Industry Week in Review – September 19, 2013

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This week, German airline Lufthansa announced a large order for wide-body jets.  The German flag carrier said it is ordering 34 new 777-9X jets from Boeing and 25 A350-900 jets from European rival Airbus as it updates its long-haul fleet to make it more fuel efficient and lower costs.

Rolls-Royce and United Technologies, two of the largest players in the worldwide aircraft engine industry, announced that they were abandoning plans to form a new joint venture to produce a mid-size commercial jet engine.  The companies cited the current regulatory environment as the reason for not proceeding with the partnership.

In the government space, the September 30th deadline for Congress to pass a funding bill is rapidly approaching.  On September 20th, the Republican-controlled House of Representatives passed a continuing resolution (“CR”) that ties discretionary spending to the defunding of the Patient Protection and Affordable Care Act (“PPACA”), which has been a politically charged issue since it was enacted in 2010.

The Democratic-controlled Senate has already declared a CR defunding PPACA as “dead on arrival,” and plans to pass a CR maintaining government funding at current levels through December 15th.  Even if a CR is successfully passed before September 30th, the government is on pace to reach its debt ceiling in mid-October, likely triggering another fiscal showdown in Congress.

Big Movers

The Boeing Company (Up 4.8%) – Shares were up this week after the successful maiden flight of the Company’s 787-9 aircraft on September 17th.  The 787-9 is a slightly longer version of Boeing’s 787-8 Dreamliner.  The Company currently has unfilled orders for 388 787-9 aircraft and 548 787-8 aircraft worth a combined $217 billion at list prices.

Triumph Group (Down 7.5%) – Shares were down this week after the Company announced lowered profit expectations due to production cuts to the Boeing 747-8, an aircraft for which Triumph is a key supplier.

Relevant Transactions

Secure Communications Systems, a portfolio company of Vance Street Capital, acquired Lark Engineering Co.,a manufacturer of radio frequency filters for the commercial, industrial, and military markets.  The acquisition will expand Secure’s product offering and cross-selling opportunities.  Terms of the deal were not disclosed.

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Industry Week in Review – September 13, 2013

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With Congress currently focused on the Syrian conflict, many experts expect the House and Senate to approve a temporary government-wide continuing resolution (“CR”) this month, which would fund Federal departments at 2013 levels.  After the expiration of this temporary CR on December 15th, Congress would have to pass either another temporary CR or consider taking up a full-year CR, a long-term government funding bill that many congressional aides have speculated would include a full 2014 defense spending measure.

Officials have echoed the need for a full defense appropriations bill.  Under the potential temporary CR, the Pentagon is limited in its ability to execute a variety of activity including starting new acquisition programs, shifting investment levels, initiating new production lines, and negotiating multiyear contracts.  The full defense appropriations would allow the Pentagon to shift investment levels in the multiple programs starting or changing throughout the year.  Conversely, continuing at prior levels under the temporary CR tends to create inefficiencies, as funds are typically locked in accounts regardless of the needs of the Department of Defense (“DoD”).

In the government services space, Honeywell Technology Solutions won a $550.4 million option to support the Air Force Satellite Control Network through 2016.  Under the option, Honeywell will provide network support integration, system and maintenance engineering, and software maintenance to both DoD and Non-DoD satellites.

Big Movers

iRobot Corporation (Up 9.7%) – Shares were up this week after the Company announced it obtained preliminary injunctions through the District Court of Dusseldorf in Germany against Shenzhen Silver Star, the Chinese business whose products had infringed four separate iRobot patents.

SAIC, Inc. (Up 7.2%) – Shares were up this week after the Company announced it will separate its systems integration business into a new publicly-traded company, Leidos, in a stock and cash transaction worth more than $295 million.

Unisys Corporation (Up 7.1%) – Shares were up this week after the Company announced its new EMC Data Domain solution will be made available on its ClearPath Libra systems, allowing clients to increase efficiency and lower the cost of storage.

Relevant Transactions

Lockheed Martin Corporation acquired Amor Business Technology Solutions Limited,a Scotland-based provider of business technology solutions and professional and managed IT services to energy, transport, and public sectors.  Lockheed will use the acquisition to expand internationally as well as grow its capabilities in civil government services and energy markets.  Terms of the deal were not disclosed.

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Industry Week in Review – September 6, 2013

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As in 2013, Congress is not expected to pass a defense budget by the end of the government fiscal year on September 30, but instead enact a temporary continuing resolution (“CR”) to fund the entire government at spending levels comparable to the previous fiscal year.  In response, Pentagon officials are asking for flexibility in meeting Congress’ spending cap, which the Pentagon’s 2014 budget proposal currently exceeds by $52 billion.  Rather than focusing on eliminating certain programs, officials are hoping to reduce investment and increase efficiency in certain programs.  Typically under a CR, starting new programs and adjusting program investment levels are prohibited.

Last year, the Pentagon furloughed most civilian employees, decreased training, and delayed deployments to meet spending caps.  For 2014, a similar reduction in civilian work force will likely be a component in meeting spending caps.  While the need for reduction is uncertain until the enactment of the CR, officials are hopeful they will not have to resort to furloughs again in the coming fiscal year.

Big Movers

SAIC Inc. (Down 4.6%) – Shares were down this week after the Company announced second quarter earnings results below analyst estimates and subsequently decreased its fiscal 2014 outlook.

The Timken Company (Up 9.7%) – Shares were up this week after the Company announced it will spin off its specialty steel making division into a separate stand-alone company.

Relevant Transactions

Alliant Techsystems, Inc. (“ATK”) to acquire MidOcean Partners’ Bushnell Group Holdings, Inc.,a provider of branded sports optics, outdoor accessories, and performance eyewear, for $985 million in cash.  ATK will use the acquisition to expand the offerings and capabilities of its Sporting Group division as well as enter new markets.

Marshall Aerospace and Defence Group acquired Hawker Beechcraft Limited, European MRO Business Unit, a provider of maintenance, modification, paint, and upgrade services to Hawker and Beechcraft aircraft.  Marshall will use the acquisition to strengthen its civil aerospace business and increase its offerings to the business and commercial aviation marketplace.

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Industry Week in Review – August 30, 2013

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With defense contractors facing uncertain defense budgets in both the United States and Europe, companies are increasingly looking to international military sales for growth.  The Middle East has been an especially active market as oil-rich countries look to upgrade their defense capabilities.  This past week, the Pentagon announced over $13 billion in potential Middle East military deals, with $6.4 billion of orders coming from Saudi Arabia, $4.7 billion from Iraq, and the remaining orders coming from other countries including Qatar, Libya, and Kuwait.  The orders consisted of items such as a $4 billion Saudi National Guard modernization program and $1.2 billion of support for the Saudi Air Force, as well as a $2.4 billion integrated defense system and $900 million order for Stryker vehicles from Iraq.

Moving forward, analysts see continuing growth in military sales to the Middle East.  Not only are U.S. defense contractors looking to diversify away from the uncertain domestic market, but the Pentagon has indicated a strong desire to bolster the defense capabilities of Middle Eastern allies against a potential Iranian nuclear threat.

In the government services space, the Army, Air Force, and Defense Information Systems Agency (“DISA”) announced a new architecture-sharing and modernization agreement that will increase bandwidth and network security and save more than $1 billion in future costs.  Through the agreement, the Air Force will upgrade to the Army’s multiprotocol label switching routers and the Army will consolidate hundreds of network security stacks into 15 joint regional security stacks, which the Air Force will also use.  Additionally, the Army and DISA plan to implement the joint MPLS transport cloud and continue JRSS consolidation, which will be owned and operated by DISA as a joint capability.

Big Movers

Kratos Defense and Security Solutions (Up 11.2%) – Shares continued trading up this week after the Company announced it received approximately $3.1 million in orders to produce integrated microwave assemblies for two critical U.S. Navy platforms.

Relevant Transactions

Northrop Grumman Corporation to Acquire Qantas Defence Services Pty Ltd.,a provider of support and maintenance services for Australian government and military aviation industries.  Northrop Grumman will use the acquisition to strengthen its presence in fast-growing international defense markets amidst future budget uncertainty in the United States.

Rexnord Corporation Acquired Micro Precision Limited, a provider of specialized components to various markets in the United Kingdom and India.  Rexnord will use the acquisition to expand its portfolio of aerospace components, sub-assemblies, and services, as well as increasing its customer base.

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Industry Week in Review – August 23, 2013

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After two weeks of continued violence in Egypt, American military aid to the country is coming under scrutiny.  Annually, the U.S. provides $1.3 billion in military aid to Egypt in the form of tanks, helicopters, aircraft, infantry vehicles, and ammunition.  On August 22, the European Union unanimously agreed to suspend export licenses for all military technology to Egypt.  In response, the U.S. government has temporarily delayed the delivery of four F-16 jets, 10 Apache helicopters, and 125 Abrams tanks to Egypt.

Despite the current suspension of foreign military aid, analysts do not see the U.S. permanently ending its support as Egypt’s geographic location makes it a regional linchpin.  Egypt is one of the few Arab countries to have a peace treaty with Israel, a key U.S. ally, and the U.S. relies on access to Egyptian airspace for military flights and the Suez Canal for oil transportation.  U.S. officials worry that other parties will fill the void were military aid permanently suspended, as a group of Persian Gulf states have already offered $12 billion in aid if the U.S. assistance program ends.  Ultimately, analysts believe military aid will continue as U.S. strategic concerns remain the primary catalyst behind the decision.

The decision on military aid also has implications for defense contractors, as Egypt presents opportunities to provide products and assembly assistance services.  In 2011, General Dynamics won a $395 million award from the U.S. Army to provide Abrams tanks to the Egyptian military, and last year won an additional $50 million award to provide technical assistance at Egyptian tank assembly plants.  The Egyptian military has consistently shown a strong preference for U.S. defense products, and any U.S. suspension in aid would have a large impact on the U.S. defense industry.

In the government services space, NASA awarded a $1.76 billion contract to SAIC to provide biomedical, medical, and health services for NASA’s human spaceflight programs at Houston’s Johnson Space Center.  Additionally, SAIC named Samuel Gordy as the head of the Company’s National Security Sector integrated systems group.  This division will be a key part of Leidos when SAIC splits into two companies later this year.

Big Movers

Kratos Defense and Security Solutions (Up 11.8%) – Shares continued their upward climb this week after the Company announced 2Q13 earnings above analyst estimates.  Additionally, Kratos recently announced they had won a position on the Department of Homeland Security’s five year, $6 billion Continuous Diagnostics and Mitigation contract to provide government-wide cybersecurity products

Relevant Transactions

Sparton Corporation to acquire Aydin Displays, Inc.,a provider of flat panel display and touch-screen solutions with application-critical performance for military, aerospace, and civil marine customers.  Sparton will use the acquisition to expand its electromechanical capabilities and gain further penetration into the Boeing P8A Poseidon program.

Gen Cap America, Inc. acquired Renaissance Electronics Corporation, a provider of radiofrequency, microwave, and millimeter wave solutions for military and commercial applications.  Gen Cap will use the acquisition to expand its portfolio and strengthen customer relationships in the military, avionics, industrial, and consumer sectors.  Terms of the deal were not disclosed.

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Industry Week in Review – August 16, 2013

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The Department of Justice (“DOJ”), six states, and the District of Columbia jointly filed a lawsuit in Federal court on August 13th to stop the proposed merger between U.S. Airways and American Airlines.  The proposed transaction would bring American Airlines out of bankruptcy and create the world’s largest airline with a combined 100,000 employees and 187 million annual passengers.

According to the DOJ, the potential deal violates U.S. antitrust law because customers would face significant increases in fares and fees from the loss of competition.  Although the two airlines currently only compete directly on 12 routes, the merger would eliminate a key competitor on more than 1,600 other routes.  One main airport of concern is Ronald Reagan National Airport in Washington D.C., where the combined airline would control 69% of all flight slots, approximately six times more than the closest competitor.  Upon the lawsuit filing, both companies announced they will mount a vigorous defense and pursue any legal action to move forward with the transaction.

In the government services space, Engility Holdings announced that it has replaced its existing $500 million senior secured credit facility with a new $450 million senior secured credit facility.  With the change, the pure-play government services contractor hopes to reduce future interest expense, enhance cash flow, and gain flexibility to grow its business.

Big Movers

TASER International Corp. (Up 17.9%) – Shares were up this week after the company announced multiple new deployments of its AXON flex cameras and EVIDENCE.com service used in support of law enforcement.

DigitalGlobe, Inc. (Down 7.4%) – Shares were down this week after the company announced mixed earnings reviews after reporting earnings per share below analyst estimates and quarterly revenue above analyst estimates.

Relevant Transactions

Rockwell Collins, Inc. to acquire Carlyle Group’s ARINC Inc.,a provider of communications, engineering, and systems integration support to the commercial aerospace industry.  Rockwell will use the acquisition to further develop its information management systems and expand its services to the commercial aviation and transportation sectors       to diversify away from government contract work. The acquisition is valued at $1.39 billion.

Aurora Capital to acquire National Technical Systems, Inc., a provider of testing and engineering services to the aerospace, defense, and commercial industries. Aurora will use the acquisition to strengthen its portfolio of aerospace and defense engineering capabilities.  National Technical Systems shareholders will receive $23 per share, representing a transaction value of approximately $267 million.

Cargo Airport Services USA, LLC acquired Integrated Airline Services, a provider of ground handling services and logistics support.  Cargo Airport Services, a portfolio company of ICV Partners, will use the acquisition to strengthen its North American operations and expand its capabilities for increased operational efficiency.  The terms of the deal were not disclosed.

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Industry Week in Review – August 9, 2013

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After a successful second quarter earnings season for defense primes, many Wall Street analysts reaffirmed their view that the defense market bottomed out at the end of 2012.  This week brought more positive news as Secretary of Defense Chuck Hagel announced that the number of furlough days for Department of Defense (“DoD”) civilian employees, which began on July 8th, would be cut from eleven to six days after the DoD found cost savings in other areas.

In the government contracting space, the Department of Homeland Security’s (“DHS”) Eagle II contract vehicle announced 18 additional awards this week.  All awarded contracts have a five-year base and one two-year option.  Additionally, seven of these awards were within the HUBZone small business track for service delivery, while the remaining eleven awards were within the unrestricted track for IT Services.  The DHS Eagle II contract vehicle is worth $22 billion.

Despite the generally positive news, attention is quickly shifting towards another potential fiscal crisis in September.  According to Treasury Secretary Jack Lew, the government is likely to hit its $16.7 trillion debt ceiling shortly after Labor Day.  In an attempt to avert a government shutdown, President Obama and his aides have been meeting with key Republican senators, including Senators John McCain, Lindsey Graham, and Kelly Ayotte, to reach a “grand bargain” that will not only avert a September shutdown, but also avoid sequestration cuts.  To reach such a “grand bargain,” the President and Congress must agree on roughly $1 trillion in budget cuts or increased revenues.  However, the two sides remain far apart, with Democrats refusing to exchange spending cuts for a debt ceiling raise, and Republicans refusing higher spending or taxes.  As the defense and government services contractors rebound from the budget turmoil earlier this year, additional uncertainty looms on the horizon.

Big Movers

LMI Aerospace, Inc. (Down 24.6%) – Shares were down this week after the Company reported weak revenue in its Engineer Services segment and significantly reduced full-year revenue guidance across its Engineering Services and Aerostructures businesses.

Relevant Transactions

Kaman Corporation acquired Western Fluid Components, Inc.,a manufacturer of hydraulic and industrial hose assemblies and custom kits.  Kaman will use the acquisition to strengthen its fluid power position and further its relationship and authorizations with its primary supplier, Parker Hannifin. Terms of the deal were not disclosed.

Micross Components, Inc. acquired Premier Semiconductor Services, LLC, a provider of outsourced final manufacturing services for commercial, military, and aerospace applications.  Micross Components, a portfolio company of Insight Equity, will use the acquisition to bring additional capacities and capabilities to Micross’ Products & Services division.  Terms of the deal were not disclosed.

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Industry Week in Review – August 2, 2013

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This week the Senate Appropriations Defense Subcommittee approved a $594 billion defense budget for the 2014 fiscal year, further easing uncertainty about future defense spending. The Subcommittee voted in favor of a bill that provides the Pentagon with a $516.4 billion base budget and an additional $77.8 billion for Overseas Contingency Operations.  The bill calls for increased funding in multiple areas, such as restoring $3 billion to readiness accounts, adding over $320 million to Naval shipbuilding initiatives, and introducing a 1% pay increase for various personnel.  Among the components of the bill is a new spending restriction on the F-35 Joint Strike Fighter program that, although providing full funding for the purchase of 29 new aircraft in 2014, reduces advanced procurement for 2015 in order to focus on testing, design, and development of the current aircraft.  To counteract the proposed funding increases for specific programs, the bill looks to reinforce Defense Secretary Chuck Hagel’s planned pay cuts and 20% personnel reduction to create a savings of about $8 billion.  Additionally, the Subcommittee hopes to carefully reduce spending within the budget and transfer $12.6 billion of “wasteful, unnecessary, and duplicative” spending from lower to higher priority programs.

Big Movers

EADS N.V. (Up 2.2%) – Shares were up this week after EADS announced plans to restructure the Company’s business divisions and rebrand itself as Airbus, its commercial aerospace division, in 2014.

CGI Group, Inc. (Up 12.4%) – Shares were up this week after CGI Group announced its fiscal year third quarter earnings of $0.68 per share and $2.57 billion in revenue, both of which beat analyst estimates by 6.8% and 2.0%, respectively.

Relevant Transactions

Integrated Missions Solutions, LLC has agreed to acquire Michael Baker Corporation, an architecture, construction, and engineering firm.  Integrated Mission Solutions, an affiliate of DC Capital Partners, will use the acquisition to increase its global presence and expand its engineering capabilities to execute larger projects.  Michael Baker shareholders will receive $40.50 per share, valuing the transaction at $397 million.

Accenture Federal Services has agreed to acquire ASM Research, Inc.,a provider of advanced information technology and services to U.S. Defense and Federal health clients.  Accenture will use the acquisition to expand its Federal health capabilities, serve military personnel, and support its growing health business. Terms of the deal were not disclosed.(1)

(1) KippsDeSanto & Co. served as exclusive financial advisor to ASM Research, Inc.

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Industry Week in Review – July 26, 2013

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On Thursday, an official leaked that the Obama administration has opted not to deliver several F-16s to Egypt, preferring instead to have the fighters remain in Lockheed Martin’s plant.  Political and diplomatic questions have arisen regarding the sale of the aircraft to a regime that overthrew democratically elected President Mohammad Morsi earlier this month.  The decision to halt delivery is seen as largely symbolic, with just over a dozen of the twenty total aircraft already delivered to Egypt since the order was placed in 2010.  The US delivers roughly $1.3 billion in military aid to Egypt and oftentimes uses such aid as diplomatic leverage to the politically embattled country.  “This was a very specific decision made at this specific time about this specific case, so I would caution you to read further into it,” said State Department spokeswoman Jennifer Psaki.  “Given the current situation in Egypt, we do not believe it is appropriate to move forward with the delivery of F-16s at this time.”

Repairs to the newest littoral combat ship (LCS) Freedom have been completed after the ship was temporarily disabled while in the South China Sea.  According to the Navy, on July 20th, two of the ship’s diesel engines overheated prompting the shutdown and temporary disabling. After restarting the engines, the ship returned to port in Singapore to undergo repairs.  The ship will return to participate in Cooperation Afloat Readiness and Training Singapore naval exercises, a joint training program between the US Navy and the Republic of Singapore Navy.

Big Movers

Spirit AeroSystems Holdings, Inc. (Up 8.6%) – Shares were up for the week after news of Spirit AeroSystems hiring a banker to find a buyer for its Tulsa, Oklahoma wing factory.  GNK, a British aerospace and car parts maker is rumored to be interested.

FLIR Systems, Inc. (Up 12.0%) – Shares were up this week after FLIR Systems announced a 22.0% increase in its second-quarter net income despite missing Zacks Consensus Estimates by two cents.

Relevant Transactions

SIFCO Industries, Inc. acquired MW General, an aerospace component supplier.  The transaction increases the Company’s presence in the aluminum forging market and broadens its customer base.  The terms of the deal were not disclosed.

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Industry Week in Review – July 19, 2013

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During a visit to Jacksonville Naval Air Station on Tuesday, Defense Secretary Chuck Hagel discussed a 20% staff reduction within the offices of high ranking officials and senior civilians at the Pentagon from 2015 to 2019.  Hagel provided limited details on the cuts, but explained that they would apply to the Office of the Secretary of Defense, the offices of the Chairman of the Joint Chiefs of Staff, and the Pentagon headquarters of the Army, Navy, Air Force, and Marines.  Although the estimated 3,000 to 5,000 job cuts only address a small fraction of the 2.1 million Department of Defense (“DoD”) jobs, the trimming of upper branches within the DoD is a strong indication of the scope of future personnel reductions, as these areas have previously been resilient to cutbacks.  Later Tuesday evening, Pentagon Press Secretary George Little released a statement explaining that the cuts arose from the comprehensive Strategic Choices and Management Review earlier this year and that they will be implemented regardless of whether or not Congress removes sequester-level budget caps.  Little estimated that the personnel cuts, which will target both civilian and contracted employees, could save the DoD up to $2 billion over the five year period.  The specific positions and exact number of jobs to be eliminated will be determined following a comprehensive review of each office and will be included in the FY15 budget request, scheduled to be released next February.

Big Movers

AeroVironment, Inc. (Up 10.8%) – Shares were up for the week after Engaged Capital LLC announced that it has taken stake in roughly 5.1% of the company’s stock.

SAAB AB (Down 7.6%) – Shares fell this week following the company’s release of its 2013 profitability forecast.  SAAB’s original projection of EBIT margins around 7.7% declined to 6.6% due to shrinking defense markets.

Relevant Transactions

EDAC Technologies, a Greenbriar Equity Group portfolio company, acquired Parkway Products, Inc.’s Aerospace & Defense business, a manufacturer of aerospace composites.  The transaction broadens EDAC’s manufacturing, engineering, and design capabilities to meet growing demand.  The terms of the deal were not disclosed.

Colt Defense LLC acquired New Colt Holding Corp., the parent company of Colt’s Manufacturing Company LLC for an undisclosed amount.   The acquisition of a leading civilian and sporting firearms manufacturer supports Colt Defense’s expansion into the commercial firearm market.

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