Over the past week, U.S. Congress did not reach a deal on the sweeping Federal spending cuts known as sequestration.  The $85 billion in spending cuts will target everything, from defense to education (but leave major drivers of debt such as Medicare and Medicaid untouched), over the next decade.  Within the coming days, the White House is expected to alert agencies that their budgets have been cut, while agencies are expected to notify employees, contractors, and states that spending will contract for at least the next seven months.  Attention turns to another budget deadline on March 27^th, when the Continuing Resolution is set to expire and a partial government shutdown is possible.  The question still remains if political leaders will reach a comprehensive deficit-cutting deal that solves the nation’s long-term debt problems.

The Senate confirmed Senator Chuck Hagel as U.S. Defense Secretary after escaping a filibuster from the Republican Party.  The 58-to-41 vote was the smallest margin for a defense secretary since the creation of the position in 1947.  Hagel was also the only nominee for the position to face a filibuster.  In his first address as defense secretary, Hagel addressed the Pentagon’s budgetary concerns in the coming years and the need to protect the Department of Defense’s workforce.   Hagel will succeed Defense Secretary Leon Panetta and join Obama’s retooled national security team.

Big Movers

CPI Aerostructures (Down 11.1%) – shares were down after the Company announced preliminary, unaudited 2012 revenue of approximately $89.6 million and EPS of about $1.42.  Analysts were expecting revenue of $92.4 million and EPS of $1.47.  CPI will announce audited 2012 results on March 12^th.

NCI (Down 11.5%) – shares were down after the Company reported 2012 EPS excluding impairment charges of $0.51 on revenue of $368.4 million, down from 2011 EPS excluding impairment charges of $1.09 on $558.3 million of revenue.  NCI also issued guidance for 2013 of revenue between $280 and $320 million and EPS between $0.14 and $0.26.

Relevant Transactions

The Boeing Company acquired the Acalis Business of CPU Technology, Inc., a provider of firmware used to detect and protect against cyber-attacks for any platform on which it is integrated.  Specifically, the firmware is used in the Joint Strike Fighter, but can be added to a host of applications.  Terms of the deal were not disclosed.

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On Tuesday Italian authorities arrested Finmeccanica CEO Giuseppe Orsi for possible engagement in corrupt activities.  Prosecutor Eugenio Fusco noted that Mr. Orsi and Bruno Spagnolini, CEO of helicopter unit AgustaWestland, had been under investigation for several months for whether or not AgustaWestland paid bribes in order to secure a $750 million sale of 12 helicopters to the Indian government.  The arrest comes after several legal issues for the Italian defense contractor, as other prosecutors have been investigating alleged corrupt activities in the Company’s Latin American, Asian, and domestic operations.  The Company announced on Thursday that Alessandro Pansa would replace Orsi as CEO and COO, with Admiral Guido Venturoni becoming vice-chairman of the group.

In Washington, the Senate delayed Defense Secretary Nominee Chuck Hagel’s confirmation vote after failing to garner the 60 votes required to overcome a Republican filibuster.  Senate Republicans have been demanding additional information from both the White House and from Mr. Hagel, and refused to allow a vote on his nomination before receiving sufficient time to review the requested information.  The Senate is expected to hold a vote closing the debate immediately after the upcoming recess, at which point the chamber will be able to hold a vote on the nomination.

Big Movers

Ultralife Corp. (Up 15.7%) – shares were up for the week following the release of 4Q12 earnings.  The Company announced EPS of $0.12 for the quarter, beating consensus estimates of $0.04, while revenues of $29.3 million for the quarter beat estimates of $27.5 million.

GenCorp Inc. (Up 9.7%) – shares were up for the week after the company released earnings for its fiscal fourth quarter ended November 2012.  The Company earned $2.8 million on sales of $298.2 million for the quarter, up from earnings of $500,000 on sales of $252.2 million in fiscal 4Q11.

Finmeccanica SpA (Down 16.3%) – shares were down for the week following the arrest of CEO Giuseppe Orsi on suspicion of corrupt activities, described above.

Relevant Transactions

Chicago Bridge & Iron completed its $3.1 billion purchase of The Shaw Group, which was initially announced in July 2012. The boards of both companies had approved the deal in December.  According to CB&I President Phillip Asherman, the transaction expands the Company’s capabilities and expertise, enabling it to address energy infrastructure needs around the globe.

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This past Thursday, Senator Chuck Hagel endured a peppering of questions during his confirmation hearing before the Senate Armed Services Committee (“SASC”).  Republican panel members questioned Hagel’s past judgment on issues such as the nation’s alliance with Israel, Iran’s nuclear program, troop levels after 2014, and the 2007 troop “surge” in Iraq. 

In one of the more stimulating moments of the hearing, Sen. John McCain grilled Hagel on his opposition to the surge and refusal to stand by his previous comments.  McCain: “I would like you to answer whether you were right or wrong, and then you are free to elaborate.” Hagel: “I’m not going to give you a yes or no answer on a lot of things today.”  McCain further questioned Hagel on his opinion of the nation’s involvement in Syria, and whether or not the U.S. should be more engaged.  Hagel refused to take a clear stance on Syria and several other issues; however, he often sided with the judgment of the President.  

Further blows came from Republican panel members Sen. Lindsey Graham and Sen. Ted Cruz who questioned Hagel’s statements from an interview in 2006 in which he called pro-Israeli groups the “Jewish lobby” as well as comments he made on Al-Jazeera television network in which he agreed that Israel has committed war crimes in the past.  The SASC requires Hagel submit further information requested by panel members and plans on voting on his nomination as early as February 7^th.

The Senate kept busy on Thursday by passing a bill to extend the U.S. borrowing authority until mid-May.  The Senate approved the bill 64 – 34, and sent it to the White House later in the afternoon for approval.  Congress plans to focus its attention on the threat of sequestration which is set to begin on March 1^st.

Big Movers

Unisys Corporation (Up 22.1%) – Shares are up this week after the company announced 4Q12 earnings per share of $1.67, beating consensus estimates by $0.74.  The company attributed its success to a strong performance in its technology business and increased margins in its services business.

Mercury Systems, Inc. (Down 6.9%) – Shares are down this week after the company announced fiscal year 2Q13 financial results that were below analyst expectations.  Revenues for the quarter were $49.8 million, a decrease of $18.2 million from the same period last year.  The company attributed the slowdown to the potential for sequestration and continued uncertainty within Congress.

Relevant Transactions

Goldner Hawn Johnson & Morrison acquired Universal Turbine Parts, a provider of turboprop aircraft engine products and related services to maintenance, repair, and overhaul facilities, fleet operators, and engine parts dealers.  Terms of the deal were not disclosed.

DC Capital Partners acquired Computer Security Solutions, a provider of technology solutions for the intelligence community (“IC”).  The acquisition expands DC Capital’s portfolio of companies that focus on the IC, including Catapult Technology, Kaseman, and Strategic Intelligence Group.  Terms of the deal were not disclosed.

Dynamic Precision Group acquired Paradigm Precision Holdings, a provider of precision machined aerospace engine components.  The acquisition expands Dynamic Precision Group’s global footprint and supports the company’s strategy to deliver complex engine components to its customer base.  Terms of the deal were not disclosed.

Consolidated Aerospace Manufacturing acquired Aerofit, a provider of high and low pressure fluid fittings and fitting systems for the aerospace industry.  The acquisition expands Consolidated Aerospace’s product offerings as well as its customer base across commercial and military aircraft platforms.  Terms of the deal were not disclosed.

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Over the past week, President Obama announced he would attempt to speed troop withdrawals from Afghanistan in an effort to accelerate the end of the war.  The President made the announcement following his meeting with Afghan President Hamid Karzai, noting the shift in troop levels was possible due to advancements made in training Afghan security forces and the overall success of U.S. troops. 

The role of U.S. Forces would alter to one of training and advisory of Afghan forces while still conducting counterterrorism operations.  “That is a very limited mission, and it is not one that would require the same kind of footprint, obviously, that we’ve had over the last 10 years in Afghanistan,” Obama noted of the effort.  U.S. officials claim the number of troops remaining in Afghanistan by 2014 could be as low as 3,000 – 9,000, while General John Allen, the top U.S. and NATO commander in Afghanistan, had initially suggested that as many as 15,000 should remain.

Big Movers

Smith & Wesson Holding Corporation (Up 8.3%) – Shares are up this week following a speech by President Obama in which he addressed tightening gun limitations.  Governor Cuomo of New York passed the Secure Ammunition and Firearms Enforcement Act late on Monday night which expands the definition of banned assault weapons, creates a state database for pistol permits, reduces the maximum number of rounds in a magazine, and requires background checks on all gun sales, including those between individuals.  Several other firearm manufacturers had strong gains over the week.

Relevant Transactions

Cubic Corporation to acquire PS Management Consultants, a provider of specialist engineering and project management services for Australian Defense Forces’ training, simulation, communications, and range safety programs.  The acquisition enhances Cubic’s training and simulation capabilities while expanding the company’s footprint abroad.  Terms of the deal were not disclosed.

The Atlas Group, a portfolio company of Graham Partners, acquired Brenner Aerostructures, a company that specializes in the bonding of metals, anodizing of phosphoric acids, and stretch-forming for the aerospace industry.  The acquisition brings historically outsourced, specialty manufacturing capabilities in-house.  The company anticipates that the new capabilities will allow Atlas to win new business.  Terms of the deal were not disclosed.

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Last weekend President Obama nominated Senator John Kerry (D-Mass.) for the position of Secretary of State in the Administration’s second term.  Mr. Kerry has served as chairman of the Foreign Relations Committee since 2009, and has worked in Pakistan helping to calm concerns after the raid that killed Osama bin Laden, and in Afghanistan helping to build the electoral process. 

During the press conference, the President highlighted the increasingly close relationship between the State Department and the DoD, pointing to the coming transition in Afghanistan, which Obama noted will require an increased role for the Department of State.

Despite downward pressure in the last weeks due to ongoing fiscal cliff concerns, the market has had a relatively strong 2012, with the S&P 500 returning 9.8% for the year.  Aerospace shares have outperformed, returning 15.2%, bolstered by a positive commercial aerospace delivery outlook and healthier expectations for aftermarket suppliers.  Defense Primes, while trailing the broader market, have still returned 8.6% for the year, driven in large part by strong earnings reports and operational adjustments to the uncertain contracting environment experienced throughout the year.

Big Movers

Magellan Aerospace (Up 6.2%) – Shares were up for the week following the company’s announcement that it has amended its operating credit agreement with its existing lenders and has extended its subordinated loan financing with Edco Capital Corporation.

Relevant Transactions

Woodward to acquire GE Hydraulic TRAS Business, a manufacturer of hydraulic thrust reverser actuation systems for commercial aerospace platforms, for $200 million.  The acquisition, which will be integrated into the Aerospace business segment, expands Woodward’s motion control technologies and platforms.

General Dynamics acquired Applied Physical Sciences Corp., a provider of engineering and prototyping services in the fields of signal processing, marine hydrodynamics, and electromagnetics, for an undisclosed amount.  The acquisition enhances the GD Electric Boat business’ rapid-prototyping capabilities.

Cessna, a Textron Company, to acquire Jet Aviation Management’s Dusseldorf and Zurich MRO Operations, providers of MRO, refurbishment, customization, and line maintenance services for commercial aircraft, for an undisclosed amount.  The acquisition expands Cessna’s service presence in Europe, particularly in Germany and Switzerland where a majority of the Company’s Citation aircraft in the region are based.

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