Industry Week in Review – October 26, 2018

KippsDeSanto & Co. Industry Week in Review – October 26, 2018

Summary

Several aerospace and defense and government technology solutions companies announced positive earnings this week. Healthy global air travel and rising military budgets were cited as primary drivers behind the strong earnings reports. Moreover, the U.S Department of Justice continues to prioritize cybersecurity and has formally charged a Russian national in connection with fabricating disinformation throughout the 2016 election.

Aerospace & Defense Update

Numerous aerospace and defense companies announced positive 3Q18 earnings this past week.  Boeing beat earnings per share (“EPS”) estimates by $0.11 (3.2%) and revenue estimates by $1 billion, reporting $25.1 billion of total revenue for 3Q18, reflecting more efficient commercial aircraft production and robust defense business growth highlighted by several major contract awards.  Moreover, Lockheed Martin beat EPS estimates by $0.83 (19.3%) and increased year-over-year revenue 16% to $14.2 billion.  Lockheed’s strong revenue and earnings growth was led by its Aeronautics business unit, which continues to benefit from increased production of its F-35 combat jet program.  Raytheon’s earnings also beat EPS estimates by $0.24 (11.9%) and grew revenue by 8.3% YoY to $6.81 billion, driven by 7% sales growth in its missile systems business unit and 13% sales growth in its intelligence, information and services business units.

StandardAero Aviation Holdings, Inc., a portfolio company of Veritas Capital, is exploring a potential sale that could be worth over $5 billion. StandardAero has a global presence and is one of the largest maintenance, repair, and overhaul providers for Boeing and Airbus’ aircrafts, engines, business jets, and helicopters. Favorable macroeconomic trends including robust global air travel, a proliferating military budget, and the Pentagon’s renewed focus on maintenance and upgrades make StandardAero a desirable acquisition target for a variety of strategic and private equity suitors.

Government Technology Solutions

As it continues its initiative on cracking down on foreign cyber threats, the Department of Justice (“DOJ”) officially charged a Russian national this past week in connection with a disinformation campaign in the wake of the 2016 election. The specifics behind the alleged cybercrime involved funding the creation of fake and politically-contentious information in an effort to stir up political unrest. This public indictment of a foreign national provides one of the first concrete examples of enforcing the U.S. government’s new National Cyber Strategy. The policy, released in September, specified a shift in approach whereby the U.S. would publicly condemn nation states for their involvement in cyberattacks. This year has already seen the DOJ responding to cybercrimes more publicly, including the indictment of nine Iranians for stealing several universities’ data in March, twelve Russians for the Democratic National Committee (”DNC”) hack in July, a North Korean programmer who was involved in some of the biggest cyber-attacks in recent years, and seven Russian military officers earlier this month for the attacks against the World Anti-Doping Agency (“WADA”). As cybercrime is becoming an increasingly popular political weapon for international states, the DOJ intends to respond accordingly publicly condemn and indict foreign cyber criminals, in an attempt to curtail the behavior and lead the way for other Western governments to do the same.

Big Movers

Bombardier (down 15.1%) – Share prices were down this week after Mitsubishi pushed back against claims Bombardier made in a lawsuit that Mitsubishi hired Bombardier engineers and stole trade secrets to expedite production.

General Dynamics (down 10.7%) – Share prices were down this week after the company announced revenue below expectations. Total revenue rose 20% to $9.09 billion but fell short of the $9.38 billion estimated.

Transactions

Applied Insight acquires Organizational Strategies Inc., a provider of analytics, IT and intelligence, surveillance and reconnaissance (“ISR”). Terms of the deal were not disclosed.

Directional Aviation has agreed to acquired SimCom International, Inc., a provider of initial and recurrent pilot training for jet, turboprop, and piston aircrafts using FAA-qualified flight training device and full-motion simulators. Terms of the deal were not disclosed.  

QinetiQ Group, plc. has acquired Inzpire Group, Ltd., a provider of operation training and mission systems for military customers in the UK and internationally. The deal is worth an estimated $30.5 million.

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Industry Week in Review – October 19, 2018

KippsDeSanto & Co. Industry Week in Review – October 19, 2018

Summary

On the heels of the Esterline Technologies / TransDigm deal, L3 Technologies has entered into an agreement to combine with Harris Corporation to form another major player in the defense industry.  In addition to an active M&A market, federal agencies are recognizing the need and benefit of updating legacy infrastructure and incorporating NextGen technologies to drive increased investment in IT over the next few years.

 Aerospace & Defense Update

L3 Technologies and Harris Corporation have agreed to combine in an all-stock deal, which will be the largest-ever defense industry merger.  The combination will form a sixth prime defense contractor focused primarily on defense electronics and communications.  The newly formed entity, L3 Harris Technologies, will be based in Melbourne, Florida and will be approximately $33.5 billion in combined market value.  The two companies are projecting approximately $16 billion in combined revenue this year, which will surpass Huntington Ingalls and BAE Systems.  M&A activity continues to be highly active for the defense market, fueled by premium market valuations and favorable defense spending.  This merger also represents a further hollowing out of the middle of the U.S. defense market, as larger players continue to seek scale through inorganic growth.  This transaction is expected to close mid-way through 2019, pending a review by the Defense Department.

Shortly after midnight on October 17th, the Air Force’s fourth Advanced Extremely High Frequency (“AEHF”) satellite successfully launched aboard an Atlas 5 rocket from Cape Canaveral Air Force Base in Florida.  The AEHF satellite provides highly protected communications for the Department of Defense, offering “survivable, global, secure, protected and jam-resistant communication for high-priority military ground, sea, and air assets,“ according to an Air Force statement.  The fourth AEHF satellite significantly increases communication speed allowing the transmission of real-time video, battlefield maps, and targeting data to help combatant commanders make optimal tactical and strategic decisions.  The prime contractor on this $15 billion Air Force program, Lockheed Martin, is under contract to deliver a total of six AEHF satellites.  The launch of the next satellite, AEHF 5, is scheduled for July 2019.

Government Technology Solutions

This week, FedScoop released the results of a study that details shifting patterns in federal IT investment strategies.  The report, underwritten by IBM, surveyed 169 federal agency IT and program management executives to assess which IT and cloud deployment models are in the highest demand in the technology solutions market.  Agency efficiency has been a key priority for the federal government and the publishers of the survey hope to “break fresh ground in linking how IT investment strategies are helping, and to a certain extent hindering, agencies and their ability to capitalize on many of the benefits cloud computing services can offer,” according to Wyatt Kash, senior vice president of content strategy at Scoop News Group.  Nearly 38% of those surveyed are still investing in on-site, government-run data centers, compared to 20% in government-only community clouds, 7% in public / commercial clouds, 16% in hybrid models, and 19% outsourced, privately managed government cloud / data centers.  While the on-site approach is the least conducive to digital transformation compared to a hybrid approach, risk tolerance and data sensitivity remain areas of concern for many agencies.  Nevertheless, the results of the study indicate a coming shift in investment towards the aforementioned, cloud-friendly approaches that would provide enhanced flexibility and greater scalability for government agencies seeking to retain autonomy over their data.  The study indicates that agencies that devote a greater focus on enhancing cloud capabilities also demonstrate a greater propensity to pursue machine learning and AI to increase mission efficiency.  Not surprising, cloud forerunners are also more apt to early technology adopters.  Federal agency recognition of the need and benefit of updating legacy infrastructure and incorporating NextGen technologies should hopefully drive increased investment in IT over the next few years.

Big Movers

 L3 Technologies (up 10.0%) and Harris Corporation (up 9.0%) – Share prices for both entities were among the biggest movers as news of a merger fueled an increase in stock price for both companies.

Transactions

Harris Corporation and L3 Technologies, Inc. have agreed to merge, the combined entity will create a global defense technology leader, focused on developing differentiated and mission critical solutions.  The deal is worth an estimated $18.7 billion.

Luna Innovations, Inc. has acquired Micron Optics, Inc., a provider of innovative optical components and laser-based measurement technologies.  Terms of the transaction were not disclosed.

Sonardyne International Ltd has acquired Chelsea Technologies Group Ltd., a provider of underwater acoustic products to both civilian and defense customers.  Terms of the transaction were not disclosed.

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KippsDeSanto MarketView Fall 2018

KippsDeSanto MarketView Fall 2018