Boeing started the year on a high note as the Company announced it set a new record of deliveries in 2013 in addition to coming to an agreement with machinist union members surrounding assembly work for the new 777X.  Driven by high production rates on the 737, 777, and 787 lines of aircraft, which the OEM has been steadily ramping up over the past few years, Boeing delivered 648 commercial aircraft in 2013.  This is the second time Boeing has exceeded 600 deliveries, with the first time just last year in 2012 when the Company delivered 601 aircraft.  Deliveries of the 737 made up the majority with 440 units while the 777 contributed 98 deliveries.  As orders continue, specifically for the newest 777X, Boeing was able to come to an agreement with union members to keep assembly work in the state of Washington, following two months of speculation.  The agreement, which passed in the slimmest of margins, extends current contracts by eight years through 2024.  Among the agreements in the contract, workers will receive a 4% general wage increase as well as replacing pension-plan accruals in 2016 with defined-contribution savings retirement plans.  Boeing is now expected to start construction in November of the new 1.1 million square foot wing manufacturing site in the Puget Sound area.  The site requires $4 billion in new investment and will employ up to 3,000 workers while the current Everett site will house the 777X final assembly line.

In his new memoir scheduled to be published next week, former Secretary of Defense Robert Gates makes interesting comments on the Obama administration, specifically on defense-related issues including policy toward the war in Afghanistan.  Gates, who served as defense secretary from 2006 to 2011 under both George W. Bush and Barack Obama, is critical of Obama’s own skepticism but still considers him “a man of personal integrity”.  In a statement issued by a National Security Council spokeswoman, Obama stated he deeply appreciates Gates’ service and welcomes differences of view, which serve to broaden his options and enhance policies.

Big Movers

TASER International, Inc. (Up 19.2%) – Shares were up this week after the Company announced strong fourth quarter results with large orders from 13 customers for its conducted electrical weapons and 29 agencies deploying its next generation smart weapons.

FLIR Systems, Inc. (Up 11.3%) – Shares were up this week after the Company introduced its Lepton thermal-imaging camera core, one of the world’s smallest microbolometer-based thermal-imaging camera cores, which will be used in the new FLIR One, a smartphone case that turns phones into fully functional night vision cameras.

Relevant Transactions

Vance Street Capital LLC’s Secure Communication Systems, Inc. acquired Relativity Capital LLC’s Tactical Micro, Inc.⁽¹⁾, a provider of ruggedized electronics for military, homeland security, and transportation markets.  Terms of the deal were not disclosed.

(1)    KippsDeSanto & Co. acted as financial advisor to Tactical Micro, Inc.

Click here to review comparable company analysis.

M&A activity in the aerospace / defense industry in 2013 was decidedly mixed.  The headline is that 158 industry transactions were announced during the year, down from 2012’s 177 transaction announcements (see chart below).  Essentially all of this decline in transaction volume was attributable to activity involving companies primarily serving the defense sector, where the number of deals slid from 77 to 58.  Deal volume involving target companies operating primarily in the commercial aerospace sector, on the other hand, was flat (albeit at a very high level), with 100 announced transactions in both 2013 and 2012.  Clearly, the uncertain defense budget environment had a significant impact on deal activity in 2013.

Valuations are extremely difficult to generalize since there is a greater amount of buyer selectivity than there has been in previous years.  But general valuation trends mirror the trends in volume – multiples for transactions involving defense companies settled into a lower range, while multiples in the aerospace sector remain at cyclical highs.

From a size perspective, 2013 witnessed the continuation of a trend that has prevailed in the aerospace / defense industry for several years:  the predominance of middle-market sized deals.  Fully 97% of the transactions in the industry were for enterprise values of less than $500 million (see chart below).  Moreover, mega-deals of greater than $1 billion in enterprise value were few and far between, with only two such transactions (Rockwell Collins’ acquisition of ARINC for $1.4 billion and Textron’s acquisition of Beechcraft for $1.4 billion) announced in 2013.

What do we predict will happen for aerospace / defense M&A activity in 2014?  The commercial aerospace market continues to roar along, with healthy backlog and strong visibility for years’ worth of production.  Barring an economic slowdown, we would expect transaction volume to proceed at already robust levels, with perhaps a pause in valuations that seem to be cresting.  In the defense sector, one of the factors that created the biggest drags on activity in 2013 – the lack of certainty around the budget / funding environment – has been removed with the budget deal struck in December 2013.  We predict that this will loosen the constraints on deals in 2014, providing a confidence boost to buyers eager to do strategic deals.  That said, the defense market is still in the early stages of an anemic “growth” cycle, which will put a crimp on super-premium valuations.

M&A Deals by Announce Date and Size

Source: CapitalIQ and KippsDeSanto Research

After the Senate voted to pass the 2014 National Defense Authorization Act (“NDAA”) last week, President Obama signed the legislation into law on Thursday.  The bill now assures $552.1 billion in base military spending with an additional $80.7 billion for overseas contingency operations, namely the war in Afghanistan.  Among the new legislation, President Obama praised the NDAA for allowing accelerated repatriation of detainees from the U.S. naval facility at Guantanamo Bay in Cuba as it allows greater flexibility to transfer detainees abroad and he will continue to work with Congress to take additional steps needed to close the facility.  Following months of budget uncertainty and sequestration stipulations, the newly-signed law and broader budget agreement allow for a 1 percent raise for military personnel and create top-line spending limits for 2014 and 2015, which will erase an estimated $63 billion in arbitrary spending cuts that were to take effect on January 1^st.  Most importantly, the legislation critically reduces the threat of a future government shutdown on or around January 15^th, when members from both chambers will be crafting spending bills under the new spending limits.

Big Movers

Meggitt plc (Up 4.0%) – Shares were up this week after the Company’s Training Systems division won a contract from the Australian Defence Force to provide hardware and software upgrades to training simulation facilities in a deal worth an estimated $18 million USD.

Relevant Transactions

Textron Inc. to acquire Beechcraft Corporation, a provider of turboprops, pistons, and light attack military aircraft for militaries, governments, and individuals in the United States and internationally.  Textron will pay approximately $1.4 billion to acquire Beechcraft.

L-3 Communications Holdings Inc. acquired Mustang Technology Group, L.P., a provider of radar-based sensors and systems used in precision-guided weapons, electronic warfare, unmanned systems, and other military applications.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

The House voted Thursday night to ease across-the-board federal spending cuts and head off future government shutdowns.  The legislation, heading to the Senate for a vote, calls for federal employees hired in 2014 to contribute a total of 10.6% of their salaries to their retirement benefits, a 1.3% increase in contributions from those made by 2013 hires.  This increase is expected to reduce the budget deficit by $23 billion over the next decade without raising taxes and erase $63 billion in across-the-board spending cuts in domestic and defense programs.

The International Air Transport Association (“IATA”) announced that 2014 will be the airline industry’s most profitable year ever as the IATA increased its profit forecast for 2013 and 2014 based on a variety of factors currently driving positive growth in the industry.  The association is now forecasting a combined net profit of $19.7 billion in 2014, which represents a $3.3 billion increase from the association’s $16.4 billion forecast in September.  Similarly, the IATA expects 2013 profit to reach $12.9 billion, up from the previous prediction of $11.7 billion.  Among the reasons, officials cite the continuous easing of fuel prices due to the discovery of substantial new supplies as well as decreased geopolitical tension particularly surrounding Iran as main drivers of profitability.  Additionally, structural improvements in the airlines industry also play an influence as airlines have introduced broader ancillary fees to open up new sources of revenue.  North American carriers are expected to contribute the most with forecasted profits of $8.3 billion.  Asia-Pacific and European carriers follow behind with forecasts of $4.1 billion and $3.2 billion, respectively.

Big Movers

OSI Systems, Inc. (Down 19.6%) – Shares were down this week after Pomerantz Grossman Hufford Dahlstrom & Gross LLP filed a class action lawsuit against the Company regarding false and misleading statements about business, operational and compliance policies.

Relevant Transactions

CapitalWorks, LLC acquired Morgenthaler Private Equity’s Avtron Aerospace Inc., a provider of electrical, electronic, and hydraulic aircraft component test solutions for the global commercial and military aerospace markets.  Terms of the deal were not disclosed.

3P Equity Partners, LLC and Silver Sail Capital, LLC acquired Hammond, Kennedy, Whitney & Co.’s Visioneering Inc., a provider of high-quality fabrication, assembly, and automation tooling systems for the aerospace and defense industry.  Terms of the deal were not disclosed.

 Click here to review comparable company analysis.

According to new data from Avascent Analytics, the United States currently ranks as the leading supplier of defense aircraft for Asia-Pacific partners and allies.  The increased percentage of U.S. investments in the region comes as the nation continues to shift resources to the Asia-Pacific as it withdraws forces from Iraq and Afghanistan as well as government contractors redirecting attention to international sales amidst domestic budget uncertainty.  The U.S. will have sold about $79.2 billion worth of defense aircraft and related equipment, including development and production costs, between fiscal years 2009-2023 to various countries in the Asia-Pacific.  Italy ranks second with about $48.7 billion during the time period, while India currently ranks third.

As the expiration date for the current government funding bill nears, House Republicans are contemplating a short-term continuing resolution that would fund the government through April 15^th, since it is unlikely budget negotiators will reach a long-term deal by December 13^th, the deadline for the conference committee to report an agreement.  Additionally, the current funding bill passed on October 16^th expires on January 15^th, but House members are not expected to return back to Washington until January 7th, leaving little time for further negotiations.

Big Movers

Intevac, Inc. (Up 13.4%) – Shares were up this week after the Company’s Board of Directors authorized the repurchase of $30 million of the Company’s common stock.

SIFCO Industries, Inc. (Up 11.8%) – Shares were up this week after the Company reported a strong fiscal 2013 as net sales increased 12.8% from the previous year.

AeroVironment, Inc. (Up 9.7%) – Shares were up this week after the Company reported positive fiscal second quarter earnings with increased backlog and overall results in-line with expectations.

Relevant Transactions

Winchester Electronics Corporation acquired Haverhill Cable and Manufacturing Corporation, a provider of semi-rigid coaxial cable and cable assemblies for commercial, military, and satellite equipment.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.