Details emerged on Friday surrounding the DoD’s planned budget reprogramming request, which the department had said would be necessary to address funding shortfalls in certain accounts that came as a result of the continuing resolution (“CR”) and sequestration.  The majority of the reprogramming will be focused on the Army, which, according to the draft document, plans to request $1.34 billion in additional O&M funds and $3.6 billion more in OCO funds.  The Army plans to offset these increases by decreases in certain procurement programs.  At-risk programs include AH-64 Apache build and modernization, WIN-T battlefield communications, and the Joint IED Defeat Organization.  Additionally, the service proposed $730 million in savings by delaying Humvee recapitalizations and MRAP modifications.  Separately, the Air Force has requested a $1 billion addition to its O&M appropriation, funded through reductions of the F-15, C-130, C-135, unmanned systems, and missile and space procurement.

In further budget news, Senate Armed Services Committee (“SASC”) Chairman Senator Carl Levin and Ranking Member Senator James Inhofe have called on Secretary of Defense Chuck Hagel to deliver the Pentagon’s plan for how to enact mandated cuts.  The two Senators said that they saw little potential for Congress reaching a budget agreement that would void sequestration.  Given that neither the CR nor the President’s Budget Request incorporated the reductions, the SASC has requested that the Pentagon provide a detailed blueprint for their enactment by July 1, 2013.

Big Movers

Mercury Systems (Up 20.2%) – shares were up for the week following the company’s announcement of fiscal third quarter results, which beat analyst expectations.  Revenue and EPS were both down year-over year, at $54.1 million and $0.03, respectively.  However, both were an improvement over 2FQ13, which saw a net loss per share of $0.16.

NCI, Inc. (Up 10.5%) – shares were up for the week following first quarter results that exceeded management’s guidance and beat analyst expectations.  Revenue of $91.5 million decreased by 7.6% from 1Q12, however EPS of $0.15 increased from $0.12 in 1Q12.

Relevant Transactions

No relevant transactions for the week.

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Over the past week, the Federal Aviation Administration announced that it approved the 787’s redesigned battery system and is allowing the plane to return to service after the government’s three-month long grounding of the aircraft.  Airlines will get instructions over the next week on how to modify the planes, along with a final directive allowing 787s to fly.  The decision will allow the Dreamliner’s 8 current operators to restart flights over the next several weeks as batteries are replaced and pilots recertified.  The reworked battery includes increased insulation to contain overheating, a steel case to prevent the spreading of fire, and vent tube to direct any possible fumes outside the fuselage.  Boeing noted it expects that the 787 battery issue will have no significant impact to its 2013 financial guidance.

Big Movers

Anaren, Inc. (Up 18.1%) – Shares are up this week after the company announced that it had received a non-binding offer from Vintage Capital Management to acquire Anaren in a cash transaction for $23.00 per share.  The company’s Board of Directors announced it plans to consider all strategic alternatives and will review and evaluate the unsolicited offer with financial and legal advisors.

Textron Inc. (Down 11.6%) – Shares were down this week after the company announced that first quarter revenues were flat at $2.9 billion and income from continuing operations dropped 2.5% to $0.40 per share.  The company noted business jets were to blame for much of the weak performance.

Relevant Transactions

Prospect Partners acquired Velocity Aerospace Group, a provider of MRO services for commercial, corporate, regional, and helicopter airline carriers through repair stations in Florida and California.  Velocity Aerospace plans to add other providers of aviation MRO services to the platform.  Terms of the deal were not disclosed.

Bohemia Interactive Simulations acquired TerraSim, a provider of automated terrain generation software for use in interactive simulation systems for defense, emergency, and mission-critical customers.  The acquisition accelerates Bohemia’s technical capabilities and will help the company expand to new markets.  Terms of the deal were not disclosed.

Haystax Technology acquired Digital Sandbox, a provider of threat and risk analysis, and monitoring software in the National Security and Homeland Security markets.  The acquisition extends Haystax Technology’s capabilities and products in public safety, law enforcement, and corporate security markets.  Terms of the deal were not disclosed.

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Tensions on the Korean peninsula escalated over the last week as North Korea continued to make aggressive statements regarding attacks on U.S. bases in the Pacific, as well as against South Korea and Japan.  Following the U.S. and South Korea’s military exercises in which the U.S. publically flew two B-2 Bombers over the peninsula, North Korea responded with heightened rhetoric against the two countries.  In response to the escalated tensions and in an effort to ease pressure on Seoul, the U.S. deployed a missile destroyer off the Korean shore.  The Pentagon also announced on Wednesday that it would deploy an advanced missile defense system called the Terminal High-Altitude Area Defense (“THAAD”) battery, developed by Lockheed Martin, to Guam.  That same day, North Korea blocked access to the Kaesong Industrial Complex, a jointly run industrial park located in North Korea where South Korean companies employ northern workers.  The blockade continued through Friday, when the zone was closed for a national holiday.  On Thursday, North Korea reportedly moved a medium-range rocket to its eastern coast, and on Friday, the regime began notifying several embassies in Pyongyang that they should withdraw their delegations lest tensions escalate further.  According to several statements made by such embassies, the warnings were being viewed as a tactic to keep tensions high, rather than a threat that violence was imminent.

Big Movers

Innovative Solutions & Support, Inc. (Up 42.4%) – shares were up for the week after the Company received a major contract award from Delta Airlines for NextGen Flat Panel Display System and Flight Management System upgrades to the MD-88 and MD-99 aircraft fleet.  The $60+ million order includes complete systems integration, dual GPS navigation, and cockpit avionics, which will enable the Delta MD fleet to fly shorter flight paths and reduce fuel consumption.

Relevant Transactions

MidOcean Partners acquired Noranco, Inc., a provider of machined and sheet metal components, kits, and assemblies for landing gear, aero structure, and aero engine applications, for an undisclosed amount.  The acquisition provides MidOcean with a leading platform in precision-machined aerospace components, upon which it plans to expand by helping Noranco add new capabilities, customers, and supported platforms.

Elgin Fastener Group acquired Vegas Fastener Manufacturing, a manufacturer of hot-forged bolts, nuts, and specialized parts for military shipbuilding, power generation, and industrial applications.  The acquisition is the fifth add-on for Elgin since it was acquired by the Audax Group.

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On Thursday, the House of Representatives passed a $982 billion Continuing Resolution (“CR”), which the Senate had passed just eighteen hours earlier, on Wednesday afternoon.  Following comments earlier in the month from the Administration that it would accept a CR that resembles 2012 spending, the President is expected to sign the bill before the current CR expires on Wednesday, averting a potential government shutdown.  In response to the legislation’s passage, the Department of Defense announced that it will be delaying roughly 800,000 furlough notices that it had planned on issuing over the next week.  Acting undersecretary of Defense for personnel and readiness, Jessica Wright, noted in an email that despite still facing sequestration, the added flexibility under the CR may have an effect on the overall number of furlough days.  Thus, the Pentagon plans to use the delay to further analyze the impact of the CR and the roughly $10.4 billion in additional Operations & Maintenance funds that it affords the department.

Big Movers

Kratos Defense & Security Solutions (Up 12.5%) – shares were up for the week after the Company’s subsidiary SAT Corporation was awarded a multi-million dollar contract to provide satellite interference detection and quality of service monitoring solutions.  As part of the contract, SAT will deploy its proprietary satellite monitoring product, Monics®.  Additionally, the Company announced the launch of a new precision channel simulation product, the satID® GeoSim Geolocation Simulator, which is a geolocation training and test system that enables commercial and military satellite operators to protect the performance and function of critical SATCOM links.

Federal Signal Corp. (Up 10.6%) – shares were up for the week following the Company’s announcement of fourth quarter 2012 results.  Net income for the quarter was $4.8 million or $0.08 a share, compared to a loss of $15.2 million or $0.25 a share in 4Q11.  Revenue grew 12% to $217.7 million for the year.

Relevant Transactions

Resilience Capital Partners acquired a majority interest in Aerospace Products International, a provider of aviation parts, equipment, and supply chain management services that increase product availability, minimize time-to-delivery, and reduce process and working capital costs.  The acquisition expands RCP’s presence in the aviation services industry, and will enable API to offer its services to a wider range of commercial and government customers.

Greenbriar Equity Group to acquire EDAC Technologies Corp., a designer, manufacturer, and servicer of precision components for aerospace and industrial applications, for $17.75 a share.  The implied enterprise value of $141.1 million represents an LTM revenue multiple of 1.33x and an LTM EBITDA multiple 10.3x.  EDAC expects the transaction, which is subject to shareholder and regulatory approval, to close in the second quarter of 2013.

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On Wednesday, the House of Representatives passed a $982 billion continuing resolution (“CR”) that would avoid a government shut down on March 27^th, funding the government through the end of the fiscal year on September 30^th.  The CR includes a $518.1 billion defense appropriations bill, equal to 2012 defense appropriations, as well as $87.2 billion in OCO funding. 

While these funding levels would be subject to sequestration, the bill does offer agencies increased flexibility in administering cuts, especially in Operations & Maintenance (“O&M”) accounts, by shifting funds around.  The bill moves $10.4 billion into O&M accounts from R&D and procurement accounts, for example.  The bill is likely to face steep opposition in the Senate, which is expected to vote on its version next week.  Before its passage, the White House had indicated that it would not veto a CR that reflects previous fiscal legislation, suggesting that if this version is approved in the Senate, President Obama would sign the legislation.

Big Movers

Ducommun (up 11.0%) – shares were up for the week following the Company’s announcement of fourth quarter and full year 2012 financial results.  Revenue for the quarter was $193.9 million, up from $188.2 million in 4Q11, while EPS was $0.32, up from a loss per share of ($4.60) in 4Q11.  For the year, revenue grew to $747.0 million from $580.9 million in 2011, and EPS grew to $1.55 from a loss per share of ($4.52) in 2011.

AeroVironment (down 13.7%) – shares were down for the week after the Company announced fiscal third quarter financial results that, according to CEO Tim Conver, “fell well short of our plans due to delays in government procurements expected during the quarter.”  Revenue for the quarter was $47.1 million, down from $72.0 million last year, while EPS for the quarter was $0.17, down from $0.26 a year earlier.

Relevant Transactions

RBC Bearings acquired Western Precision Aero, a manufacturer of CNC machined components and assemblies for aerospace and military applications, for $2.6 million.  The transaction, which represented a 2012 Revenue multiple of 0.52x, expands RBC’s product portfolio in the aerospace market.

MacAulay-Brown has acquired the Secure Computing & Communications division of Luna Innovations, for $6.7 million.  The acquisition expands MacB’s capabilities and footprint in critical sectors of the Intelligence Community, Department of Defense, and Homeland Security.

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