit trebled to £32.5m, although both remain below pre-pandemic levels. Reported pre-tax profit was 5 per cent lower due to a prior-year, one-off gain from the sale of a helicopter structures business in the US.
The improved state of the civil aerospace market (which makes up 40 per cent of group sales) drove like-for-like revenue in Senior’s aerospace arm up 20 per cent. This helped to double its adjusted operating margin to 3.7 per cent.
Business was also pretty robust in its Flexonics arm, which provides parts for vehicles and the power and energy sector. Margins in this division rose to 8.6 per cent, from 5.9 per cent a year earlier.
Free cash flow also doubled to £27.7m, although net debt ticked up by £25.8mn following the group’s $60m acquisition of fluid fittings firm Spencer Aerospace – half of which was paid upfront, with the remainder due later this year.
Senior’s shares rose by 3 per cent in early trading to their highest point in more than a year, despite the company saying that ongoing supply chain pressures, including a fire at one of its key suppliers, would mean profits in its aerospace arm will be weighted towards the back end of this year. Working capital, which increased by £28m to £131m last year, may also need to be increased this year if snarl-ups persist, it warned.
Demand is holding up well, though, with the board expecting “strong growth” in the year ahead, adding that it remained on track to drive return on capital employed to a minimum of 13.5 per cent. Despite a big improvement last year, it currently remains some way off this – ROCE rose to 4.7 per cent, from 1 per cent in 2021.
China’s recent lifting of its Covid-induced aerospace restrictions adds further momentum to aviation’s recovery, with industry body IATA forecasting that global passenger numbers will reach pre-pandemic levels next year. Senior’s margins should continue to improve as it does, but with its shares trading at more than 24 times forecast earnings they seem to be soaring above the point that represents decent value. We maintain our hold position. Last IC View: Hold, 139p, 1 Aug 2022. (Source: Investors Chronicle)
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