Heckler & Koch : Second quarter 2023

SECURITY REF. ISIN: DE000A11Q133

H&K AG

QUARTERLY REPORT

Results for the

six-month period to June 30, 2023

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 six-month period ended June 30, 2023

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

Sales in the first half of 2023 were €150 million, a decrease of €6 million compared to the first half of 2022 with lower sales in the US being partially compensated by higher sales in Germany and the UK. We generated €31.7 million EBITDA in the half-year, a decrease of €7.6 million compared to H1 2022, including €2.7 million for the retirement of capitalised development costs relating to projects that were cancelled due to changed conditions. The Group continues to generate positive earnings after tax. Cash and cash equivalents decreased by €7 million during the half-year with, in particular, net cash outflows for higher inventory and capex levels (including €2.5 million for land purchased in Germany) being partly compensated for by the net proceeds from the capital increase described below.

In May 2023 H&K AG was able to successfully implement a rights issue and associated debt-equity swap. As part of the capital increase, €95 million hybrid loans from two shareholders were contributed as contributions in kind and thus converted into legal equity of the Company. As a result of the capital increase, the Company's share capital was increased by €7.8 million to €35.5 million by issuing new no-par value bearer shares in the Company with the same dividend rights as all other outstanding ordinary shares of the Company, including full dividend rights for the financial year ended December 31, 2022. In line with an external valuation of the Company, the new shares were priced at €13.40 per share (a 78% increase over the price determined for the 2017 rights issue); €1.00 per share was recognised in share capital and the balance in additional paid in capital. The capital increase was entered in the commercial register on May 17, 2023 and the new shares were included in the existing price fixing on Euronext Access Paris on May 19, 2023.

Overall, the subscription rate for all new shares offered was 99.3%; this significantly exceeded our expectations. We would like to thank our shareholders for their participation in the capital increase and the confidence they have thus shown in the Company. The gross proceeds from the cash capital increase amounted to €10.1 million. The Company intends to use the net proceeds from the capital increase for investments in production facilities and infrastructure at its site in Oberndorf am Neckar. Both the significant improvement in the legal equity base, as a result of the conversion of the hybrid loans, and the new cash received by the Company will enable the Company in the coming periods to continue on the successful course of recent years.

As described in the 2022 annual accounts, the hybrid lenders' entitlement to interest only applies if the Annual General Meeting ("AGM") of H&K AG resolves to distribute dividends to ordinary shareholders relating to the corresponding business year. The AGM in June 2023 resolved dividends relating to 2022 and consequently the hybrid lenders' entitlements to interest relating to 2022 were also recognised in June 2023. The dividends resolved were paid to shareholders in June 2023 (€1.4 million).

During its session on December 14, 2022, the Budget Committee of the German Parliament approved funds for the successor to the G36 assault rifle. The "System Assault Rifle Bundeswehr", a new assault rifle from Heckler & Koch GmbH based on the HK416 A8, will replace the G36 as the standard assault rifle for the German Army. The first test weapons will be made available in 2023; series production is planned for 2025. The selection decision was actually made in the Spring of 2021, however review proceedings against the decision initiated by an unsuccessful tenderer delayed the contract signature. The contract was signed in January 2023.

As we commented previously, 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 long-standing and also as a result of the current situation. Inflation has started to affect our suppliers and consequently their prices

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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.

Guidance:

In Q3 2023, as usual given the holiday period, we currently expect to achieve slightly lower net sales and EBITDA than in Q2 2023. Net working capital is currently expected to be at a similar level to the end of Q2 2023; the resulting operating cash flow is currently expected to be negative.

In July 2023, with the agreement of all parties, the initial termination date of the CFA was extended by one year, to August 17, 2026. In August, in line with the contracted repayment schedule, we repaid €5 million of CFA loan Facility A.

Following the exceptionally good results achieved in our financial year 2022, overall we currently expect our net sales and EBITDA for 2023 to be above those achieved in 2021.

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 June 30, 2023 and 2022 and the related unaudited, interim, consolidated statements of income, comprehensive income, equity and cash flows for the six-month periods ended June 30, 2023 and 2022 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 six-month periods to June 30, 2023 and 2022.

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Unaudited, Interim, Consolidated Statement of Financial Position

(€ millions)	30.06.2023	31.12.2022
Property, plant & equipment	68.5	67.9
Intangible assets - goodwill	5.1	5.1
Intangible assets - other	42.5	43.5
Other investments	2.4	2.4
Deferred tax assets	18.1	16.8
Total non-current assets	136.6	135.7
Inventories	132.0	117.6
Prepayments for inventories	0.9	0.1
Prepayments for other current assets	0.2	0.2
Other deposits	0.2	2.5
Current tax assets	0.1	1.1
Trade receivables	36.6	29.9
Other receivables	4.1	5.3
Cash & cash equivalents	28.9	35.8
Total current assets	203.1	192.5
Total assets	339.7	328.2
Equity
Share capital	35.5	27.6
Additional paid in capital	148.6	53.0
Other reserves	(9.5)	(9.3)
Consolidated retained earnings	(89.4)	(96.0)
Total equity attributable to H&K AG shareholders	85.2	(24.7)
Equity attributable to hybrid capital investors	9.5	95.0
Total equity	94.7	70.3
Liabilities
Loans & borrowings	98.0	102.4
Lease liabilities	1.0	1.1
Employee defined benefit obligations	44.4	45.1
Provisions	2.4	2.5
Other payables	0.7	0.1
Deferred tax liabilities	23.5	23.9
Total non-current liabilities	170.1	175.0
Loans & borrowings	9.8	4.8
Trade payables	16.7	21.2
Other payables	16.4	13.8
Contract liabilities	13.3	18.7
Derivatives	0.2	1.5
Tax liabilities	7.6	8.3
Other provisions & accruals	10.8	14.6
Total current liabilities	74.8	82.9
Total liabilities	244.9	257.9
Total equity & liabilities	339.7	328.2
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