Heckler & Koch : 2022 Q3 Report

SECURITY REF. ISIN: DE000A11Q133

SECURITY REF. ISIN: XS1649057640

H&K AG

QUARTERLY REPORT

Results for the

nine-month period

to September 30, 2022

About HK

We are a leading defence contractor in the small arms sector of the European NATO defence industry. We design, produce and distribute small arms, including rifles, side arms, fully automatic weapons and grenade launchers, and a variety of other related products. We supply the armed forces of NATO and its allies and many law enforcement agencies. We have been in operation for more than 70 years and have a strong history of design innovation. We have a strong management team and a highly skilled work force. Our brand name, Heckler & Koch, is well respected and our products are widely considered to be of the highest quality.

Our sales strategy remains focussed on so-called "Green Countries"; the "Green Country Strategy" is a self-imposed filter to the member countries of NATO, the EU and the NATO-equivalent countries (Switzerland, New Zealand, Australia, Japan). In addition to these, for countries that are classed as partners by the German government, deliveries may be approved on a case-by-case basis. This "Green Country Strategy" is not only fully in line with the laws, regulations, requirements and restrictions that the German Government has issued for defence exports but goes significantly further. The focus on "Green Countries" since 2016 has stabilised the Group's forecasting and delivery capabilities.

For more information, please visit our web site:

www.heckler-koch.com

Analysts, investors, media and others seeking financial and general information, please contact:

Investor Relations

E-mail:[e-mail]

Public Relations

E-mail:[e-mail]

Note regarding forward-looking statements

This report includes forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "anticipates," "expects," "intends," "may," "will" or "should" or, in each case, their negative, or other variations or comparable terminology, or by discussions of strategy, plans or intentions. These forward-looking statements include statements that are not statements of historical facts and relate to our current intentions, beliefs or expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report, in statements made by HK representatives in their presentations or in a "Question and Answer" period following such presentations. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

We undertake no obligation to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise. All written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the above cautionary statements.

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Results as at and for the nine-month period ended September 30, 2022

Chief Executive Officer Dr Jens Bodo Koch and Chief Financial Officer Dr Björn Krönert commented:

Sales in the first nine months of 2022 were €226 million, over 7% higher than in the first nine months of 2021. We generated €62 million EBITDA in the same period, an increase of 44% over the first nine months of 2021. Cash and cash equivalents fell by €13.7 million during the first nine months of 2022, with operating cash-flow generated being sufficient to finance the cash flows for our investing activities and interest payments but some of our own funds being used in the refinancing described below. This continuing strong performance is the result of successful, ongoing optimisation programmes and modernisation over the past four years, so that we are once again a profitable and innovative company.

In August 2022, the Group received a new term loan and revolving credit facility from a consortium of banks and used €50 million of these funds, together with cash balances, to repay the then remaining balance of the SFA loan (€72.5 million nominal, plus interest). We currently expect to draw on these and other facilities again in December to repay the listed notes.

To strengthen the Group's equity position, in August 2022 the three shareholder loans were converted to hybrid loans totalling €95 million. As a result previously accrued interest for 2022 was reversed since interest for the hybrid loans will not be recognised for 2022 unless the AGM in 2023 decides to pay dividends for 2022. Accrued interest to December 31, 2021 will be paid in Q4 2022. In a next step we currently expect that these loans will be converted into equity in 2023.

As we commented in our Q4 2021 and Q1 2022 reports, the Russian invasion of Ukraine in February 2022 has made it clear that the defence industry is crucial when it comes to maintaining and defending democracy, liberty and human rights. This has led to a paradigm shift in Germany. A few days after the beginning of the war, German Chancellor Olaf Scholz announced that a special fund would be set up; this fund together with the annual budget allocations are to be used for necessary investments and armament projects of the German Armed Forces. In addition, he announced that the defence budget would be permanently increased to "more than two percent" of the gross domestic product. Other nations have similar programmes to improve their defence capabilities, in some cases longstanding and also as a result of the current situation. We currently expect any such additional orders from our current customer base to be for delivery in later years. Inflation has started to affect our suppliers and consequently their prices to us; we are able to pass on some of these effects to our customers where we have price escalation clauses in our existing sales contracts and are taking this into account when pricing new contracts.

In Q1 2021, the German Federal Office of Bundeswehr Equipment, Information Technology and In- service Support (BAAINBw) informed us that, since the only other competitor had been excluded from the procurement procedure, it was intended that the new assault rifle for the German Army be procured from HK. That competitor requested a review of the BAAINBw's decision, however in June 2021 the German Federal Cartel Office (BKartA) rejected the challenge. The competitor filed an appeal against the BKartA's decision but in June 2022 this was rejected as unfounded. Consequently, the competitor is legally excluded from the award procedure for replacement of the G36 standard assault rifle for the German Army and HK is now the only remaining bidder in this tender. We currently expect the contract to be signed in Q4 2022 and the main sales to begin in 2025.

As previously reported, due to the preventative measures we implemented to protect our employees and our business, together with proactive communication with customers and suppliers, the corona pandemic has not led to significant restrictions on our delivery chain so far. However at this point in time, our forecasts for the balance of 2022, remain subject to the effects of potential more dangerous new virus mutations. The following guidance for the next quarter is based on the current situation, as it is known to us today, and so the actual Q4 2022 results may vary.

Q4 2022 Guidance: In Q4 2022 we currently expect to achieve slightly higher net sales with a similar EBITDA compared to Q3 2022. Net working capital is currently expected to be at a similar level to the end of Q3 2022; the resulting operating cash flow is currently expected to be positive. We currently expect to use part of the new Facilities signed this August to refinance our Notes in Q4 2022.

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Note regarding presentation of financial information

Some financial information in this report has been rounded and, as a result, the totals in this report may vary slightly from the exact arithmetic aggregation of the figures that precede them.

Certain financial information in this release has been derived from our unaudited, interim, consolidated statements of financial position at September 30, 2022 and 2021 and the related unaudited, interim, consolidated statements of income, comprehensive income, equity and cash flows for the nine month periods ended September 30, 2022 and 2021 prepared in accordance with IFRS, subject only to normal year-end audit adjustments and the absence of notes.

Attached are our

• Unaudited, Interim, Consolidated Statement of Financial Position
• Unaudited, Interim, Consolidated Income Statement
• Unaudited, Interim, Consolidated Statement of Comprehensive Income
• Unaudited, Interim, Consolidated Statement of Changes in Equity, and
• Unaudited, Interim, Consolidated Statement of Cash Flows

with figures determined according to IFRS as at and for the nine-month periods to September 30, 2022 and 2021.

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Unaudited, Interim, Consolidated Statement of Financial Position

(€ millions)	30.09.2022	31.12.2021
Property, plant & equipment	62.3	61.7
Intangible assets - goodwill	5.1	5.1
Intangible assets - other	42.6	40.3
Other investments	3.8	9.5
Deferred tax assets	12.3	11.8
Total non-current assets	126.2	128.4
Inventories	115.7	96.7
Prepayments for inventories	0.2	0.6
Prepayments for other current assets	0.7	0.3
Other deposits	3.1	4.4
Current tax assets	0.3	0.1
Trade receivables	30.1	28.9
Other receivables	5.5	3.2
Cash & cash equivalents	32.8	46.5
Total current assets	188.4	180.9
Total assets	314.6	309.3
Equity
Share capital	27.6	27.6
Additional paid in capital	53.0	53.0
Other reserves	(17.2)	(19.2)
Consolidated retained earnings	(117.5)	(146.7)
Total equity attributable to H&K AG shareholders	(54.1)	(85.3)
Equity attributable to hybrid capital investors	95.0	-
Total equity	40.9	(85.3)
Liabilities
Loans & borrowings	103.4	163.1
Lease liabilities	0.9	1.0
Derivatives	1.2	-
Employee defined benefit obligations	58.9	60.5
Provisions	2.9	2.9
Deferred tax liabilities	23.9	21.6
Total non-current liabilities	191.1	249.1
Loans & borrowings	4.8	79.4
Trade payables	15.1	19.0
Other payables	21.1	12.2
Contract liabilities	12.1	13.0
Derivatives	4.7	1.1
Tax liabilities	7.5	3.9
Other provisions & accruals	17.2	16.8
Total current liabilities	82.6	145.5
Total liabilities	273.7	394.6
Total equity & liabilities	314.6	309.3

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