Industry Week in Review – May 1, 2015
Aerospace & Defense Update
Northrop Grumman and General Dynamics, in their earnings calls earlier this week, reiterated that their stock buyback programs will remain preferred methods of cash deployment. Recently, each of the two contractors has participated in extensive share repurchases. Northrop Grumman has bought back roughly a quarter of its shares between 2013 and 2015, and returned nearly $1 billion to shareholders through repurchases and dividends in the first quarter of 2015. Meanwhile, General Dynamics spent $826 million on share repurchases, or 1.3x free cash flow from operations, during the first quarter of 2015. According to the companies, an absence of highly attractive acquisition targets and strong operating performance continue to prompt share repurchase initiatives, rather than M&A transactions.
Early Thursday morning, the House Armed Services Committee (“HASC”) approved its version of the national defense authorization act (“NDAA”). The bill provides the Pentagon a $495.9 billion base budget and an additional $89.2 billion in the overseas contingency operations (“OCO”) account. Notably, the HASC legislation provides the Navy with $1.15 billion to buy twelve additional F/A-18 Super Hornets, while setting aside $1 billion for the Marine Corps to purchase six F-35Bs, in addition to the nine it had already requested. Moreover, for the second year in a row, the bill rejects the Air Force’s attempt to retire its fleet of A-10 attack planes, instead adding $682.7 million beyond what the Obama administration had requested for the program. Ultimately, the HASC authorized legislation is viewed as largely favorable to the Department of Defense and industry, with funds allocated beyond requested levels for a number of programs.
Government Technology Solutions Update
The House of Representatives adopted a non-binding budget plan this Thursday by a 226-197 margin, which will be passed to the Senate for a vote next week. The plan aims to balance the budget in nine years and proposes more than $5 trillion in spending cuts during this time, primarily through reduced spending on social welfare programs such as ObamaCare. However, it would give the Pentagon an additional $38 billion of funding in GFY2016 and an additional $90 billion boost to defense spending through an off-the-books war fund. President Obama is expected to block the defense spending boost unless Congress agrees to relief for domestic programs.
The Federal Bureau of Investigation (“FBI”) has announced a cyber solicitation seeking contractors with the ability to recruit, retain, and replace operational cyber subject matter experts (“SME”). The FBI is looking to build a base of cleared cyber contractors to pull from on an as-needed basis for tasks of varying scope and complexity. SMEs would work directly with the FBI on consultations, data collection and analysis, intelligence interviewing, training, policy development, and project implementation and management. The request for proposal (“RFP”) is expected before May 6th and awards are anticipated between August and September.
Big Movers
General Dynamics (Up 4.5%) – Shares were up this week after the company released earnings for the first quarter of 2015. Earnings per share increased 25.1% to $2.14 and beat analysts’ estimates of $1.94.
BAE Systems plc (Up 1.9%) – Shares were down this week after the company reported first quarter revenue of $2.7 billion, down 8.3% from the same period last year and missing analysts’ estimates of $2.79 billion.
Transactions
TransDigm Group, Inc. to acquire the assets of the aerospace business of Pexco LLC, a manufacturer of extruded plastic interior parts for use in the commercial aerospace industry. The deal is valued at $496 million.
Special Aerospace Services (“SAS”) acquired C&C Manufacturing Corp., a provider of precision machining solutions in plastics, non-ferrous, and ferrous metals for aerospace, aviation, and commercial customers. Terms of the deal were not disclosed.
Hava Elektronick Sanayii (Havelsan) to acquire Quantum3D, Inc., a provider of commercial-off-the-shelf open-architecture real-time simulation and ruggedized embedded computing solutions for government and commercial applications. Terms of the deal were not disclosed.
British Engines Limited to acquire Michell Bearings business of Rolls-Royce plc, a manufacturer of hydrodynamic bearings for a wide range of marine and industrial applications. The deal is valued at $19.1 million.
American Securities, LLC acquired Royal Adhesives and Sealants, LLC, a provider of proprietary, high-performance adhesives, sealants, and specialty formulated products designed to solve complex bonding, laminating, and sealing applications. Terms of the deal were not disclosed.
Universal Manufacturing Company, Inc. acquired Ultra Machine & Fabrication, Inc., a provider of precision cutting, bending, welding, coatings services, as well as a manufacturer of precision armor parts and weldments. Terms of the deal were not disclosed.
ManTech acquired Welkin Associates, Ltd, a provider of mission-centric services in high-end systems engineering and advanced national security technology and business services. Welkin was formerly a wholly-owned subsidiary of CSC. The deal is valued at $34 million and Welkin generated 2014 revenue of $33 million.
