2011 I/ITSEC Conference – A Multi-Football Field Sized Arcade for Government and Defense Professionals

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I walked the exhibition floor at the 2011 I/ITSEC conference in Orlando earlier this week where industry and government professionals travel from around the world to showcase, collaborate, and buy leading-edge training and simulation technologies.  Most exciting, where else can an investment banker fly a helicopter and fighter jet, and shoot a buffet of firearms?  All simulations of course.

Fun aside, the conference also sheds light on the trends and market pulse of this innovate and technology-forward segment of the defense industrial base.  Some observations (two technologies) and rumblings (two trends) are worth sharing.

  • Tablet, So What – 2010 I/ITSEC was the year of the iPad, sprinkled amongst the exhibitors.  Virtual and portable training was a fresh approach to classrooms, paper manuals, and distance learning via laptops.  Tablets matured from a sprinkling last year to a torrential downpour this year.  They were everywhere, and across all platforms (iPad, Samsung, other Android-based devices, etc.).  The concept of training on a tablet has quickly become a commoditized expectation versus a true competitive differentiation.  However, select companies have tried taking the tablet to the next level, adding bells and whistles such as cloud-hosted solutions and secure and mobile collaboration (content, voice, and video).
  • 3D, Coming to a Military Base Near You – The 3D rage has transcended the silver screen and living room flat screen to the military training realm.  There were more than a handful of companies introducing 3D video screens for training and visual simulation (display vs. interactive).  Best of all, glasses optional.
  • Nothing Says Cost Avoidance Like Simulation – The exhibition vibe was bullish around virtual training and technologies, especially distance-based learning solutions, despite the gloomy funding environment.  Folks felt confident that these types of training solutions remain consistent with the cost-avoidance business model of the current and future government customer, and the need to train a more geographically dispersed warfighter.
  • Small Business Key to Innovation – Smaller product companies (compared to a number of more R&D or custom development) are still struggling to migrate from subsystems to bona fide systems, or to get direct access to customers.  Customers remain motivated to make the safer bet by choosing larger firms for full systems development.  As a result, smaller firms continue to face the decision of choosing to remain the subsystem niche provider, fight the upward battle for lead developer status, or join a larger platform via acquisition.

Industry Week in Review – December 2, 2011

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This week, the Obama administration released a proposed 2013 base defense budget of $523.4 billion with an additional $82.5 billion for contingency operations, a combined one-year reduction of about $47 billion in the base budget. The bill, which still must be approved by Congress, represents progress in a time of government stand-still and provides a more optimistic view of the government’s ability to finalize budgetary decisions in the wake of the recent Super Committee failure.

Central banks from developed nations took action to ease strains in financial markets by lowering the price on existing temporary U.S. dollar liquidity swap arrangements. The move makes dollar funding cheaper for European banks that hold dollar-denominated securities or make U.S. dollar loans, but does not fix systemic European debt issues. The arrangement also signifies the possibility of future coordinated actions by Central banks if global economic conditions worsen.

American Airlines filed for Chapter 11 bankruptcy after the company announced that it failed to “achieve a cost and debt structure that is industry competitive and thereby assure long-term viability.” The third largest airline by traffic was unable to shrink the cost gaps between itself and its largest competitors after widespread industry consolidation followed the 2001 terrorist attacks.

Big Movers

Rheinmetall AG (Up 20.4%) – Shares are up this week after the company won a major order from Russian Ministry of Defense to build an army training center in Mulino, Russia worth about $134 million. The facility is expected to be complete by 2014 and have the capability of training 30,000 troops a year in a simulation-supported center. The deal expands Rheinmetall’s footprint in the Russian market.

Boeing Co. (Up 13.6%) – Shares are up this week after analysts initiated coverage with a “Buy” rating as manufacturing and production is expected to increase. Boeing recently announced two of the largest orders in the company’s history.

Recent Acquisitions

Astronics Corporation acquired Ballard Technology, a provider of avionic interface solutions for defense and commercial aerospace applications for $24.0 million with an earn-out of up to $5.5 million if Ballard achieves certain revenue growth targets. The acquisition advances Astronics strategy to develop and maintain positions of technical leadership while diversifying its products and technologies. Ballard is projecting 2011 annual revenue of approximately $11.0 million. KippsDeSanto acted as the sole financial advisor to Ballard Technology.

Sotera announced the acquisition of Potomac Fusion, Inc., a provider of data analytics, cyber and visualization solutions for U.S. Intelligence Community and Department of Defense. The acquisition expands Sotera’s capabilities to address evolving requirements of national security customers.

Microsoft acquired VideoSurf, Inc., a provider of a video search engine that allows users to search and discover videos from massive amounts of visual data for an estimated $100 million. The back-end computer vision technology that “sees” frames inside videos to make discovering content fast, easy and accurate will be integrated across Microsoft’s entertainment platform including Xbox 360 and Xbox LIVE.

Twitter acquired Whisper Systems, A provider of security and management solutions that transform consumer phones and tablets into enterprise-ready devices. The acquisition expands Twitter’s data protection and security capabilities. More importantly, the acquisition gives Twitter access to famed security researcher Moxie Marlinspike, founder of and one of two employees at Whisper Systems.

TE Connectivity Ltd. to buy Deutsch Group SAS, a provider of heavy-duty electronic connectors for about $2.6 billion. The acquisition expands TE Connectivity’s presence in the defense and industrial transportation markets.

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Industry Week in Review – November 25, 2011

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This week, the Joint Select Committee, better known as the “Super Committee,” failed to identify $1.2 trillion in reductions to the federal deficit. The committee’s failure triggers automatic spending cuts and sequestration beginning in 2013. If defense budget cuts are not softened, the defense base budget in 2013 would be cut to approximately $472 billion, nearly $100 billion under the Pentagon’s 2012 budget request for the following year.

While defense cuts seem inevitable, the amount and timing are under debate. A main factor in the debate is the 2012 Presidential election; Committee failure and pending job loss from defense cuts in a tough economy are key considerations in the President’s re-election. Several members of Congress and the White House agree the defense cuts under sequestration go too far. Policymakers are likely to seek spending reductions and revenue increases in other places in order to avoid the full effects of defense cuts.

Big Movers

Zodiac Aerospace (Up 5.4%) – Shares are up this week after the company announced a bullish view on aerospace growth, projecting Q1 organic sales up 20% when its fiscal quarter ends next week. The company which supplies plumbing, power and parts for Airbus and Boeing Co jetliners, said on Tuesday their supply chain was robust enough to keep up with record production needed to meet demand in the Middle East and Asia.

Northstar Aerospace Inc. (Down 21%) – Shares are down again this week as investors remain wary of weak earnings reports and agreements made with employees to end a 30-day workforce strike. The company, which produces flight-critical parts for military and commercial aircraft applications, ratified a new collective bargaining agreement in which it conceded cost-of-living allowances and job security clauses.

Recent Acquisitions

NetScout Systems acquired Sterling-based Simena, a provider of network monitoring switching technology. The acquisition expands NetScout’s capabilities in packet-flow switching technology that will help its enterprise, public sector and service provider customers tackle diverse traffic requirements and improve monitoring. Terms of the deal were not disclosed.

Czech arms and aircraft company Omnipol AS acquired ERA AS, a subsidiary of U.S.-based company SRA International, Inc. for an undisclosed amount. The acquisition solidifies ERA’s position in the global market and gives Omnipol ownership of ERA’s passive surveillance system, known as “Vera,” which is touted as being capable of detecting stealth jets.

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Industry Week in Review – November 18, 2011

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This week, Defense Secretary Leon Panetta provided a dire outlook for the Defense Department, as the Pentagon will undergo automatic cuts across the board if the 12-member Super Committee created by the Budget Control Act in August cannot compromise on a plan to eliminate $1.2 trillion in debt. Mr. Panetta warned that the cuts do not allow the department to decide the distribution, but instead applies a 23% reduction to each major investment and construction project, rendering most ship and construction projects deficient.

Uncertainty looms as the November 23rd deadline approaches, as both sides of the Super Committee have shown little signs of swaying from their stoic positions on spending and taxes. Should Sequestration be triggered, 42% of every dollar shy of $1.2 trillion will automatically be cut from the Defense budget.

Boeing announced two record orders this week, as the company signed an $18 billion deal with Emirates Airlines, a Dubai-based airline, for 50 777 – 300ER (“extended range”) airliners with the option to expand the deal by an additional 20 aircraft or $8 billion. Four days later, Boeing announced an even bigger deal with Lion Air, which agreed to purchase 29 737-900s and 201 737 MAXs for nearly $22 billion. Such large deals coupled with record 777 sales presents signs of robust company health.

Big Movers

Wesco Aircraft Holdings (Up 11%) – Shares are up this week after the company released results for its fiscal fourth quarter and full-year ended September 30, 2011. Fourth quarter and full-year revenue of $181.3 million and $710.9 million, respectively, both setting company records.

Northstar Aerospace Inc. (Down 37%) – Shares are down this week after the company reported revenue for the three months ended September 30, 2011 of $45.9 million compared to $49.4 million in the same period of 2010. The company simultaneously ended a 30-day strike with its employees, agreeing to new a deal which maintains workers’ cost-of-living allowance and creates new job security language.

Recent Acquisitions

Kratos Defense & Security Solutions acquired SecureInfo, a leading provider of National Security Solutions for $17.5 million with an earn-out option of $2 million. The acquisition expands Kratos’ cyber security capabilities and helps the company deliver advanced solutions in key growth areas such as Continuous Monitoring and Securing the Cloud.

CH2M HILL Companies, Ltd. completes acquisition of Halcrow Holdings Ltd, a provider of professional engineering services for just under $200 million. The acquisition will strengthen CH2M Hill’s global footprint and advance its leadership in water, environmental, transportation and other markets. Halcrow Holdings had 2010 revenue of around $730 million representing a 0.27x deal multiple.

Carlisle to acquire Tri-Star Electronics, a provider of electronic components to commercial aerospace, defense and industrial customers for $285 million. The acquisition expands Carlisle’s capabilities offering to its customers. Tri-Star posts sales of about $95 million and EBITDA of $26 million, representing a 3.00x and 11.0x deal respectively.

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Industry Week in Review – November 11, 2011

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In order to bridge the gap caused by delays in the F-35 Joint Strike Fighter program and the termination of the F-22 program, the U.S. Air Force has announced plans to upgrade more than 300 Lockheed Martin F-16s and, potentially, Boeing’s F-15s. The proposed structural and avionics upgrades are projected to increase the service life of the F-16 by 8 years and cost $9.4 million per aircraft. The upgrades could provide near term revenue opportunities for both Lockheed and Boeing, who would provide structures such as wing boxes; Northrop Grumman and Raytheon, who have already responded to requests for information to install radars; and Rockwell Collins, who is likely to provide the avionics.

The Air Force has enough F-16s to upgrade as many as 600 aircraft to cover any fighter shortfall should there be further F-35 delays, however, the Air Force has already begun upgrading 176 F-15/Ds, extending their service lives to 2025 and therefore, likely will not need additional F-15s/F-16s beyond the proposed 300.

Big Movers

Force Protection Inc. (Up 30.9%) – Shares rose this week following the announcement that General Dynamics will acquire Force Protection for $5.52, representing a 50% premium from prices just a week before the announcement.

Computer Sciences Corporation (Down 18.3%) – Shares were down this week after the company released 2Q2012 earnings. Revenue increased slightly to $3.97 billion up from $3.94 billion the same period a year before. Operating cash flow was a loss of $268 million, down from last year’s $178 billion.

Aeroflex Holding Corp (Down 11.9%) – Shares were down this week after announcing 2Q2012 estimates below analysts’ expectations. The company estimated 2Q2012 revenue between $160 million and $170 million and EBITDA between $26 million and $30 million. Analysts’ had expected revenue and EBITDA of $187 million and $44 million, respectively.

Recent Acquisitions

General Dynamics to acquire Force Protection Inc., a manufacturer of blast- and ballistic-protected vehicles for U.S. and foreign militaries, for $5.52 a share; representing $275 million or 10x LTM EBITDA. The acquisition complements and strategically expands General Dynamics’ armored vehicle business and will enable the combined company to quickly scale product offerings and offer additional services to meet demand.

TransDigm Group Incorporated to acquire Harco Laboratories, Inc., a manufacturer of highly engineered thermocouples, sensors, engine cable assemblies, and related products, for around $84 million. Harco’s long established proprietary business with significant aftermarket content, modest military exposure and highly engineered products fits well with Transdigm’s overall strategy and will allow it to expand its content for certain engine applications. Harco reported fiscal 2011 revenue of approximately $37 million.

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Industry Week in Review – November 4, 2011

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As the U.S. and Department of Defense (“DoD”) restlessly await the Super Committee’s November 23rd deadline for a proposal to reduce the country’s deficit by at least $1.5 trillion, all of the branches of the military have expressed concern over the potential for further defense cuts. Army chief of staff, General Ray Odierno, warned that additional budget cuts “would be catastrophic to the military, and, in the case of the Army, would significantly reduce [the] capability and capacity to assure [U.S.] partners abroad, respond to crisis, and deter potential adversaries, while threatening the readiness and, potentially, the all-volunteer force.”

In response to further potential cuts, the military has begun to change its acquisition requirements in order to take into account price, as well as capability. Currently, the Army’s main acquisition programs, the ground combat vehicle (“GCV”) and the armored multipurpose vehicle (“AMPV”), are mandating contractors to rely solely on mature technologies harvested from other programs, like the JLTV or MRAP. The cost relief and improved schedule adherence will benefit the government, while the reliance on previously developed materials will benefit defense companies with solid track records within the industry.

Big Movers

Spirit AeroSystems Holdings, Inc. (Up 8.9%) – Shares rose this week after the company reported strong 3Q2011 results. Revenue rose 12.7%, from the same quarter last year, to $1.1 billion, and the company expects 2011 revenue of $4.7 billion, at the top of its range given in August.

GeoEye, Inc. (Down 29.1%) – Stocks fell this week after the company missed 3Q2011 revenue and EPS estimates. GeoEye reported 3Q2011 revenue and EPS of $85.8 million and $0.51, both below analysts’ estimates of $93.0 million and $0.56, respectively.

Relevant Acquisitions

Kaman Aerospace Group, Inc. to acquire Vermont Composites, Inc., a manufacturer of composite aerostructures and advanced composite medical equipment, for an undisclosed amount. The acquisition supports Kaman’s strategy of supplementing its ongoing growth with targeted, strategic acquisitions, as well as expanding its presence onto a number of additional platforms with solid growth prospects.

Lockheed Martin Corporation acquired Sim-Industries BV, a commercial aviation simulation company located in the Netherlands. The combination of Sim-Industries with Lockheed’s military simulation business will provide airlines, civil pilot training centers, and military customers access to training systems that can be provided more quickly and with lower operating costs. Terms of the deal were not disclosed.

Additionally, this week ITT Corporation completed a spinoff of Xylem Inc., a water company, and Exelis Inc., a defense and information business with notable exposure to Iraq and Afghanistan. The spinoff was planned with the belief that the sum of its parts would be greater than the whole. Exelis has been marked as a potential takeover target, however near term tax implications would likely push back any immediate acquisition proposals. In the event that a sale was to occur, industry sources estimate Exelis could command 7x – 8x 2010 EBITDA ($828 million). Expected revenue in 2011 is roughly $5.8 billion.

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Industry Week in Review – October 28, 2011

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Over the past few months there has been a softening of demand in the $60 billion global air-freight market. According to Teal group analyst Richard Aboulafia, cargo numbers over the past three months “look an awful lot like a double dip,” and typically represent an “advanced warning of things going down.” One of these warnings was seen this week when Boeing had to push back its delivery of 747-8 freighters due to a three week dispute with Cargolux Airlines International.

To keep its customers from jumping ship, Boeing has begun cutting deals as jittery airlines seize on the chance to curb their exposure to a slump. Cathay Pacific, the world’s largest international air cargo carrier, was assuaged with concessions on a previous order of eight 777’s in order to keep its order of ten 747-8s. The delay in delivery and small decline in air-freight markets clearly fall short of the buyer rebellion and supply bottlenecks that forced Airbus to suspend plans for a freight version of its A-380. But, these disturbances come at a time when Boeing is trying to focus its attention on building more than 800 carbon fiber 787 Dreamliners, rather than deal with customer disputes.

Big Movers

Unisys Corporation, (Up 42.8%) – Shares are up this week after the company reported third quarter net income from continuing operations of $1.63 per share compared to the consensus estimate of $0.77. The company claimed growth in its non-U.S. Federal IT outsourcing business, while higher sales in industry solutions offset a decline in its U.S. Federal business.

Ceradyne Inc., (Up 21.1%) – Shares are up this week after the company reported strong financial results in 3Q2011 as compared to the same time period last year. Sales and net income were $148.0 million and $20.4 million this quarter compared to the same quarter last year’s $91.8 million and $4.5 million, respectively.

VSE Corporation, (Down 13.4%) – Shares are down this week as the company announced 3Q2011 sales of $159.9 million down from same quarter last year sales of $212.9 million. Net income and EPS fell this quarter as well, from $7.2 million and $1.39 in 3Q2010 to $6.1 million and $1.17 in 3Q2011, respectively.

Relevant Acquisitions

ManTech International to acquire Worldwide Information Network Systems, Inc. (WINS), a provider of global support and IT services to the Department of Defense, Department of State, and other agencies for $90 million. The acquisition will enable ManTech to deliver IT services through WINS’ prime position on the Defense Intelligence Agency’s Solutions for Information Technology Enterprises (SITE) contract, an indefinite delivery / indefinite quantity contract vehicle with a $6.6 billion ceiling and a period of performance through 2015. KippsDeSanto acted as the sole financial advisor to WINS.

Oracle to acquire RightNow Technologies, a provider of cloud-based customer experience software products and services for $1.5 billion. The acquisition adds customer experience capabilities to help companies interact with and provide a consistent experience to customers across channels.

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Industry Week in Review – October 21, 2011

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Deposed Libyan leader Moammar Gadhafi’s death Thursday will bring significant change to the people of Libya, however it may also bring transformation to how the U.S. engages in future conflict. Defense experts are pointing to the quick planning, small footprint, and limited duration utilized by NATO during the eight month involvement in Libya as the new template for military intervention. “The days of strategic warning, watching forces mobilize, stage, and move are gone,” said a senior defense official. “We will need the capability to respond on very short notice in geographic areas where we have little or no infrastructure.

In contrast to past engagements, the U.S. initially led the alliance during the opening days of the conflict, but then moved to more of a support role, quickly handing responsibility and most airstrikes over to European forces.

Future interventions may not look the same as Libya, potentially involving less airpower and more special operations troops on the ground, however the common elements will stay the same: a small footprint combined with little time to plan the mission. And, as the eight month conflict in Libya cost the U.S. just over $1 billion dollars, compared to the nearly $1 trillion dollar price tag of the eight years spent in Iraq, collective action could gain further support from voters.

Big Movers

Safran SA (Down 12.6%) – Shares fell this week, despite a 5.2% gain in 3Q2011sales to roughly $3.8 billion, after demand for spare parts came in at the bottom end of Safran’s forecast for the full year of 10 percent to 15 percent.

EADS (Down 11.2%) – Shares fell this week after British Airways’ CEO stated that China’s new single-aisle plane design represents a serious competitor to Airbus SAS

Relevant Transactions

The Parsons Corporation to acquire Cobham Analytic Solutions, a manufacturer of weapon, tactical, and space systems, missiles, and network-centric warfare, for $350 million. The acquisition enhances Parsons’ ability to offer mission-oriented technical and professional services to new and existing customers in the U.S. national security marketplace

AAR Corp to acquire two businesses of Teleflex Incorporated, Telair International GmbH, a manufacturer of cargo-loading systems for passenger and cargo jets, and Nordisk Aviation Products, a producer of pallets and cargo containers for airlines, for $280 million. AAR Corp expects the acquisitions of Telair and Nordisk to add over $225 million to revenue and Teleflex chief executive Benson Smith said in a separate statement that the deal was part of the company’s strategy to transform from a cyclical, diversified-industrial conglomerate into a pure-play medical technology company.

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Industry Week in Review – October 14, 2011

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In a competitive move to gain market share from rival General Electric and its CFM International partner Snecma, Rolls-Royce and Pratt & Whitney (“P&W”) have decided to create a new joint venture aimed at powering the next generation of 120 – 230 passenger aircraft that will eventually succeed the Airbus A320 and Boeing 737 aircraft families. Despite Rolls-Royce’s previously negative stance towards the geared turbo fan (“GTF”), the new joint venture (“JV”) will springboard off of current GTF designs, as Rolls-Royce and P&W believe this is the most likely starting point for developing future turbofan engines.

The aerospace industry was shaken by this unexpected announcement; however, the move has been seen as one of the few options left for CFM competitors.  After Boeing announced that it would follow Airbus and re-engine its 737’s rather than release a radically new design, Rolls-Royce and P&W quickly forgot their engineering differences and instead chose to collaborate.

Without this venture, GE and CFM’s exclusive deal with Boeing and its ability to offer package deals for both the A320 and A320neo may have pushed Rolls-Royce and P&W essentially out of the narrow body market, a market expected to reach $2 trillion including engine sales over the next 20 years.

Big Movers

Rolls-Royce Holdings (Up 15.4%) – Shares are up this week after the company announced a restructuring agreement and joint-venture with Pratt & Whitney.

EADS (up 12.3%) – Shares are up this week after Russia announced its need for 1,006 aircraft, valued at $95 billion, over the next 20 years. Airbus expects to supply at least half of all the deliveries.

Relevant Acquisitions

IBM Corp. to acquire Platform Computing Inc., a provider of cluster, grid, and cloud management software solutions for distributed computing environments. The acquisition strengthens IBM’s business analytics and optimization, as well as cloud computing capabilities. Terms of the deal were not disclosed.

CoorsTek, Inc. acquired BAE Systems’ Advanced Ceramics Business, a provider of lightweight ceramic armor systems for aerospace and aviation applications. The acquisition broadens CoorsTek’s customer base and expands its offerings in materials. Terms of the deal were not disclosed.

Stony Point Group, Inc. acquired Broadwing Air Repair, LLC, a provider of composite and sheet metal repair. Known particularly for its flight control surface and door repair, Broadwing’s capabilities and expertise in commercial aviation will be extended to other markets, including military and business aviation, and is consistent with Stony Point’s objectives for organic growth. Terms of the deal were not disclosed.

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Industry Week in Review – October 7, 2011

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The White house this week released an executive order establishing an Insider Threat Task Force aimed at better protecting the country’s classified information.  Along with the task force, the order will require every agency to designate a senior official to oversee classified information sharing and implement an insider threat detection and prevention program.  The order is in direct response to WikiLeaks’ publications of classified government documents, but will have an effect on all government information.

Additionally, the order was made just a few days after the U.S. Air Force reported that a computer virus has infected the cockpits of the military’s Predator and Reaper drones.  The virus was first detected by the military’s Host-Based Security System and is believed to have originated from disks and removable drives used to upload map updates and transport mission videos from one computer to another.  The drives are severely restricted throughout the military, but Creech Air Force base in Nevada was one of the few exceptions where they were allowed.

This virus is not the first security breach the military has experienced relating to unmanned vehicles—noting specifically the Predator and Reaper unencrypted video found on laptops of Iraqi insurgents—and further reinforces the government’s increased investment in cyber security research and acquisitions.

Big Movers

CPI Aerostructures (Up 14.2%) – Shares were up this week after the company announced authorization for an existing program that will add more than $15.7 million to current backlog.

Comtech Telecommunications Corp. (Up 10.3%) – Shares are up this week after an activist shareholder pressures the company to evaluate a sale. No bid has been made yet, however potential acquirers include, EADS, General Dynamics Corp, L-3 Communications, and BAE Systems Plc.

Macdonald Dettwiler & Associates Ltd. (Down 9.6%) – Shares were down this week after the company closed a deal to buy back more than 20% of its stock. The company had previously told investors it would use its cash to diversify its business.

Relevant Acquisitions

Salient Federal Solutions to acquire the Electronic Security Systems Division of Dataline LLC, a provider of IT solutions, engineering and intelligence analysis services to the Department of Defense, military and federal customers. The acquisition provides Salient with a full spectrum and lifecycle of emergency response system requirements including, access control, alarm monitoring, intrusion detection, video surveillance, asset tracking and other capabilities. Terms of the deal were not disclosed.

McAfee to acquire NitroSecurity Inc., a provider of security information and event management solutions that provide complete visibility and situational awareness to protect critical information and infrastructure. The acquisition will expand McAfee’s Risk and Compliance and Global Threat Intelligence capabilities.  Terms of the deal were not disclosed.

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