June Cyber Intelligence Review

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May was another busy month in the Cyber / Intel arena, with a significant increase in venture capital activity and news regarding the ever-increasingly precarious cyber threat environment grabbing headlines.  Researchers in the UK found embedded hardware “backdoor” vulnerabilities in chips commonly used in defense applications and news of more large-scale data losses surfaced. 

Offensive cyber activity was also in the news as The New York Times reported that U.S. officials confirmed responsibility (with the close participation of Israel) for the Stuxnet virus, aimed at disabling Iran’s uranium enrichment activities.  Additionally, May saw the discovery of a successor to Stuxnet, known as “Flame,” which has recently infected systems across the Middle East and appears to be intended for gathering intelligence data.

Several companies focused on Big Data solutions raised venture capital funding in May, while two other Big Data firms were acquired by larger industry players to augment existing offerings.  Accel Partners and Sequoia Capital also invested $70 million in SaaS data collection and analysis provider Qualtrics, the two firms’ largest-ever joint investment.

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Industry Week in Review – June 1, 2012

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The DoD’s growing inventory management problem emerged in headlines this week after a former DLA director, Keith Lippert, warned of an impending “inventory crisis” as agencies are faced with the cost of eliminating excess goods currently in store and dealing with the flood of items that are returning from conflict zones overseas. According to DoD estimates, the current excess could be valued at $9 billion within an overall inventory valued at ~$100 billion. The excess in inventory spans all artifact categories, including vehicles, gear, and weapons, all compiled after nearly a decade of war abroad.

While the DLA has several options in dealing with this excess (e.g., discounted sales, foreign military sales, destruction), the manpower and cost needed to administer this issue provides for a significant cost center in the context of broader fiscal pressures and numerous higher priorities. As reported by the GAO, the current inventory problem has been driven by decades of poor management practices and procedures, weaknesses in accurately forecasting demand, and challenges in establishing the proper metrics and analysis techniques to gain visibility into the supply chain. While recent efforts have focused on increased data analysis to uncover efficiencies and strengthen fiscal policy with respect to inventory management, the issue of reducing existing stockpiles and cleaning up past missteps may soon become a much more serious matter across the DoD community.

Big Movers

Booz Allen Hamilton (Up 9.7%) – Shares traded upward this week after an announcement that its Board of Directors authorized and declared a special dividend of $1.50 / share, which analysts regarded as a positive surprise payout for shareholders.

Aeroflex Holding Corp. (Down 6.7%) – Shares traded downward this week after an investigation over potential violations of securities laws was announced; the potential violation concerns whether or not Aeroflex made materially false or misleading statements about the business to its stakeholders.

Relevant Transactions

Teledyne Technologies to acquire LeCroy Corporation, a leading supplier of oscilloscopes, protocol analyzers, and signal integrity test solutions with approximately 500 employees worldwide. The acquisition will serve to broaden Teledyne’s portfolio of analytical instrumentation businesses and provide a commercial outlet for Teledyne’s Indium Phosphide process technology and ultra-high frequency mixed signal design capabilities. Teledyne’s offer is $14.30 / share, implying an enterprise value for LeCroy north of $290 million. As of March 31, 2012, LeCroy’s trailing twelve months revenue was $196 million.

TZP Group to acquire Total Military Management LLC, a provider of non-asset based logistics services to transportation service provider partners serving the military market worldwide. Total Military Management (“TMM”) was previously backed by Philadelphia-based financial sponsor Eureka Growth Partners. Edgeview Partners served as the exclusive financial advisor of Eureka and TMM. Terms of the deal were undisclosed.

CGI Group to acquire Logica PLC, a provider of business consulting, system integration, cloud computing, and outsourcing services to various industries across Europe. CGI pursued the acquisition to “create a global technology champion with significant presence throughout the Americas, Europe, and Asia” with 72,000 employees in 43 countries and annual revenues greater than $10 billion (more than double CGI’s current size). CGI’s offer represents a ~60% premium over Logica’s previous day closing price, and implies an enterprise value above $3.2 billion. Logica was advised by Rothschild, Bank of America Merrill Lynch, and Deutsche Bank, while CGI was advised by Goldman Sachs.

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Industry Week in Review – May 25, 2012

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Just six years after NASA established the Commercial Orbital Transportation Services Initiative, this Friday, Space Exploration Technologies Corp., or SpaceX, became the first commercial space provider to successfully reach and dock its unmanned re-supply craft, Dragon, with the International Space Station.  The linkup marks a significant step in NASA’s move towards transferring orbital cargo and crew transport responsibilities from the space shuttle to the private sector.  NASA hopes companies, like SpaceX, will allow the space agency to focus its efforts, instead, on a decades-long goal of sending humans on deep space exploration missions, first to an asteroid, and then Mars.

After finding Type 2 cracks in many of its A380’s wing rib feet earlier this year, Airbus has announced that it will have to retrofit 120 aircraft to resolve the problem while a permanent fix is implemented into new build aircraft.  The aircraft manufacturer has only delivered 74 A380s to date, however the total number of retrofits will include work already in the production system, raising the total aircraft count to 120. With two fixes developed by Airbus to permanently deal with the cracking of rib feet – one addressing the retrofits and the other altering the production process – the total cost of resolving the situation is expected to top €260 million ($327 million).

Airbus is currently in discussions with airlines over how best to implement the retrofits. Airlines will have to choose whether to park aircraft for several weeks, in order to fully install the fix, or to implement changes over time during several C-checks. Others are choosing instead, to not take delivery of aircraft until the permanent solution is installed. Airbus’ permanent fix should be available in early 2013

Big Movers

HEICO Corp. (Up 13.1%) – Shares rose this week after the Company increased its year-over-year FY2012 estimates in net sales to 17% to 20% and growth in net income to 12% to 14%, up from 15% to 17% and 10% to 12%, respectively.

Smith & Wesson Holding Corporation (Up 10.6%) – Shares rose this week after the company reported April Quarter sales around $129 million, compared to estimates of $120 million. Additionally, the Company’s backlog increased to about $439 million, up about 135% compared to a year ago.

Relevant Transactions

Robbins-Gioia, LLC (“RG”) has been acquired by a management led team of investors for an undisclosed amount.  The acquisition will once again establish RG as an independent, U.S.-owned entity and will allow management to refocus on expanding its services and technology business.  The Company was acquired by the Institute for International Research in 2005, which was in turn acquired by Informa, the world’s largest conference and event company. Robbins-Gioia provides management consulting services to non-profit organizations, large government agencies, and major commercial companies worldwide.

Exceed Corporation acquired Valor Concepts, a designer and integrator of complex security and communication systems for the Federal Government.  The acquisition will provide Valor with the necessary capabilities in system design, consulting, system integration, and related services that are essential in the security and IT industries. Terms of the deal were not disclosed.

Moelis Capital Partners acquired Mxi Technologies, a provider of aviation maintenance management software solutions to commercial airlines, OEMs, MRO organizations, and defense operators.  The acquisition will help Mxi continue to grow and meet the needs of customers and prospects alike.  Terms of the deal were not disclosed.

Precision Castparts Corp. to acquire Dickson Testing Company, Inc. and Aerocraft Heat Treating Company, Inc., for an undisclosed amount.  Dickson tests aircraft parts by measuring metrics such as fracture toughness, shear, creep, stress fracture, corrosion, salt spray and alloy depletion, while Aerocraft, heat treats steel, titanium and high-temperature materials for aircraft-engine and structural parts. The two businesses enable Precision Castparts to integrate and expand their capabilities both within its facilities and with its many valued aerospace customers worldwide.

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Industry Week in Review – May 18, 2012

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This week, the House on Friday passed a $642 billion defense bill that abandons the deficit-cutting agreement that President Obama and congressional Republicans backed last summer. After a 299-120 vote, lawmakers backed the spending blueprint that adds $8 billion for the military for next year. The bill calls for a missile defense site on the East Coast that the military opposes and restricts the ability of the President to reduce the arsenal of nuclear weapons under a 2010 treaty with Russia. It also preserves ships and aircraft that the Pentagon wanted to retire in a cost-cutting move. In addition, lawmakers rejected the military’s request for another round of domestic base closings.

The spending blueprint calls for money for aircraft, ships, weapons, $88.5 billion for the war in Afghanistan and a 1.7% pay raise for military personnel, billions of dollars more than Obama proposed. The bill snubs the Pentagon’s budget that was based on a new military strategy shifting focus from the Iraq and Afghanistan wars to future challenges in Asia, the Mideast and in cyberspace. The bill spares aircraft and ships slated for retirement, slows the reduction in the size of the Army and Marine Corps and calls for construction of a new missile defense site on the East Coast. The bill also includes new funding (opposed by Defense Secretary Leon Panetta) for certain tank upgrades, additional submarines, long-range bomber development and Air Force drones.

Under the terms of a deficit reduction deal reached last year by administration and congressional leaders, defense spending is set to be cut by roughly $450 billion over the next decade. The Pentagon could also be on the hook for about half of $1.2 trillion in additional savings over the next 10 years if Congress fails to come up with an alternative deficit reduction plan. The effort to stick to last year’s deficit-cutting pact and cut $8 billion from the bill failed on Friday after a 252-170 vote.

Big Movers

American Science and Engineering, Inc. (Down 27.7%) – Shares traded down this week after AS&E released results for the fourth quarter and fiscal year ended March 31, 2012. The Company reported revenues of $203.5 million as compared with record revenues of $278.6 million for the prior fiscal year; net income was $21.4 million as compared with record net income of $42.8 million for fiscal year 2011, representing a year-over-year decline of 50%.

Lakeland Industries, Inc. (Down 25.1%) – Shares traded down this week after the company announced that it received notice of an unfavorable arbitration award in the arbitration proceeding in Brazil involving the Company and two former officers of Lakeland Brasil. In the arbitration proceeding, the former officers sought a determination that they were terminated by the Company without cause and, therefore, entitled to be paid their portion of the Maximum SPP and the monthly remuneration that they would have been paid from the date of termination through the end of their contractual employment period on December 31, 2011. On May 8, 2012, the Company received the arbitration decision which accepted the former officers’ requests.

Relevant Transactions

CAE announced that it has acquired Oxford Aviation Academy (“OAA”), a provider of aviation training and crew sourcing services for C$314 million. This acquisition is meant to strengthen CAE’s leadership and global reach in civil aviation training by increasing its training center footprint, growing its Ab-Initio flight training network, and extending its portfolio by adding OAA’s Parc Aviation, a global leader in pilot and maintenance crew sourcing for airlines and leasing companies. The Company had revenues of approximately C$280 million during CAE’s fiscal year 2012 and the purchase price represents approximately 9 times OAA’s EBITDA during the same period. The acquisition is expected to be accretive to CAE’s earnings in fiscal year 2014.

The Jordan Company, L.P. has agreed to acquire VT Services, Inc., the Babcock International Group U.S. defense business for $98.8 million. VT, Services Inc. is an engineering support and facilities management business. The business was acquired as part of Babcock’s acquisition of VT Group plc, which was completed in July 2010. The division’s last reported revenue was approximately $324.1 million. The disposal is expected to complete by the end of June 2012.

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Industry Week in Review – May 11, 2012

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On May 7th, the U.S. House of Representatives’ Budget Committee passed a plan to circumvent across-the-board cuts in January and reverse billions in reductions that were made last fall.  The Republican-led effort aims to restore cuts in the defense budget that were approved as part of the Budget Control Act of 2011. 

The plan is accompanied by two bills, from both the House Armed Services Committee and the Defense Appropriations Subcommittee, to spend the additional funds.  Rep. Paul Ryan (R-Wis) commented, “In our view, we shouldn’t be taking more from hardworking Americans to fix Washington’s mistakes.  Instead, we should be solving the problem with structural reforms to our entitlement programs… [there is] strong bipartisan agreement that the sequester is a bad policy.”

However, on May 10th, the Pentagon immediately rejected both spending plans, which will likely be dead on arrival when the Democrat-controlled Senate finalizes its military spending recommendations.  Defense Secretary Leon Panetta commented, “The Department of Defense, and I believe the administration, are not going to support additional funds that come at the expense of other critical national security priorities…if members [of Congress] try to restore their favorite programs without regard to an overall strategy, the cuts will have to come from areas that could impact overall readiness.”

Big Movers

Aeroflex Holding Corp. (Down 23.2%) – Shares traded down this week after the company issued Q4 2012 guidance below Wall Street estimates.  The company reported that it expects net sales to be between $180 million and $195 million and adjusted EBITDA between $41 million and $51 million.  Analysts were previously expecting the company to report revenues of $202 million and EBITDA of $58 million.

GeoEye, Inc. (Down 16.1%) – Shares traded down this week after DigitalGlobe’s Board of Directors rejected GeoEye’s proposal to acquire the company for $17.00 / share.  Later in the week, a secondary drop-off occurred when Macquarie analysts downgraded GeoEye’s stock to “Neutral” from “Outperform.”

Wesco Aircraft Holdings Inc. (Down 10.4%) – Shares traded down this week after announcing earnings results on Monday, in which it reported earnings-per-share of $0.22, missing analysts’ consensus estimates by $0.03.  However, the company did report revenue that was up 3.5% as compared to the same quarter last year.

Relevant Transactions

GTCR announced that it has acquired CAMP Systems, a provider of maintenance management, flight scheduling, inventory control, and engine control trend monitoring solutions for $675 million.  The auction process was orchestrated by Credit Suisse AG, who also drew bids from Bain Capital and Welsh Carson, Anderson & Stowe for the Warburg Pincus-backed company.  According to sources close to the deal, the company was generating EBITDA ~$45 million.  The deal reportedly closed on April 7th.

Kratos Defense & Security Solutions, Inc. has agreed to acquire Composite Engineering, a provider of ballistic missile target systems, augmentation and payload equipment, and launch solutions, for $155 million.  The company primarily provides miniature jet targets for the U.S. Air Force and U.S. Navy. According to Kratos, the company earned ~$94 million in revenues in 2011, up 25% over 2010, and has a qualified pipeline in excess of $1 billion.  The deal includes a $20 million component of Kratos stock.

General Dynamics C4 Systems has agreed to acquire IPWireless, a provider of LTE mobile broadcast solutions for government and public safety customers, as well as integrated mobile broadcast solutions for 3G mobile data offload applications, for an undisclosed purchase price.  General Dynamics consummated the transaction to tap into the “fast current of growth” in the rapidly expanding 3G and 4G wireless market.  The acquisition will also provide General Dynamics with a technological and pricing edge in future upgrades to secure communications networks programs for U.S. military and civilian customers.  IPWireless reportedly has ~90 employees and expects to generate between $65 million and $75 million of revenue this year.

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May Cyber Intelligence Review

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Over the past month, there has been significant activity in the Cyber / Intel space – particularly in the world of Big Data – with several policy developments and a handful of noteworthy transactions taking place.  The end of March included an announcement from the White House that six federal departments / agencies would be committing $200 million towards a new Big Data initiative, followed by April coming to a close with the House of Representatives passing three cyber-related bills. 

Big Data companies grabbed headlines for both M&A and venture capital fundraising in April, and Splunk, the first pure-play public Big Data company, saw its stock price double in the first day of trading after its IPO on April 19th.

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Industry Week in Review – May 04, 2012

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As the Army continues to bring its tactical wheeled vehicles home from Afghanistan, it is now faced with the decision of what vehicles to keep, what vehicles to reset, and what vehicles to buy. With an inventory of 270,000 vehicles across the range of vehicle platforms, including tens of thousands of new MRAPs, M-ATVS, Strykers, and up armored Humvees, the Army needs to either position vehicles into its revamped force structure or divest them. Army leadership is conducting a “fleet mix analysis” to determine just which vehicles to support, however there is one vehicle where plans appear to be set.

“For combat, we know the Humvee is no longer feasible,” Maj. Gen. Tony Cucolo, director of force development for the deputy chief of staff, G-8 said. Army officials have stressed that the Humvee still has a future within homeland security and logistics operations, however, once the vehicle leaves Afghanistan it will not see the battlefield again.

After years of debate over finding a replacement for the Humvee, it now appears that the Joint Light Tactical Vehicle (“JLTV”) will fill this role. A joint venture between the Army and the Marine Corps, the JLTV is currently moving towards a prototype and testing phase that could result in production orders for more than 55,000 vehicles. The JLTV program is expected to cost well over $10 billion, though some estimates have put this figure as high as $70 billion, depending on the final per-vehicle cost and total quantity ordered.

Big Movers

DigitalGlobe, Inc. (Up 35.5%) – Shares are up this week after the satellite imagery company GeoEye, Inc. offered to purchase DigitalGlobe for $792 million in a cash-and-stock deal. A deal between the two companies would create the world’s largest fleet of commercial imagery satellites. (note: DigitalGlobe has since rejected GeoEye’s unsolicited offer)

Chemring Group plc (Up 4.6%) – Shares rose this week after Non-Intrusive Inspection Technology, Inc. (“NIITEK”), a U.S. subsidiary of Chemring, was awarded an Army sole source contract for the Ground Penetrating Radar Husky Mounted Detection System worth up to $579 million. The Company has already been awarded an initial order of $161 million.

ManTech International Corporation (Down 21.8%) – Shares fell this week after ManTech missed analysts expectations for the second quarter in a row and cut its 2012 outlook sighting slowing revenue from overseas contingency operations. The Company now expects FY2012 revenue of $3 billion and net income of $113 million.

CACI International, Inc.(Down 20.3%) – CACI’s shares saw their steepest decline since April 2011 this week after the Company cut its sales forecast from $4.05 billion down to a range of $3.73 billion to $3.83 billion. Analysts had estimated $3.95 billion. CACI blamed the shortfall in part on slower-than-anticipated procurement by customers, uncertainty in government budgeting, and the drawdown in Southwest Asia.

Relevant Transactions

Kanders & Company, Inc. to acquire BAE Systems’ Safariland, LLC, a manufacturer of protective equipment for law enforcement agencies, including gloves, holsters, and riot gear, as well as armored combat vehicles, ships, and satellite systems for the military. The proposed $114 million sale is another step in BAE’s ongoing plan to streamline its organization and further align its business portfolio and strategy. The sale is expected to close in the second or third quarter.

GeoEye, Inc. to acquire DigitalGlobe, Inc., a provider of commercial earth imagery products and information services worldwide, for $792 million in cash and stock. In the face of increased defense budgetary pressures and internal competition, a combined company will be better able to provide the U.S. government with geospatial intelligence. GeoEye has offered to pay $17.00 per share for DigitalGlobe, a 26 percent premium to Thursday’s close. (note: DigitalGlobe has since rejected GeoEye’s unsolicited offer)

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Industry Week in Review – April 27, 2012

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This week, U.S. House lawmakers, seemingly frustrated by Air Force and Army decisions to cancel weapons in the 2013 budget, have taken the first steps toward reinstating funding for those programs. In its markup of the 2013 defense authorization bill, the House Armed Services subcommittee on tactical air and land forces recommended adding $1.1 billion above what the Pentagon requested for certain weapons programs.  The draft legislation blocks the previously speculated cancelation of the Northrop Grumman Block 30 Global Hawk.  If the legislation is approved, it will not only add $263 million to the requested $75 million to fund continued operations, the Air Force will be required to operate the unmanned aircraft through the end of 2014.

The subcommittee seeks to fully fund procurement of 29 Lockheed Martin F-35 Joint Strike Fighter aircraft, and to buy the additional 12 General Atomics MQ-9 Reaper unmanned aircraft, the subcommittee recommends a $180 million addition to the Air Force’s $920 million request.  The markup also authorizes multiyear procurement of the Bell-Boeing V-22 Osprey, funds production of 21 tilt-rotor aircraft in 2013, extends the Boeing F/A-18E/F Super Hornet multiyear for a fifth year, and funds 26 F/A-18s and 12 EA-18G Growler electronic attack aircraft.

Army budget requests were also revisited. In its markup of the authorization bill, the subcommittee says there is not enough information available about the Army’s future needs or the risks associated with temporarily closing the combat vehicle production lines.  In the absence of the force-mix study results and a quantitative analysis of the impacts to the combat vehicle industrial base, the subcommittee recommends providing funding to keep those production lines open.  The subcommittee recommends an additional $181 million for continued M1 Abrams tank upgrades and $140 million for upgrades to the Bradley fighting vehicle. It also adds $62 million to increase 2013 production for the M88A2 Improved Recovery Vehicle.

Big Movers

Dynamics Research Corp. (Down 23.3%) – Shares are down this week after the Company further reduced 2012E expectations, citing continuing deferral of procurement decisions and program cuts, together with intensified price competition as the main drivers for the downward shift.

Safran SA (Up 14.3%) – Shares rose this week as brisk overhaul demand for jet engines underpinned stronger than expected first quarter sales.  The Company posted first-quarter revenue of 3.1 billion euros ($4.1 billion), above market forecasts of around 3 billion, boosted by a 15.1% rise in the economically sensitive after-market for civil jet engines.

Relevant Transactions

Blackland Aerospace acquires Lewis Machine Company, a provider of complex precision-machined components for clients in the commercial and military jet engine, airframe, missile and power plant industries. The acquisition of Lewis Machine represents the third in fourteen months and reaffirms Blackland’s commitment to building a leading platform in the sector. The terms of the transaction were not publically disclosed.

Six3 Systems acquires Ticom Geomatics, a provider of interoperable, mission-ready, precision Geolocation and ISR systems and services. The acquisition combines Ticom’s expertise in Tactical precision Geolocation and COMINT with Six3’s strong capabilities in the National ISR/SIGINT and Cyber market. Together the Company will be able to offer customers comprehensive solutions and services that span from National through Tactical ISR needs and address all elements of the Multi-INT market. While some reports show Ticom’s latest reported revenue to be almost $30 million, the specific terms of the transaction were not publically disclosed.

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Industry Week in Review – April 20, 2012

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A recent DoD report, released on April 18, suggests that Congress should lift restrictions on commercial satellite exports to eliminate existing headwinds in the U.S. space manufacturing market.  Currently, commercial satellite exports are regulated by the U.S. Munitions List (“USML”), grouped with other defense-related artifacts such as firearms, missiles, military vehicles, and warfighter training equipment.  The Obama Administration’s current proposal suggests moving commercial satellites to the Commerce Department’s Commerce Control List in an effort to reduce pressure on the U.S. commercial satellite industry and alleviate associated risks to broader national security.  The revision of the regulations is part of a comprehensive strategy to rebuild the USML and introduce new export control reforms, with an overall goal to create “higher walls around fewer items.”

In a related story, the Air Force announced this week its intention to launch the second Advanced Extremely High Frequency (“AEHF”) communications satellite on May 3, as part of the effort to replace the legacy Milstar constellation and provide secure, high-integrity, jam-resistant communication support to senior military and government officials.  The third AEHF satellite is expected to launch in September 2013, a fourth satellite is on contract, and two more are expected to be procured by the end of the upcoming summer.

Big Movers

MAXIMUS, Inc. (Up 7.0%) – Shares rose this week after the company announced that it has signed a definitive agreement to acquire Denver, CO-based Policy Studies Inc. (“PSI”) for $67 million.  PSI helps administer various government health programs, including Medicaid and the Children’s Health Insurance Program, welfare-to-work programs, and child support enforcement initiatives.  The acquisition is expected to help bolster MAXIMUS’ position in the increasingly lucrative government health market.

TransDigm Group Incorporated (Up 5.4%) – Shares rose this week after analysts reported confidence that the company will raise adjusted earnings-per-share (“EPS”) estimates meaningfully during reports next month.  Analysts rationalize the higher EPS estimates through a combination of further McKechnie upside, AmSafe accretion, and continued aftermarket strength.

Relevant Transactions

HEICO Subsidiary Radiant Power Corp. acquires the aerospace assets of Mortiz Aerospace, a designer / manufacturer of next generation wireless cabin control systems, solid state power distribution and management systems, and fuel level sensing systems for business jets, military / defense aircraft, and general aviation consumers.  The acquisition enables Radiant Power to provide a full suite of power control and cabin electronics solutions.  Terms of the deal were undisclosed.

Venture Aircraft, LLC acquires certain assets of Swift-Cor Aerospace, Inc., a producer of precision computer numerical control (“CNC”) machined and sheet metal parts, as well as assemblies, for commercial jets, business jets, and military aircraft, among other aerospace platforms.  The combined entity will now operate as Impresa Aerospace; management views the acquisition as instrumental towards being able to tackle growing demand driven by rapidly increasing aircraft build rates.  Terms of the deal were undisclosed.

Waveland Investments acquired NTE Aviation, an aftermarket reseller of airplane engine and airframe components.  NTE engages in the sourcing and reselling of engine and airframe parts to / from MRO facilities, OEMs, airline operators, and leasing companies.  The company is well recognized within the aviation industry as a specialist in the regional airline turboprop engine and airframe segment, in addition to Boeing 737 Classic applications.  Terms of the deal were undisclosed.

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Industry Week in Review – April 13, 2012

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This week the Pentagon released its 30-year aviation plan which forecasts to spend $770 billion on aircraft purchases, operations, maintenance, and construction between fiscal year 2013 and 2022, with annual funding levels set to peak at $80 billion in fiscal year 2022. The capabilities of aircraft identified in the plan reflect five principle investment objectives identified by the Pentagon:

  • Meet the demand for persistent, multirole intelligence, surveillance, and reconnaissance (“ISR”) capabilities
  • Provide sufficient enabler capability and capacity
  • Acquire fifth generation fighter / attack aircraft, while maintaining sufficient inventory capacity
  • Modernize long-range strike capabilities; and
  • Emphasize modernization and readiness.

Along with the surprise announcement that a new Air Force One presidential transport has been included in the 30-year plan (the first time the Pentagon has mentioned a replacement to the long standing Boeing 747 jet transport), the Pentagon released plans to increase its fleet of armed and long-haul surveillance drones by 45 percent over the next 10 years. The U.S. inventory of UAV’s will increase to 645 aircraft by 2022, from about 445 aircraft in 2013. Even as drones are set to play an ever increasing role in the Pentagon’s future, “smaller and leaner” force, the U.S. military is buying fewer than originally planned due to budget restrictions.

Big Movers

Hexcel Corp. (Up 8.5%) – Shares are up this week amid speculation that Hexcel Corp. will submit a counter bid for British aerospace parts supplier Umeco Plc. Cytec Industries Inc. has already made an offer valued at roughly $439 million, however analysts believe that were Hexcel to counter bid, it would be the likeliest candidate. Umeco’s shares rose as much as 48% on Thursday, following the initial bid.

Embraer SA (Up 2.8%) – Shares rose this week after the Company announced it had entered into a partnership with Boeing targeted to pursue several areas of cooperation, including research, technology, and sustainable aviation biofuels.

Relevant Transactions

L-3 Communications to acquire the assets of Thales Training & Simulation Ltd., a provider of simulation and training systems for military aircraft to government, defense, aerospace, and air travel industries, for $132 million. L-3 plans to integrate the civil aircraft simulation and training business into its link simulation and training organization, within its electronic systems group. The acquired assets are expected to generate sales of approximately $150 million for the 12 months ending December 31, 2012.

Thunderbird, LLC acquired Excaliber Precision Machining LLC, a developer of precision machining and assembly of aerospace parts, for an undisclosed amount. The acquisition will add complimentary machining skills to Thunderbird’s capabilities. Following the change of control, the business will be renamed Excaliber Precision Manufacturing LLC.

Trimble Navigation Limited acquired Gatewing N.V., a Belgian provider of lightweight unmanned aerial vehicles for photogrammetry and rapid terrain mapping applications. The acquisition broadens Trimble’s platforms for surveying solutions. Terms of the deal were not disclosed

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