Industry Week in Review – September 14, 2012

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Over the past week, European Aeronautic, Defence & Space Co. (“EADS”) and BAE Systems have confirmed they are in discussions regarding a possible combination of their businesses.  EADS shareholders would control 60% of the new entity and BAE shareholders would own 40% according to company announcements.  Following the news, EADS stock fell as much as 10% while BAE declined as much as 9.2% on concerns that a combined company would struggle to penetrate the U.S. defense market and find cost savings. 

According to regulatory code, EADS is required to announce a transaction by October 10th, 2012 or announce that the companies are no longer interested in pursuing a transaction.  However, the deadline can be extended if the companies are still in discussions at that time.

Moreover, the House Appropriations Committee unveiled a stopgap spending measure that would continue funding the Pentagon at current levels and provide $88.5 billion for the war in Afghanistan and other ongoing global operations.  If approved, the spending measure would fund all federal activities through March 27th.  Both Republican and Democrat House panel representatives criticized the use of continuing resolutions noting the use of stopgap measures hinders Pentagon officials and industry executives’ ability to properly run programs and make business decisions.

Big Movers

Analogic Corporation (Up 14.4%) – Shares are up this week after the company announced its net income more than doubled in the fiscal fourth quarter on greater sales of ultrasound and security products.  Analogic said it expects organic revenue growth in the “high single digits” in fiscal 2013.

Macdonald Dettwiler & Associates Ltd.(“MDA”) (Down 13.4%) – Shares fell this week amid news that the U.S. Department of Justice asked for a “second request” relating to the company’s Montreal satellite communications antenna and payload business.  The department’s request delays MDA’s $875 million takeover bid for California-based Space Systems / Loral Inc.

Relevant Transactions

General Dynamics Corp. (“GD”) acquired Open Kernal Labs Inc., a provider of virtualization software for securing wireless communications, applications, and content for mobile devices and automotive in-vehicle “infotainment” systems.  The acquisition is GD’s third in the past month.  Terms of the deal were not disclosed.

KEYW Holding Corp to acquire Poole & Associates, Inc., a provider of software and systems engineering to U.S. intelligence agencies, for $116 million in cash and $10 million in stock.  The acquisition is expected to increase KEYW’s 2013 revenue by about $90 million.

KEYW Holding Corp to acquire SenSage, Inc., a provider of Security Information and Event Management (“SIEM”) and event data warehousing solutions for $18.0 million in cash and up to $16.5 million in stock.  KEYW expects the acquisition to play an integral role in what it has deemed “Project G”, a cyber awareness and response platform that the company is preparing to launch.

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September Cyber Intelligence Review

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August began with a setback for the proposed Cybersecurity Act after a filibuster in the Senate stalled the bill before the August recess.  Joint Chiefs Chairman Martin Dempsey and sponsor Joe Lieberman deplored the filibuster and continue to urge action before the end of the year, though the hotly contested election could distract these efforts.

On the transaction front, August saw a few notable Cyber / Intel M&A transactions and venture capital (“VC”) fundings.  Prime contractor General Dynamics’ (“GD”) acquisition of Fidelis Security Systems on August 28th exemplified cyber-focused M&A activity as GD aims to enhance its ability to deliver innovative cyber solutions to its customers. 

On the Cloud side, Accel-KKR-backed Layered Technologies entered the Federal cloud and hosting market by acquiring New World Apps. 

In the VC arena, activity was strong across the board, with several large-scale investments in Big Data, Cloud, and Security markets.  Highlighting the Big Data trend, longstanding Sigma Partners Principal, Richard Dale, left to start a new VC firm called “Big Data Boston,” which will focus on Big Data start-ups focused on software and services.

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Industry Week in Review – September 7, 2012

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The Democratic Party revealed its 2012 Platform during the Democratic National Convention held in Charlotte, NC.  This year’s platform includes language suggesting that it supports additional defense spending reductions.  The platform calls for “tough budgetary decisions” and has singled out certain programs such as nuclear weapons, which it characterizes as outdated remnants of the Cold War era.  It does not contain any language about avoiding sequestration, noting that the Budget Control Act of 2011 was passed with bipartisan support and that its mandated cuts were borne of a “strategy-driven process” that included both Congress and the Administration. 

The Republican platform announced during the prior week’s convention, on the other hand, is opposed to the automatic cuts under sequestration, characterizing such cuts as being “a disaster for national security.”

Big Movers

Smith & Wesson Holding Corporation (Up 25.2%)  Shares were up for the week following the company’s announcement that 2Q13 net sales will be between $130 million and $135 million, beating analyst estimates of $119 million.  The company also raised its guidance for FY13 sales as being between $530 million and $540 million, beating analyst estimates of $498 million.

AAR Corp. (Up 14.5%)  Shares were up for the week following the company’s announcement that it expects 1Q13 diluted EPS to be between $0.42 – $0.45 on sales of $540 million – $550 million, beating analyst estimates of $0.33 in EPS on sales of $526 million.

Relevant Transactions

Graphic Plc acquired Printca Denmark A/S, a developer of printed circuit boards for space, aerospace, and defense industries, for an undisclosed amount.  The acquisition expands Graphic’s high-specialization products enabling them to support a wider range of customers.

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Industry Week in Review – August 31, 2012

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On Wednesday, the Army announced that it would begin mobilizing resources to complete an audit of its Statement of Budgetary Resources (“SBR”) by 2014 and an audit of all financial statements by 2017.  Likely as part of a larger effort to control spending, this effort will constitute the first of its kind within the Army organization.  Officials note that the effects of gearing up for an audit of this magnitude will reach a broad range of staff offices, including contracting, payroll, acquisition, logistics and other business functions. The SBR is the statement that shows the money the Army has received in a fiscal year and outlines how it spent that money.

In fiscal year 2011, for instance, the Army had more than $335 billion in budgetary resources to account for.  The Department of Defense (“DoD”) is the last remaining federal agency with financial operations that cannot muster an independent audit. Secretary of Defense Leon Panetta has described the situation as “unacceptable” in testimony to Congress.  In 2009, Congress mandated that DoD obtain a clean audit opinion of all of its financial statements by 2017. In October 2011, Panetta announced that DoD, including all of the services, would move up the timeline to obtain a clean opinion on its SBR by 2014.

In other news, Science Applications International Corporation (“SAIC”) announced on Thursday that its Board of Directors, following a recently completed comprehensive strategic review, authorized management to pursue a plan to separate into two independent, publicly traded companies. The proposed separation is intended to take the form of a tax-free spin-off to SAIC stockholders of 100% of the shares of a newly formed company in order to focus on delivering science and technology solutions in high-growth markets that reflect high priority, long-term global needs (e.g. national security, engineering and health).  The two companies are expected to unlock substantial value by removing both the potential and the perception of organizational conflicts of interest that now prevent pursuit of new business in both the services and the solutions markets.

Big Movers

Esterline Technologies Corp. (Up 13.2%) – Shares rose this week after the Company announced 3Q2012 results with sales of $485.9 million, an 18.7% increase from the $409.5 million announced in the prior year.  In his comments regarding the most recent earnings release, Esterline CEO Brad Lawrence expressed expectations of a completed rebound by the end of this fiscal year as discrete events that impacted the third quarter are abating and improvements at the Avionics Systems, Control Systems, and Engineered Materials operations contribute to a strong fourth quarter performance.

Relevant Transactions

Arlington Capital Partners to acquire AeroMetric, a provider of high-quality geospatial services to corporate and governmental clients.  AeroMetric had been a portfolio company of HKW since 2007.  Terms of the deal were not disclosed.

Magellan Aerospace acquired John Huddleston Engineering Limited, a European supplier of precision machined aerospace components.  This acquisition is part of Magellan’s global growth strategy to invest in opportunities that complement the core business and strengthen Magellan’s manufacturing operations. The JHE acquisition provides additional capacity and engineering resources to support the growth in key customer programs.  Terms of the deal were not disclosed.

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Industry Week in Review – August 24, 2012

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Mid-year earnings season for Aerospace & Defense has begun wrapping-up with nearly all major players reporting results.  In a subset of about 30 major companies, roughly 80% beat earnings expectations and very few missed earnings.  Despite beating expectations, several Aerospace companies such as B/E Aerospace, Hexcel, and SAFRAN kept FY2012 guidance unchanged due to a muted outlook of aftermarket growth for the year. 

Meanwhile, large aircraft OEM outlook from Boeing and Airbus remains positive after the companies reported strong year-over-year performance and optimistic full-year guidance.  In general, Defense companies continue to rely on cutting costs in times of flat revenue growth and a tightened procurement environment.  Furthermore, roughly two-thirds of Defense companies left unchanged or lowered full-year guidance given the lack of sequestration visibility.

Big Movers

Chemring Group Plc (Down 9.9%) – Shares dropped this week amid concerns that interested suitor The Carlyle Group may not materialize.  Last week, Chemring disclosed a “highly preliminary expression of interest” from The Carlyle Group.

Relevant Transactions

LORD Corporation to acquire MicroStrain, a manufacturer of micro-displacement sensors used in a number of sectors.  The company specializes in combining micro-sensors with embedded processors to autonomously track operational usage and to navigate and control unmanned systems.  Terms of the deal were not disclosed.

General Dynamics to acquire Fidelis Security Systems, a provider of cyber security tools that offer real-time network visibility, analysis, and control.  The acquisition expands GD’s ability to provide its customers with continuous monitoring solutions to prevent advanced threats.  Terms of the deal were not disclosed.

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Government Services Firms Seeking Ways to Drive Value

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Despite downward budgetary pressures and a contracted spending environment, services firms continue to seek new ways to return value to shareholders.  Services firms are employing a range of techniques to accomplish this from the traditional growth drivers including M&A, to less common tactics like the distribution of dividends.   

Earlier this month Booz Allen announced a $1B special dividend, citing the attractiveness of current debt markets and effective use of the balance sheet.  Exploring our government services comp set, Booz, SAIC, and ManTech all boast dividend yields in excess of 2%.  Traditionally, dividends are reserved for lower growth companies whose business had matured to a level in which returning cash to shareholders trumped reinvestment (e.g., capex, M&A). 

That said, we don’t interpret the dividend trend of these three government services firms as an indictment on growth opportunities in the federal space.  These firms, consistent with their non-dividend paying peers, are also opportunistically pursuing acquisitions and taking advantage of ongoing low interest rates and available credit (often at the same time).  The low capital expenditure and net working capital requirements of the services business model affords significant cash generation even in this down market.  SAIC (maxIT Healthcare), CACI (Delta Solutions and Technologies), ManTech (HBGary; Evolvent), ICF (GHK Holdings), and Kratos (Ingersoll Rand Security Technologies) have all announced or closed deals thus far in 2012.  Granted, the maxIT, and GHK deals were more commercially focused and evidence a diversification strategy. 

The key however, is that with looming sequestration, upcoming elections, and an ever tenuous budget environment, the industry bell weathers are not hoarding cash like during the 2008 downturn, but continue to proactively seek ways to reposition and drive value.  Bottom line, the credit and M&A markets remain open and active for government services firms, and we anticipate that to continue for the remainder of 2012.

Industry Week in Review – August 17, 2012

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With sequestration continuing to loom, some members of Congress are working toward a compromise.  Senators Lindsey Graham and Carl Levin have been working together within the Senate Armed Services committee in an attempt to delay defense cuts until May 2013. 

This plan includes compromises surrounding increasing revenues while maintaining tax rates by eliminating certain tax deductions and credits, such as deductions for whaling and corporate jets.  Rep. Bob Andrews, a member of the House Armed Services Committee has proposed delaying Medicare and Social Security eligibility, commenting that these “sacred” topics need to be discussed.  While no legislative action will take place during the August recess, this movement towards compromise may serve to ease concerns over Congress’ inability to avoid sequestration.

In addition, Governor Mitt Romney announced the Republican Vice Presidential candidate would be Paul Ryan, who is seen as both a budget hawk and a supporter of a strong U.S. military presence.  His comments during a speech to the Alexander Hamilton Society that defense is highly important were tempered by comments that a balanced budget is essential for U.S. power, both hard and soft.

Big Movers

Chemring Group Plc (Up 33%) – Shares are up for the week as the military equipment maker announced they had received a preliminary expression of interest from The Carlyle Group.  Carlyle has until September 14 to make a firm bid.

Finmeccanica (Up 16.6%) – Shares are up for the week as news circulated that the Italian government would not stand in the way of previously discussed divestiture plans of “non-core” assets, which could include DRS Technologies.

Mercury Computer Systems, Inc. (Up 12.0%) – Shares are up for the week after the company announced it has received an initial order from a leading defense prime contractor to design an optimized high performance processing subsystem that will support unmanned aerial vehicles.  Shares were also bolstered by continuing coverage of the prior week’s Micronetics acquisition.

Smith & Wesson Holding Corporation (Down 14.2%) – Shares are down for the week after the company was downgraded by KeyBanc Capital Markets.  Analyst Scott Hammann noted that the firearms industry is at peak profitability, and that there is risk that these metrics could decline if sales were to moderate following the recent run-up in firearm demand.

Relevant Transactions

Piramal Enterprises Ltd. Acquired a 27.83% stake in BlueBird Aero Systems Ltd., an Israeli developer and manufacturer of UAS and peripheral equipment.  The deal, valued at $14 million, implies and Enterprise Value of $50.31 million.

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Industry Week in Review – August 10, 2012

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Last week, the Association for Unmanned Vehicle Systems International (“AUVSI”) held its Unmanned Systems North America conference.  The cadre of key players and industry authorities included acting FAA Administrator, Michael Huerta, whose remarks gave support to a potential boon for drone makers.  As technology becomes more advanced and demand increases from police agencies and others for using drones in the commercial world, the FAA has moved to ease restrictions. 

Nonetheless, there are still major safety and privacy concerns surrounding drone use.  In spite of these challenges, Huerta said that the FAA was prepared to meet a congressional mandate to integrate the airspace with robotic aircraft by September of 2015, “There’s a lot of work that needs to be done to move [drone] integration forward, but I’m very, very optimistic we will get there.”

Big Movers

Ducommun Inc. (Up 35.0%) – Shares are up after the company announced second quarter sales of $184.7 million, increasing 71% versus the second quarter of 2011, including sales of $80.3 million from the acquisition of LaBarge, Inc.  The Company also reported that adjusted EBITDA grew to $21.3 million in the second quarter of 2012 from $11.1 million in the second quarter of 2011.

Computer Science Corporation (Up 26.1%) – Shares are up after the company announced solid first quarter 2013 results.  CSC’s operating margin of 4.6% increased by 16 basis points from the previous year.  The Company also saw operating cash flow of $221 million for the quarter, an improvement of $267 million year-over-year.  While the North American Public Sector business line experienced an 8% topline decline, investors seemed to show more optimism, given revenue increases in the other business lines and new business announcements amounting to $4.0 billion.

NCI, Inc. (Up 22.8%) – Shares continued to rise after the company announced that it was awarded a $158.3 million competitive contract for fielding and logistics services in support of Program Executive Office Soldier, subordinate PEO Soldier offices, and other associated Department of Defense organizations with related missions.

Relevant Transactions

Global Invacom Group Limited Acquired The Waveguide Solution Limited, a manufacturer of waveguide solutions for ship, aircraft, satellite, medical, radar, and communication systems, for $8.1 million in cash and stock.  For the year ended February 29, 2012, The Waveguide Solution posted revenues of approximately $6.4 million.

LMI Aerospace, Inc. Acquired TASS, Inc., a premier aftermarket engineering and support services firm, for an undisclosed amount.  LMI funded the purchase of TASS with internal cash.  TASS is expected to generate approximately $17M in sales for full year 2012. The addition of TASS provides LMI Aerospace with a global presence in aftermarket engineering and builds on its history with Boeing products.

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August Cyber Intelligence Review

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Several noteworthy acquisitions and VC investments took place in the Cyber / Intelligence arena during July, as the areas of Cloud and Big Data continue to generate significant interest among both strategic and financial investors.

Additionally, cybersecurity remained at the forefront of national awareness as the Industrial Control Systems Cyber Emergency Response Team (ICS-CERT) announced a significant jump in the number of critical infrastructure breaches that took place in 2011.

VMware made a splash this past month, spending over $1 billion on two acquisitions to reinforce its position as a leader in virtualization and cloud infrastructure solutions.  It made a particularly strong statement with its acquisition of 100 person startup Nicira for $1.2 billion.

On the funding side, Trinity Ventures and Kleiner Perkins Caufield & Byers were active in the month of July, both participating in three separate rounds of funding for three different companies.  Additionally, Palo Alto Networks and Kayak Software posted substantial returns during their initial public offerings on July 17th, both closing with gains of more than 25%. This high level of funding activity aligns with the recent theme of increased investment in the cyber arena by venture capital funds.

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Industry Week in Review – August 3, 2012

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Boeing and Space Exploration Technologies (“SpaceX”) announced Friday that they expect to win the majority of $1 billion in federal awards for commercially-designed, manned spacecraft engineering.  NASA plans to spend between $800 million and $1 billion through the middle of 2014 for commercially-owned and operated vehicles intended to shuttle crews to and from the International Space Station. 

Three months ago, SpaceX demonstrated its ability to navigate its unmanned Dragon capsule to the International Space Station and back to earth, providing supplies to the station with nearly-flawless execution.  Sierra Nevada Corp. is expected to be the recipient of a markedly smaller, third award in the program.  If awarded the contracts, both Boeing and SpaceX plan to launch refurbished facilities at the Kennedy Space Center, which could generate thousands of new jobs and reignite the area’s economy.

Big Movers

Shaw Group Inc. (Up 47.9%) – Shares are up this week after the company announced a definitive merger agreement with Chicago Bridge & Iron Company (“CBI”).  CBI will acquire Shaw for $46.00 per share in cash and stock.

NCI, Inc. (Up 20.8%) – Shares are up this week after the company announced second quarter earnings of $0.11 per share which exceeded analysts’ consensus of $0.07 per share.  Despite beating analysts’ estimates, NCI still reported decreased revenue, operating income, and operating margin as compared to the same period last year.

Relevant Transactions

Astronics Corporation acquired Max-Viz, a leader in the design and production of enhanced vision systems (“EVS”) for the civilian and military aviation industry for $10.0 million with additional purchase consideration of up to $8.0 million if Max-Viz achieves certain revenue targets.  The acquisition demonstrates a market interest in leading technologies that enhance capabilities and performance of diverse, existing aerospace assets in dynamic ways.  Max-Viz is projecting 2012 full-year revenue in the range of $7.0 to 8.0 million.  KippsDeSanto & Co. acted as exclusive financial advisor to Max-Viz, Inc. on this transaction.

GE Aviation acquired Austin Digital, a supplier of flight operations data analysis, for an undisclosed amount.  The acquisition strengthens GE’s services offerings with integrated solutions for aviation customers around the world.  Terms of the deal were not disclosed.

Chicago Bridge & Iron Company N.V. to acquire Shaw Group Inc., a provider of construction and engineering services to a variety of industries for roughly $3 billion.  The acquisition will expand CBI’s nuclear building services and supplement CBI’s role in construction of the first nuclear reactors approved in United States since 1978.

General Dynamics acquired the Ship Repair & Coating Division of Earl Industries, LLC, a provider of maintenance, modernization, and repair to ships in specific homeport areas as well as certain classes of naval ships.  The acquisition boosts General Dynamics’ ability to compete in the growing naval ship repair market.  Terms of the deal were not disclosed.

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