According to a new Department of Defense report this week, the price tag for Lockheed Martin’s F-35 Joint Strike Fighter, the Pentagon’s most expensive weapons acquisition program, increased by $7.4 billion in 2013.  Officials have stated the primary reason for the increase is due to the decreased number of jets the Pentagon plans to buy in the coming years as a result of federal spending caps.  Officials have also noted an $89.4 billion decrease in estimated sustainment costs over the life of the program as an indicator of recent improved cost control efforts.  Pratt & Whitney’s F135 engine was the most significant driver behind the price increase, accounting for $4.3 billion of the total.  Two additional factors pushing costs were higher labor rates from prime contractors and their respective subcontractors, as well as delays from purchasers seeking to shift deliveries to the right into later years, leading to lower production and higher per-unit costs per lost scale efficiencies.  Moving forward, Lockheed Martin and the Pentagon will continue to work with the F-35 Joint Program Office to implement further cost saving measures, as officials are confident that as the program continues to grow and mature, costs will continue to decrease.

Director of National Intelligence, James Clapper, announced the Intelligence Community (“IC”) is ready to start deploying the Intelligence Community Information Technology Enterprise (“ICITE”) project, a shared IT system environment meant to consolidate and reduce duplication.  Although ICITE was originally intended as a cost-savings measure, it is also meant to bring other benefits such as increased security and sharing, a continuous evaluation clearance system, and heightened insider threat detection capabilities.  Additionally, the ICITE project is expected to provide new opportunities in cloud computing and encryption / decryption research for IC contractors.  Deployment of the project will be complete within the NGA and DIA by the end of 2014 and will begin at other IC agencies towards the beginning of next year.

Big Movers

TASER International, Inc. (Up 6.8%) – Shares were up this week after the Company announced it has entered into an agreement to provide the London Metropolitan Police Service with 500 units of its AXON on-officer cameras and its video storage service, EVIDENCE.com.

Relevant Transactions

Google Inc. acquired Titan Aerospace, a manufacturer of high-altitude drones and solar-powered atmospheric satellites.  Terms of the deal were not disclosed.

Public Consulting Group to acquire Hubbert Consulting Group, a provider of strategic and operational management consulting services for the U.S. Department of Human Health Services.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

This week, select U.S. military service groups sent Congress “wish lists”, called unfunded priorities or unfunded requirements, totaling approximately $36 billion in value of priority items that were not included in the Pentagon’s 2015 budget proposal.  Rep. Buck McKeon, R-California, chairman of the House Armed Services Committee, requested the lists and received requests from the Army, Navy, Marine Corps, Air Force, Army National Guard, and Air National Guard.  From the wish lists, notable requests include 22 additional Boeing EA-18 Growler aircraft for the Navy valued at $2.1 billion and 14 F-35 aircraft for the Air Force and Marine Corps valued at $1.4 billion.  The wish lists also include multiple requests for upgrades, maintenance, and construction projects that have been reduced or deferred due to defense budget caps and sequestration cuts.  Of the departments, the Army and Navy requested the largest amounts at $10.6 billion each.  The requests are very similar to the White House’s Opportunity, Growth, and Security Initiative (“OGSI”) fund, which includes $26 billion in additional defense spending not included in the original $496 billion spending request.  However, like the OGSI, officials have stated the actual passage of the proposed wish lists is highly unlikely, since defense spending is capped at $496 billion.

The Department of Veterans Affairs (“VA”) announced that it has cut its backlog of pending disability claims by more than 40%, with backlog now at its lowest point since March 2011.  The VA also announced that veterans are waiting an average of 119 days less for a decision regarding disability benefits than they were a year ago.  The agency cited transformation initiatives and streamlined business processes as key contributors to the reduction in backlog and wait times, and reiterated its goal of eliminating the claims backlog by 2015, which would indicate continued demand within the VA for innovative IT solutions over the near-term.

Big Movers

Babcock International Group PLC (Up 9.2%) – Shares were up this week after the Company announced it will acquire Avincis Mission Critical Service Holdings SLU from Kohlberg Kravis Roberts & Company for approximately $1.5 billion.

Relevant Transactions

Arotech Corporation acquired UEC Electronics, LLC, a provider of electronic components and subsystems for military, aerospace, and industrial customers.  The acquisition allows Arotech to pursue new market opportunities with new customers, as well as strengthen its electronic engineering and manufacturing capabilities.  UEC will be integrated into Arotech’s Battery and Power Systems division.⁽¹⁾

MB Aerospace acquired Norbert Industries, Inc., a provider of machined components for aerospace, defense, automotive, machine tool, and robotic industries.  Terms of the deal were not disclosed.

Levine Leichtman Capital acquired NOBLES Worldwide, Inc., a provider of weapon systems and ammunition feed systems to various branches of the U.S. military and its allies worldwide.  Terms of the deal were not disclosed.

(1)    KippsDeSanto & Co. acted as the exclusive financial advisor to UEC Electronics, LLC.

Click here to review comparable company analysis.

The U.S. credit rating was affirmed at the top-notch triple-A level with a stable outlook this week by Fitch Ratings.  This affirmation negates the “rating watch negative” the firm placed on the country’s ratings back in October.  Additionally, the firm said it does not expect any developments in the near-term that would lead to a U.S. rating downgrade and suspects that the debt limit will be suspended or raised again in March 2015.  If ratings had been cut by Fitch, it could have prompted big institutional investors to  sell Treasury bonds, since investment rules constrain some institutions to only invest in securities rated triple-A by at least two major rating firms.

As Airbus and Boeing raise production to all-new levels in response to record numbers of orders, officials from both manufacturers this week have said that the global air transport industry is now much more resistant to current potential market fluctuations and possible threat of a “market bubble” threatening the companies’ combined backlog of more than 10,000 aircraft.  Among the factors supporting the optimism, officials stated the market is looking better in 2014 with expected traffic growth of 6% throughout the year, as well as revenue passenger kilometers and freight traffic showing early signs of climbing beyond 2013 levels.  In addition, both Boeing and Airbus also report signs of a continued recovery in the cargo market and airlines becoming more profitable, led by continued operational improvements in the U.S. and positivity within the leasing and secondary markets.  Boeing finished 2013 with a record order backlog of 5,100 aircraft valued at nearly $400 billion and expects to deliver up to 725 aircraft this year.  Airbus currently holds an order backlog of 5,560 and plans to deliver 630 aircraft this year.

On the government contracting front, the SBA, in a recent decision, held that unless the Contracting Officer expressly requires recertification, a company’s size for an 8(a) set-aside task order is governed by that company’s size status for the underlying GWAC.  Therefore, size recertification is not required for individual task orders within a specific GWAC.

Big Movers

Mercury Systems, Inc. (Up 16.0%) – Shares were up this week as it was speculated that the Company is entertaining offers for a potential sale.

Relevant Transactions

Precision Castparts Corporation to acquire Aerospace Dynamics International, a provider of machined parts and assemblies to the commercial and military aerospace industries.  Precision Castparts will pay $625 million for the acquisition.

Lockheed Martin Corporation acquired BEONTRA AG, a German provider of integrated planning and demand forecasting tools for airports around the world.  Terms of the deal were not disclosed.

Carlyle Group’s Landmark Aviation acquired Midlantic Jet Aviation, Inc. and Midlantic Jet Charters, Inc., a provider of fixed base operations and charter services in the northeast United States.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

President Obama released his 2015 budget on Tuesday, requesting $3.9 trillion in budget authority for the upcoming fiscal year.  Among the budget’s priorities are diplomatic security, domestic infrastructure, research and development, cybersecurity, and education and job training, in addition to a separate request for a $56 billion “Opportunity, Growth, and Security” fund designed to boost spending in areas such as research at the National Institutes of Health.  Key departments in which increased spending over 2014 is requested include the Department of Commerce (+6.0%), Department of Veterans Affairs (+3.0%), Department of Energy (+2.6%), and Department of Transportation (+2.2%).

The Department of Defense’s proposed spending and program cuts in President Obama’s 2015 budget request were in line with expectations established from Chuck Hagel’s budget preview a week prior.  The Pentagon’s proposed base budget of $495.6 billion is in compliance with spending caps imposed by the Budget Control Act and the Ryan-Murray budget deal.  Overseas Contingency Operations funding is still undecided until a final decision on troop presence in Afghanistan is made, but is expected to be around $79.5 billion.  The budget cancels and reduces several key programs and personnel including the cancelling Ground Combat Vehicle and reducing active duty military to as low as 440,000.

Big Movers

AeroVironment, Inc. (Up 15.2%) – Shares were up this week after the Company announced positive fiscal third quarter results with earnings of $0.34 per share, which was well above the consensus analyst estimates of $0.19 per share.

Federal Signal Corporation (Up 14.7%) – Shares were up this week after the Company reported strong fiscal fourth quarter results with revenue and operating income up 14% and 65%, respectively, compared to the same period last year.

Relevant Transactions

TransDigm Group Inc. acquired Elektro-Metall Export GmbH, a German provider of electromechanical actuators, electrical and electromechanical components and assemblies for commercial aircraft, helicopters and other specialty applications.  TransDigm paid $47.4 million for the acquisition.

L-3 Communications Holdings Inc. acquired Data Tactics Corporation, a provider of Big Data analytics and cloud computing solutions and services, primarily to the U.S. Department of Defense.  Terms of the deal were not disclosed.

Constellis Group Inc. acquired Strategic Social LLC, a provider of public safety technology, business consulting, and program management solutions to commercial and government customers in challenging and austere environments.  Terms of the deal were not disclosed.

Cubic Corporation acquired Intific Inc., a provider of software and game-based resources for modeling and simulation, training and education, cyberwar, and neuroscience applications.  Terms of the deal were not disclosed.

 Click here to review comparable company analysis. 

International sales continue to play an important role in 2014 within the aerospace and defense industry as companies look to diversify revenue and operations amidst domestic budget uncertainty.  This week, Sikorsky and Boeing both inked multi-billion dollar international deals.  The Turkish government and Sikorsky signed a contract for 109 Sikorsky T-70 Black utility helicopters in a deal worth an estimated $3.5 billion.  The majority of the aircraft will go to the Turkish Armed Forces, with Army, Navy, Air Force, and Special Forces receiving the remainder.  Australia agreed to purchase eight of Boeing’s P-8A Poseidon long-range maritime reconnaissance planes in a deal worth an estimated $3.6 billion.  The purchase is aimed to boost Australia’s ability to patrol its 2.5 million square kilometer marine jurisdiction, part of a growing trend by Asia-Pacific nations to protect commercial maritime interests as tensions in the region continue to rise.  Both sales provide an important boost for Sikorsky and Boeing’s defense divisions, which experienced a down year in 2013 due to cuts in defense spending.

In a continued effort to address the growing cybersecurity threat, Defense Secretary Chuck Hagel announced Tuesday that the Department of Defense’s cyber budget will receive an increase in requested funding for GFY15.  Secretary Hagel noted that the Pentagon “will increase spending to help improve its cyber capabilities, including a larger focus on cyber security, intelligence gathering, and reconnaissance,” in order to combat the growing frequency of cyber-based attacks which some defense officials have called the greatest threat to U.S. national security.  Hagel’s announcement underscores the continued opportunity for contractors operating in this priority market.

Big Movers

NCI Inc. (Up 27.8%) – Shares were up this week after analysts raised the consensus fiscal year 2014 earnings estimate from $0.40 per share to $0.49 per share, representing an increase of 22.5%.

Relevant Transactions

Ultra Electronics Holdings plc acquired 3Phoenix, Inc., a provider of sensor and processing systems in the areas of sonar, radar, intelligence, surveillance, and reconnaissance.  Ultra Electronics paid $70 million for the acquisition.

ManTech International Corporation acquired Allied Technology Group, Inc., a provider of engineering and information management solutions to civilian, military, and intelligence agencies.  Terms of the deal were not disclosed.

Tangible Security, Inc. acquired A & N Associates, Inc., a provider of information assurance and acquisition management services to defense, intelligence, and federal agencies.  Terms of the deal were not disclosed.

Camber Corporation acquired Avaya Government Solutions’ IT Professional Services Business, a provider of full lifecycle support services to Federal government customers.  Camber paid $100 million for the acquisition.

Sapient Government Services, a division of Sapient Corporation, acquired OnPoint Consulting, Inc., a provider of technology and management consulting solutions in the areas of cybersecurity, enterprise architecture, and infrastructure systems to civilian and defense agencies.  Terms of the deal were not disclosed.⁽¹⁾

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

Click here to review comparable company analysis.