Industry Week in Review – December 12, 2014
Aerospace & Defense Update
This week, both Boeing and Airbus announced cuts to monthly production rates of their respective wide-body jets. The Companies have cited a decrease in demand for their long-range, wide-body jets as airlines have opted for smaller, twin-engine jetliners and the cargo market has proven less robust than expected. In response, Airbus will decrease production of the A330 to 9 per month in 2015 with further cuts planned for 2016. The A330 is currently an important contributor to profitability and decreases will negatively affect overall sales and profit. Boeing concurrently reduced production rates of its 747-8 jetliner to 1.3 per month from 1.5 per month, the second iteration of cuts to the program. Production rates for the smaller, 737 and A320 remain high and will help offset losses from the wide-body jet.
Lockheed Martin released information about its top-secret “Skunk Works” business. The program develops advanced weapons systems for the Pentagon and has remained strictly confidential except for a few instances. In an effort to protect its brand and win new orders, the Company dissented from this policy and published a brochure describing the 10 main focus items for “Skunk Works” going forward. The business unit will focus on keeping costs low, working closely with the government, and building prototypes. The move, provoked by fierce competition and pressure from smaller competitors like SpaceX, demonstrates the effects of the shrinking government budget and the importance of remaining nimble in the changing environment. Last quarter, aeronautics margins fell by about 10% and last year, aeronautics sales fell 6%. Despite lack-luster financials, Marillyn Hewson has plans to boost R&D by 5%, to the highest percentage of sales ever. The combination of these trends increases pressure on the “Skunk Works” program and may lead to further public exchanges.
Government Technology Solutions Update
Late Thursday night, the House of Representatives and Senate both passed a two day Continuing Resolution (“CR”) to prevent a government shutdown. While the House narrowly approved an appropriations bill 219-206, the two day extension provides additional time for the Senate to debate the bill. The “cromnibus” (continuing resolution and omnibus) bill funds most of the government through October 2015, allows a 1.0% pay raise for military, blue-collar, and General Schedule employees, and maintains the $1.1 trillion level of spending from last year’s bipartisan deal. Of the total, $492 billion is allocated for civilian agency operations, while $521 billion is for defense spending. A full year of funding enables longer term budget planning within agencies.
However, as the exception to the bill, the Department of Homeland Security (“DHS”) will only be funded through February 27, 2015 under a CR. This portion of the bill, drafted by Republican leaders, aims to push out funding so that immigration concerns are addressed next year when Republicans control both the House and the Senate. The funding for DHS, along with riders that amend parts of the Doff-Frank Act and Federal Election Campaign Act, are currently the main points of debate between parties.
Big Movers
Airbus Group N.V. (Down 7.4%) – Shares were down this week after the Company announced production rate decreases for the A330 and that despite confirmed earnings targets, cash flow would be negative.
Comtech Telecommunications (Down 22.7%) – Shares were down this week after the Company announced first quarter of fiscal year 2015 results. Comtech reported $76.4 million in revenue for the quarter, compared to $83.4 million for the same period last year.
Transactions
BAE Systems to acquire Esterline Corporation’s Eclipse Electronic Systems, Inc., a provider of intelligence, surveillance, and reconnaissance products and services. The deal is worth an estimated $28 million.
Burtek Group acquired Process Fab, Inc., a provider of flight hardware, ground support equipment, and tooling to the spaceflight, aerospace, and defense markets. Terms of the deal were not disclosed.
Periscope Holdings, a portfolio company of Parthenon Capital Partners, acquired BidSync, a provider of cloud-based procurement and bid notification solutions for the public sector. Terms of the deal were not disclosed.
Preferred Systems Solutions (“PSS”) acquired Government Contract Solutions (“GCS”), a provider of program management, acquisition lifecycle management, and systems engineering and integration to federal customers such as the Intelligence Community and the Department of Homeland Security. Terms of the deal were not disclosed.
Vistronix acquired Agency Consulting Group (“ACG”), a provider of information technology support services to intelligence clients. Terms of the deal were not disclosed.
Vistronix acquired Objective Solutions Inc. (“OSI”), a provider of big data, cyber, collection, and advanced analytics to the Intelligence Community. Terms of the deal were not disclosed.
Vistronix acquired ExaTech Solutions Inc., a provider of software, systems and network engineering support to the Intelligence Community. Terms of the deal were not disclosed.
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