Industry Week in Review – November 4, 2016

The National Business Aviation Association (“NBAA”) hosted its annual Business Aviation and Convention Exhibition in Orlando from November 1^st through the 3^rd.  During the week, roughly 27,000 visitors from executive management, flight department personnel, sales and marketing, and finance / legal firms visited over 1,100 exhibitors to network, view the newest products, and keep up with the latest trends.  In advance of the conference, Honeywell had released a fairly pessimistic business jet forecast where the Company lowered its 10-year total jet delivery forecast from 9,200 jets to 8,600 jets.  However, the atmosphere at the NBAA conference was still filled with high energy and excitement.

After more than a year of negotiations with Lockheed Martin concerning the ninth lot of Low Rate Initial Production (“LRIP”) for the F-35, the Pentagon has given a unilateral price ultimatum of $6.1 billion to the aircraft manufacturer for production of 57 F-35 aircraft.  The $6.1 billion contract value equates to a price of $107 million per F-35, a 3.7% average decrease over the lot eight price per plane in 2014.  The decision to end negotiations would mark the largest unilateral action in the Department of Defense (“DoD”) history.  F-35 spokesman, Joe DellaVedova, explained the unilateral action saying, “[the Pentagon] believed further negotiations would not result in the government and Lockheed coming to an agreement on total price.”  At this stage, Lockheed must either accept the $6.1 billion dollar terms or appeal the contract.

Government Technology Solutions Update

On Monday, the Court of Federal Claims issued an oral ruling in favor of Palantir Technologies Inc. in a lawsuit the company filed against the U.S. Army.  Palantir claimed that the Army was in violation of the 1994 Federal Acquisition Streamlining Act when it decided to bypass pre-existing commercial solutions in building out the latest phase of its Distributed Common Ground System (“DCGS”).  DCGS is an Army platform which collects and analyzes surveillance and other intelligence in order to promote situational awareness and support the decision-making capabilities of battlefield leaders.  Palantir, which specializes in big data analytics and data mining, claimed that its Gotham platform was robust, proven, and versatile enough to be used by the Army for DCGS, and tried unsuccessfully to compete for the contract.  The ruling from the Court of Federal Claims is one of the first upholding the Acquisition Streamlining Act, which compels Federal agencies to seek existing commercial solutions before attempting to proprietarily develop them. If this decision is upheld and more strictly enforced, it could prove to be a momentous shift in the manner through which Federal agencies procure future solutions.

During its third-quarter earnings call on Thursday, Leidos announced that it had already met its 2016 cost savings target after its $4.6 billion acquisition of Lockheed Martin’s Information Systems & Global Solutions segment, which closed earlier this year.  Leidos had originally estimated that it would likely recognize approximately $25 million in cost synergies in 2016 alone, but it is now on pace to surpass this figure.  The company further projects that the total cost savings in future years could be worth as much as $350 million.  A large portion of identified savings comes from the upgrade and integration of IT systems and back office accounting and finance systems, a reduction in pension costs, and the paring down of real estate assets, all of which Leidos hopes will increase efficiency and eliminate redundancy in the newly merged entity. Leidos attributes the timely recognition of these synergies to the effective pursuit and execution of diligence and integration preparation efforts against an aggressive timeline.

Big Movers

Leidos (up 5.7%) – Shares were up this week after Leidos raised its revenue and earnings per share guidance and announced it had already met its 2016 cost saving targets resulting from the acquisition of Lockheed Martin’s Information Systems & Global Solutions segment.

Spirit AeroSystems (up 6.4%) – Shares were up this week after Spirit AeroSystems announced share repurchases worth $600 million

Transactions

Altamira Technologies Corp. has acquired APG Technologies, Inc., a provider of advanced data management, private cloud engineering, as well as information assurance and cybersecurity services for a variety of DoD and IC clients.  Terms of the deal were not disclosed.

 EDAC Technologies Group has acquired Flanagan Industries, a provider of precision machined and fabricated aerospace engine components and assemblies.  Terms of the deal were not disclosed.

EQT Partners AB has agreed to acquire CHEP Aerospace Solutions, a provider of lightweight pooling solutions and a range of ULDs that include aluminum and lightweight containers, standard and heavy-duty pallets, as well as specialty ULDs.  The deal is worth an estimated $130.0 million.

Ferro Corporation has acquired Electro-Science Laboratories, Inc., a provider of thick-film pastes and ceramic tape systems that enable important functionality in a wide variety of industrial and consumer applications.  The deal is worth an estimated $75.0 million.

Global Aviation Services, LLC has acquired D&D GSE, a provider of leading ground support equipment maintenance.  Terms of the deal were not disclosed.

Huntington Ingalls Industries Inc. has agreed to acquire Camber Corporation, a provider of engineering and technical solutions, including agile software development and cybersecurity, to Department of Defense (“DoD”), Intelligence Community (“IC”), and Civilian customers within the Federal government.  The deal is worth $380 million and is expected to close this quarter.

Mercury Systems, Inc. has agreed to acquire CES Creative Electronic Systems, SA, a provider of subsystems solutions including primary flight control units, flight test computers, mission computers, and command / control processors.  The deal is worth an estimated $38.0 million

Satcom Direct, Inc. has agreed to acquire TrueNorth, Inc., a provider of satellite communications solutions for business jets and avionics OEMs.  Terms of the deal were not disclosed.