Industry Week in Review – December 13, 2013

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The House voted Thursday night to ease across-the-board federal spending cuts and head off future government shutdowns.  The legislation, heading to the Senate for a vote, calls for federal employees hired in 2014 to contribute a total of 10.6% of their salaries to their retirement benefits, a 1.3% increase in contributions from those made by 2013 hires.  This increase is expected to reduce the budget deficit by $23 billion over the next decade without raising taxes and erase $63 billion in across-the-board spending cuts in domestic and defense programs.

The International Air Transport Association (“IATA”) announced that 2014 will be the airline industry’s most profitable year ever as the IATA increased its profit forecast for 2013 and 2014 based on a variety of factors currently driving positive growth in the industry.  The association is now forecasting a combined net profit of $19.7 billion in 2014, which represents a $3.3 billion increase from the association’s $16.4 billion forecast in September.  Similarly, the IATA expects 2013 profit to reach $12.9 billion, up from the previous prediction of $11.7 billion.  Among the reasons, officials cite the continuous easing of fuel prices due to the discovery of substantial new supplies as well as decreased geopolitical tension particularly surrounding Iran as main drivers of profitability.  Additionally, structural improvements in the airlines industry also play an influence as airlines have introduced broader ancillary fees to open up new sources of revenue.  North American carriers are expected to contribute the most with forecasted profits of $8.3 billion.  Asia-Pacific and European carriers follow behind with forecasts of $4.1 billion and $3.2 billion, respectively.

Big Movers

OSI Systems, Inc. (Down 19.6%) – Shares were down this week after Pomerantz Grossman Hufford Dahlstrom & Gross LLP filed a class action lawsuit against the Company regarding false and misleading statements about business, operational and compliance policies.

Relevant Transactions

CapitalWorks, LLC acquired Morgenthaler Private Equity’s Avtron Aerospace Inc., a provider of electrical, electronic, and hydraulic aircraft component test solutions for the global commercial and military aerospace markets.  Terms of the deal were not disclosed.

3P Equity Partners, LLC and Silver Sail Capital, LLC acquired Hammond, Kennedy, Whitney & Co.’s Visioneering Inc., a provider of high-quality fabrication, assembly, and automation tooling systems for the aerospace and defense industry.  Terms of the deal were not disclosed.

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Industry Week in Review – December 6, 2013

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Bombardier received a mix of positive and negative news this week.  China Express placed a firm order for three CRJ900 jets with options for 13 more in a deal worth an estimated $733 million.  Meanwhile, Bombardier’s CSeries, which has experienced difficulties in the past, faces another delay as the company is now waiting until the first three CSeries test aircraft are fully assessed before announcing a new service-entry date.  The initial CS100 was planned to enter service in mid-2014 with the larger CS300 following the year after, but with the most recent delays, analysts predict the CS100 will enter service sometime in early 2015.  While China Express has also expressed interest in the CSeries, Bombardier is still currently 118 orders short of their target 300 firm orders by service entry.

Defense Secretary Chuck Hagel plans to reduce the Pentagon’s staff by 20 percent in an effort to save the Department of Defense approximately $1 billion over the next five years.  Among the changes, many civilian and contract workers will be eliminated while oversight responsibilities of senior officials will be reorganized.  The plan also calls for a policy directorate overhaul, including the possible elimination of one deputy undersecretary and four deputy assistant secretaries.  Further details and information of the plan will be included in the Department of Defense’s 2015 budget proposal, which is scheduled to be released in February.

Big Movers

Unisys Corporation (Up 9.2%) – Shares were up this week after the Company announced it was awarded a contract to transition 6,000 Department of Energy program personnel to Google’s cloud-based email and collaboration solution, Google Apps for Government.

Leidos Holdings, Inc. (Down 14.5%) – Shares were down this week after the Company released disappointing preliminary third-quarter results and lowered its full-year guidance.

OSI Systems, Inc. (Down 15.6%) – Shares were down this week after the Transportation Security Administration terminated a $60 million delivery order with the Company’s security division, Rapiscan Systems.

Relevant Transactions

TransDigm Group Inc. to acquire Airborne Systems Inc., a provider of personnel parachutes, cargo aerial delivery systems, emergency escape systems, and other related products.  TransDigm will pay approximately $250 million for Airborne Systems.

Eagle Ray Inc. acquired Kore Federal Inc., a provider of IT management and consulting services to intelligence and defense clients.  Terms of the deal were not disclosed.

AAR Corporation’s Telair International GmbH to acquire PFW Aerospace GmbH’s Cargo Loading System Assets, a provider of cargo loading and baggage handling systems worldwide.  Terms of the deal were not disclosed.

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Industry Week in Review – November 29, 2013

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According to new data from Avascent Analytics, the United States currently ranks as the leading supplier of defense aircraft for Asia-Pacific partners and allies.  The increased percentage of U.S. investments in the region comes as the nation continues to shift resources to the Asia-Pacific as it withdraws forces from Iraq and Afghanistan as well as government contractors redirecting attention to international sales amidst domestic budget uncertainty.  The U.S. will have sold about $79.2 billion worth of defense aircraft and related equipment, including development and production costs, between fiscal years 2009-2023 to various countries in the Asia-Pacific.  Italy ranks second with about $48.7 billion during the time period, while India currently ranks third.

As the expiration date for the current government funding bill nears, House Republicans are contemplating a short-term continuing resolution that would fund the government through April 15th, since it is unlikely budget negotiators will reach a long-term deal by December 13th, the deadline for the conference committee to report an agreement.  Additionally, the current funding bill passed on October 16th expires on January 15th, but House members are not expected to return back to Washington until January 7th, leaving little time for further negotiations.

Big Movers

Intevac, Inc. (Up 13.4%) – Shares were up this week after the Company’s Board of Directors authorized the repurchase of $30 million of the Company’s common stock.

SIFCO Industries, Inc. (Up 11.8%) – Shares were up this week after the Company reported a strong fiscal 2013 as net sales increased 12.8% from the previous year.

AeroVironment, Inc. (Up 9.7%) – Shares were up this week after the Company reported positive fiscal second quarter earnings with increased backlog and overall results in-line with expectations.

Relevant Transactions

Winchester Electronics Corporation acquired Haverhill Cable and Manufacturing Corporation, a provider of semi-rigid coaxial cable and cable assemblies for commercial, military, and satellite equipment.  Terms of the deal were not disclosed.

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Industry Week in Review – November 22, 2013

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All eyes were on Boeing at the Dubai Air Show this week as the Company officially launched its 777X line of aircraft and subsequently receiving orders totaling nearly $100 billion.  The 777X, which boasts greater fuel efficiency from its carbon-fiber wings, is the largest single commercial launch by value in the history of the aerospace industry.  As expected, the Gulf Arab region’s “Big Three” of Emirates Airline, Etihad Airways, and Qatar Airways were the most active suitors at the event.  Airbus also had an impressive showing at the show, netting an estimated $50 billion in orders.

Debate over the potential cut of the Air Force’s A-10 Thunderbolt program continues to build as 33 lawmakers recently issued a letter to the U.S. Secretary of Defense and Chairman of the Joint Chiefs of Staff to reconsider and hold off on plans to cut the entire A-10 fleet.  The letter, signed by 13 senators and 20 representatives, expressed deep concern about retiring the fleet, and called for more scrutiny to the Air Force’s budget plans moving forward.  Additionally, Senators Kelly Ayotte (R-N.H.), one of the more vocal supporters of the A-10 program, and Roy Blunt (R-Mo.), have curated an amendment to the National Defense Authorization Act that would prohibit and delay the discontinuation of the fleet until the year 2021, when the A-10’s replacement, the F-35A, is expected to be fully ready and operational.

Booz Allen Hamilton announced the closing of their previously announced secondary public offering of Class A common stock shares by an affiliate of the Carlyle Group.  The offering sold approximately 12.7 million shares of common stock to underwriters at $17.00 per share.  Carlyle now owns approximately 58.3% of the outstanding Class A common stock.

Big Movers

QinetiQ Group Plc (Up 10.3%) – Shares were up this week after the Company’s North America business won a position on the Department of Homeland Security’s EAGLE II vehicle to provide information technology services to meet security and communication goals.

Relevant Transactions

The Jordan Company acquired J.F. Lehman and Company’s ACR Electronics, Inc., a provider of safety and survival solutions to aviation, marine, military, and outdoor customers.  Terms of the deal were not disclosed.

NewSpring Capital and Plexus Capital acquired Northeast Ship Repair, Inc., a provider of large vessel maintenance, repair, and overhaul services for U.S. Government and commercial customers.  Terms of the deal were not disclosed.

Palm Beach Capital acquired a 60% majority stake of Neff Capital Management’s CTS Engines, LLC, a provider of aircraft engine maintenance, repair, and overhaul services for jet engine owners and operators worldwide.  Terms of the deal were not disclosed.

Apprio Inc. acquired Professional Consulting Solutions, Inc., a provider of quality training, organizational development, and human capital consulting services to the Federal Government.  Terms of the deal were not disclosed.

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Industry Week in Review – November 15, 2013

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This week marked the end of the first week of sea trials for the new amphibious assault ship USS America (LHA 6), which has been under development by Huntington Ingalls Industries since 2006.  The warship, along with its sister ship the Tripoli, are the first assault ships built without a well deck, allowing for additional Marine aviation capacity.  Specifically, the America will be able to support helicopters, V-22 Ospreys, and F-35 aircraft, in addition to its more traditional role carrying troops into battle.  The ship, larger than many other countries’ aircraft carriers, will be able to hold a crew of 1,059 and 1,687 troops.  The America is scheduled to enter the service in 2014.

Three months after the Department of Justice (“DOJ”), six states, and the District of Columbia filed a lawsuit in Federal court to block the proposed merger between U.S. Airways and American Airlines, an antitrust settlement was reached allowing the $17 billion merger to proceed.  The airlines alleviated the DOJ’s initial concerns of decreased competition and subsequent fare increases by agreeing to give up space at major airports, including reductions in combined daily departures at Reagan National and La Guardia by 15% and 7%, respectively.  A federal judge still must approve the settlement, but the two companies are aiming to close the transaction by December of this year.

In the government sector, Lockheed Martin announced it will be cutting 4,000 jobs and closing facilities due to shrinking budgets and overcapacity within the government services space.  The layoffs are expected to take place at the company’s Information Systems and Global Solutions, Space Systems, Mission Systems and Training, and the Missiles and Fire Control divisions across the country.

Big Movers

LMI Aerospace Inc. (Down 24.7%) – Shares were down this week after the Company announced another disappointing quarter, reporting earnings per share of $0.16 versus consensus estimates of $0.22.

Relevant Transactions

Liberty Hill Capital Partners acquired Precise Machining & Manufacturing, Inc., a manufacturer of precision machined parts for aerospace, defense, commercial, and medical industries.  Terms of the deal were not disclosed.

Former Stanley Associates executive team acquired GAP Solutions, a provider of professional and technical services to Federal agencies.  The team, Eric Wolking and Pat Flannery, will use the Company as a “platform for growth.”  Terms of the deal were not disclosed.

A-T Solutions, Inc. acquired GreenLine Systems, Inc., a developer of risk management solutions for maritime and cross-border movement of ships, cargo, and people.  Terms of the deal were not disclosed.

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Industry Week in Review – November 8, 2013

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As the Department of Defense (“DoD”) aims to move beyond the recent government shutdown and focus on its future budget, Defense Secretary Chuck Hagel stated this week that the Pentagon needs to make significant changes “across every aspect.”  He subsequently identified six focus areas that will ultimately drive a major DoD reform effort:

  1. Institutional reform
  2. Re-evaluating the military’s force planning construct
  3. Preparing for a prolonged military readiness challenge
  4. Protecting investment in emerging military capabilities
  5. Balanced mix between capacity and capability
  6. Personnel and compensation policy

Among the priorities to “help determine the shape of our defense institutions to come”, Secretary Hagel indicated that the DoD must prepare for a future in which non-deployed troops may not be trained to their present-day levels.  However, despite the budget cuts, the DoD will look to protect investments in emerging military capabilities, especially space, cyber, special operations forces, and intelligence, surveillance, and reconnaissance.

The Executive Office of the President released a report this month quantifying the financial impacts and costs of the October 2013 Federal Government Shutdown.  During the 16-day shutdown, Federal government employees were furloughed for a combined total of 6.6 million days, more than during any previous Federal government shutdown.  The Executive Office estimates that the total cost of pay for furloughed Federal employees during the period of the shutdown is roughly $2.0 billion and total compensation costs, including benefits, are about 30% larger, in the range of $2.5 billion.  Furthermore, independent forecasters estimate that the shutdown will lower fourth quarter real GDP growth by 0.2 – 0.6 percentage points or more, or $2.0 – $6.0 billion in lost output.

Big Movers

CPI Aerostructures, Inc. (Up 13.2%) – Shares were up this week after the Company announced a strong third quarter.  The Company reported earnings and revenues above consensus analyst estimates.

Federal Signal Corp. (Up 9.2%) – Shares were up this week after the Company announced positive third quarter performance with revenue and operating income up 13% and 52%, respectively, versus the same period last year.

Relevant Transactions

Audax Group’s Winchester Electronics acquired SRC Cables Inc., a manufacturer of flexible and semi-rigid cable assemblies for defense, aerospace, medical imaging, and wireless communications companies worldwide.  Terms of the deal were not disclosed.

Astronics Corporation to acquire PGA Electronic S.A., a manufacturer of seat motion and lighting systems for business and first-class aircraft seats.  The deal is valued at approximately $28.5 million.

Veritas Capital to acquire Anaren, Inc., a provider of components, assemblies, and subsystems for wireless communications, satellite communications, and space and defense electronics.  The deal is valued at approximately $381 million.

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Industry Week in Review – November 1, 2013

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The Navy successfully conducted the inaugural test flight of its new MQ-8C Fire Scout unmanned helicopter at Naval Base Ventura County this week.  The aircraft stayed airborne for seven minutes.  The unmanned helicopter is the newest variant of the MQ-8B already in use by the Navy.  With an internal payload capacity of 1,000 pounds, 400 more than the MQ-8B, the MQ-8C has approximately twice the capability of its predecessor, as it can fly 30 knots faster and stay seven to nine hours longer in the air.  The aircraft was developed by the Naval Air Systems Command and several private sector players.  Measuring 10 feet longer than the MQ-8B, the MQ-8C is not expected to replace its predecessor, but instead join the fleet by 2016, though some could deploy as early as next year.

In the government contracting space, several government services providers released earnings this week, many of which noted a decrease in revenues offset by flat or slightly higher than expected operating margins.  Common themes discussed on the earnings calls were the challenge to operate within a two budget scenario environment, international expansion, reinvestment into research and development, the effects of the Afghanistan drawdown on programs and funding, and special dividend distributions.

Big Movers

TASER International Inc. (Up 11.8%) – Shares were up this up after the Company announced a strong third quarter.  The Company reported earnings and revenues above consensus analyst estimates.

Ultralife Corp. (Down 13.9%) – Shares were down this week after the Company announced a poor third quarter with revenue down 22% from the same quarter last year.

Meggitt plc (Down 10.7%) – Shares were down this week after the Company lowered its full-year revenue guidance following a disappointing third quarter.

Relevant Transactions

ESI Group SA acquired CyDesign Labs, Inc., a provider of simulation, analysis tools, and physics-based modeling systems for the aerospace, defense, and automotive industries.  Terms of the deal were not disclosed.

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Industry Week in Review – October 25, 2013

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Two aerospace companies received positive news this week as Boeing announced plans to increase the overall production rate of its 787 aircraft and Pratt & Whitney announced it reached a $1.1 billion agreement with the Pentagon on the sixth lot of F-35 Joint Strike Fighter jet engines.

Despite early problems, specifically related to battery issues and service reliability, Boeing’s 787 program continues to show improvements in operations and efficiency with 23 deliveries of the 787 in the third quarter.  With the increased efficiency, Boeing announced on its third quarter earnings call it will increase the overall production rate for the 787 to 12 per month in 2016 and 14 per month by the end of the decade, doubling the current year’s production rate of 7 per month.

Pratt & Whitney’s $1.1 billion deal with the Pentagon covers 38 total engines, which includes eighteen conventional take-off and landing engines for the Air Force F-35A model, seven for the Navy’s F-35C model, and six for the Marine’s F-35B jump-jet model.  Deliveries are scheduled for the fourth quarter of this year.

In the government contracting space, numerous contract awards have been announced since the government reopened late last week.  One announcement to note is IBM’s capture of a $1 billion five year General Services Administration (“GSA”) cloud computing contract to implement IBM’s SmartCloud for Government.  Besides hosting, the GSA plans to use several additional IBM cloud-based services beginning in 2014, such as its Sterling Order Management and B2B integrators.

Big Movers

The Boeing Company (Up 7.1%) – Shares were up this week following a series of positive news from the Company, including strong third quarter earnings above consensus estimates and increasing the production rate of its 787 aircraft.

Tyler Technologies, Inc. (Up 6.0%) – Shares were up this week after the Company announced a strong third quarter.  The Company reported earnings and revenues above consensus analyst estimates.

The Timken Company (Down 14.9%) – Shares were down this week after the Company released disappointing 3Q13 earnings.  The Company reported a 7% decrease in sales versus last year.

Relevant Transactions

Hong Kong Aircraft Engineering Company agreed to acquire Owl Creek Asset Management’s TIMCO Aviation Services, Inc., a provider of aircraft maintenance, repair, overhaul, and line maintenance services to commercial airlines, aircraft leasing companies, and government and military sectors.  The deal is valued at approximately $388.8 million.

Resilience Capital Partners’ Aerospace Products International acquired Avionics International Supply Inc., a wholesale distributor of avionics parts and supplies to private and commercial repair facilities worldwide.  Terms of the deal were not disclosed.

Microsemi Corporation agreed to acquire Symmetricom, Inc., a provider of timekeeping technologies, instruments, and solutions in GPS satellites and critical military and civilian networks.  The deal is valued at approximately $230 million.

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Industry Week in Review – October 18, 2013

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On October 16th, Congress passed a Continuing Resolution to end the government shutdown, funding the sequester-level budget until January 15, 2014 and extending the government’s borrowing authority until February 7, 2014.  Additionally, the bill grants retroactive pay for furloughed government employees and raises the possibility for federal employees to receive a 1 percent pay raise in January 2014. While experts are still debating the total cost of the shutdown for the government and the economy as a whole, Pentagon Comptroller Robert Hale estimated the shutdown cost the Department of Defense $600 million in lost productivity.

Days ahead of the annual NBAA conference, the business jet industry’s most significant event, OEMs have continued to deliver underwhelming performance.  In a sign of the listlessness that has pervaded the sector since the recession, revenue at Textron’s Cessna unit fell 24% as the company delivered 25 new Citation jets in the quarter, down from 41 a year ago.  Cessna, one of the largest business jet OEMs, swung to a loss of $23 million, reflecting the lower jet deliveries.

In the government contracting space, Serco Inc. hired former CACI Chief Executive Officer Dan Allen to be its new CEO.  Allen is replacing Ed Casey, who has been CEO of Serco for the past eight years.  Casey has been appointed the Chief Transformation Officer for the global operations of Serco Group, the British parent company of Serco Inc.

Big Movers

Embraer SA (Down 8.1%) – Shares were down this week after the Company released disappointing 3Q13 earnings.  The Company delivered only 19 E-Jets to airlines in the third quarter, bringing total commercial deliveries to 58 aircraft for the first nine months of the year.  The Company had been predicting 90 to 95 regional jet deliveries for FY2013, but this target will now be difficult to meet.

Relevant Transactions

Integrated Mission Solutions, LLC, a portfolio company of DC Capital Partners, completed its acquisition of the Michael Baker Corporation, a provider of engineering services for public and private sector clients worldwide.  Integrated Mission Solutions is paying $327.6 million for Michael Baker.

Delta Information Systems, Inc. acquired Acroamatics, Inc., a provider of design and manufacturing services for advanced digital signal processing products. Terms of the deal were not disclosed.

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Industry Week in Review – October 11, 2013

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Airbus announced on October 7th that it received a $9.5 billion order from Japan Airlines for 31 of its wide-body A350 jets, allowing the European firm to significantly divert market share traditionally dominated by Boeing.  The agreement, which includes an option for 25 additional aircraft, is expected to replace Japan Airlines’ long-haul lineup of Boeing 777s.

Analysts agree the landmark deal has much deeper implications for Boeing’s relationship in a country that has previously invested billions of dollars in helping develop Boeing’s planes.  For decades, Boeing has benefited from strong relationships with Japanese parts suppliers and political ties to maintain more than an 80% market share in the Japanese market.  Problems and delays with its 787 Dreamliner ultimately tarnished Boeing’s reputation and created doubt on the American firm’s ability to deliver aircraft on time.

In the government services space this week, CACI International announced that it has agreed to acquire Six3 Systems from private equity firm GTCR for $820 million. CACI hopes the deal will aid it in its shift towards higher-margin solutions work and expand its capabilities in the areas of cyber and intelligence. The deal, which is expected to close during the quarter ending December 2013, implies a forward EBITDA multiple (net of tax benefits) of approximately 11.5x.

Big Movers

Chemring Group plc (Down 23.5%) – Shares were down this week after the Company released a note stating their operating profit would be 8 million pounds lower than previously expected, and issued guidance that 2014 would be lower still.

Relevant Transactions

CACI International to acquire GTCR’s Six3 Systems Inc., a provider of intelligence, defense, and civilian solutions for national security agencies and critical missions in the United States. The deal is worth an estimated $820 million.

LongueView Capital acquired Victory Capital’s Ascent Aviation Services, a provider of narrow body maintenance and storage services for aviation customers worldwide. Terms of the deal were not disclosed.

Technical and Project Engineering, LLC acquired Strong Point Research, a provider of modeling, simulation, and training services to government, military, and commercial organizations. Terms of the deal were not disclosed.

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