On September 23, as the government’s 2011 fiscal year end approaches, the Republican controlled House passed a continuing resolution (“CR”) aimed at preventing a government shutdown by funding operations for the first seven weeks of the new fiscal year. However, the bill was “put-aside” by the Democrat controlled Senate, disapproving of tying disaster relief funds to cuts in Democrat-backed programs. This move stops short of killing the deal, but leaves the debate open until as late as Monday.  Although disaster relief was the main topic of debate, and could be left unfunded as soon as next Friday if a resolution is not reached, it looks as if Congress may also have eliminated the one expected silver lining defense contractors were looking for in this stop-gap measure.

Overseas Contingency Operations (“OCO”) funding appears to have been reduced by the 25% planned for FY2012, eliminating the possibility that the new CR would extend FY2011 OCO funding levels into FY2012. The shift represents a decrease from FY2011’s $157 billion run-rate to FY2012’s run-rate of $118 billion. While OCO represents roughly 60% of operations and maintenance spending, it also includes modest investment spending. If this CR is passed, contractors supporting combat operations will likely see some of the effect, but infrastructure firms are expected to see the greatest downside.

Notes on some big movers

Goodrich Corp. (Up 31.1%) – Despite multiple investigations announced concerning possible breaches of fiduciary responsibility, shares are up this week after United Technologies Corp. announced that they will acquire Goodrich for $127.5 per share, an approximate value of $18.4 billion.

Oshkosh Corporation (Down 19.3%) – shares are down this week amid a market downturn as union workers went on strike over job security, seniority, and health and medical issues. The union’s five-year contract is set to expire a week from Saturday.

Notes on some relevant transactions

General Dynamics to acquire Metro Machine Corp., a leading East Coast surface-ship repair company that supports the U.S. Navy fleet in Norfolk, Va. The Norfolk location will extend the reach of NASSCO’s ship-repair operations to a key East Coast naval port and will enhance General Dynamics’ ability to deliver cost-effective maintenance and repair services to the U.S. Navy. Terms of the deal were not disclosed.

United Technologies Corp. to acquire Goodrich Corp., a global supplier of systems and services to the aerospace and defense industry, for $127.5 per share, equating to a total enterprise value of roughly $18.4 billion. The acquisition further strengthens United Technologies position in the growing commercial aerospace market and enhances its ability to support its customers with more integrated systems.

CACI to acquire Advanced Programs Group, an Oracle Platinum Partner and leading provider of Oracle e-Business services in the federal market, for an undisclosed amount. The acquisition makes CACI one of the largest federal Oracle providers and the only Federal Shared Service Provider in both the financial and contract lifecycle management business areas. APG’s 2010 revenue was $41.9 million.

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As he bade farewell to the military Wednesday and prepares to take over as the CIA Chief, former United Stated Army, four–star general David Patraeus expressed concern that further defense budget cuts could undermine the military force he helped to shape and jeopardize the U.S. military’s ability to fight insurgencies. But, as treasury yields continue to head south and the U.S. economy fails to add jobs for the first time in almost a year this month, fears of another recession grow, precipitating a drop in all 10 sectors of the S&P 500 and all 30 of the Dow components. Such fiscal pressures and simultaneous ground wars have prompted calls to resume more conventional training and move away from Patraeus’ counterinsurgency approach, however, the general emphasized that amid “difficult” budget decisions it is imperative to build a force “that maintains the versatility and flexibility that [has] been developed [over] the past decade in particular.” As investors wait for congressional outcomes to calm market volatility, it appears the military will have to wait and do the same.

Notes on some big movers

SAIC, Inc. (Down 10.4%) – Shares are down this week after CEO Walt Havenstein, announced “disappointing” 2Q2011 results. Quarterly revenue was down 6.0% this quarter to $2.6B, operating income fell to 8.1% of revenue from 9.9% last quarter, and diluted EPS dropped $0.10 to $0.32.

Esterline Technologies Corp. (Down 9.2%) – Shares are down this week after the aerospace and defense supplier reported adjusted earnings in 2011 of less than $4.55 per share well below analysts’ estimates of $5.07 per share.

Notes on some relevant transactions

CSC acquired Maricom Systems, a provider of business intelligence and data management solutions to support mission-critical health IT systems. The acquisition expands CSC’s support of the U.S. Department of Health and Human Services’ efforts to implement IT improvements in the Patient Protection and Affordable Care Act. The deal also enhances CSC’s capabilities in the areas of healthcare informatics and data management. KippsDeSanto acted as the sole financial advisor to Maricom, terms of the deal were not disclosed.

IBM to acquire Algorithmics, a provider of risk solutions, analytics and advisory services to financial organizations and insurance businesses for $387M. The acquisition expands IBM’s analytic practices in the financial services industry and enhances IBM’s Business Analytics and Optimization capabilities.

IBM to acquire i2 Limited, a provider of intelligence analytics for crime and fraud prevention efforts based in Cambridge, UK. The acquisition accelerates its business analytics initiatives and helps clients in the public and private sectors address crime, fraud, and security threats. Terms of the deal were not disclosed.

Accelera Solutions, Inc. acquired ITS Group, Inc., an IT solutions provider specializing in virtualization solutions focused on cloud computing, desktop, application, and server virtualization. The strategic acquisition is expected to help Accelera become a leading partner in the deployment of Microsoft’s Systems Management and Messaging technologies and significantly expand its Microsoft offerings.

The Gores Group, LLC enters into asset purchase agreement with Point Black Solutions, Inc., a leader in the field of protective body armor used by military, law enforcement, and security and corrections personnel around the world. The agreement is intended to rectify the company after it filed for Chapter 11 in April 2010.

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The U.S. government is taking the first steps since its downgrade to avoid a possible double-dip recession. Fed officials announced this week that they will hold short-term interest rates at record, near zero, levels, until at least the middle of 2013, in an effort to spur economic growth. Additionally, the Fed discussed the use of quantitative easing, but, due to the surge in inflation in July (core inflation increased 0.2%, 1.8% since June of last year), a third round of government bond purchases will most likely be postponed.

The White House has also taken steps to prevent a second recession, directing the Defense Department, along with all federal agencies to draw up 2013 budget options that will meet the strict spending guidelines laid out in the Budget Control Act of 2011. Every government office will have to submit proposals based on two scenarios—a 5% cut and a 10% cut from 2011 discretionary spending—very close to what the DoD would experience given the first $350 billion spending cut and possible $1.2 trillion trigger. The 10% scenario, for example, would lower the DoD budget to $477 billion, just $5 billion above what the trigger would instate, however, supplemental spending on overseas operations in Iraq and Afghanistan, veterans programs, and possibly military pay, would be exempt from all spending cuts.

Notes on some big movers:

AeroFlex Holding Corp. (Down 26.2%) – Shares are down this week after 1Q2012 guidance was released below analysts’ estimates. AeroFlex forecasted 1Q2012 revenue and adjusted EBITDA of $160 – $165 million and $24 -$27 million, respectively, while the market was expecting revenue of $175 million and EBITDA of $42 million.

BE Aerospace Inc. (Down 12.1%) – Shares are down due to broader market forces as well as RBC Capital’s downgrade of BE Aerospace two notches from Top Picks List at RBC Capital to Outperform.

Notes on some relevant transactions:

General Dynamics to acquire Vangent Inc., a subsidiary of Vangent Holding Corp, for $960 million, or 11.0x LTM EBITDA. Vangent Inc., majority-owned by Veritas Capital, is a leading provider of healthcare information-technology and business systems to federal agencies. The acquisition will add depth and breadth to General Dynamics’ healthcare IT organization and create a Tier 1-level healthcare IT business unit.

GTSI Corp. to acquire Information Systems Consulting Group Inc. (“InSysCo”), a privately held Federal IT professional service provider, for $14.4 million. The acquisition expands GTSI’s professional services capabilities in the areas of software and database development and maintenance. InSysCo will help grow GTSI’s professional services business component.

Dovel Technologies to acquire ZapThink LLC, a provider of thought leading content, training, advisory, and expertise to an audience of over 20,000 senior IT executives, enterprise architects, and other IT practitioners. The acquisition will allow Dovel Technologies to expand its pool of talent and create more customized courses to further educate the market on the realities of SOA and Cloud. The details of the deal were not disclosed.

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On Tuesday, August 2^nd, the day the U.S. Treasury warned that it would run out of cash to meet its debt obligations, President Obama signed the deficit-reduction deal that finally raised the U.S. debt ceiling. The deal allows for a two-stage $900 billion debt increase in return for the promise of $917 billion in spending cuts over the next 10 years.

Additionally, a 12-member congressional committee, comprised equally of Democrats and Republicans, has until December 23^rd to find and approve $1.5 trillion in further deficit reductions, in order for a second $900 billion debt ceiling increase to occur. If the committee fails to reach agreement, or the proposal is rejected, $1.2 trillion in spending cuts, taken equally from domestic spending and defense, will be triggered.

The Pentagon believes it will be able to meet the initial spending cuts called for in the debt-reduction deal ($400 billion over the next decade, based on the president’s budget submitted to Congress in February) but warned that deeper cuts could lead to civilian furloughs and program terminations.

Notes on some big movers:

SPX Corp. (Down 25.6%) – Shares fell Wednesday after 2Q11 earnings were released. Despite quarterly revenues up 16.4%, net income per diluted share this quarter was $0.62 compared to $1.40 same time last year. Free cash flow was down $19.1 million this quarter from last year due primarily to higher capital expenditures.

Embraer SA (Down 19.7%) – Shares fell this week amid an overall market downturn. Embraer stock closed today at $23.71, near its 52-week low of $23.37. The decrease was amplified by technical traders after the stock broke a $23.57 support level.

Notes on some relevant transactions:

Astrium N.V. to acquire Vizada SAS from Apax France, a French private equity fund, for $960 million, representing multiples of 10.1x EBITDA and 1.45x revenue. Vizada is a leading independent provider of global satellite-based mobility communication services. The acquisition marks a step towards the realization of Astrium’s parent company, EADS’, strategy to balance platforms with services, develop business in North America, and diversify its workforce.

Strategic Enterprise Solutions (“SE Solutions”), Inc. to acquire Evolution Technologies, Inc., a recognized leader in emergency and disaster process, systems support, and electronic information exchange. The addition of Evolution Technologies broadens SE Solutions’ mission capabilities and allows it to deliver services throughout its entire domain from the Department of Homeland Security to the first responder. The terms of the deal were not disclosed.

Andrew Redfern to acquire Lightning Aerospace, a Coventry engineering firm that provides laser and water jet material cutting, fabrication of steel and aluminum components and bespoke wire harnessing to the defense, commercial and aerospace sectors. Mr. Redfern, an aeronautical engineer and entrepreneur believes that his commitment to delivering on-going operational improvement will allow Lightning Aerospace to deliver higher levels of performance to its customers. The terms of the deal were not disclosed.

TransDigm Group Incorporated to acquire Schneller Holdings LLC, from an affiliate of Graham Partners, Inc., for approximately $288 million. Schneller Holdings designs and manufactures highly engineered laminates, thermoplastics, and non-textile flooring for use primarily on airplane side walls, lavatories, galleys, bulkheads and cabin floors.  The acquisition will bring significant value creation opportunities through both the application of proven methodologies as well as a recovering commercial aerospace market.

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A debt ceiling agreement remained elusive this week, with the Senate rejecting the House’s “Cut, Cap and Balance” Plan on Friday. Nevertheless, President Obama and House Speaker Boehner seemed to be moving closer toward a deficit reduction deal cutting as much as $3 trillion in spending coupled with revenues of $1 trillion from tax code overhauls. The potential programs to see cuts remain unclear as the deadline for a deal draws closer, creating further uncertainty in the market. Other proposals on the table include Senators Harry Reid and Mitch McConnell’s incremental raise plan and the Gang of Six plan to cut the deficit by $3.7 trillion including $1 trillion in revenue increases.

Notes on some big movers:

Textron (Up 13.5%) – Shares were up for the week following strong second quarter earnings that exceeded Wall Street expectations.  Net income rose to $90 million, or $0.29 per share, beating analyst expectations of $0.24 per share. Revenue rose 12.2% to $2.48 billion, falling short of Wall Street revenue estimate of $2.83 billion.

Orbital Sciences Corp (Up 8.7%) – Shares rose as the company reported strong second quarter earnings. The company earned $0.36 per share, surpassing analyst expectations $0.22 per share, on $354.3 million of revenue, versus expectations of $328 million.

Notes on some relevant transactions:

Boeing announced Thursday that it will acquire Solutions Made Simple Inc., an information services provider for the IC and U.S. government. The terms of the deal, which is expected to close in 3Q11, were not disclosed. The transaction will further expand Boeing’s capabilities in C4ISR and cybersecurity.

SAIC announced Thursday that it will acquire Vitalize Consulting Solutions Inc., a provider of clinical, business, and IT services for healthcare enterprises. The terms of the deal, which is expected to close in early August 2011, were not disclosed. The transaction will strengthen SAIC’s existing government health solutions business and provide a dynamic channel into the commercial health provider market.

Stratos BV, a global provider of advanced mobile and fixed-site remote communications solutions, announced Thursday that it has acquired Blue

Ocean Wireless Ltd., a provider of shipboard GSM services that enables crewmembers to use personal GSM phones to communicate via voice and SMS, for an undisclosed amount. The transaction will improve Stratos’ GSM services to its global customer base.

General Dynamics announced Monday that it has acquired Network Connectivity Solutions Corp., a provider of enterprise services and cloud computing to the DoD, for an undisclosed amount. The cash transaction brings GD a prime position on the DISA Encore II vehicle and bolsters its enterprise IT solutions for DoD customers.

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