Industry Week in Review – July 19, 2013

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During a visit to Jacksonville Naval Air Station on Tuesday, Defense Secretary Chuck Hagel discussed a 20% staff reduction within the offices of high ranking officials and senior civilians at the Pentagon from 2015 to 2019.  Hagel provided limited details on the cuts, but explained that they would apply to the Office of the Secretary of Defense, the offices of the Chairman of the Joint Chiefs of Staff, and the Pentagon headquarters of the Army, Navy, Air Force, and Marines.  Although the estimated 3,000 to 5,000 job cuts only address a small fraction of the 2.1 million Department of Defense (“DoD”) jobs, the trimming of upper branches within the DoD is a strong indication of the scope of future personnel reductions, as these areas have previously been resilient to cutbacks.  Later Tuesday evening, Pentagon Press Secretary George Little released a statement explaining that the cuts arose from the comprehensive Strategic Choices and Management Review earlier this year and that they will be implemented regardless of whether or not Congress removes sequester-level budget caps.  Little estimated that the personnel cuts, which will target both civilian and contracted employees, could save the DoD up to $2 billion over the five year period.  The specific positions and exact number of jobs to be eliminated will be determined following a comprehensive review of each office and will be included in the FY15 budget request, scheduled to be released next February.

Big Movers

AeroVironment, Inc. (Up 10.8%) – Shares were up for the week after Engaged Capital LLC announced that it has taken stake in roughly 5.1% of the company’s stock.

SAAB AB (Down 7.6%) – Shares fell this week following the company’s release of its 2013 profitability forecast.  SAAB’s original projection of EBIT margins around 7.7% declined to 6.6% due to shrinking defense markets.

Relevant Transactions

EDAC Technologies, a Greenbriar Equity Group portfolio company, acquired Parkway Products, Inc.’s Aerospace & Defense business, a manufacturer of aerospace composites.  The transaction broadens EDAC’s manufacturing, engineering, and design capabilities to meet growing demand.  The terms of the deal were not disclosed.

Colt Defense LLC acquired New Colt Holding Corp., the parent company of Colt’s Manufacturing Company LLC for an undisclosed amount.   The acquisition of a leading civilian and sporting firearms manufacturer supports Colt Defense’s expansion into the commercial firearm market.

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Industry Week in Review – July 12, 2013

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History was made at sea as the Northrop Grumman X-47B became the first unmanned jet aircraft to land on an aircraft carrier. After taking off from Patuxent River, Md., the aircraft did one flyby over the U.S.S. George H.W. Bush and performed a smooth landing and caught the number three wire, as engineers had intended. “You saw the future today. This is the first of the next generation of naval aircraft,” said Navy Secretary Ray Mabus after the successful landing. Development of the X-47B began in 2007 under the Unmanned Combat Air System (“UCAS”), a precursor to a follow-on program, Unmanned Carrier Launched Surveillance and Strike (“UCLASS”), which aids the Navy’s goals of integrating unmanned wing aircraft into carrier-based aviation.

Sequestration furloughs have impacted military equipment deals that require technical review, according to Rizwan Ramakdawala, a senior aerospace engineer at Defense Technology Security Administration (“DTSA”). DTSA, responsible for reviewing exports and sales of potentially sensitive technical equipment, declared that the processing times for requests will be delayed after a 20% reduction in workforce due to Department-wide furloughs. “We are all going to be furloughed come July 8, [and so] there will be a 20% reduction in workforce availability at DTSA, so you can definitely expect to see delays. We are not sure of any other way to avoid it,” said Ramakdawala. The extent of the delays will not be known until late July once furloughs take effect.

Big Movers

Chemring Group PLC (Up 6.2%) – Share prices were up following an announcement that a subsidiary, Chemring Military Products, Inc., was awarded a major Department of Defense (“DoD”) contract to supply non-U.S. standard ammunition to the agency. The award, worth $42.1 million, was a Firm Fixed Price (FFP) contract for a one-year period to deliver various non-U.S. standard ammunition to foreign governments and international organizations eligible to receive military defense items.

Relevant Transaction

Data Device Corporation (“DDC”) acquired National Hybrid Inc. – DDC, a portfolio company of Behrman Capital, acquired National Hybrid in a transaction valued at $32.5 million. National Hybrid, a designer and manufacturer of data networking technology for the aerospace / defense industry, enhances DDC’s product offering while providing access to new strategic markets and will help to reinforce DDC’s position as a leading supplier of data networking electronics for the Department of Defense and other aerospace and defense contractors.

AGC Aerospace & Defense and The Edgewater Funds acquired Tods Aerospace & Defence – Tods, a manufacturer of advanced composites and materials found in defense and aerospace systems across the world, was acquired by private equity groups AGC Aerospace & Defense and The Edgewater Funds. For AGC, the acquisition of Tods will provide cost synergies and further group innovation while helping AGC penetrate further into the European, Middle East, and Asian marketplaces.

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Industry Week in Review – July 5, 2013

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Over the past week, the Senate passed a $46 billion immigration reform and border security bill.  With the bill, the Senate approved an amendment that would require an additional $38 million investment in technologies and security personnel to be stationed along the U.S. southern border.  If enacted, the amendment would double the number of personnel, add four drones, 30 marine vessels, 17 Huey helicopters, 15 Black Hawk helicopters, and hundreds of sensors and surveillance systems.  Though the enactment of a final immigration bill has yet to occur, defense companies are already moving towards the homeland security sector.  General Dynamics, Raytheon, Lockheed Martin, and Elbit are currently competing for the Customs and Border Protection’s Integrated Fixed Tower solicitation worth $1.1 billion, which is slated for award this fall.

This week predictions of further delays for the F-35 Joint Strike Fighter program arose.  The delays are a result of software requirements for the previously announced initial operating capability plans and weapons integration concerns of inaccuracy.  More specifically, the helmet-mounted display system and software regression testing are expected to result in an eight-month delay while weapons integration will push the timeline out by more than a year.

Big Movers

Intevac Inc. (Up 12.5%) – Shares were up this week after the Company’s ENERGi ion implantation production system was qualified by a Tier 1 solar company in Asia.  Intevac fulfilled an order to the Tier 1 solar company in the first quarter of 2013 and expects the customer to add incremental cell production capacity through 2014.

Comtech Telecommunications Corp.  (Up 7.3%) – Shares rose for the week after the Company received $3.6 million in orders for solid-state high-power amplifiers to a military integrator.  The orders will be used in satellite communications systems to provide voice, data, video, and internet connectivity for deployed military forces world-wide.

Relevant Transactions

Sensintel Inc. acquired BAE Systems Unmanned Aircraft Program business in order to expand the Company’s portfolio of offerings and quickly expand into new platforms and sensors.  Sensintel, an Arizona based startup invested in the unmanned industry, will continue to design and manufacture its original three unmanned aerial systems.  The terms of the deal were not disclosed.

Caltius Partners acquired SM&A, a provider of contract competition and program management services.  The Company was previously owned by Odyssey Investment Partners.  Caltius brought on Ajay Patel, SM&A’s former COO, as the company’s new CEO along with a new team of senior leaders to build upon SM&A’s 30 year history.  The terms of the deal were not disclosed.

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Industry Week in Review – June 28, 2013

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Army Chief General Ray Odierno announced on Tuesday an extensive plan to cut 12 brigade combat teams (“BCT”) from the active force by 2017.  This announcement has sparked heated debate amongst policymakers and throughout the military communities whose economies are centered on these installations.  The plan to reduce the number of BCTs from 45 to 33 outlines the Army’s strategy for reducing its force structure by nearly 80,000 soldiers over the next three and a half years.  The Army plans to preserve its overall combat force by keeping 95 of its 98 combat battalions and distributing the cuts amongst the brigades’ headquarters positions. Under the current plan, the cut will effect 15 Army installations in the continental United States.  However, brigades located in Alaska, Hawaii, and South Korea will be immune to this round of cuts in order to maintain a military and political focus in the Asia / Pacific region.  The Army will be left with 12 armored brigade combat teams, 14 infantry brigade combat teams, and seven Stryker brigade combat teams following the execution of these cuts.  Odierno expressed his concern that if sequestration continues beyond 2014 this reduction will likely be the first in a series of cuts that could require him to reduce another 100,000 active duty soldiers.  The Senate Armed Services Committee (“SASC”) Ranking Member Sen. James Inhofe, R-Okla., said, “We’ll do everything we can [in order to block the plan]. It’s the last step in disarming America.”  The Senate will debate the Army’s BCT reduction plan later this year.

Big Movers

Cohort PLC (Up 7.9%) – Shares were up for the week after the company announced that operating profit jumped 13% in the year ended April 30th.  CEO Andy Thomis’s statement indicating a shift in Cohort’s strategy towards growth-by-acquisition also spurred the stock’s rise.

Intevac Inc. (Up 10.6%) – Shares rose this week following the company’s announcement that it has successfully qualified the ENERi™ ion implant production system that was ordered and shipped in the first quarter of 2013 to a Tier 1 Asian solar company.  Intevac raised its second quarter revenue range from $14 – $16.5 million, to $16 – $16.5 million after the qualification, acceptance, and revenue recognition of the ENERGi™ ion implant system.

Relevant Transactions

Precision Castparts Corp. (“PCP”) agreed to acquire Permaswage SA, a designer and manufacturer of permanent fittings used in fluid conveyance systems for airframe applications.  The deal will strengthen PCP’s Airframe Products division with the addition of permanent fittings to its already strong separable fittings business.  PCP plans to acquire Permaswage in a $600 million, all-cash transaction that is expected to be immediately accretive to earnings.

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Industry Week in Review – June 21, 2013

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The Paris Air Show lived up to the industry’s high expectations in terms of optimism and new aircraft order activity.  At center stage this past week stood Airbus and Boeing, whose combined new aircraft orders exceeded 840 aircraft worth nearly $140 billion.

Both companies raked in new orders for high-profile new platforms.  Boeing gained over 100 orders for its new, stretched version of its 787 Dreamliner, the 787-10.  Airbus, meanwhile, generated buzz with the maiden flight of its new A350 widebody, which generated dozens of orders.  The strong order activity adds to already robust, long-term backlogs for both aerospace companies.  Defense order activity, and overall presence by prime contractors and suppliers, was subdued, with many companies sending smaller contingents to the show.

On the domestic front, concern over privacy issues intensified following the NSA leak by former contractor Edward Snowden as FBI Director Robert Mueller acknowledged that the FBI has used drones for surveillance operations inside the U.S. in a “very, very minimal way.”  He did not give any examples when drones could have been used, though this marks the first time an intelligence chief admitted to domestic drone surveillance operations.

Big Movers

TransDigm Group (up 9.2%) – shares were up for the week following their announced acquisition of the Electromechanical Actuation Division of GE Aviation, referenced below.

Bombardier Aerospace (down 8.3%) – shares fell for the Canadian manufacturer following the loss of a $2.5 billion rail contract to Siemens AG. Shares recouped lightly following the announcement of $1.8 billion in orders from the Paris Air Show, only to continue their gradual decline thereafter.

Relevant Transactions

TransDigm Group Inc. to acquire GE Aviation’s Electromechanical Actuation Division, a producer of electromechanical motion control systems, such as motors and control electronics, for the civil and military sectors, for about $150 million in cash. The division has revenues of approximately $80 million.

Subsystem Technologies, Inc. acquired Alapko, Incorporated, a provider of executive information integration and program support to the national security community.  The acquisition enables Subsystem Technologies to expand its defensible security strategies to address cyber-related issues while expanding its financial management offerings. Terms of the deal were not disclosed.

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Industry Week in Review – June 14, 2013

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Auguring an exciting week for the upcoming Paris Air Show, Airbus’s new A350 widebody aircraft made its maiden flight on Friday, June 14, more than two weeks ahead of schedule.  With the A350, Airbus is trying to avoid the costly delays and production issues that have plagued its competitor, the Boeing 787.

Over the past week, the DoD announced two major aircraft procurement awards.  The U.S. Navy awarded a multiyear aircraft contract for V-22 Ospreys to Bell Helicopter and Boeing worth $6.5 billion over five years.  The V-22 contract covers fiscal years 2013 through 2017 and will be used to purchase 99 aircraft, with an option of 22 more Ospreys.  Marine Corps Colonel Gregory Masiello believes that given the current fiscal situation, this award signals strong long-term confidence in the aircraft.  Additionally, Boeing signed a $4 billion contract with the U.S. Army for CH-47F Chinook Helicopters.  Under the contract, the U.S. Army will purchase 177 aircraft with an option of 38 additional helicopters.  This order will bring the Army’s total procurement of CH-47Fs close to its target of 464 aircraft.  The two multiyear aircraft contracts are expected to result in $1.8 billion in savings compared to individual aircraft purchases.

On Monday, Booz Allen Hamilton’s shares fell approximately 4.5% after the company confirmed Edward Snowden as an employee.  Snowden claims to be the source of the National Security Agency leak on data surveillance of phone and internet usage.  Shares continued declining as much as 8% as the story developed, but recovered slightly to end the week down 5.1%.

Big Movers

Intevac Inc. (Up 4.5%) – Shares rose for the week after the company received a $27 million contract from the U.S. Army for M611 night vision cameras that will be integrated into the Apache Helicopter’s Pilot Night Vision Sensor.

Kratos Defense and Security Solutions (Up 6.4%) – Shares were up for the week after the company announced $3 million in new contract awards.  Though details remain classified, the company stated that the products will support a modular data center and communications related to an undisclosed customer.

Relevant Transactions

Paramount Group acquired Advanced Technology and Engineering Company (Pty) Ltd., a provider of aeronautical engineering services including civilian and military systems integration, unmanned aircraft system development, and mission sensor innovation, in a bankruptcy sale.  The acquisition expands Paramount Group’s suite of aerospace, land, and maritime defense products and augments the company’s civilian market expertise.  Terms of the deal were not disclosed.

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June Cyber Intelligence Review

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The month of May featured several cybersecurity headlines, in addition to many M&A and venture capital (“VC”) transactions.  A confidential report prepared by the Defense Science Board  listed advanced weapon system designs,  such as those of the Patriot missile and Aegis ballistic missile, that have been compromised by Chinese cyberspies.  Amidst frequent and high-profile cyber breaches in both the government and private sector,  VCs  invested  about  $350 million into IT security deals in 1Q13, up 90%  over  1Q12[1]. On the Big Data front, President Obama signed an executive order that mandated all  legally-permissible  federal data be made publicly accessible in machine-readable format.

On the M&A front, Blue Coat Systems (a portfolio company of Thoma Bravo)  acquired Solera Networks, a provider of  security analytics and forensics  solutions;  Vista Equity Partners  purchased  publicly-traded Websense, a provider of web, email, and data security solutions, for  nearly  $1 billion; and  Haystax Technology acquired FlexPoint Technology, a provider of security services and cloud computing solutions. In VC funding news,  Digital Signal Corporation, a provider of 3D  long-range facial recognition solutions for government and commercial clients,  raised a $50 million Series D round to expand sales, distribution, and manufacturing.  AirWatch, a provider of  mobile security and mobility management solutions, raised  another $25 million to extend its Series A round  from  February 2013  to a total of $225  million.  Finally, Cloudant, a provider of  data hosting and analytics solutions, raised  a  $12 million Series B  round  to  support global expansion and grow support, service, and go-to-market strategies.

[1]GigaOM

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Industry Week in Review – May 31, 2013

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The Pentagon released its plans for initial operational capability (“IOC”) of the F-35 Joint Strike Fighter, adding to a string of positive developments for the program over the past several weeks.  According to Commandant Gen. James Amos, the Marine Corps plans to be the first potential customer of the F-35B variant, indicating that the Marines plan to achieve IOC in late 2015.  The IOC declaration will include ten F-35B aircraft, ten fully trained flight and maintenance crews, and sufficient spares for deployment, but the Marines expect the full squadron to consist of 16 aircraft.  The Marine Corps jets will rely on the 2B software package, which offers limited weapons carriage and is expected to be delivered in 2015.

Though initially expected to wait until the more expansive 3F software package is released, The Air Force also announced that it would declare IOC with the 2B package in December 2016.  The Air Force is expected to be the JSF’s largest customer, purchasing 1,763 F-35A variants, some of which will be sold to international program partners as well as Israel and Japan.  Whereas the Marine Corps and Air Force are accepting an incremental approach to the fighter jet’s capabilities roll-out, the Navy emphasized that in order to move forward with its F-35C variant, the jet will have to have the full range of capabilities to track, target, and engage in various contested environments.  Navy leadership announced that the service will wait for the 3F software package, estimated to be delivered in 2017, and will declare IOC in February 2019.

Big Movers

Aeroflex Holding Corp. (Up 6.5%) – shares were up for the week following the Company’s announcement of an amended credit agreement that will reduce annual interest expense by $7.3 million, or $0.05 per share.  The agreement also included other more favorable terms, including the elimination of a total leverage ratio covenant from the term loan portion of the facility.

EADS NV (Up 4.9%) – shares were up for the week after Air China and its subsidiary Shenzhen Airlines agreed to purchase 100 A320 aircraft from EADS subsidiary Airbus Co. for $8.9 billion.  Air China ordered 60 aircraft, to be delivered between 2014 and 2020, for $5.4 billion.  Shenzhen airlines ordered 40 aircraft, to be delivered between 2016 and 2020, for $3.5 billion.

Relevant Transactions

PAE agreed to acquire the Applied Technology Division from CSC in a $175 million cash transaction.  The division, which had FY2013 revenue of $760 million, provides aviation maintenance, base operations, test and training range support, and space range support services.  The acquisition introduces new military and space testing and training capabilities into PAE’s portfolio, and also expands the Company’s footprint within the DoD and NASA.

Astronics Corporation agreed to Acquire PECO Inc., a manufacturer of highly-engineered aircraft interior components and systems, for $136 million.  PECO projects 2013 revenue of $83 million, with EBITDA margins consistent with Astronics’ historical performance.  The acquisition expands Astronics’ capabilities, particularly within Passenger Service Units, which include cabin lighting, emergency oxygen, and other cabin systems.

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Industry Week in Review – May 24, 2013

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Over the past week, the Department of Defense (“DoD”) released an addendum to its initial budget request that incorporates updates to the Overseas Contingency Operations (“OCO”) request, which funds military operations in Afghanistan and other activities that primarily support Operation Enduring Freedom.  The amendment to the FY 2014 Presidential budget includes $79.4 billion for OCO support, a decline from the initial request’s placeholder of $88.0 billion.  Noted in the addendum, the President intends to draw down U.S. forces in Afghanistan to 34,000 by February 2014, a reduction in overall force of about 39%.  The President is also seeking to have all troops out of Afghanistan by December 2014 as the U.S. moves into a support role and Afghan forces take the lead.  To this end, OCO-funded activities in the addendum include training Afghan instructors, as well as sustaining and equipping a 352,000 person Afghan National Security Force.  Although the number of U.S. combat troops in Afghanistan will decline over 2014, military operations in support of the transition to full Afghan responsibility will “continue at a high pace” and certain costs such as Intelligence, Surveillance, and Reconnaissance will grow or remain flat.  Furthermore, increased spending is expected for transportation of ships and cargo containers of equipment back to home stations as well as the repair and replacement of equipment and munitions.

Big Movers

Booz Allen Hamilton (Up 12.9%) – Shares were up this week after the company announced that its fiscal fourth-quarter net income rose 8%, helped by lower compensation and infrastructure costs.  Revenue remained relatively flat at $1.55 billion, a 0.3% increase over the previous quarter.

OSI Systems, Inc. (Down 12.8%) – Shares are down this week after the company announced that it expects to receive a debarment notice from the Department of Homeland Security related to a long-running controversy with its airport scanner software.  In January of this year, the Transportation Security Administration ended its contract with Rapiscan, OSI’s security division, for its full-body scanner machines, which many complained were too revealing.

Relevant Transactions

Air Comm Corporation acquired Meggitt Addison, a manufacturer of air conditioning systems used by military and civil rotorcraft, as well as general aviation fixed wing aircraft.  The company, formerly known as Keith Products, also fabricates plastic parts and manufactures hose assemblies.  Terms of the deal were not disclosed.

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Industry Week in Review – May 17, 2013

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In an interview last week, Lockheed Martin CEO Marillyn Hewson expressed optimism about the F-35 Joint Strike Fighter, which has experienced numerous setbacks and budget overruns throughout its development.  According to Hewson, the international partners in the program, including Australia, Norway, and the Netherlands are reaffirming their support, and are increasingly likely to purchase the jets.  Australia recently decided to move forward with its planned procurement of 100 F-35s, and Lockheed officials believe that Singapore and South Korea are likely to do the same.  Additionally, Canada is currently assessing its planned purchase of 65 fighter jets, though the timing of its decision remains unclear.  Hewson highlighted the program’s recent achievements, such as the completed assembly of the 100th jet and the ongoing advanced test flights around the world, as demonstrations of the program’s momentum.

Pilot training on the F-35 also saw a milestone during the week, with the qualification of U.S. Air Force instructor pilots to perform aerial refueling.  This will allow aerial refueling to become part of the standard F-35 training syllabus, and will extend the range of training missions. The additional capability augments a number of training missions cleared in recent months for the F-35, including the use of its internal electro-optical targeting system and simulated weapons systems.

Big Movers

ViaSat (Up 21.6%) – shares were up for the week following a strong earnings announcement for fiscal 4Q13.  Revenue rose 28.34% year-over-year to $308.7 million, while EPS of $0.19 beat analyst estimates of $0.02.  Sales were up across segments, including Government Systems, which saw 37% higher product revenues and 48% higher service revenues than fiscal 4Q12.

Relevant Transactions

TransDigm agreed to acquire Arkwin Industries, a manufacturer of hydraulic and fuel system components for civil and military aircraft, for approximately $286 million.  The acquisition further expands TransDigm’s capabilities in aftermarket components and land based aero-derivative turbine engine components. Arkwin’s 2012 revenue was approximately $95 million in 2012, with 40% from aftermarket services.

The SI Organization acquired Applied Communication Sciences, a provider of cybersecurity, network communications, data analytics, and other critical infrastructure protection technologies to government agencies, power utilities, and commercial customers.  The acquisition augments the SI’s capabilities in niche technology areas and strengthens its relationships with key government clients.

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