History was made at sea as the Northrop Grumman X-47B became the first unmanned jet aircraft to land on an aircraft carrier. After taking off from Patuxent River, Md., the aircraft did one flyby over the U.S.S. George H.W. Bush and performed a smooth landing and caught the number three wire, as engineers had intended. “You saw the future today. This is the first of the next generation of naval aircraft,” said Navy Secretary Ray Mabus after the successful landing. Development of the X-47B began in 2007 under the Unmanned Combat Air System (“UCAS”), a precursor to a follow-on program, Unmanned Carrier Launched Surveillance and Strike (“UCLASS”), which aids the Navy’s goals of integrating unmanned wing aircraft into carrier-based aviation.

Sequestration furloughs have impacted military equipment deals that require technical review, according to Rizwan Ramakdawala, a senior aerospace engineer at Defense Technology Security Administration (“DTSA”). DTSA, responsible for reviewing exports and sales of potentially sensitive technical equipment, declared that the processing times for requests will be delayed after a 20% reduction in workforce due to Department-wide furloughs. “We are all going to be furloughed come July 8, [and so] there will be a 20% reduction in workforce availability at DTSA, so you can definitely expect to see delays. We are not sure of any other way to avoid it,” said Ramakdawala. The extent of the delays will not be known until late July once furloughs take effect.

Big Movers

Chemring Group PLC (Up 6.2%) – Share prices were up following an announcement that a subsidiary, Chemring Military Products, Inc., was awarded a major Department of Defense (“DoD”) contract to supply non-U.S. standard ammunition to the agency. The award, worth $42.1 million, was a Firm Fixed Price (FFP) contract for a one-year period to deliver various non-U.S. standard ammunition to foreign governments and international organizations eligible to receive military defense items.

Relevant Transaction

Data Device Corporation (“DDC”) acquired National Hybrid Inc. – DDC, a portfolio company of Behrman Capital, acquired National Hybrid in a transaction valued at $32.5 million. National Hybrid, a designer and manufacturer of data networking technology for the aerospace / defense industry, enhances DDC’s product offering while providing access to new strategic markets and will help to reinforce DDC’s position as a leading supplier of data networking electronics for the Department of Defense and other aerospace and defense contractors.

AGC Aerospace & Defense and The Edgewater Funds acquired Tods Aerospace & Defence – Tods, a manufacturer of advanced composites and materials found in defense and aerospace systems across the world, was acquired by private equity groups AGC Aerospace & Defense and The Edgewater Funds. For AGC, the acquisition of Tods will provide cost synergies and further group innovation while helping AGC penetrate further into the European, Middle East, and Asian marketplaces.

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Army Chief General Ray Odierno announced on Tuesday an extensive plan to cut 12 brigade combat teams (“BCT”) from the active force by 2017.  This announcement has sparked heated debate amongst policymakers and throughout the military communities whose economies are centered on these installations.  The plan to reduce the number of BCTs from 45 to 33 outlines the Army’s strategy for reducing its force structure by nearly 80,000 soldiers over the next three and a half years.  The Army plans to preserve its overall combat force by keeping 95 of its 98 combat battalions and distributing the cuts amongst the brigades’ headquarters positions. Under the current plan, the cut will effect 15 Army installations in the continental United States.  However, brigades located in Alaska, Hawaii, and South Korea will be immune to this round of cuts in order to maintain a military and political focus in the Asia / Pacific region.  The Army will be left with 12 armored brigade combat teams, 14 infantry brigade combat teams, and seven Stryker brigade combat teams following the execution of these cuts.  Odierno expressed his concern that if sequestration continues beyond 2014 this reduction will likely be the first in a series of cuts that could require him to reduce another 100,000 active duty soldiers.  The Senate Armed Services Committee (“SASC”) Ranking Member Sen. James Inhofe, R-Okla., said, “We’ll do everything we can [in order to block the plan]. It’s the last step in disarming America.”  The Senate will debate the Army’s BCT reduction plan later this year.

Big Movers

Cohort PLC (Up 7.9%) – Shares were up for the week after the company announced that operating profit jumped 13% in the year ended April 30^th.  CEO Andy Thomis’s statement indicating a shift in Cohort’s strategy towards growth-by-acquisition also spurred the stock’s rise.

Intevac Inc. (Up 10.6%) – Shares rose this week following the company’s announcement that it has successfully qualified the ENERi™ ion implant production system that was ordered and shipped in the first quarter of 2013 to a Tier 1 Asian solar company.  Intevac raised its second quarter revenue range from $14 – $16.5 million, to $16 – $16.5 million after the qualification, acceptance, and revenue recognition of the ENERGi™ ion implant system.

Relevant Transactions

Precision Castparts Corp. (“PCP”) agreed to acquire Permaswage SA, a designer and manufacturer of permanent fittings used in fluid conveyance systems for airframe applications.  The deal will strengthen PCP’s Airframe Products division with the addition of permanent fittings to its already strong separable fittings business.  PCP plans to acquire Permaswage in a $600 million, all-cash transaction that is expected to be immediately accretive to earnings.

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Auguring an exciting week for the upcoming Paris Air Show, Airbus’s new A350 widebody aircraft made its maiden flight on Friday, June 14, more than two weeks ahead of schedule.  With the A350, Airbus is trying to avoid the costly delays and production issues that have plagued its competitor, the Boeing 787.

Over the past week, the DoD announced two major aircraft procurement awards.  The U.S. Navy awarded a multiyear aircraft contract for V-22 Ospreys to Bell Helicopter and Boeing worth $6.5 billion over five years.  The V-22 contract covers fiscal years 2013 through 2017 and will be used to purchase 99 aircraft, with an option of 22 more Ospreys.  Marine Corps Colonel Gregory Masiello believes that given the current fiscal situation, this award signals strong long-term confidence in the aircraft.  Additionally, Boeing signed a $4 billion contract with the U.S. Army for CH-47F Chinook Helicopters.  Under the contract, the U.S. Army will purchase 177 aircraft with an option of 38 additional helicopters.  This order will bring the Army’s total procurement of CH-47Fs close to its target of 464 aircraft.  The two multiyear aircraft contracts are expected to result in $1.8 billion in savings compared to individual aircraft purchases.

On Monday, Booz Allen Hamilton’s shares fell approximately 4.5% after the company confirmed Edward Snowden as an employee.  Snowden claims to be the source of the National Security Agency leak on data surveillance of phone and internet usage.  Shares continued declining as much as 8% as the story developed, but recovered slightly to end the week down 5.1%.

Big Movers

Intevac Inc. (Up 4.5%) – Shares rose for the week after the company received a $27 million contract from the U.S. Army for M611 night vision cameras that will be integrated into the Apache Helicopter’s Pilot Night Vision Sensor.

Kratos Defense and Security Solutions (Up 6.4%) – Shares were up for the week after the company announced $3 million in new contract awards.  Though details remain classified, the company stated that the products will support a modular data center and communications related to an undisclosed customer.

Relevant Transactions

Paramount Group acquired Advanced Technology and Engineering Company (Pty) Ltd., a provider of aeronautical engineering services including civilian and military systems integration, unmanned aircraft system development, and mission sensor innovation, in a bankruptcy sale.  The acquisition expands Paramount Group’s suite of aerospace, land, and maritime defense products and augments the company’s civilian market expertise.  Terms of the deal were not disclosed.

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On Wednesday, the U.S. House Armed Services Committee (“HASC”) began marking up the 2014 National Defense Authorization Act proposed by Committee Chairman Rep. Howard McKeon.  In its current stage, referred to as the “chairman’s mark”, the bill would authorize the Department of Defense (“DoD”) to spend $552.6 billion in baseline dollars and an additional $85.8 billion for operations overseas for FY2014, totaling roughly $164 billion over the spending cap set by the Budget Control Act of 2011. 

The HASC bill addresses plans for special operations forces, cyber defense, drone strikes, and military space launches, while also introducing some highly debated programs such as the East Coast missile shield.  HASC Ranking Member Rep. Adam Smith, D-Wash., presented concerns about unnecessary and wasteful spending included in the bill, specifically identifying a half-billion dollars in the Strategic Forces subcommittee that was not requested by the DoD.  The House-Senate panel will meet in the summer or fall of this year to collaborate on a final version of the Pentagon-authorization bill.  

On a similar note, the House Appropriations defense subcommittee has proposed a bill that would allocate $512.5 billion to the Pentagon’s base budget and $85 billion for war funding, emulating the HASC authorization bill.  The Appropriations subcommittee’s bill cut $2 billion from the enacted 2013 procurement level, but still exceeds the sequestered Pentagon budget by roughly $28 billion.  The bill includes $98.4 billion for the purchase of combat platforms, $29 billion for certain special weapon programs, and $66.4 billion for R&D. 

Big Movers

Kratos Defense & Security Solutions (Up 6.9%) – Shares were up for the week after the company received two contract awards totaling $8.1 million.  One of the awards, from an existing customer, relates to the production of specialty products for an electronic attack and electronic warfare program.  The second award is for specialized equipment for undisclosed radar and National Security programs.

Astronics Corporation (Up 6.4%) – Shares rose this week after the company announced its plans to acquire the outstanding shares of PECO, Inc. one week ago for $136 million. 

Relevant Transactions

MB Aerospace acquired Delta Industries, Inc., a provider of engineering, manufacturing, and repair services for a variety of intake, compression, combustion, and exhaust products used in ground based turbines and jet engines.  The acquisition expands MB Aerospace’s technical capabilities in the fabrication and robotic welding of complex aero engine components.  The terms of the deal were not disclosed.

Quantum Research International acquired J2 Technologies, Inc., a specialist in aviation and missile defense architecture, defense technology assessments, software and prototype development, and integration support for the U.S. Government and the DoD, for an undisclosed amount.  The acquisition enhances Quantum’s portfolio of prime contracts in the cybersecurity and defense areas.

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Over the past week, the Department of Defense (“DoD”) released an addendum to its initial budget request that incorporates updates to the Overseas Contingency Operations (“OCO”) request, which funds military operations in Afghanistan and other activities that primarily support Operation Enduring Freedom.  The amendment to the FY 2014 Presidential budget includes $79.4 billion for OCO support, a decline from the initial request’s placeholder of $88.0 billion.  Noted in the addendum, the President intends to draw down U.S. forces in Afghanistan to 34,000 by February 2014, a reduction in overall force of about 39%.  The President is also seeking to have all troops out of Afghanistan by December 2014 as the U.S. moves into a support role and Afghan forces take the lead.  To this end, OCO-funded activities in the addendum include training Afghan instructors, as well as sustaining and equipping a 352,000 person Afghan National Security Force.  Although the number of U.S. combat troops in Afghanistan will decline over 2014, military operations in support of the transition to full Afghan responsibility will “continue at a high pace” and certain costs such as Intelligence, Surveillance, and Reconnaissance will grow or remain flat.  Furthermore, increased spending is expected for transportation of ships and cargo containers of equipment back to home stations as well as the repair and replacement of equipment and munitions.

Big Movers

Booz Allen Hamilton (Up 12.9%) – Shares were up this week after the company announced that its fiscal fourth-quarter net income rose 8%, helped by lower compensation and infrastructure costs.  Revenue remained relatively flat at $1.55 billion, a 0.3% increase over the previous quarter.

OSI Systems, Inc. (Down 12.8%) – Shares are down this week after the company announced that it expects to receive a debarment notice from the Department of Homeland Security related to a long-running controversy with its airport scanner software.  In January of this year, the Transportation Security Administration ended its contract with Rapiscan, OSI’s security division, for its full-body scanner machines, which many complained were too revealing.

Relevant Transactions

Air Comm Corporation acquired Meggitt Addison, a manufacturer of air conditioning systems used by military and civil rotorcraft, as well as general aviation fixed wing aircraft.  The company, formerly known as Keith Products, also fabricates plastic parts and manufactures hose assemblies.  Terms of the deal were not disclosed.

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