Industry Week in Review – June 27, 2014

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Aerospace & Defense Update

The White House this week requested $60 billion from Congress to fund military operations in Afghanistan and other global contingencies.  The Pentagon is set to receive $58.5 billion through the 2015 overseas contingency operations (“OCO”) request, with an additional $1.5 billion requested through a budget bill amendment for State Department contingency funding.  The combined $60 billion figure is nearly $20 billion less than the $79.4 billion placeholder included in the administration’s 2015 Pentagon spending request.  Included in the request is $6 billion for new military aircraft, drones, vehicles, and bombs to fund the war in Afghanistan, $3.8 billion for the Air Force, $1.3 billion for the Army, $658 million for the Navy and Marine Corps, and $239 million for defense-wide initiatives.  The Department of Defense and State Department also requested $4 billion and $1 billion, respectively, as part of a new counterterrorism fund supported by President Obama.  Despite drastic reductions in troop levels, the White House reports the OCO budget will not decrease swiftly.

Government Technology Solutions Update

The Senate Homeland Security and Governmental Affairs Committee passed three bills on June 25th, aiming to augment cybersecurity and bolster IT management within Federal agencies.  The bills include the Federal Information Security Modernization Act, which updates the Federal Information Security Management Act standards to move toward automated and continuous monitoring of information that supports agency operations; the National Cybersecurity and Communications Integration Center Act, which focuses on the consolidation of federally managed cybersecurity resources; and the Federal Information Technology Acquisition Reform Act, which aims to strengthen the authority of agency Chief Information Officers.

The Defense Intelligence Agency is in the process of rolling out its Open Innovation Gateway initiative, a major component of the agency’s push to acquire new technologies in smaller increments and shorter procurement cycles.  The initiative is aimed at gaining a broader set of products and solutions in order to increase opportunities for small businesses and nontraditional providers, and streamline the agency’s acquisition process.

Big Movers

iRobot Corporation (Up 5.3%) – Shares were up this week after the Company announced a 7.5% increase in revenue for the most recent fiscal quarter, driven by 16.5% revenue growth in the Home Robots segment.

Relevant Transactions

Alcoa, Inc. to acquire Firth Rixson Limited, a manufacturer of rings, forgings, and metal products to OEMs, serving the aero-engine and structural components aerospace industry.  The deal is worth an estimated $2.85 billion.

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Industry Week in Review – June 20, 2014

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Aerospace & Defense Update

The U.S. House of Representatives voted this week to block the Air Force’s plan to cut its entire A-10 fleet during deliberation on the FY2015 defense spending bill.  The chamber approved the amendment, proposed by Rep. Candice Miller (R-Mich.), which would prohibit the Pentagon’s potential divestiture, retirement, transfer, storage, or cutting of any A-10 aircraft.  This vote is the latest in a prolonged battle between the Department of Defense and Congress on the future of the aging but popular aircraft.  The Air Force’s plan would replace the A-10 missions with F-15, F-16, or C-130 missions, saving the service about $3.7 billion.  Air Force Secretary Deborah Lee James supported their decision with rationale that the A-10 is a single-mission attack aircraft whose missions can be covered by other aircraft with more versatility.  However, the proposal has been met by staunch opposition in the House and Senate, which both already approved amendments to the 2015 National Defense Authorization Act prohibiting the retirement of the A-10.  Language in the bill states that the U.S. comptroller general would make multiple certifications and complete studies on the impact of retiring the A-10.  A final decision on the fate of the aircraft will not be decided until the official FY2015 defense spending bill is finalized and passed.

Technology Solutions Update

The DoD is testing the viability of cloud-based cybersecurity for certain mission-critical systems within the department. Currently, Federal Risk and Authorization Management Program (FedRAMP) approved cloud service providers (“CSP”) are able to seek DoD approval to support low and moderate-security systems, referred to as impact level-1 and impact level-2 systems. The DoD’s new pilots are aimed at addressing the security needs of more sensitive systems, referred to as impact level-3. These pilots suggest that CSPs pursuing level-3 systems will be required to meet significantly higher security standards, and authorization to support such data will be more stringent than low to moderate data types. Today, there are only a few CSP’s that have been authorized to host level 1 and level 2 systems, but the potential to support level-3 systems may present additional opportunities for qualified CSPs to receive DoD approval.

In order to improve network performance, the Navy is seeking vendors for rapid upgrades to the Navy Marine Corps Intranet (“NMCI”), the Navy’s enterprise network designed to provide secure and reliable information transfer across the continental United States. The Navy is especially interested in procuring enhanced cybersecurity capabilities, data center consolidation, and mobile computing technologies.

Big Movers

KBR, Inc. (Down 7.4%) – Shares were down this week after the Company announced disappointing fiscal first quarter results, reporting a loss of $0.29 per share. Additionally, the Company announced it will review its business strategy following continuous revenue declines.

Relevant Transactions

Sierra Nevada Corporation to acquire Orbital Technologies Corporation, a provider of space subsystem integration and liquid rocket propulsion, life science and support, and fire suppression capabilities.  Terms of the deal were not disclosed.

Lockheed Martin Corporation to acquire Deposition Sciences, Inc., a provider of thin optical film used in coating metals, lenses, lighting, and mirrors for military and aerospace customers worldwide.  Terms of the deal were not disclosed.

Saint-Gobain acquired Phoenix Coating Resources, Inc., a provider of ceramic ingots used to produce high-resistance thermal coatings for the aeronautics industry.  Terms of the deal were not disclosed.

Intelligent Decisions, Inc. acquired Quantum 3D’s ExpeditionDI Product Line, a provider of human-worn, fully immersive team simulation solutions used for infantry training.  Terms of the deal were not disclosed.

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Industry Week in Review – June 13, 2014

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Aerospace & Defense Update

B/E Aerospace, Inc. announced plans this week to split its operations into two independent, publicly traded companies, currently titled “Manufacturing Company” and “Services Company”.  The Manufacturing Company will focus on producing aircraft interior equipment, while the Services Company plans to focus on providing logistics and technical support primarily to the aerospace, oil, and gas markets.  Both companies will be free to pursue independent deal-making and change of control when the separation is expected to become finalized in the first quarter of 2015.  B/E’s interior-parts business generated nearly two-thirds of the company’s 2013 revenue and has been attempting to consolidate as development costs have risen while aircraft makers move to secure larger contracts.  While the Company’s President and Chairman have both agreed to remain involved in the steering of the new companies, the Board of Directors and management teams will be decided at a later date.  Investors reacted negatively to the announcement, driving share prices down 5% the morning of the proposed split.  This decision was one of numerous potential moves B/E said it was exploring last month in an attempt to aggressively pursue its strategic alternatives.

Earlier this week, Emirates Airlines cancelled an order with Airbus for 70 aircraft, a deal valued at about $16 billion when it was placed in 2007.  Analysts point to regional slowdowns and disappointment in the A350’s range and fuel consumption, compared to Boeing’s jets, as two potential causes for the largest cancellation in Airbus’ history.  The immediate financial impact on Airbus is softened by their current backlog of 740 aircraft and the fact that delivery would not occur until 2019 through 2032.  Airbus is hopeful that Emirates’ cancellation will drastically cut lead times on other orders and increase accessibility for other airlines interested in the A350.

Technology Solutions Update

On June 9th, the House passed a bill to reform the acquisition process at the Department of Homeland Security in an effort to increase accountability and transparency regarding the agency’s procurement process. The DHS Acquisition Accountability and Efficiency Act would authorize the chief acquisition officer at DHS to approve, modify, or cancel major acquisition programs as needed, and would create an acquisition review board within the agency that would validate procurement documents and review cost and performance schedules.

The Transportation Security Administration is asking cloud service providers for disaster recovery support for the agency’s Technology Infrastructure Modernization (“TIM”) division, which resides within the Mission Essential Services Directorate of TSA’s Office of Intelligence & Analysis. In a Request for Information posted on June 10th, TSA stated that it is seeking a cloud service provider with disaster recovery capabilities to support emergency and disaster backup efforts at TIM.

Big Movers

Science Applications International Corporation (Up 10.7%) – Shares were up this week after the Company announced positive earnings estimates for its most recent fiscal quarter with operating income up 13.5% from the same quarter last year, and earnings per share beating analyst estimates by 3.0%.

Relevant Transactions

Park-Ohio Holdings Corp. acquired Apollo Aerospace Components Limited, a provider of components and hardware, as well as supply chain solutions to aerospace customers worldwide.  Terms of the deal were not disclosed.

Zodiac Aerospace acquired Greenpoint Technologies, Inc., a provider of high-end interior completions and modifications for both widebody aircraft and private business jets.  Terms of the deal were not disclosed.

Analog Devices, Inc. acquired Hittite Microwave Corporation, a designer and manufacturer of high performance integrated circuits, modules, subsystems, and instrumentation for radio frequency, microwave, and millimeter wave detection.   The deal is worth an estimated $2.0 billion.

Exelis, Inc. acquired Celestech, Inc., a provider of technical solutions for government and commercial customers, with concentrations in advanced signal processing and communications systems.  Terms of the deal were not disclosed.

Preferred Systems Solutions, Inc. acquired Envision Technical Services, Inc. a provider of technology systems supporting mission-critical systems and applications for intelligence and defense customers.  Terms of the deal were not disclosed.

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Industry Week in Review – June 6, 2014

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Aerospace & Defense Update

Bombardier suspended flight tests of its CSeries aircraft after a Pratt & Whitney PW1500G engine suffered an unspecified failure during ground runs at the Mirabel, Quebec site last week.  This recent failure adds unwelcome pressure to the already delayed CSeries flight-test-effort.  This week, reports announced Bombardier’s CSeries planes could resume flight testing in a few weeks after the plane’s engine manufacturer believes it has found the cause of the incident that grounded the four test aircraft.  Pratt & Whitney officials said a preliminary analysis of the engine confirms the minor incident was not related to the engine’s design, and that all problems can be fixed rapidly as not to affect testing schedules.  Bombardier will disclose details about the incident and a time frame for a return to flight testing as soon as possible.  In the meantime, ground tests will continue as Bombardier attempts to keep the CSeries on track for service in 2015.

Despite President Obama’s announcement last week that the Pentagon would leave only 9,800 American troops in Afghanistan in 2015, experts stated this week they still expect the Pentagon to request between $50 billion to $70 billion in Overseas Contingency Operations (“OCO”) funding.  This range is in the middle of the $79.4 billion placeholder submitted to Congress in March, and the Pentagon’s estimate of $20 billion to support remaining troops in Afghanistan annually.  Experts say the estimate indicates the Pentagon will continue using OCO funding to soften the blow from defense spending caps in 2015 and beyond.  In addition to troop costs, the OCO budget includes funding to support the Afghan military, repair battle-worn equipment repairs, and transport equipment back to the U.S.; however, it is also used as a “treasure chest” to fund procurement of systems and services not covered by the base budget.  As Defense News stated in an op-ed this week, “OCO has been a giant slush fund that gets less oversight than the base budget.”

Technology Solutions Update

HP Enterprise Services announced a new high-security private cloud solution designed to accelerate government agencies’ migration to the cloud.  HP Helion Managed Private Cloud for Public Sector (“Helion”) allows government entities to implement shared service models across multiple departments, and enables them to achieve operational efficiencies.  Helion is currently undergoing FedRAMP assessments, and is expected to meet FedRAMP’s risk-based security requirements within the next six to nine months.  HP has made significant investments in its cloud solutions in order to capitalize on positive trends within the Federal cloud market, which is estimated to reach $18.5 billion by 2018.

The General Services Administration (“GSA”) has suspended government wide-use of the Office Supplies 2 strategic sourcing contract, the GSA’s first and highly successful program to accelerate the government’s buying power through cross-agency purchasing agreements, following a protest filed by Coast to Coast Computer Products (“CTC”).  CTC has argued that the Office Supplies 2 contract, which expired May 31st, has already been extended beyond its maximum allowable terms, and that any bridge contracts would violate requirements that give small businesses an opportunity to compete.  A decision on the protest is due from the Government Accountability Office on September 8th.

Big Movers

Comtech Telecommunications Corporation (Up 18.6%) – Shares were up this week after the Company announced strong fiscal quarter results with earnings of $0.32 per share and revenue of $88.9 million, which beat analyst estimates by 77.8% and 14.7%, respectively.

Relevant Transactions

Moelis Capital Partners acquired PATS Aircraft Systems, LLC, a provider of aircraft services, components, and integrated systems to OEMs, airline operators, governments, and corporations.  Terms of the deal were not disclosed.

Fulcrum Capital partners Inc. acquired Weatherhaven Global Resources Ltd., an engineer and manufacturer of portable shelters, camps, and systems for application in remote military sites worldwide.  Terms of the deal were not disclosed.

B/E Aerospace Inc. to acquire EMTEQ, Inc. and F+E Fischer + Entwicklungen Gmbh & Co. Kg. EMTEQ provides interior and exterior lighting systems, cabin management solutions, and power systems for commercial aircraft.  F+E Fischer provides seating products for civilian helicopters.  B/E Aerospace will pay a combined $470 million for both acquisitions.

Good Technology, Inc. acquired the security business of Fixmo, Inc., a provider of defense-grade mobile device integrity and security solutions for the public and private sectors. Terms of the deal were not disclosed.

Noblis, Inc. acquired National Security Partners, LLC, a provider of consulting and technical services to the defense and intelligence agencies. Terms of the deal were not disclosed.

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Industry Week in Review – May 30, 2014

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President Obama announced this week that the U.S. plans for approximately 9,800 American troops to remain in Afghanistan in 2015, following the scheduled completion of combat operations in the country this year.  The 9,800 U.S. troops, along with some allied forces, staying in Afghanistan would get cut roughly in half by the end of 2015.  Furthermore, by the end of 2016 and less than a month before Obama leaves the White House, the U.S. military presence would scale down to what officials described as a “normal” embassy security contingent to provide embassy security and engage in cooperative security efforts with the host government and military.  With roughly 32,000 troops currently in Afghanistan, senior political officials have stated the number of U.S. service members in Afghanistan beyond 2016 will likely be around 1,000, symbolizing an end to the U.S. military mission that began as a response to the 9/11 terrorist attacks.  Tony Blinken, Obama’s deputy national security adviser, stated that the U.S. will spend about $20 billion on the continued military presence in Afghanistan after 2014.  Although a final decision on troop levels is still contingent upon Afghanistan’s next president signing a bilateral security agreement, both candidates have indicated they will sign the security pact.

A recent survey conducted by Deltek found that government contractors are expecting a 14% increase in revenue in FY15, citing a more stable budgetary environment over the near-term as a primary reason.  Contractors pointed towards recent events in Congress, such as the passage of both the Bipartisan Budget Act (“BBA”) of 2013 and the Consolidated Appropriations Act (“CAA”) of 2014, as key indicators for greater funding visibility over the near-term.  Additionally, recent procurement data shows spending on federal contracts in the second quarter of GFY14 increased 58% over spending levels a year ago, while the number of solicitations and task orders in GFY14 have increased 54% over comparable GFY13 levels, and contractors are expecting these trends to continue into GFY15.  While not all areas of the Federal market are expected to grow throughout GFY14 and GFY15, Deltek analysts see intelligence and cybersecurity as key priorities over the near-term.

Big Movers

KBR, Inc. (Up 4.2%) – Shares were up this week after the Company announced it had been awarded a contract by Maersk Oil for topsides front-end engineering and design (“FEED”) work as a part of the Culzean Project, an ultra high-pressure, high-temperature (“uHPHT”) gas condensate development project in the North Sea.  The contract value was not disclosed, but expected revenue from the contract will be included in Backlog of Unfilled Orders for KBR’s Hydrocarbons segment in the second quarter of 2014.

Booz Allen Hamilton Corporation (Down 7.7%) – Shares were down this week after the Company announced the sale of 10 million shares of its Class A common stock by an affiliate of The Carlyle Group to Citigroup Global Markets, Inc. and Barclays Capital, Inc., who will act as the underwriters in the registered offering of the shares.  Booz Allen Hamilton will not sell any shares of common stock in the offering, and will not receive any of the proceeds.  The offering is expected to close and settle on June 3, 2014.

Relevant Transactions

Lockheed Martin Corporation to acquire Astrotech Corporation’s Space Operations, a provider of satellite launch processing services to government and commercial customers sending satellites to low-earth-orbit or geosynchronous orbit.  Lockheed Martin will pay $61 million for the acquisition.

Winchester Electronics Corporation acquired TRU Corporation, a provider of high performance RF connectors and cable assemblies for aerospace, military, semiconductor, and test and measurement end markets.  Terms of the deal were not disclosed.

Triumph Group, Inc. to acquire GE Aviation’s Hydraulic Actuation Business, a provider of landing gear actuation systems, door actuation, nose-wheel steering, hydraulic fuses, manifolds, flight control actuation, and locking mechanisms for the commercial, military and business jet markets.  Triumph will pay $70 million for the acquisition.

The Boeing Company to acquire AerData Group BV, a provider of integrated software solutions for lease management, engine fleet planning and records management.  Terms of the deal were not disclosed.

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Industry Week in Review – May 23, 2014

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Airbus confirmed this week it plans to increase seating on its A320 aircraft from 180 to 186 seats, while maximum capacity on A321 aircraft will increase from 220 to 240 seats.  Although full details will not be revealed until next month, the European Aviation Safety Agency also confirmed Airbus’ “process for significant modification” has already started.  Airbus officials admitted that its A320 aircraft had disadvantages in sales campaigns in competition with other carriers due to seating limits.  In comparison, Boeing’s 787-800 aircraft seats a maximum of 189 passengers.  Notably, Airbus’ move was triggered by low-cost carrier Vueling’s firm order of 62 A320 aircraft, where a promise to fit 186 seats in the cabin was a key factor in Airbus winning the order.  A continuing trend in the industry, Airbus is not the only company that has done significant interior redesign with much more planned.  Many airlines, including Boeing, have announced plans to install slim backrest seats that allow airlines to reduce pitch and gain space for several more seat rows.

The General Services Administration announced the 74 full-and-open (“F&O”) awardees for its One Acquisition Solution for Integrated Services (“OASIS”) vehicle this week.  The $60 billion contract vehicle was developed in collaboration with industry partners over the last two years as part of a family of contracts meant to streamline services contracting. No protests have been filed thus far in relation to the F&O portion of this professional services contract; however, 10 protests were filed after the release of the small business awards back in February.

Big Movers

Kratos Defense & Security Solutions, Inc. (Up 13.5%) – Shares were up this week after the Company announced it won a $9 million award from an undisclosed customer to support prototype development of the railgun fire control system and hypervelocity guided projectile.  Additionally, the Company’s Chairman, William Hoglund, acquired 200,000 shares of the company’s stock in a transaction worth approximately $1.4 million.

Relevant Transactions

The Boeing Company to acquire ETS Aviation Ltd., a provider of fuel-efficiency management and analystics software to commercial airlines and corporate flight departments.  Terms of the deal were not disclosed.

Warburg Pincus LLC to acquire Wencor Group LLC, a designer and manufacturer of aircraft parts for repair stations, operators of general aviation aircraft, and airlines worldwide.  Terms of the deal were not disclosed.

Cobham plc to acquire Aeroflex Holding Corporation, a provider of radio frequency and microwave integrated circuits used in high-performance aerospace equipment for harsh environments and wireless communication systems.  The deal is worth an estimated $1.4 billion.

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Industry Week in Review – May 16, 2014

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International competition between the aerospace giants, Airbus and Boeing, continues to heat up as both companies secured multi-billion dollar orders in China this week.  China Southern Airlines Company announced an order of 50 Airbus A320neo aircraft, as well as 30 A320 jets, with a combined order value of approximately $7.3 billion.  On Boeing’s side, China’s Juneyao Airlines Company ordered 50 single-aisle 737 model aircraft in a deal worth approximately $3.8 billion.  Both orders come at an opportune time when a growing middle class in China continues to fuel a travel boom, with Airbus predicting the Chinese aviation market will overtake the U.S. as the largest market by 2032.  The trend is further supported by China’s Civil Aviation Administration stating earlier this year it would loosen regulations and study tax breaks to encourage low-cost travel and budget carriers.  Airbus plans to begin delivery of its aircraft in 2016, while Boeing expects the aircraft in its order to be in operation by 2020.

The Department of Homeland Security (“DHS”) awarded a new round of contracts under the Functional Category 1 (“FC1”) component of DHS’ Enterprise Acquisition Gateway for Leading Edge Solutions II (“EAGLE II”) vehicle.  With the new round of awards, 68 companies, including Accenture, Boeing, Booz Allen Hamilton, and General Dynamics, will now compete under the unrestricted FC1 component of the contract.  DHS had previously selected 15 companies to compete under the unrestricted portion of FC1 in September 2013, along with 15 small businesses to compete under the small business portion.  With a seven-year period of performance and $22 billion ceiling value, EAGLE II has remained a highly coveted vehicle among government technology contractors; however, this new round of expanded awardees may also dilute the attractiveness of awardees from an M&A perspective.

Big Movers

Engility Holdings Inc. (Down 12.7%) – Shares were down this week after the Company announced relatively flat fiscal quarter earnings, with quarterly revenue down 6.3% year-over-year, but still beating analyst estimates on an earnings per share basis.

Relevant Transactions

Chemring Group plc acquired 3d-Radar AS, a developer of commercial three-dimensional ground penetrating radar technology for airport runway inspection and railway maintenance.  Chemring paid $3 million for the acquisition.

Dovel Technologies, Inc. acquired RNSolutions, Inc., a provider of enterprise architecture, application development, and grant management solutions to Federal agencies, with a strong presence serving the Department of Health and Human Services.  Terms of the deal were not disclosed.(1)

(1) KippsDesanto & Co. served as the exclusive financial advisor to RNSolutions, Inc.

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Industry Week in Review – May 9, 2014

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The House Armed Services Committee (“HASC”) unanimously approved a measure that would authorize just over $600 billion in defense spending for the 2015 fiscal year.  The HASC’s version of the 2015 National Defense Authorization Act includes the Pentagon’s previously requested $495.8 billion base budget, as well as $79.4 billion for Overseas Contingency Operations (“OCO”).  The bill also authorizes $17.9 billion in Energy Department defense programs and $7.9 billion in mandatory defense spending, both of which could grow larger since the OCO figure is still standing as a placeholder and will likely decrease.  Most notable from the measure is the HASC’s amendment that, if included in the final bill, would ultimately reverse and block the highly controversial plan to retire the Air Force’s fleet of A-10 Warthog aircraft.  The new amendment would prohibit the retirement of the aircraft until the U.S. comptroller general makes a number of certifications and studies to evaluate Air Force platforms used for close-air-support missions.  Another key focus from the HASC’s measure is the protection of weapons programs, which would involve shifting more than $2.5 billion from service contract accounts and other non-weapons accounts towards projects not budgeted in Obama’s 2015 budget request.  The projects include refueling the George Washington aircraft carrier, developing missile defenses with Israel, and purchasing or upgrading certain aircraft and tanks.

The National Institutes of Health (“NIH”) released a request for proposal (“RFP”) for the Chief Information Officer – Commodities and Solutions Contract (“CIO-CS”), which will succeed the NIH’s current Electronic Commodities Store III contract. CIO-CS will be a government-wide acquisition contract and will support the procurement of IT commodities and solutions relating to general IT initiatives, especially for those agencies participating in health care and biological research, such as the NIH and Department of Health and Human Services more broadly. This 10-year, $20 billion contract is expected to have 75 awardees and small businesses will receive 60 percent of the total value of all delivery orders, compared to its predecessor contract which has a $6 billion ceiling value, 66 awardees, and small businesses receive ~42% of the total value of all delivery orders.   The release of this contract vehicle is a testament to the continuation of opportunities within the HIT marketplace for contractors.  The contract’s RFP was released Wednesday, May 7th and the bid deadline is set for June 11th.

Big Movers

B/E Aerospace Inc. (Up 11.6%) – Shares were up this week after the Company announced it is reviewing strategic alternatives for a potential sale or spin-off of the business.

Relevant Transactions

Calian Technologies Ltd. acquired AMTEK Engineering Services Ltd., a provider of engineering and technical services primarily to the Department of National Defence in Canada.  Terms of the deal were not disclosed.

Ultra Electronics Holdings plc acquired ICE Corporation, Inc., a manufacturer of aerospace products including motor control electronics, electrothermal ice protection controllers, and pneumatic valve controls.  Ultra Electronics paid $8.6 million for the acquisition.

FireEye, Inc. to acquire nPulse Technologies Inc., a provider of network forensics, including security flows and packet capture solutions for government agencies and financial institutions.  FireEye will pay approximately $70 million for the acquisition, which is expected to close during 2Q14.

Endgame, Inc. acquired Onyxware Corporation, a provider of mobile security technology used to detect mobile devices that are connecting to unsafe networks or are being accessed by a third party.  Terms of the deal were not disclosed.

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Industry Week in Review – May 2, 2014

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According to a new Deloitte report analyzing the financial performance of the top 20 major U.S. aerospace and defense sector companies, U.S. defense contractors posted a 2.6% revenue decrease in 2013.  The decline is mostly due to the Pentagon’s reduction in funding and outlays during the fiscal year, primarily from budgetary uncertainty and sequestration effects that clouded the spending environment. Additionally, budget reductions were also the result from the drawdown of forces in the Middle East, as well as spending reductions mandated by the Budget Control Act of 2011.  Specifically, 17 of the top 20 U.S. defense contractors had decreases in revenues, representing the widespread impact of budget reductions on the industry.  While revenues were down, however, profitability increased 17.9%, reflecting companies’ efforts to create operational efficiencies through personnel cuts and cost reductions.  Looking forward, while recent clarity with the FY2014 budget and the FY2015 budget request may sustain declining revenues, defense contractors will continue to look to expanding foreign military sales, refining core capabilities, and improving operational efficiencies for future growth.

In an effort to improve patient care, the DoD is looking to bid its Healthcare Management Systems Modernization (“DHMSM”) contract by the end of 2014.  The single-award contract will aim to advance the integration of a commercial electronic health records system to cover the DoD’s nearly 10 million beneficiaries worldwide.  At an estimated total value of approximately $11 billion, DHMSM would be one of the largest IT contracts in the government procurement market, and could present strategic opportunities for government technology contractors seeking access to the Military Health System.

Big Movers

Spirit AeroSystems Holdings, Inc. (Up 11.2%) – Shares were up this week after the Company announced strong fiscal quarter results, with revenue up 20% from the same period last year.

Relevant Transactions

Alliant Techsystems Inc.’s Aerospace and Defense Unit to merge with Orbital Sciences Corporation, a provider of small and medium class rockets and space systems for commercial, military, and civil government customers worldwide.  The deal is worth an estimated $3.9 billion.

Dubin Clark and Company’s Merex Incorporated acquired Kellstrom Defense Aerospace, Inc., a provider of aircraft engine parts and MRO services to commercial and military aircraft.  Terms of the deal were not disclosed.

Ultra Electronics Holdings plc to acquire Forensic Technology WAI, Inc., a provider of automated firearm ballistics identification and forensic analysis systems to law enforcement agencies.  Ultra Electronics paid approximately $85.7 million for the acquisition.

Digital Management, Inc. acquired Pappas Group, LLC, a full-service digital and creative agency focused on mobile product and brand development solutions.  Terms of the deal were not disclosed.

ManTech International Corporation signed a definitive agreement to acquire 7Delta, Inc., a provider of application development, program management, and systems integration solutions to both civilian and defense agencies, with extensive experience serving the Department of Veterans Affairs.  The transaction is expected to close in May 2014.  Terms of the deal were not disclosed.(1)

General Catalyst Partners announced an investment in OGSystems, LLC, a provider of data processing, exploitation, and dissemination solutions to defense and intelligence agencies.  Terms of the investment were not disclosed.

(1) KippsDeSanto & Co. acted as the exclusive financial advisor to 7Delta, Inc.

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Industry Week in Review – April 25, 2014

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Boeing’s first quarter earnings release this week offered generally clear skies, with a strong tailwind from its commercial operations.  The world’s largest aerospace / defense company delivered 161 aircraft in the first three months of 2014, decidedly trumping Airbus’ 141 deliveries in the same period.  Boeing’s deliveries, which were up 18% year-over-year, were primarily made up of 115 deliveries of its re-engined 737 model.  Additionally, 18 787 Dreamliners were delivered in the period.  In comparison to the same period last year, only one 787 Dreamliner had been delivered following its highly-publicized battery problems.  In its fiscal first quarter, Boeing Commercial Airplanes won 235 net orders, which ended with a backlog of more than 5,100 airplanes, valued at approximately $374 billion.  The company’s total backlog rests at $440 billion, which is only a slight decrease from the beginning of the year and includes first quarter net orders of $19 billion.  Boeing still expects to deliver between 715 to 725 jetliners this year, following a record 648 deliveries in 2013.  Results from Boeing’s defense business, like those from its prime contractor competitors who also released earnings this week, were less sanguine.  Revenue at Boeing’s defense business fell nearly 6% year-over-year, with future orders for some key programs, such as the venerable F/A-18, under intense scrutiny.  Overall, the company’s expectations remain high, however, as it raised its 2014 profit outlook this week from a range between $7.00 and $7.20 to a range between $7.15 and $7.35, citing strong aircraft demand and positioning within the global defense, space, and security markets for the persistent optimism.  Along with Boeing, four major aerospace companies – B/E Aerospace, Hexcel, Rockwell Collins, and United Technologies – all released earnings reports this week.  Representative of the positive aerospace market environment, each company beat their consensus analyst earnings estimates.

While the effects of sequestration caused a decline in overall Federal contract spending in GFY13, according to a recent Bloomberg report, seven departments managed to increase contract spending, despite various budgetary headwinds.  The seven departments included the Department of Homeland Security (+2.1% over GFY12), the Department of Health and Human Services (+4.6% over GFY12), the Department of Veterans Affairs (+5.3% over GFY12), the Department of Justice (+7.0% over GFY12), the Department of Housing and Urban Development (+9.5% over GFY12), the Department of the Treasury (+16.4% over GFY12), and the Department of Education (+27.0% over GFY12).  The report’s findings point toward continued opportunities for government technology contractors serving priority markets such as Homeland Security, Health and Human Services, and Veterans Affairs.

Big Movers

Raytheon Co. (Down 5.2%) – Shares were down this week after the company’s 1Q14 earnings release reported quarter over quarter sales down 6.3%, with decreases across all four divisions.  Raytheon reported the largest sales decline of the Defense Primes.

Relevant Transactions

Nexter Systems to acquire Chemring Group plc’s MECAR SA, a provider of weapon systems and ammunitions for LAVs, tanks, and infantry.  Nexter will pay approximately $232 million for the acquisition.

Sumitomo Bakelite Co. Ltd. to acquire H.I.G. Capital’s Vaupell, Inc., a provider of thermoplastic interior solutions to the commercial aerospace industry.  Sumitomo Bakelite will pay $270 million for the acquisition.

Prospect Partners’ Velocity Aerospace Inc. acquired E.D.N. Aviation, Inc., a provider of multi-unit fabrication and engineering / design services for various aircraft panel components.  Terms of the deal were not disclosed.

The Parsons Corporation acquired Secure Mission Solutions, a provider of security consulting solutions to the Department of Defense, Intelligence Community, and civilian agencies.  Terms of the deal were not disclosed.

The SI Organization acquired the U.S. Services Division of QinetiQ, which provides technical services and solutions to customers in the global aerospace, defense, and security markets.  The SI Organization will pay $165 million upfront for the acquisition, and will potentially pay an additional $50 million if certain targets are met over the near-term.

Jacobs Engineering Group acquired Verizon Federal Network Systems, a provider of network solutions to the Department of Defense and civilian agencies.  Terms of the deal were not disclosed.

Flatirons Solutions acquired CORENA, a provider of document management and system integration solutions for the defense, aerospace, marine, and energy industries.  Terms of the deal were not disclosed.

The Blackstone Group acquired a majority stake in Accuvant, a provider of services and solutions to help clients plan, build, and run successful security programs.  Blackstone will pay approximately $230 million for the majority stake.

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