The U.S. credit rating was affirmed at the top-notch triple-A level with a stable outlook this week by Fitch Ratings.  This affirmation negates the “rating watch negative” the firm placed on the country’s ratings back in October.  Additionally, the firm said it does not expect any developments in the near-term that would lead to a U.S. rating downgrade and suspects that the debt limit will be suspended or raised again in March 2015.  If ratings had been cut by Fitch, it could have prompted big institutional investors to  sell Treasury bonds, since investment rules constrain some institutions to only invest in securities rated triple-A by at least two major rating firms.

As Airbus and Boeing raise production to all-new levels in response to record numbers of orders, officials from both manufacturers this week have said that the global air transport industry is now much more resistant to current potential market fluctuations and possible threat of a “market bubble” threatening the companies’ combined backlog of more than 10,000 aircraft.  Among the factors supporting the optimism, officials stated the market is looking better in 2014 with expected traffic growth of 6% throughout the year, as well as revenue passenger kilometers and freight traffic showing early signs of climbing beyond 2013 levels.  In addition, both Boeing and Airbus also report signs of a continued recovery in the cargo market and airlines becoming more profitable, led by continued operational improvements in the U.S. and positivity within the leasing and secondary markets.  Boeing finished 2013 with a record order backlog of 5,100 aircraft valued at nearly $400 billion and expects to deliver up to 725 aircraft this year.  Airbus currently holds an order backlog of 5,560 and plans to deliver 630 aircraft this year.

On the government contracting front, the SBA, in a recent decision, held that unless the Contracting Officer expressly requires recertification, a company’s size for an 8(a) set-aside task order is governed by that company’s size status for the underlying GWAC.  Therefore, size recertification is not required for individual task orders within a specific GWAC.

Big Movers

Mercury Systems, Inc. (Up 16.0%) – Shares were up this week as it was speculated that the Company is entertaining offers for a potential sale.

Relevant Transactions

Precision Castparts Corporation to acquire Aerospace Dynamics International, a provider of machined parts and assemblies to the commercial and military aerospace industries.  Precision Castparts will pay $625 million for the acquisition.

Lockheed Martin Corporation acquired BEONTRA AG, a German provider of integrated planning and demand forecasting tools for airports around the world.  Terms of the deal were not disclosed.

Carlyle Group’s Landmark Aviation acquired Midlantic Jet Aviation, Inc. and Midlantic Jet Charters, Inc., a provider of fixed base operations and charter services in the northeast United States.  Terms of the deal were not disclosed.

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President Obama released his 2015 budget on Tuesday, requesting $3.9 trillion in budget authority for the upcoming fiscal year.  Among the budget’s priorities are diplomatic security, domestic infrastructure, research and development, cybersecurity, and education and job training, in addition to a separate request for a $56 billion “Opportunity, Growth, and Security” fund designed to boost spending in areas such as research at the National Institutes of Health.  Key departments in which increased spending over 2014 is requested include the Department of Commerce (+6.0%), Department of Veterans Affairs (+3.0%), Department of Energy (+2.6%), and Department of Transportation (+2.2%).

The Department of Defense’s proposed spending and program cuts in President Obama’s 2015 budget request were in line with expectations established from Chuck Hagel’s budget preview a week prior.  The Pentagon’s proposed base budget of $495.6 billion is in compliance with spending caps imposed by the Budget Control Act and the Ryan-Murray budget deal.  Overseas Contingency Operations funding is still undecided until a final decision on troop presence in Afghanistan is made, but is expected to be around $79.5 billion.  The budget cancels and reduces several key programs and personnel including the cancelling Ground Combat Vehicle and reducing active duty military to as low as 440,000.

Big Movers

AeroVironment, Inc. (Up 15.2%) – Shares were up this week after the Company announced positive fiscal third quarter results with earnings of $0.34 per share, which was well above the consensus analyst estimates of $0.19 per share.

Federal Signal Corporation (Up 14.7%) – Shares were up this week after the Company reported strong fiscal fourth quarter results with revenue and operating income up 14% and 65%, respectively, compared to the same period last year.

Relevant Transactions

TransDigm Group Inc. acquired Elektro-Metall Export GmbH, a German provider of electromechanical actuators, electrical and electromechanical components and assemblies for commercial aircraft, helicopters and other specialty applications.  TransDigm paid $47.4 million for the acquisition.

L-3 Communications Holdings Inc. acquired Data Tactics Corporation, a provider of Big Data analytics and cloud computing solutions and services, primarily to the U.S. Department of Defense.  Terms of the deal were not disclosed.

Constellis Group Inc. acquired Strategic Social LLC, a provider of public safety technology, business consulting, and program management solutions to commercial and government customers in challenging and austere environments.  Terms of the deal were not disclosed.

Cubic Corporation acquired Intific Inc., a provider of software and game-based resources for modeling and simulation, training and education, cyberwar, and neuroscience applications.  Terms of the deal were not disclosed.

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International sales continue to play an important role in 2014 within the aerospace and defense industry as companies look to diversify revenue and operations amidst domestic budget uncertainty.  This week, Sikorsky and Boeing both inked multi-billion dollar international deals.  The Turkish government and Sikorsky signed a contract for 109 Sikorsky T-70 Black utility helicopters in a deal worth an estimated $3.5 billion.  The majority of the aircraft will go to the Turkish Armed Forces, with Army, Navy, Air Force, and Special Forces receiving the remainder.  Australia agreed to purchase eight of Boeing’s P-8A Poseidon long-range maritime reconnaissance planes in a deal worth an estimated $3.6 billion.  The purchase is aimed to boost Australia’s ability to patrol its 2.5 million square kilometer marine jurisdiction, part of a growing trend by Asia-Pacific nations to protect commercial maritime interests as tensions in the region continue to rise.  Both sales provide an important boost for Sikorsky and Boeing’s defense divisions, which experienced a down year in 2013 due to cuts in defense spending.

In a continued effort to address the growing cybersecurity threat, Defense Secretary Chuck Hagel announced Tuesday that the Department of Defense’s cyber budget will receive an increase in requested funding for GFY15.  Secretary Hagel noted that the Pentagon “will increase spending to help improve its cyber capabilities, including a larger focus on cyber security, intelligence gathering, and reconnaissance,” in order to combat the growing frequency of cyber-based attacks which some defense officials have called the greatest threat to U.S. national security.  Hagel’s announcement underscores the continued opportunity for contractors operating in this priority market.

Big Movers

NCI Inc. (Up 27.8%) – Shares were up this week after analysts raised the consensus fiscal year 2014 earnings estimate from $0.40 per share to $0.49 per share, representing an increase of 22.5%.

Relevant Transactions

Ultra Electronics Holdings plc acquired 3Phoenix, Inc., a provider of sensor and processing systems in the areas of sonar, radar, intelligence, surveillance, and reconnaissance.  Ultra Electronics paid $70 million for the acquisition.

ManTech International Corporation acquired Allied Technology Group, Inc., a provider of engineering and information management solutions to civilian, military, and intelligence agencies.  Terms of the deal were not disclosed.

Tangible Security, Inc. acquired A & N Associates, Inc., a provider of information assurance and acquisition management services to defense, intelligence, and federal agencies.  Terms of the deal were not disclosed.

Camber Corporation acquired Avaya Government Solutions’ IT Professional Services Business, a provider of full lifecycle support services to Federal government customers.  Camber paid $100 million for the acquisition.

Sapient Government Services, a division of Sapient Corporation, acquired OnPoint Consulting, Inc., a provider of technology and management consulting solutions in the areas of cybersecurity, enterprise architecture, and infrastructure systems to civilian and defense agencies.  Terms of the deal were not disclosed.⁽¹⁾

(1) KippsDeSanto & Co. acted as the exclusive financial advisor to OnPoint Consulting, Inc.

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With the March 4^th submission of the fiscal 2015 budget approaching, more information detailing plans of future spending and potential cuts continue to be determined.  Among the departments soon to realize their respective fates, the Air Force is expecting to take severe cuts to personnel and platforms.  The overall theme of the budget is the question of capability and necessity today or in the future, creating a difficult landscape as current and previous programs are being cut to keep future modernization programs, such as the KC-46A tanker and F-35 joint strike fighter programs, moving forward.  Air Force Secretary Deborah Lee James confirmed that service personnel will decrease to sustain a smaller force in the near term in order to resource needed modernization programs.  Some of the cuts do not come as a surprise, including the A-10 platform in favor of multifunction platforms, as well as the KC-10 and MC-12 aircraft and surveillance platforms.  Other notable changes include shifting funding from the highly-favored U-2 manned spy plane program to the Global Hawk long-range drone system and reducing the number of Reaper and Predator unmanned combat air patrols.  However, even with program and funding cuts, Air Force officials remain confident that the department will remain sharply focused and highly capable on the cutting edge of new technology to meet the country’s needs moving forward.

Engility Holdings, Inc. completed its $120 million acquisition of Dynamics Research Corporation, Inc. (“DRC”) on January 31st.  Investors have responded positively to the acquisition, with Engility’s stock price up ~21% since the deal was announced on December 23^rd.  The acquisition is expected to be immediately accretive to Engility’s full-year 2014 earnings, and expands the company’s presence within high-end defense, intelligence, and healthcare markets, as well as its access to key prime contract vehicles such as CIO-SP3.

Big Movers

MAXIMUS, Inc. (Up 11.5%) – Shares were up this week after the Company announced positive fiscal quarter results with $406.6 million in revenue, a 42% increase from the same period last year.

Spirit AeroSystems Holdings, Inc. (Down 20.2%) – Shares were down this week after the Company reported disappointing fiscal quarter results, which included a net loss of $587 million.

Relevant Transactions

CapitalWorks, LLC acquired Meriwether Capital’s Capewell Components Company, a provider of specialized industrial, commercial, and military components and tools for the aerospace and defense industry.  Terms of the deal were not disclosed.

Héroux-Devtek, Inc. acquired BBA Aviation Plc’s APPH Ltd. and APPH Wichita, Inc., providers of landing gear and hydraulics systems and assemblies for original equipment manufacturer and aftermarket applications.  Héroux-Devtek paid $124 million for the acquisition.

Wesco Aircraft Holdings, Inc. to acquire Haas Group International Inc., a provider of chemical management, product distribution, and supply chain management for the aerospace, defense, electronics, and manufacturing industries.  Wesco will pay $550 million for the acquisition.

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Bombardier’s rough beginning to 2014 continues as the company announced it would lay off approximately 1,700 employees from its aerospace division, or 4.4% of its aerospace workforce, due to continued difficulties within the tough market and ongoing delays of its CSeries line of aircraft.  Company spokesmen stated that the cuts are part of a companywide cost-containment plan, which has been in place since late 2012 and are not necessarily linked to delays with the CSeries.  Of the affected employees, roughly 1,100 in the Montreal region will be affected while the remaining 600 are in North America, primarily Wichita, Kansas.  Bombardier stated it delivered a total of 238 aircraft in 2013, five more than the previous year, but still 10 fewer than its original forecast.

Following funding cuts in the recently approved omnibus budget bill, the U.S. Army’s Ground Combat Vehicle program has come to a halt.  The Army requested $592 million in its fiscal 2014 request for the continued development of the program, but after Congress slashed $492 million from the request, the next-generation infantry carrier has become no more than a technology development and study program.  Senior officials hope the remaining funding will allow the Army to continue developing technology so that the service can be revived in the future.

Following last week’s passage of the FY14 omnibus spending bill, the White House announced on Thursday that it will release the President’s Budget Proposal for FY15 on March 4^th.  According to the announcement, the proposal will incorporate elements of the budget deal reached in December, which set FY15 discretionary spending at a total of $1.014 trillion.  The Administration noted the partial relief from sequestration achieved by the budget deal would have to be worked into the President’s budget, which had previously assumed steeper spending cuts.

Big Movers

Parker-Hannifin Corporation (Down 10.0%) – Shares were down this week after the Company offered an updated fiscal year 2014 earnings per share outlook that was well below forecasts and analyst estimates.

Moog Inc. (Down 8.1%) – Shares were down this week after the Company announced fourth quarter earnings below analyst estimates, resulting in the Company issuing lower than expected fiscal year 2014 earnings and revenue guidance.

Relevant Transactions

Astronics Corporation to acquire EADS North America Test & Services, Inc., a provider of engineered automatic test systems, subsystems, and instruments for the semi-conductor, consumer electronics, commercial aerospace, and defense industries.  The deal is worth an estimated $53 million.

AVX Learning, LLC acquired Adayana, Inc., a provider of human capital development and organizational performance improvement solutions to various industries including healthcare and the U.S. federal government.  The deal is worth an estimated $5 million.

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