Sponsored by SPX CommTech (TCI & ECS)
08 Aug 23. Profile: Eric Kaled, President CommTech Platform at SPX Technologies. Eric Kaled is President of SPX CommTech, made up of TCI and ECS. Kaled’s team specialises in innovating technologies that address evolving threats in the RF spectrum battlespace, from tactical Data Links, RF detection and location systems, to RF inhibitors, including counter-drone and counter RC-IED inhibitors. Kaled is committed to making easy-to-use high-tech solutions that solve some of the world’s biggest challenges. As the organisation continues to scale, Kaled is focused on empowering employees to grow in their careers and build on the company’s successes. He said; “We must focus on staying one step ahead and deliver the latest advancements to guarantee a smarter, more secure future for all.”
31 Aug 23. IFS, the global cloud enterprise software company, today announced it has signed a definitive agreement to acquire Falkonry, Inc. a California-based Industrial AI software company that provides automated, high-speed data analysis to the manufacturing and defence industries. The AI-based, self-learning solution continuously monitors large volumes of data for assets, machines, systems, and industrial processes to discover and analyse unusual behaviour and causes of failures.
Over the past two decades, the growing scale of assets, machines, and fleets has generated unprecedented amounts of data, making real-time operational monitoring highly complex and hindering immediate operational enhancements, such as maintenance and process adjustments. By leveraging Falkonry’s automated and self-learning AI, organisations can democratise intelligence, enabling operational users to take timely actions to prevent asset downtimes, quality issues, and emission violations and automate process and workflow improvements.
The addition of Falkonry’s self-learning anomaly detection solution to IFS’s existing enterprise simulation and AI based scheduling and optimisation capabilities further evidences the company’s strategy to use AI pervasively to provide end-to-end intelligent insights in EAM (Enterprise Asset Management) across ERP (Enterprise Resource Planning), MES (Manufacturing Execution System), PSO (Planning, Scheduling, Optimisation), FSM (Field Service Management) and ESM (Enterprise Service Management) technology to increase people and asset productivity.
Headquartered in California, USA, and regional presence in Mumbai, India, Falkonry was founded in 2012 by CEO Nikunj Mehta. The company has customers across North America, South America, and Europe, including the US Navy and Air Force, Ternium, North American Stainless, Harbour Energy, and SSAB, demonstrating its focus on industries in industrial manufacturing and Defence agencies.
IFS CEO, Darren Roos, commented: “Falkonry is unique in the market because its technology is agnostic and also it does not require data scientists. These are great differentiators for Falkonry that means the solution is both scalable and low-cost to implement – two fundamental attributes that very much align to our own values.” Roos added: “Falkonry’s technology can be applied in all industries, and whilst the team has some hugely impressive references in IFS’s focus markets on asset performance management, manufacturing execution systems, servitisation, and configurable workflows, we see a really broad addressable market to capitalise on.”
Nikunj Mehta, CEO of Falkonry, commented: “The convergence of artificial intelligence and industrial processes has become increasingly crucial for organisations seeking to enhance productivity through data”. He added: “We are thrilled to join forces with IFS and looking forward to combining our unique strengths to provide a truly compelling value proposition to our existing customers as well as IFS’s customers.” He concluded: “Becoming part of IFS will enable us to further innovate and extend the value we create for our customers.”
“Today’s enterprise is continuously collecting asset performance data, making it a challenge across a multitude of industries from manufacturing to service to put it in the right context and take action in real-time. Organisations using artificial intelligence and machine learning models with their data for self-learning asset performance anomaly detection will generate critical insights faster, boosting productivity and business performance,” said Brian O’Rourke, IDC Research Manager, EAM and Smart Facilities.’
This acquisition follows soon after IFS’s acquisition of Poka, a provider of connected worker technology that empowers factory and field operatives to work smarter, safer and drive productivity. The combination of Falkonry and Poka with IFS Cloud makes IFS the most compelling vendor for organisations wanting to establish the most progressive and effective Smart Factories of the future.
IFS expects the acquisition of Falkonry to complete in Q4 2023.
29 Aug 23. Contract wins have turned BATM into a buy. A provider of cyber security and network solutions is winning high-margin contracts.
- First half pre-tax profit up 18 per cent to $0.7m on 4.6 per cent higher revenue of $60.2m
- Improvement in gross margin from 31.6 to 35.3 per cent
- Cyber and network unit returns to profit
- Net cash of $36.3m (6.6p)
- Board maintains full-year sales and profit guidance
BATM Advanced Communications (BVC:26p), a provider of medical laboratory systems, diagnostic kits, cyber security and network solutions, is benefiting from higher margin contract wins in its networking and cyber division.
Although divisional revenue edged up slightly to $13.3m (£10.6mn), accounting for 22 per cent of the group total, the unit’s gross margin surged from 40.1 to 51.2 per cent to deliver an operating profit of $0.1mn. That’s quite some turnaround from the $1.3m first half loss reported by the unit in the same period of 2022.
It is mainly being driven by BATM’s high-margin edge computing and network function virtualisation software product suite, Edgility, which continues to gain momentum. Chief executive Moti Nagar revealed to Investors’ Chronicle that the unit’s revenue doubled in the latest six-month period and he expects to announce a major extension of last autumn’s $3.5m five-year contract award with CityFibre, the UK’s largest independent carrier-neutral full fibre platform. The deployment of Edgility’s contract with CEMEX (US: CX) is being accelerated by the global construction materials company, too.
Importantly, BATM continues to win new contracts, the latest being a major five-year award with a leading provider of emergency connectivity services in North America. This is the first time Edgility is being used for a government application to support critical public infrastructure. Specifically, it will deliver the call-handling system for 911 Emergency Services and the 988 National Suicide Prevention & Mental Health Crisis Lifeline across a major US State.
Utilising the Edgility platform to run critical applications close to end-users at the edge of the network reduces network latency and improves response and call resolution times. It also enables the virtualisation of multiple applications on a single device, reducing the need for additional hardware, and cutting power consumption. To maximise the commercial market opportunity, BATM is undergoing proof-of-concept trials with leading network operators, system integrators and service providers and has entered several partnerships, too. Expect further news flow on contract win, some of which could be “significant”.
Another reason to expect a sustainable return to profitability for the group’s cyber security and networking division is the improving trading outlook. At the start of 2023, a long standing defence department customer awarded BATM a $26m five-year contract which commences in the second half and provides strong revenue visibility. Moti “expects the unit to receive further orders in the second half.”
Improved second half performance
True, the biomedical division’s first half operating profit declined from $2.9m to $2.2m on 5.6 per cent higher revenue of $46.9m, but this was due to much lower higher margin Covid-19 product sales and the second half performance is expected to continue the upward sales trajectory.
In the first half, the group’s medical distribution and Eco-med units delivered 11 per cent and 51 per cent revenue growth, respectively, the former benefiting from higher volumes and price increases and the latter delivering bio-waste treatment products for medical settings including hospitals.
Furthermore, there are no Covid-19 product sales embedded into analyst forecasts, so there is scope for outperformance in the event of another outbreak. In the latest 28-day reporting period to 17 August 2023, World Health Organisation data reveals over 1.4mn new Covid-19 infections, a 63 per cent increase compared to the previous 28 days.
Full-year guidance maintained
It’s important to note that although first half pre-tax profit increased from $0.6m to $0.7m, it is stated after a 12-fold rise in share-based payments (SBPs) to $1.2m for the new management team. However, even after factoring in $1.5m of SBPs for the full-year, house broker Shore Capital still expects reported pre-tax profit to surge from $1.9m to $3.4m on 13 per cent higher revenue of $131.6m. The growth not only reflects higher margin sales from the cyber security and networking unit, but delivery of 10G and 100G products from the group’s carrier ethernet solutions.
The bigger picture is what happens next year as revenue from these activities scale up. Analysts at Shore Capital have taken a stab, pencilling in a doubling of pre-tax profit to $6.9mn on 16 per cent higher revenue of $153.6m. On this basis, the shares are priced on a cash-adjusted 2024 price/earnings (PE) ratio of 26, eight times 2024 cash profit estimates to enterprise valuation, and on 1.2 times book value, ratings that have scope to expand if BATM maintains the current contract momentum. I also note that the board plans to deploy some of the group’s $36.3m net cash to add capability through acquisitions, mainly to enhance market access in the networking business, and is considering divestments if it can secure attractive terms, too. So, having last rated the shares a hold, at 25.5p (‘This tech business is a few steps away from a re-rating’, 6 March 2023), and ahead of a likely raft of positive news flow, the shares now rate a buy. (Source: Investors Chronicle)
29 Aug 23. SIONYX Announces Acquisition of Amigen and New Chief Technology Officer. Silicon-based photonics company SIONYX announced the acquisition of American Imaging Engineering (Amigen), a premier thermal imaging system provider, expanding the limits of what’s possible in the imaging technology and night vision markets. The move adds the founder and President of Amigen, Jeffrey Lee, as Chief Technology Officer of SIONYX’s commercial products division. Jeff is a product visionary who has led many of the industry’s most impactful thermal imaging innovations in his over 20 years of category growth.
SIONYX has led the charge of designing and implementing innovative products in the nascent digital night vision market, leveraging their proprietary ultra-low-light CMOS image sensor technology to dramatically enhance the performance of light sensing devices commonly used in consumer, industrial, medical, and defense-related applications. SIONYX’s acquisition of Amigen signifies new possibilities in the imaging technology industry.
“Our mission at SIONYX has always been to create innovative low-light products that help professionals and enthusiasts do more in the dark,” said Robert Pignataro, General Manager of the Commercial Product Division of SIONYX. “Bringing Amigen’s proprietary software in-house at SIONYX will allow for further development and integration into a wider range of markets and provide a wealth of sophisticated options for our customers.”
Drawing on extensive expertise, Amigen has a proven track record developing a diverse range of products thanks to its digital imaging fusion software, which fuses thermal with visible sensors for direct view and low-power systems. Amigen’s technology has found successful applications in defense, sporting/hunting, and related markets that benefit from night vision. The acquisition will pave the way for accelerated product design and development of integrated color digital and thermal night vision technologies and products. The accomplished Amigen team will bolster SIONYX’s product development unit, contributing a wealth of industry insight and proficiency in integrating fused thermal imaging solutions.
“The entire organization and I are enthusiastic about this merger,” said Jeff Lee, CTO of SIONYX. “We envision a future where digital and thermal night vision becomes as ubiquitous as the mobile phone camera. Our combined technologies, talents, and resources will empower us to bring our game-changing technologies to market faster. Our night vision product solutions highlight the best of consumer functionality and military performance, making our customers’ jobs and daily lives safer and easier.”
All Amigen and SIONYX customers and partners can expect a seamless transition and continued dedication to delivering high-performance imaging solutions. The acquisition and future developments at SIONYX will continue creating inventive products that allow the human eye to be more well-equipped and prepared for any adventure or mission.
22 Aug 23. AeroVironment, Inc. to Acquire Tomahawk Robotics. AeroVironment has announced its anticipated acquisition of Tomahawk Robotics, a leader in AI-enabled robotic control systems. The acquisition will enable deeper integration of both companies’ technology, leading to enhanced interoperability and interconnectivity of unmanned systems through a singular platform with similar control features. This will ultimately enable warfighters to operate various connected robotic solutions in the battlefield and share information between multiple domains with one common controller. The two companies entered into a definitive agreement under which AeroVironment will acquire 100% of Tomahawk Robotics equity for a total purchase price of $120 m to be paid in a mix of cash and stock.
Founded by Brad Truesdell and Matt Summer in 2018, Tomahawk Robotics is the visionary force behind the groundbreaking Kinesis Ecosystem, an unmatched tactical capability designed for the warfighter first. At the heart of this innovation lies Kinesis, an AI-enhanced and open architecture common control system that seamlessly integrates the network of battle-proven unmanned expeditionary vehicles, sensors, and third-party software onto a single pane of glass. Powered by innovation, the Kinesis Ecosystem delivers targeted situational awareness and precision strike capabilities for the human-machine teams across the battlespace.
“The acquisition of Tomahawk Robotics will not only provide AeroVironment with strong new members of our team, but a quality brand and products that are widely respected in the industry. Tomahawk Robotics will become part of the small UAS (SUAS) business unit within AeroVironment’s Unmanned Systems segment. We intend to retain all of their workforce and existing facilities in Florida,” said AeroVironment’s CEO and Chairman Wahid Nawabi. “We will support all existing Tomahawk Robotics customers and their products will remain platform agnostic to the market and within the industry. We also plan to introduce Tomahawk Robotics solutions to AeroVironment’s growing network of more than 55 allied nations.”
“Combining features of our Crysalis operating system with Tomahawk Robotics’ AI-enhanced Kinesis platform means pairing the best common controller technology with the most ubiquitous unmanned systems on the market today,” said AeroVironment’s Senior Vice President of Unmanned Systems Trace Stevenson. Tomahawk Robotics’ Kinesis control system was integrated into AeroVironment’s small unmanned aircraft family of systems including Raven© B and Puma TM 3 AE in 2022.
“Tomahawk Robotics’ solutions will accelerate our adoption and implementation of AI and autonomy into AeroVironment platforms,” continued Stevenson. “We’re confident that the combined experience and expertise of our two teams will result in a variety of unmatched unmanned expeditionary vehicles that meet our customers’ emerging needs and exacting standards.”
“Our motto has always been ‘warfighter first.’ Everything we’ve designed or made has been optimized to better equip and prepare soldiers on the battlefield,” said Tomahawk Robotics’ CEO Brad Truesdell. “Joining AeroVironment means our solutions will have a broader reach and the opportunity to be optimized by not only AeroVironment’s family of systems, but the broader robotics community, better enabling warfighters across the globe.”
“Acquiring Tomahawk Robotics strengthens our value to our customers as we will be uniquely qualified to support multiple platforms and offer the best solution for their operational needs,” continued Nawabi. “Tomahawk Robotics’ products will enable AeroVironment’s solutions to achieve an elevated Modular Open System Approach (MOSA) desired by our customers, and the opportunity to expand into new and adjacent markets for interconnected soldiers with a Common Operating Picture enabled by AI and autonomy.” (Source: BUSINESS WIRE)
14 Aug 23. Elbit Systems Ltd. Backlog of orders at $16.1bn; Revenues of $1.5bn; Non-GAAP net income of $70.2; GAAP net income of $62.4m;
Non-GAAP net EPS of $1.57; GAAP net EPS of $1.40
Elbit Systems Ltd. (“Elbit Systems” or the “Company”) (NASDAQ: ESLT) (TASE: ESLT), the international high technology defense company, reported today its consolidated results for the second quarter ended June 30, 2023.
Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems, commented: “Double digit revenue growth in the second quarter reflects the conversion of the order backlog, increased capacity and sustained demand for our solutions from customers around the world. We have started to deliver the initial benefits of our operational improvement program with an increase in operating profitability in recent quarters, that also benefited from the easing of supply chain and labor market pressures, as anticipated. Our financial expenses in the first half mainly reflect increased interest rates. Elbit Systems’ portfolio of market leading technological solutions and growing global presence combined with an innovative culture and the resilience demonstrated by our employees in recent years should support the long term outlook.”
Second quarter 2023 results:
Revenues in the second quarter of 2023 were $1,453.9m, as compared to $1,303.4m in the second quarter of 2022.
Aerospace revenues increased by 19%, to $487.0m in the second quarter of 2023 from $408.9m in the second quarter of 2022, mainly due to growth in Training & Simulation sales in Europe.
C4I and Cyber revenues increased by 1%, to $168.7m in the second quarter of 2023 from $167.3m in the second quarter of 2022.
ISTAR and EW revenues increased by 21%, to $292.7m in the second quarter of 2023 from $241.5m in the second quarter of 2022, mainly due to European Electronic Warfare sales.
Land revenues increased by 3%, to $294.1 m in the second quarter of 2023 from $284.9 m in the second quarter of 2022, mainly due to armored vehicle upgrades and ammunition sales.
Elbit Systems of America revenues increased by 7% to $355.3 m in the second quarter of 2023 compared to $330.6 m in the second quarter of 2022 due to growth in night vision sales.
For distribution of revenues by segments and geographic regions see the tables on page 11.
Non-GAAP(*) gross profit amounted to $378.8m (26.1% of revenues) in the second quarter of 2023, as compared to $345.9m (26.5% of revenues) in the second quarter of 2022. GAAP gross profit in the second quarter of 2023 was $372.2m (25.6% of revenues), as compared to $339.7m (26.1% of revenues) in the second quarter of 2022.
Research and development expenses, net were $93.4m (6.4% of revenues) in the second quarter of 2023, as compared to $96.4m (7.4% of revenues) in the second quarter of 2022.
Marketing and selling expenses, net were $101.7m (7.0% of revenues) in the second quarter of 2023, as compared to $82.8m (6.4% of revenues) in the second quarter of 2022.
General and administrative expenses, net were $75.4m (5.2% of revenues) in the second quarter of 2023, as compared to $72.7m (5.6% of revenues) in the second quarter of 2022.
Non-GAAP(*) operating income was $112.2m (7.7% of revenues) in the second quarter of 2023, as compared to $103.3m (7.9% of revenues) in the second quarter of 2022. GAAP operating income in the second quarter of 2023 was $101.6m (7.0% of revenues), as compared to $115. m (8.8% of revenues) in the second quarter of 2022.
Financial expenses, net were $32.1m in the second quarter of 2023, as compared to $9.3m in the second quarter of 2022. The financial expenses in 2023 were higher as a result of the significant increase in interest rates.
Taxes on income were $9.2m in the second quarter of 2023, as compared to $12.8m in the second quarter of 2022.
Non-GAAP(*) net income attributable to the Company’s shareholders in the second quarter of 2023 was $70.2m (4.8% of revenues), as compared to $76.9m (5.9% of revenues) in the second quarter of 2022. GAAP net income attributable to the Company’s shareholders in the second quarter of 2023 was $62.4m (4.3% of revenues), as compared to $81.2 m (6.2% of revenues) in the second quarter of 2022. Net income in the second quarter of 2022 included capital gains from sale of our shares in a subsidiary in Israel and sale of a building in Israel.
Non-GAAP(*) diluted net earnings per share attributable to the Company’s shareholders were $1.57 for the second quarter of 2023, as compared to $1.73 for the second quarter of 2022. GAAP diluted earnings per share attributable to the Company’s shareholders in the second quarter of 2023 were $1.40, as compared to $1.82 in the second quarter of 2022.
The Company’s backlog of orders as of June 30, 2023 totaled $16.1bn. Approximately 75% of the current backlog is attributable to orders from outside Israel. Approximately 49% of the backlog is scheduled to be performed during the remainder of 2023 and 2024.
Cash flows used in operating activities in the six months ended June 30, 2023 were $210.7 m, as compared to $133.5 m in the six months ended June 30, 2022. The cash flows in the first half of 2023 were affected by the increase in inventories and trade receivables.
10 Aug 23. Rheinmetall affirms guidance as arms demand boosts Q2 earnings. Rheinmetall (RHMG.DE) reported a rise in quarterly operating earnings and affirmed its full-year guidance on Thursday as it benefited from growing demand for weapons and ammunition amid the war in Ukraine.
CEO Armin Papperger said Rheinmetall had received the first major orders, signifying that governments have started to make good on their pledges to ramp up military procurement.
“We recently signed contracts with an order volume of over 7 bn euros in a single week – a new record for us,” he noted.
The Duesseldorf-based firm posted operating earnings of 118m euros ($130m) in the second quarter through June, up from 114m euros a year earlier and bang in line with analysts’ average expectations.
Rheinmetall’s consolidated sales grew by just over 6% to around 1.5bn euros, a tad below expectations. Its order backlog jumped by 17% to around 30.1bn euros.
Rheinmetall is one of the biggest producers of ammunition in the world. Artillery shells have been in particularly high demand since Kyiv is firing these rounds at a higher rate than western companies can make them.
It is also in the business of refurbishing tanks and other vehicles for use by Ukraine, and has been working to establish a new production line for 35mm rounds used by Kyiv’s Gepard anti-aircraft guns, with the first rounds originally meant to be delivered in July.
“As promised, we will soon be delivering the urgently needed ammunition to Ukraine for the Gepard anti-aircraft tanks,” Papperger said on Thursday without giving details.
While the company is capitalising on the military boom, with the defence business making up 70% of its revenue, its civilian business saw a slowdown in growth caused by “negative earnings contributions” from affiliated companies in Europe and China, it said.
The company noted that the result was also impacted by costs of about 10m euros to restore operations resulting from a cyberattack on IT systems in the civil business in April 2023, and by higher raw material prices. ($1 = 0.9106 euros) (Source: Reuters)
10 Aug 23. First half of 2023: Rheinmetall Group continues on growth path with significant upturn in orders.
- Strong growth of security business: sales up by 12%
- Significant growth in order backlog: Threshold of €30 bn exceeded – dynamic growth continues
- Consolidated sales up 7% to €2.9bn
- Operating result at €191m
- Operating margin amounts to 6.7%
- Annual guidance for 2023 confirmed A future contributions of the new acquisition Expal Systems in Spain (closing July 31, 2023) not included
Rheinmetall AG, Düsseldorf, closed the first half of financial year 2023 with further growth in consolidated sales. This positive development was driven in particular by business with the armed forces of Germany and its partner nations in the EU and NATO. Thanks to the dynamic market situation and the high level of demand, the Group recorded double-digit sales growth in its business with military goods. By contrast, the Group’s civilian business saw a slowdown in growth. Rheinmetall now generates more than 70% of its revenues in the military business.
Building on the positive development in the first quarter, the technology group’s operating free cash flow improved significantly in the first half of the current financial year compared to the same period of the previous year.
In light of the current market situation and the consistently positive order situation, management is confirming its current guidance for the Group’s sales growth and operating result margin.
Armin Papperger, CEO of Rheinmetall AG, commented on the Group’s performance: “We are still on track to achieve our ambitious targets for sustainable, profitable growth in 2023. Governments have made far-reaching decisions for military procurement in response to the change in the security situation. Implementing these decisions is the next step, and this is reflected in the first major orders we have received. We recently signed contracts with an order volume of over €7 bn in a single week – a new record for us.”
Armin Papperger: “We are continuing to grow. The acquisition of the Spanish munitions manufacturer Expal Systems that was closed recently will secure our core business for the long term and significantly expand capacities. At the same time, we will soon begin manufacturing fuselage sections for the world’s most modern combat aircraft, the F-35A, which will open up a new chapter in Rheinmetall’s history.”
“In a changing world, we remain committed to meeting our responsibility, not least with a view to the war in Ukraine. We are grateful to be able to provide the country with effective aid for its defence in the form of our products – from air defence, main battle tanks and infantry fighting vehicles and the associated ammunition, through to military trucks, sensors and mobile field hospitals,” added Armin Papperger. “As promised, we will soon be delivering the urgently needed ammunition to Ukraine for the Gepard anti-aircraft tanks.”
Rheinmetall Group: Sales growth of 7%
Consolidated sales increased by €187m or 7% year-on-year to €2,861m in the first half of 2023 (previous year: €2,674 m). Adjusted for currency effects, sales were almost 8% higher than in the previous year.
The operating result amounted to €191m, down €15m or 7% on the previous year’s figure of €206m. Business was boosted in particular by earnings growth in the Electronic Solutions, Vehicle Systems and Weapon and Ammunition divisions on the back of higher margins and a better product mix. However, the positive development in the Group’s operating business was not enough to fully offset the negative earnings contributions from affiliated companies in Europe and China. Excluding at-equity contributions of €-17m, the operating result amounted to €208 m. The result was impacted by costs of about €10 m to restore operations resulting from the cyber-attack on IT systems in the civil business in April 2023 and by higher raw material prices.
Due to the aforementioned negative at-equity effects, the Group’s operating result margin fell to 6.7% in the first half of 2023 (previous year: 7.7%).
Earnings per share from continuing operations increased from €2.28 to €2.42 in the first half of financial year 2023.
Operating free cash flow improved significantly by €316m to €‑325m in the first half of 2023 after €‑641m in the same period of the previous year. Despite the growth in inventories in anticipation of additional orders, operating free cash flow improved considerably in the first half of the year thanks to higher customer payments. The high demand in the military sector currently requires further investments in order to significantly increase the own production capacities.
Rheinmetall Backlog increased considerably by around 17%, from €25.7 bn to around €30.1bn (June 30, 2023). In addition to orders on hand, Rheinmetall Backlog includes the call-offs expected from framework agreements in place with military customers and potential orders from contracts with civilian clients.
Rheinmetall Nomination rose by around 50% year-on-year to €7,192m in the first half of 2023 (previous year: €4,790m). Rheinmetall Nomination comprises traditional incoming orders as well as the volume from future call-offs under new framework agreements entered into with military customers and new contracts with civilian clients (nominations).
Vehicle Systems: Fivefold increase in order intake
Sales in the Vehicle Systems division, which mainly operates in military wheeled and tracked vehicles, increased by €161m or 19% year-on-year at €1,012m in the first half of 2023. The sales growth is particularly attributable to projects for the delivery of tactical vehicles.
Rheinmetall Nomination – the total of order intake and the volume of new framework agreements with military customers – increased by €3,045m as against the previous year to €3,725m. This was due in particular to a fivefold increase in order intake resulting from the acquisition of new major orders, especially in connection with the program to replace the Bradley infantry fighting vehicle in the US, orders for new Puma infantry fighting vehicles and state-of-the-art military trucks for the German armed forces, and the Leopard 2 upgrade for Norway. A framework agreement for trucks in Austria was another strategically important success.
Rheinmetall Backlog in the division – comprising orders on hand and the expected call-offs under the framework agreements in place with military customers – amounted to around €13.9bn as at June 30, 2023, up €1,244 m or around 10% on the previous year’s figure. The operating result improved from €75m to €99m in the first half of 2023. This represents growth of €24.1m or 24%. This positive development is mainly attributable to margin effects in projects. The operating margin of around 10% exceeded the previous year’s level of around 9%.
Weapon and Ammunition: Backlog rises to over €6bn
The Weapon and Ammunition division generated sales of €598m from its weapon systems and ammunition activities in the first half of 2023, an increase of €34m or 6% on the previous year’s figure. The year-on-year increase is due in particular to higher ammunition call-offs by customers and higher sales of protected truck cabs. At €1,561m, Rheinmetall Nomination largely maintained the strong prior-year level in the first half of 2023 (previous year: €1,892m). The previous year’s figure was above average due to the division’s largest single order to date from Hungary. Major new orders in the first half of 2023 related to ammunition orders for the Gepard anti-aircraft tank and tank ammunition orders for Marder and Leopard 1 for Ukraine. In addition, a large order for ship protection systems was acquired in Australia with a potential total order volume – including follow-up orders – of over €600m. Rheinmetall Backlog increased by €1,366m or around 29% to around €6.1bn as at June 30, 2023 (previous year: €4.7bn).
The operating result improved by €19m or 27% to €89m in the first half of 2023. This positive development is mainly attributable to a more profitable product mix. As a result, the operating margin rose significantly from 12.5% to 14.9%.
Electronic Solutions: Sales growth of 10%
The Electronic Solutions division, which produces solutions in the field of armed forces digitalization, infantry equipment, air defence and simulation, increased its sales by €39m to €450m in the first half of 2023 (previous year: €411m); this corresponds to growth of 10%.
Rheinmetall Nomination declined by €49m or 7% year-on-year to €652m. A major new order in the context of Puma infantry fighting vehicles was placed in the first six months of 2023. Rheinmetall Backlog amounted to €3.4bn as at June 30, 2023, a year-on-year increase of 16% (previous year: €2.9 bn).
The operating result for the first half of 2023 increased by €2m to €27m (previous year: €25m). The operating margin declined to 5.9% (previous year: 6.1%), largely as a result of changes in the product mix.
Sensors and Actuators: Nominated backlog up around 22%
Sales in the Sensors and Actuators division, which provides solutions for industrial applications and electric mobility as well as components and control systems for emission reductions, increased by €16 m or 2% year-on-year to €707m in the first half of 2023. This development primarily resulted from volume increases in Europe and Asia. Booked business in the first half of 2023 was unchanged year-on-year at €1,428m (previous year: €1,431m). The nominated backlog, i.e. the volume of call-offs expected from customer agreements, increased by around 22% to €8.2bn as at June 30, 2023 (previous year: €6.7bn).
The operating result declined by 57% to €22m in the first half of 2023 (previous year: €50m). Among other things, this development is attributable to additional business recovery costs following the cyber-attack on IT systems of the civilian business in April 2023 as well as increased raw material prices, which can only be passed on to customers after a delay. Accordingly, the operating margin fell to 3.1% (previous year: 7.3%).
Materials and Trade: Downturn in sales due to cyberattacks
Sales in the Materials and Trade division, which supplies plain bearings and structural components as well as handling global aftermarket business, declined by €22m or almost 6% year-on-year to €352 m in the first half of 2023. The downturn was due in particular to the lower sales volume in the Bearings business unit. In the Trade business unit, the downturn in sales is attributable to the cyber-attacks on IT systems at locations in Germany and abroad in April 2023. Booked business amounted to €347 m in the first six months of financial year 2023. This represents a year-on-year decrease of almost 14% (previous year: €403 m). The nominated backlog of around €600m as at June 30, 2023 was largely unchanged year-on-year (previous year: €610m).
The operating result of the Materials and Trade division fell by €10 m or almost 38% to €17 m in the first half of 2023. The operating margin declined to 4.7% (previous year: 7.2%). This was due in particular to a decline in the at-equity result of a Chinese joint venture as well as the earnings effect of the downturn in sales.
Outlook: Current guidance for year confirmed
Rheinmetall confirms its current annual guidance after the first six months of 2023.
In recent months, Rheinmetall has used strict cost control, active provisioning, and the mitigation of risks on the energy and procurement markets as measures to successfully counter the general trend of inflation and the continuing disruptions on the markets for raw materials and primary products.
Not least in light of these timely decisions and the measures it has largely already implemented, the Group continues to expect sales growth to between €7.4bn and €7.6bn in the current financial year and is anticipating an improvement in the operating result and an operating result margin of around 12%.
This guidance does not include the acquisition of the Spanish munitions manufacturer Expal Systems. Rheinmetall expects the new subsidiary to contribute sales of €150m to €190m in the current financial year from the date of consolidation (August 1, 2023).
08 Aug 23. Curtiss-Wright Corp.: A Premium Asset in a Scarce Pool; Upgrade to Overweight. We upgrade CW to OW from EW as risk reward skews positive, and raise our PT to $229. The Pivot to Growth continues and endmarket demand remains robust, positioning CW for underappreciated topline expansion. Commercial nuclear optionality and a May 2024 Investor Day could deliver further upside.
A Scarcity of High-Quality A&D Smid-caps
CW outperformed the S&P 500 by ~500bps on the day of its 2Q23 earnings report (August 3) after a strong topline-driven beat and raise. Management continues to execute on its ‘Pivot to Growth’ strategy (2021-23) with its revised higher sales outlook of ~7-9% YoY growth in 2023 as evidence (compared with a ~2% CAGR over the 2014-19 period). With a pick-up in Defense Department outlays (up ~21% YoY in 2Q23) and easing supply chain pressures, we see a path to a ~13% sales CAGR at CW’s Defense Electronics segment through 2024 (vs. current consensus of ~8.5%). Continued strength in CW’s commercial aerospace business given OEM production ramps and a renewed interest in commercial nuclear activity in the US and abroad also provide tailwinds for CW’s topline trajectory, driving our conviction that mid-to-high single digit growth is the new normal for CW. Meanwhile, margins are expanding (guiding to ~10-30bps of YoY improvement in 2023) and CW is converting over 100% of earnings to cash at a time when many Defense peers are wrestling with cost pressures and FCF headwinds.
We are encouraged by CW’s recent execution track record and view the May 2024 investor day as an opportunity for management to potentially outline accelerated topline growth plans without sacrificing margins. We’re also monitoring for a formal AP1000 nuclear reactor order from Poland, which by our estimates could be worth an incremental ~$6 of equity value, though is not factored into our base case PT of $229 (vs. a prior $188) and thus presents additional upside (incorporated in our Bull Case). Stepping back, we see a scarcity of similar high quality smid-caps with attractive A&D exposure. We upgrade CW to OW from EW. Our updated PT $229 reflects ~14% upside and a ~1.8x risk-reward skew. We see the stock as defensive with lower downside risk.
What Has Surprised Us Thus Far?
CW in May 2021 announced its Pivot to Growth strategy, unveiling relatively ambitious three year financial targets, including a ~5-10% sales CAGR (3-5% organic), operating income growth outpacing revenue growth, an adj. EPS CAGR of 10% or higher, and average FCF conversion of ~110%. We saw supply chain challenges placing these targets at risk. Management, however, has proven adept at managing through supply-included headwinds, and recent performance in Defense Electronics – where supply chain pressures have been most acute – suggest these headwinds are easing. Defense Electronics 2Q23 sales of $198mn / margins of 21.8% exceeded cons. estimates by 20% / ~280bps respectively, helping drive an EPS beat of $2.15 vs. cons. $1.96 and leading management to increase FY23 sales / margin guide by ~$28mn / ~30bps.
On top of supply chain improvement, Defense Department outlays are inflecting as higher budgets flow through, providing an added tailwind to CW’s defense business (for more on outlays, see: Timing Defense Growth). Layering in commercial aerospace demand as OEMs execute on production rate increases and an uptick in nuclear aftermarket activity as decarbonization trends take hold in the US, we see CW well-positioned to deliver against its Pivot to Growth goals. We also now see mid-to-high single digit growth as the new normal for CW (~7.5% CAGR through 2027) given the endmarket demand backdrop, which, along with steady margin expansion, we expect to drive LDD EPS growth through 2027.
Revisiting Growth Assumptions Post 2Q23
The growth story at CW continues, with management raising 2023 topline expansion expectations to ~8% at the midpoint (up ~30 bps from its prior guide). CW is fielding higher demand across all of its core endmarkets, with A&D sales now expected to grow ~10% YoY (vs. a prior 7%) and Commercial sales now expected to grow ~4% (vs. a prior 2%). Company book-to-bill was 1.2x in 2Q23 on higher sales with backlog up ~8% YoY. We are revising our growth outlook for CW and now see sales expanding at an ~8% CAGR through 2025, ~200bps higher than prior estimates. This higher topline forecast drives our EPS expectations to $9.10 from $8.80 in 2023, to $10.15 from $9.80 in 2024, and to $11.35 from $10.10 in 2025.
Raising PT to $229
We are raising our Price Target to $229 from a prior $188. The PT increase is a function of both higher earnings expectations and a ~1.5-turn increase in P/E multiple. We now leverage a ~22.5x P/E multiple on 2025E EPS of $11.35, discounted back one year. We previously placed a ~21x P/E multiple on 2025E EPS of $10.10, discounted back on year. While we recognize that ~22.5x (~20x undiscounted) is a premium to CW’s historical multiple (10-year median of ~17.5x), we note CW traded at a median ~21x over the last multi-year period of above average growth (~7% topline CAGR 2016-2018). Given the stock currently trades at a ~21x forward P/E, our PT does not assume significant multiple expansion. We also note that peer A&D suppliers are trading at a median undiscounted multiple of ~19x 2025E EPS. We see CW’s growth profile and execution track record commanding a premium over this basket as few peers share CW’s earnings growth, cash profile and balance sheet.
EV/EBITDA: A Secondary Look
We leverage EV/EBITDA as a secondary valuation methodology. Our PT of $229 implies a ~15.5x EV/EBITDA multiple (~14x undiscounted) on 2025E EBITDA of ~$693mn. While this multiple also reflects a premium to CW’s historical valuation (10-year median of ~11x), peers are trading at ~13x 2025 EV/EBITDA (undiscounted). We also note recent announced M&A transactions have valued A&D suppliers in the mid-teens range (e.g., LHX-AJRD; HEI-Wencor).
Defense Electronics Momentum
We see the easing of supply chain challenges and an uptick in defense outlays driving momentum at Defense Electronics. On the supply chain front, electronic component shortages in particular have pressured the segment, but the situation is now improving. Lead times are coming down and management is seeing price stabilization in the supply base. Meanwhile, higher defense budgeted funds are starting to flow through, with DoD outlays up ~21% in 2Q23 – the highest growth rate in over 3 years. Pentagon modernization outlays, per DoD’s FY24 request, should see ~11% YoY growth in CY23 and ~12% YoY growth in CY24, which we view as a tailwind to CW’s defense portfolio, particularly for its shorter-cycle business (e.g., tactical communications). We note post-2Q23, management raised its expected 2023 sales growth for Ground Defense to ~15% YoY vs. a prior ~5%, driven by growth in tactical communications equipment.
The Commercial Nuclear Opportunity
Increased emphasis on decarbonization, along with an uptick in interest in energy independence in Eastern Europe provide new tailwinds for CW’s nuclear business, in our view. CW’s aftermarket work, which reflects ~90% of the company’s current commercial nuclear business continues to ramp at a ~MSD rate. Next-generation advanced reactor work, including Gen IV small modular reactors (SMRs), is small today (~$10mn), but CW is positioning for material opportunities as the technology and its reception mature (e.g., X-Energy partnership). CW is also awaiting future AP1000 sales (more on this below), with Poland as the likely lead customer and others in Eastern Europe expected to follow. We estimate a Poland AP1000 contract could be worth ~$672mn in revenue for Curtiss-Wright. Management expects to secure over $1.5bn in reactor coolant pump (RCP) orders from Eastern Europe.
Valuing the AP1000 Potential
Future AP1000 sales provide further upside to CW’s valuation, in our view. CW’s reactor coolant pumps (RCPs) are integrated into the Westinghouse AP1000 nuclear reactor design to prevent nuclear meltdowns. Poland recently selected Westinghouse to build 3 AP1000 reactors (option for 3 more), for which CW expects a reactor coolant pump order in the next 2-4 years. With 4 RCPs per reactor at $28mn per RCP and 6 reactors planned, we estimate the total value of this order to be ~$672mn.
Assuming an order materializes in 2025, we forecast ~$122mn in RCPs revenue in 2027E (modelled off the cadence of revenues from the last AP1000 order in China). CW earns ~23%+ margins on its RCPs, implying ~$28mn in EBIT or ~$0.51 in EPS. Discounted back to 2025 and capitalized at a ~22.5x multiple (assuming Poland is the first of several AP1000 orders), we see an additional ~$11 in equity value attributable to new RCPs sales, or ~$6 in value after factoring in ~50% probability of orders materializing. We note this ~$6 is not factored into our base case PT of $229, but is incorporated in our Bull Case valuation. We see this ~$6 reflecting “free” upside until the next RCP order materializes.
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