Leica parent co. posts strong Q2 cash flow as U.S., China demand heats up
3D measuring and imaging giant Hexagon AB, reported strong, second quarter demand from customers in the United States, China and South America, boosting net sales to €635 million (US$845 million), up 5 percent, and generating earnings of €99.5 million (US$132.4 million), a 9 percent increase.
Based in Stockholm, Sweden, the publicly traded company (NASDAQ OMX Stockholm: HEXA B) sells design, measure and position objects, and process and present data, design, measurement and visualization technologies under brands such as Leica Geosystems, Intergraph, as well as its own name, for the surveying, power and energy, aerospace and defense, construction, safety and security, automotive and manufacturing industries.
Strong cash flow in the second quarter, which increased 27 percent to €90.5 million (US$120 million), and even stronger cash flow in the second half of the year will reduce Hexagon’s net debt to historically low levels, “opening up opportunities for expansion going forward,” said Hexagon CEO Ola Rollen in an interim financial statement.
Hexagon posted 57 percent gross margin for the quarter ended June 30 and EBIT margin of 22 percent. The company said there’s a “seasonality” to its earnings with Q1 and Q3 typically weak, and Q2 and Q4 usually stronger.
Q2 business trends year-on-year
Hexagon reported the following share of sales per customer segment:
- Surveying – 21 percent
- Power & Energy – 20 percent
- Aerospace & Defense – 11 percent
- Construction – 11 percent
- Public Safety & Security – 10 percent
- Automotive – 10 percent
- Manufacturing – 9 percent
- Other – 8 percent
“All the application areas are growing and profitability is in line with what we set out to achieve in our financial plan,” said Rollen. “All business areas have advanced positions in their respective markets and we already see an uptake in demand for a number of new products launched in the quarter, especially in Geosystems.”
Hexagon reports in two business areas: Measurement Technologies (MT) and Other Operations. MT generates about 97 percent of its parent’s revenue. The MT business operates three units:
Geosystems – largely the operations of Leica Geosystems AG, this unit offers systems for data capture, modeling and visualization of 3D spatial information that can be presented as 3D images for infrastructure projects such as rebuilding and monitoring roads, bridges, railroads, airplanes and ports.
Geosystems reported €226.7 million (US$301.5 million) in second quarter net sales, a 6 percent organic growth rate. Geosystems represents 36 percent of Hexagon’s over sales in the quarter. “Geosystems growth is accelerating on the back of newly launched products and strong demand from Americas and China,” Hexagon said in its quarterly report.
In May, Leica signed a global distribution deal with Aibotix GmbH, maker of new vertical take-off and landing commercial, unmanned aerial vehicles (UAV) carrying multi-sensor, intelligent guidance systems. Hexagon said UAVs are becoming increasingly important in many of the applications served by Leica, including agriculture, asset and facilities management, cadastral mapping, disaster and emergency management, engineering, environmental, forensics, general industrial, mining, and public safety.
“Unrestricted positioning of various measuring technologies will spawn new applications as the full potential of this transformative UAV technology unfolds,” the company said. Commercial use of UAVs is prohibited in the United States but an increasingly sought-after tool for aerial mapping and monitoring applications in other regions, particularly Asia.
Also during the quarter, Hexagon acquired Geosoft, an Italian-based software and hardware company specializing in modular cartography, digital photogrammetry and mobile mapping solutions.
Metrology – business unit was rebranded last September, it offers systems for manufacturing evaluation, reverse engineering, process qualification and inspections of final parts.
Metrology posted another record quarter with €186.3 million (US$247.6 million) in second quarter net sales, up 3 percent, but Hexagon said comparison numbers are “getting increasingly tougher to beat.” The business unit represents 29 percent of Hexagon’s quarterly sales.
Technology – largely the operations of Intergraph, which operates two divisions: Process, Power Marine(PPM) and Security, Government, Infrastructure (SG&I), this unit provides enterprise engineering software and geospatial software as well as a comprehensive line of Global Navigation Satellite System (GNSS) products.
Technology posted €201.2 million (US$267.4 million) in sales, up 5 percent. Technology represents 32 percent of Hexagon’s net sales.
“Intergraph SG&I improved profitability compared to last year but sales contracted due to the diminishing U.S. defense business and also from governmental budget cut backs in Europe, [while]PP&M (Process, Power & Marine) continued to expand,” the company said.
Intergraph highlights from the quarter include:
- Major oil and gas owner/operator Petronas in Malaysia implemented Intergraph’s SmartPlant Enterprise software for owners and operators.
- Sadara, a joint venture with Saudi Aramco and The Dow Chemical Company, also chose SmartPlant Enterprise for a project in Saudi Arabia.
- Global engineering company, Jacobs, signed a three-year extension of its customer agreement and became Intergraph PP&M’s largest recurring customer.
- Subsidiary of ENGEVIX Engenharia S/A is using SmartMarine Enterprise to construct eight floating production, storage and offloading (FPSO) units, a floating vessel used by the offshore oil and gas industry, for Brazilian multinational energy firm Petrobas for deep-sea oilfield prospection.
Global market development
Second quarter demand was strong in the Western Hemisphere, China and other Asian countries, excluding Australia and Japan.
The Americas region, representing 32 percent of Hexagon’s sales, reported 10 percent organic growth in the second quarter, the highest for any region, mainly due to U.S. construction industry’s recovery and strong demand in South America.
U.S. sales up 15% on Leica demand
U.S. sales growth for the quarter was 15 percent thanks to demand for Hexagon’s Geosystems products from the automotive, aerospace, and general engineering industries, as well as residential housing projects, excluding defense.
Hexagon recorded second quarter organic growth of 22 percent in South America despite overall economic weakness in Brazil.
EMEA’s ‘mixed’ demand
EMEA (Europe, Middle East, Africa) demand “remains mixed but the region seems to have stabilized” with organic growth of 3 percent in the second quarter. The region represents 41 percent of Hexagon’s overall sales.
In Western Europe, demand was up in the North but continued to be weak in the South. Overall, demand for measurement hardware and software products for infrastructure projects remained weak in the second quarter, Hexagon said.
European demand from the automotive and manufacturing sectors also “weakened sequentially” in the quarter and demand for public safety software weakened due to government budget cuts.
Demand in the Middle East continued to increase, while Eastern Europe and Russia reported a weaker quarter.
China leads Asian demand
Asia also recorded organic growth in revenue of 3 percent in the second quarter, and represents 27 percent of Hexagon’s overall sales. The region’s primary growth contributor was, once again, China, which recorded 9 percent organic growth, primarily driven by strong demand in infrastructure related businesses, specifically rail, subway and monitoring software.
Demand from China’s power and energy markets was also strong in the quarter, while demand in the automotive segment there remained high but the growth rate has significantly slowed down, Hexagon said.
Other rapidly expanding Asian markets during the quarter were Malaysia, Indonesia, Philippines, New Zealand, India and Korea. Growth was held back in the region by Australia, due to the downturn in the mining sector, and Japan, due to weakening demand and the depreciating Japanese yen.