Industry Week in Review – May 10, 2013

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Over the past week, members of the Senate Armed Services Committee (“SASC”) put increased pressure on Defense Secretary Chuck Hagel to provide the DoD’s 2013 sequestration plan for the first portion of planned military cuts.  The Presidential, House, and Senate budgets did not factor in the first year of sequestration cuts, about $40 billion that must be eliminated from the military’s 2013 budget.

Given the delay in providing cuts for 2013, SASC Committee Chairman Senator Carl Levin and Ranking Member Senator James Inhofe further requested that the Defense Secretary provide a package of reductions to the 2014 defense budget by no later than July 1, 2013 in order to meet the $52 billion savings requirement as established by the Budget Control Act.  In their note to Defense Secretary Hagel, the bipartisan Senators wrote “We believe that the identification of these specific reductions will serve both to help Congress and the Department prepare for the possibility that we will be unable to avoid another round of sequestration and to show Congress and the public how unpalatable that outcome would be.”

Big Movers

Ducommun Inc. (Down 24.5%) – Shares were down this week after the company announced first quarter earnings of $0.35 per share, well below analyst expectations of $0.47 per share.  The company reported first quarter revenue of $175.9, roughly $10 million below analyst expectations for the quarter.

Relevant Transactions

HEICO Corp. to acquire Reinhold Industries, Inc., a provider of advanced custom composite components and complex composite assemblies for commercial aviation, defense, and space applications.  Reinhold has been a portfolio company of The Jordan Company since being acquired in late 2006.  Terms of the deal were not disclosed.

Haystax Technology, Inc. acquired FlexPoint Technology, LLC, a provider of cloud computing and enterprise content management services to government customers.  The acquisition complements Haystax’s existing capabilities in big data analytics and mobile solutions after its acquisition of Digital Sandbox in mid-April.  Terms of the deal were not disclosed.

Greenbriar Equity Group completed the acquisition of EDAC Technologies Corporation following its tender offer of $17.75 per share dated March 17, 2013.  Since the initial offer by Greenbriar, EDAC had also received a tender offer from MidOcean Partners worth $18.25 per share, however this offer was subsequently withdrawn.

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Industry Week in Review – May 3, 2013

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Details emerged on Friday surrounding the DoD’s planned budget reprogramming request, which the department had said would be necessary to address funding shortfalls in certain accounts that came as a result of the continuing resolution (“CR”) and sequestration.  The majority of the reprogramming will be focused on the Army, which, according to the draft document, plans to request $1.34 billion in additional O&M funds and $3.6 billion more in OCO funds.  The Army plans to offset these increases by decreases in certain procurement programs.  At-risk programs include AH-64 Apache build and modernization, WIN-T battlefield communications, and the Joint IED Defeat Organization.  Additionally, the service proposed $730 million in savings by delaying Humvee recapitalizations and MRAP modifications.  Separately, the Air Force has requested a $1 billion addition to its O&M appropriation, funded through reductions of the F-15, C-130, C-135, unmanned systems, and missile and space procurement.

In further budget news, Senate Armed Services Committee (“SASC”) Chairman Senator Carl Levin and Ranking Member Senator James Inhofe have called on Secretary of Defense Chuck Hagel to deliver the Pentagon’s plan for how to enact mandated cuts.  The two Senators said that they saw little potential for Congress reaching a budget agreement that would void sequestration.  Given that neither the CR nor the President’s Budget Request incorporated the reductions, the SASC has requested that the Pentagon provide a detailed blueprint for their enactment by July 1, 2013.

Big Movers

Mercury Systems (Up 20.2%) – shares were up for the week following the company’s announcement of fiscal third quarter results, which beat analyst expectations.  Revenue and EPS were both down year-over year, at $54.1 million and $0.03, respectively.  However, both were an improvement over 2FQ13, which saw a net loss per share of $0.16.

NCI, Inc. (Up 10.5%) – shares were up for the week following first quarter results that exceeded management’s guidance and beat analyst expectations.  Revenue of $91.5 million decreased by 7.6% from 1Q12, however EPS of $0.15 increased from $0.12 in 1Q12.

Relevant Transactions

No relevant transactions for the week.

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Industry Week in Review – April 26, 2013

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U.S. Air Force Secretary Michael Donley announced that he will be stepping down on June 21.  Donley’s five years at the service were largely focused on overseeing the Air Force’s transition from operations in the Middle East towards a heavier presence in the Pacific, and were marked by his successful effort to enter the new long-range bomber as a program of record.  A number of defense industry executives have been floated as potential nominees to succeed Donley, including Sheila Cheston, Vice President and General Counsel at Northrop Grumman, and Deborah Lee James, Executive Vice President for Communications and Government Affairs at SAIC.  Cheston served as Air Force General Counsel from 1995 to 1998, while James served as Assistant Secretary of Defense for Reserve Affairs from 1993 to 1998.  Having served as a staffer on the House Armed Services Committee, James would also bring legislative branch experience, which could help strengthen the relationship between Congress and the Air Force.  In the meantime, Donley is working to fill vacant positions and prepare the organization for his successor, announcing recently that Bill LaPlante, a MITRE executive, will fill the role of Assistant Secretary for Acquisition and Management.

Big Movers

iRobot (up 16.4%) – shares were up for the week after the Company beat earnings expectations, reporting EPS of $0.29 versus analyst estimates of $0.18, and raised its full year 2013 guidance to EPS of $0.80 to $1.00.  The Company cited strong results from both its commercial and defense businesses, reporting a shift in revenue mix towards more product sales as contract revenue declined.

General Dynamics (up 9.4%) – shares were up for the week after the Company announced first quarter earnings, reporting EPS of $1.62 and beating consensus estimates of $1.53.  Revenue for the quarter was $7.6 billion, down 2.3% year-over-year.

Relevant Transactions

Honeywell to acquire RAE Systems, a manufacturer of fixed and portable gas and radiation detection systems, for $340 million, representing 13.0x 2013 EBITDA.  The acquisition augments Honeywell’s hazardous material and first responder capabilities and expands its distribution footprint, particularly in China.  RAE will be integrated into Honeywell Life Safety, a division of Honeywell Automation and Control Solutions.

TransDigm Group to acquire Aerosonic Corp., a provider of aircraft instrumentation such as digital altimeters and airspeed indicators, for $7.75 a share, or $39 million.  The acquisition augments TransDigm’s avionics portfolio, particularly in the aftermarket, where Aerosonic derives approximately 60% of its revenue.

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Industry Week in Review – April 19, 2013

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Over the past week, the Federal Aviation Administration announced that it approved the 787’s redesigned battery system and is allowing the plane to return to service after the government’s three-month long grounding of the aircraft.  Airlines will get instructions over the next week on how to modify the planes, along with a final directive allowing 787s to fly.  The decision will allow the Dreamliner’s 8 current operators to restart flights over the next several weeks as batteries are replaced and pilots recertified.  The reworked battery includes increased insulation to contain overheating, a steel case to prevent the spreading of fire, and vent tube to direct any possible fumes outside the fuselage.  Boeing noted it expects that the 787 battery issue will have no significant impact to its 2013 financial guidance.

Big Movers

Anaren, Inc. (Up 18.1%) – Shares are up this week after the company announced that it had received a non-binding offer from Vintage Capital Management to acquire Anaren in a cash transaction for $23.00 per share.  The company’s Board of Directors announced it plans to consider all strategic alternatives and will review and evaluate the unsolicited offer with financial and legal advisors.

Textron Inc. (Down 11.6%) – Shares were down this week after the company announced that first quarter revenues were flat at $2.9 billion and income from continuing operations dropped 2.5% to $0.40 per share.  The company noted business jets were to blame for much of the weak performance.

Relevant Transactions

Prospect Partners acquired Velocity Aerospace Group, a provider of MRO services for commercial, corporate, regional, and helicopter airline carriers through repair stations in Florida and California.  Velocity Aerospace plans to add other providers of aviation MRO services to the platform.  Terms of the deal were not disclosed.

Bohemia Interactive Simulations acquired TerraSim, a provider of automated terrain generation software for use in interactive simulation systems for defense, emergency, and mission-critical customers.  The acquisition accelerates Bohemia’s technical capabilities and will help the company expand to new markets.  Terms of the deal were not disclosed.

Haystax Technology acquired Digital Sandbox, a provider of threat and risk analysis, and monitoring software in the National Security and Homeland Security markets.  The acquisition extends Haystax Technology’s capabilities and products in public safety, law enforcement, and corporate security markets.  Terms of the deal were not disclosed.

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Industry Week in Review – April 12, 2013

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Over the past week, President Obama introduced the White House’s $3.778 trillion spending plan for GFY2014, which called for almost $1 trillion in tax increases over 10 years and higher spending on programs such as education, transportation, and mental-health services. 

The U.S. Department of Defense (“DoD”) revealed a GFY2014 budget of $527 billion, a spending plan that is $52 billion above the $475 billion Federal spending cap for the year set by the Budget Control Act of 2011.  The DoD’s request includes $137.0 billion for personnel, $99.3 billion for procurement, and $67.5 billion for research and development.  Without factoring sequestration into the 2013 enacted budget, the Army and Navy requests are decreased by about 2% each, while the Air Force request is up only 3.3%.  The budget proposal mentions specific programs and capabilities in its request including $4.7 billion for cyber operations, $8.4 billion for 29 F-35 joint strike fighters, $14.3 billion for shipbuilding efforts, and $5.4 billion for the Virginia-class submarine program, among others. 

Furthermore, the budget request for the Central Intelligence Agency and other non-military spy agencies is $4.4 billion less than last year’s request of $52.6 billion.  Now that the budget has been released, DoD and military service leaders will speak before the House and Senate Armed Services Committees regarding the allocation of funds within the DoD.  The President’s proposal, which is used by Congress for budget guidance, arrived over two months late and after the House and Senate had already offered proposals of their own.

Big Movers

Edac Technologies Corp. (Down 4.3%) – Shares were down this week after MidOcean Partners withdrew its $18.25 per share buyout offer, a bid that was $0.50 higher than the $17.75 per share bid by Greenbriar Equity Group and GB Aero Engine made last month.  EDAC’s board announced it unanimously recommends that the company’s shareholders accept the offer by Greenbriar and GB Aero Engine.

Relevant Transactions

ViaSat acquired LonoCloud, an early-stage company that provides cloud networking software.  ViaSat intends to integrate core components of the LonoCloud Platform as a Service (“PaaS”) with the ViaSat broadband network.  The acquisition is expected to shorten development cycles for new ViaSat service offerings.  Terms of the deal were not disclosed.

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Industry Week in Review – April 5, 2013

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Tensions on the Korean peninsula escalated over the last week as North Korea continued to make aggressive statements regarding attacks on U.S. bases in the Pacific, as well as against South Korea and Japan.  Following the U.S. and South Korea’s military exercises in which the U.S. publically flew two B-2 Bombers over the peninsula, North Korea responded with heightened rhetoric against the two countries.  In response to the escalated tensions and in an effort to ease pressure on Seoul, the U.S. deployed a missile destroyer off the Korean shore.  The Pentagon also announced on Wednesday that it would deploy an advanced missile defense system called the Terminal High-Altitude Area Defense (“THAAD”) battery, developed by Lockheed Martin, to Guam.  That same day, North Korea blocked access to the Kaesong Industrial Complex, a jointly run industrial park located in North Korea where South Korean companies employ northern workers.  The blockade continued through Friday, when the zone was closed for a national holiday.  On Thursday, North Korea reportedly moved a medium-range rocket to its eastern coast, and on Friday, the regime began notifying several embassies in Pyongyang that they should withdraw their delegations lest tensions escalate further.  According to several statements made by such embassies, the warnings were being viewed as a tactic to keep tensions high, rather than a threat that violence was imminent.

Big Movers

Innovative Solutions & Support, Inc. (Up 42.4%) – shares were up for the week after the Company received a major contract award from Delta Airlines for NextGen Flat Panel Display System and Flight Management System upgrades to the MD-88 and MD-99 aircraft fleet.  The $60+ million order includes complete systems integration, dual GPS navigation, and cockpit avionics, which will enable the Delta MD fleet to fly shorter flight paths and reduce fuel consumption.

Relevant Transactions

MidOcean Partners acquired Noranco, Inc., a provider of machined and sheet metal components, kits, and assemblies for landing gear, aero structure, and aero engine applications, for an undisclosed amount.  The acquisition provides MidOcean with a leading platform in precision-machined aerospace components, upon which it plans to expand by helping Noranco add new capabilities, customers, and supported platforms.

Elgin Fastener Group acquired Vegas Fastener Manufacturing, a manufacturer of hot-forged bolts, nuts, and specialized parts for military shipbuilding, power generation, and industrial applications.  The acquisition is the fifth add-on for Elgin since it was acquired by the Audax Group.

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Industry Week in Review – March 29, 2013

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Over the past week, U.S. Bankruptcy Judge Sean Lane approved the American Airlines merger with US Airways Group, Inc.  The potential merger was announced in February, more than a year after US Airways began its pursuit of a deal in January 2012, shortly after American Airlines filed for bankruptcy.  A merger of the two companies would create the largest airline in the world.  The approval by Judge Lane is the first of two needed approvals; Federal regulators expect to make a final decision on the merger in the third quarter of this year.  Judge Lane declined to authorize a proposed severance package for Thomas Horton, CEO of American Airlines’ parent company AMR Corporation, worth nearly $20 million.  Horton became CEO of AMR in November of 2011, after the company had filed for bankruptcy.  The companies have targeted a consummated transaction by October 14th of this year.

Big Movers

Magellan Aerospace (Up 6.4%) – Shares were up this week after the company reported an almost 33% increase in fourth quarter earnings, citing improved business and increased production by commercial airplane manufacturers.  Furthermore, revenue for the year 2012 increased to $704.6 million from $691.4 million in 2011.

Rheinmetall AG (Down 5.6%) – Shares were down this week after the company announced unexpected restructuring charges that will impair earnings this year.  The company noted that the restructuring plan, focused on the defense business, will aim to boost cash flow to allow for acquisitions.

Relevant Transactions

The Safariland Group acquired Mustang Survival, a provider of lifesaving equipment for recreational, military, law enforcement, and industrial users in the marine and aviation environments.  The acquisition expands Safariland’s product offerings in personal floatation devices and protective clothing for extreme environments.  Terms of the deal were not disclosed.

PAI Partners to acquire ADB Solutions, a manufacturer of airfield ground lighting products for large and small airports, military bases, and heliports.  PAI Partners expects to expand the business’ footprint, particularly in emerging markets.  ADB Solutions reported annual revenue of roughly $211 million for the year ended 2012.

Overall Capital Partners acquired Honeycomb Company of America, manufacturer of complex, bonded, composite assemblies for U.S. military aircraft platforms.  The company also provides spare parts for maintenance, repair, and overhaul requirements of the U.S. Air Force and various commercial suppliers.  Terms of the deal were not disclosed.

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Industry Week in Review – March 22, 2013

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On Thursday, the House of Representatives passed a $982 billion Continuing Resolution (“CR”), which the Senate had passed just eighteen hours earlier, on Wednesday afternoon.  Following comments earlier in the month from the Administration that it would accept a CR that resembles 2012 spending, the President is expected to sign the bill before the current CR expires on Wednesday, averting a potential government shutdown.  In response to the legislation’s passage, the Department of Defense announced that it will be delaying roughly 800,000 furlough notices that it had planned on issuing over the next week.  Acting undersecretary of Defense for personnel and readiness, Jessica Wright, noted in an email that despite still facing sequestration, the added flexibility under the CR may have an effect on the overall number of furlough days.  Thus, the Pentagon plans to use the delay to further analyze the impact of the CR and the roughly $10.4 billion in additional Operations & Maintenance funds that it affords the department.

Big Movers

Kratos Defense & Security Solutions (Up 12.5%) – shares were up for the week after the Company’s subsidiary SAT Corporation was awarded a multi-million dollar contract to provide satellite interference detection and quality of service monitoring solutions.  As part of the contract, SAT will deploy its proprietary satellite monitoring product, Monics®.  Additionally, the Company announced the launch of a new precision channel simulation product, the satID® GeoSim Geolocation Simulator, which is a geolocation training and test system that enables commercial and military satellite operators to protect the performance and function of critical SATCOM links.

Federal Signal Corp. (Up 10.6%) – shares were up for the week following the Company’s announcement of fourth quarter 2012 results.  Net income for the quarter was $4.8 million or $0.08 a share, compared to a loss of $15.2 million or $0.25 a share in 4Q11.  Revenue grew 12% to $217.7 million for the year.

Relevant Transactions

Resilience Capital Partners acquired a majority interest in Aerospace Products International, a provider of aviation parts, equipment, and supply chain management services that increase product availability, minimize time-to-delivery, and reduce process and working capital costs.  The acquisition expands RCP’s presence in the aviation services industry, and will enable API to offer its services to a wider range of commercial and government customers.

Greenbriar Equity Group to acquire EDAC Technologies Corp., a designer, manufacturer, and servicer of precision components for aerospace and industrial applications, for $17.75 a share.  The implied enterprise value of $141.1 million represents an LTM revenue multiple of 1.33x and an LTM EBITDA multiple 10.3x.  EDAC expects the transaction, which is subject to shareholder and regulatory approval, to close in the second quarter of 2013.

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Industry Week in Review – March 15, 2013

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Over the past week, the Federal Aviation Administration (“FAA”) gave initial approval to Boeing’s proposed plan to fix lithium-ion battery issues on its 787 Dreamliner.  The approval is a positive milestone for Boeing, which has defended the company’s 787 aircraft for nearly two months following its grounding.  Boeing believes that testing of the redesigned lithium-ion batteries should be completed within a week or two.  Despite the redesign, Chief Project Engineer for the 787, Mike Sinnett, claimed Boeing may “never get to the single root cause [of the battery issues].”  Sinnett noted the company’s engineers spent over 200,000 hours studying the battery failures and developed solutions for all 80 possible problems they found.  Battery approvals must come from both the FAA and the Japanese equivalent agency, the Civil Aviation Bureau, since Japan is Boeing’s biggest customer for the aircraft.

Big Movers

Engility Holdings, Inc. (Up 24.9%) – Shares were up this week after the company announced fourth quarter and full-year 2012 results ahead of analyst expectations.  For the fourth quarter, the company reported earnings per share of $0.77, beating consensus estimates by $0.13.

Lakeland Industries Inc. (Down 19.7%) – Shares were down this week after the company announced lower-than-expected sales in Brazil for the quarter ended January 31, 2013 which may result in an operating loss.  The company also said it recorded an impairment charge at its Brazil subsidiary and warned of potential default on its line of credit.

Relevant Transactions

ORBOCOMM to acquire the GlobalTrak division from System Planning Corporation, a provider of real-time situational awareness and intelligence that utilizes satellite and cellular communications networks.  The acquisition expands ORBCOMM’s asset monitoring capabilities as well as its solutions for the transportation market.  Terms of the deal were not disclosed.

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Industry Week in Review – March 8, 2013

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On Wednesday, the House of Representatives passed a $982 billion continuing resolution (“CR”) that would avoid a government shut down on March 27th, funding the government through the end of the fiscal year on September 30th.  The CR includes a $518.1 billion defense appropriations bill, equal to 2012 defense appropriations, as well as $87.2 billion in OCO funding. 

While these funding levels would be subject to sequestration, the bill does offer agencies increased flexibility in administering cuts, especially in Operations & Maintenance (“O&M”) accounts, by shifting funds around.  The bill moves $10.4 billion into O&M accounts from R&D and procurement accounts, for example.  The bill is likely to face steep opposition in the Senate, which is expected to vote on its version next week.  Before its passage, the White House had indicated that it would not veto a CR that reflects previous fiscal legislation, suggesting that if this version is approved in the Senate, President Obama would sign the legislation.

Big Movers

Ducommun (up 11.0%) – shares were up for the week following the Company’s announcement of fourth quarter and full year 2012 financial results.  Revenue for the quarter was $193.9 million, up from $188.2 million in 4Q11, while EPS was $0.32, up from a loss per share of ($4.60) in 4Q11.  For the year, revenue grew to $747.0 million from $580.9 million in 2011, and EPS grew to $1.55 from a loss per share of ($4.52) in 2011.

AeroVironment (down 13.7%) – shares were down for the week after the Company announced fiscal third quarter financial results that, according to CEO Tim Conver, “fell well short of our plans due to delays in government procurements expected during the quarter.”  Revenue for the quarter was $47.1 million, down from $72.0 million last year, while EPS for the quarter was $0.17, down from $0.26 a year earlier.

Relevant Transactions

RBC Bearings acquired Western Precision Aero, a manufacturer of CNC machined components and assemblies for aerospace and military applications, for $2.6 million.  The transaction, which represented a 2012 Revenue multiple of 0.52x, expands RBC’s product portfolio in the aerospace market.

MacAulay-Brown has acquired the Secure Computing & Communications division of Luna Innovations, for $6.7 million.  The acquisition expands MacB’s capabilities and footprint in critical sectors of the Intelligence Community, Department of Defense, and Homeland Security.

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