Industry Week in Review – December 14, 2012

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Over the past week, North Korea demonstrated long-range rocket capabilities—violating United Nations (“U.N.”) Security Council resolutions—by sending a scientific satellite into orbit.  The successful launch has triggered international uproar as it brings the nation closer to completing a comprehensive nuclear weapons system that can deliver a long-range nuclear warhead.  Leader Kim Jong-Un’s decision to defy international order has placed China, the nation’s major trade partner and ally, in an awkward position.  Chinese Foreign Ministry spokesman Hong Lei noted “China has always insisted on bringing peace and stability to the Korean Peninsula through multilateral dialogue.  We hope relevant parties stay calm in order to maintain peace and stability on the Korean Peninsula.”  Ultimately, China will play a major role in U.N. efforts to impede North Korea’s development of longer-range ballistic missiles.

Big Movers

Ducommun Inc. (Up 7.3%) – Shares are up this week after the company announced that it has received a contract from Boeing to produce titanium detail components and subassemblies for the Boeing 787 Dreamliner.  The company also announced $15 million in follow-on contracts from Raytheon to continue producing a variety of interconnect and electronic assemblies for the U.S. Navy’s Tomahawk cruise missile.

LMI Aerospace Inc. (Up 7.0%) – Shares are up this week following the company’s acquisition of Valeant Aerostructures last week for $246 million.  Shareholders were initially concerned with a lack of annual synergy targets; however, the deal is expected to be highly accretive to 2014 earnings.

Relevant Transactions

Exelis to acquire C4i Pty. Ltd., an Australian-based provider of advanced communications software used in air traffic management systems and mobile communications solutions for commercial, homeland security, and defense systems for approximately USD $16.8 million.  The acquisition expands Exelis’ critical infrastructure solutions and builds on its presence in Australia.

RTI International to acquire MPR Associates Inc., a research and consulting firm that works in K-12 through adult education.  The acquisition bolsters the company’s research capabilities.  Terms of the deal were not disclosed.

Zodiac Aerospace to acquire Northwest Aerospace Technologies (“NAT”), a provider of engineering services and cabin retrofit program management services to airlines.  The acquisition of NAT will allow Zodiac Aerospace to strengthen its presence in the cabin retrofit market.  Terms of the deal were not disclosed.

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Industry Week in Review – December 7, 2012

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As Congress and the Administration continue to negotiate a budget deal, on December 4 the Senate passed a bill authorizing the Pentagon to spend $650 billion in GFY13, which includes $525.3 billion in baseline funding with an additional $88.5 in OCO funding.  While the bill does not address the impending cuts under sequestration, it provides insight into the makeup of spending for weapons systems in the event a compromise is reached.

The bill largely supports the weapons systems plans set forth in the Administration’s request, including $5.9 billion for the F-35 fighter program, $60 billion for the Navy’s F-18 fighter program, $1.3 billion  for the Army to buy UH-60 Black Hawk helicopters, $639.9 million to develop the Army’s Ground Combat Vehicle, and various other authorizations. 

However, the bill also scales back some of the Administration’s proposals, including placing restrictions on the development of modules for the Navy’s Littoral Combat Ship Fleet and “fencing” funds for a second Ford-class aircraft carrier pending the delivery of additional data from the Navy.  The bill will now move through a House-Senate conference committee before advancing to the President’s desk.

In other news, TransDigm’s agreement to acquire the Goodrich Pump and Engine Control Systems business, announced on October 25th, has been terminated after the Department of Justice objected to the deal.  Under a consent agreement between Goodrich owner United Technologies and the DoJ, the transaction required the Department’s approval, and the decision was in the DoJ’s sole discretion.

Big Movers

EADS (Up 14.5%) – Shares were up for the week following the company’s announcement of a proposed new shareholder agreement that caps sovereign ownership of the firm by France, Germany, and Spain at 12%, 12%, and 4%, respectively.  The firm also announced plans for a set of governance rules that seek to limit the influence these governments will have over the company’s decisions.

Relevant Transactions

LMI Aerospace to acquire Valent Aerostructures, a manufacturer of complex structural components, major sub-assemblies, and machined parts for OEM and Tier 1 airframe manufacturers, for $246.7 million, which LMI has indicated represents an EV/EBITDA multiple of ~8.6x, adjusted for tax benefits from the transaction.  The acquisition expands LMI’s capabilities on key platforms, including the “highly-desirable” Boeing 737 platform, and will enable the Company to compete for larger and more complex projects.  According to its filings, LMI is expected to generate over $480 million in revenue and over $80 million in EBITDA in 2013P on a combined basis.

Insight Equity acquired Micross Components, a manufacturer of specialty semiconductor products for UAV guidance systems and other defense and industrial applications, from Vance Street Capital for an undisclosed amount.  The acquisition represents an investment in an “important and growing industry niche” and will enable Micross to expand its product offerings.

SRA International to acquire MorganFranklin National Security Business, a provider of C4ISR, cybersecurity, and continuity of operations services, for an undisclosed amount.  The transaction expands SRA’s capabilities in a number of specialized technical and functional domains.

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Industry Week in Review – November 30, 2012

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Over the past week, the Obama administration noted it would be willing to keep roughly 10,000 U.S. troops in Afghanistan post formal combat in 2014.  Earlier this month, Gen. John Allen, commander of U.S. and international forces in Afghanistan as well as commander of International Security Assistance Force (“ISAF”) nominee, Marine Gen. Joseph Dunford Jr., recommended keeping troops in Afghanistan post the administration’s December 2014 deadline.  Specifically, Gen. Allen recommended maintaining a force between 6,000 and 15,000 U.S. troops to conduct training and counterterrorism operations.  The size of the training, advisory, and counterterrorism force is currently under negotiations with Afghan President Hamid Karzai.  Many consulting firms argue that a residual force of at least 30,000 troops would be needed to be effective.

Honeywell claimed it is readying itself for the bulk of sequestration cuts to occur, planning for 80% of the Jan. 2nd cuts to take place.  “We recognize these cuts are going to happen,” said Mike Madsen, president of Honeywell’s defense and space unit. “We’re not really fighting these—they need to occur.”  The company has even gone so far as incorporating sequestration in its public planning.

Big Movers

Bombardier Inc. (Up 13.8%) – Shares were up this week after the company announced it made the biggest sale of business aircraft in its history worth potentially up to $7.8 billion.  VistaJet, a private European company that provides luxury chartered flights, has placed firm orders for 56 Bombardier Global jets valued at $3.1 billion and acquired options for a further 86 Global jets.  Steve Ridolfi, the president of Bombardier Business Aircraft, says this is a historic order for Bombardier.

Select Relevant Transactions

KEYW Corporation acquired Rsignia, Inc., a provider of advanced cybersecurity solutions to industry and government customers, in an asset purchase.  The acquisition enhances KEYW’s Cyber Awareness and Response platform, “Project G” by providing the company with a scalable solution for monitoring and mitigating malicious internet packet activity, network monitoring and analysis, and forensics analysis.  Terms of the deal were not disclosed.

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Industry Week in Review – November 16, 2012

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Over the past week, Marine Gen. Joseph F. Dunford Jr. testified before the Senate Armed Services Committee during a nomination hearing to be the next commander of the International Security Assistance Force (“ISAF”).  As the top American military official in Afghanistan, Dunford noted U.S. Forces will likely remain in the country past the Obama administration’s December 2014 deadline.  Dunford also noted the top priorities during this time would be training and advising indigenous forces, supporting civilian Afghan agencies, and strengthening counterterrorism operations.

Big Movers

OSI Systems, Inc. (Down 17.8%) – Shares are down this week after the House Transportation Security Subcommittee claimed in a letter to the Transportation Security Administration that OSI “may have attempted to defraud the government by knowingly manipulating an operational test.”  The Company has responded by saying it could not have manipulated testing since the processes was entirely controlled by the government.

Woodward, Inc. (Up 7.1%) – Shares are up this week after the company reported net income above consensus estimates for the company’s fiscal fourth quarter.  Revenue rose to $528.7 million, an 8.1% increase over the same period last year.

Select Relevant Transactions

PricewaterhouseCoopers (“PWC”) acquired Ray Group International, provider of highly-technical IT solutions and professional services throughout the Department of Veterans Affairs (“VA”).  The acquisition expands PWC’s legacy business advisory presence within VA and uniquely position the newly combined entity as a leader in Health IT services across VA and throughout the federal government.  KippsDeSanto acted as financial advisor to Ray Group International.

CACI International to acquire Emergint Technologies, a provider of emerging technology solutions focused on data-driven needs of national health organizations.  The acquisition builds on CACI’s healthcare IT capability and expands its presence in the growing healthcare IT market.  Emergint expects to have 2012 revenue of approximately $42 million.  KippsDeSanto acted as financial advisor to Emergint Technologies.

Lockheed Martin acquired Chandler/May, a company that specializes in the design, development, integration, manufacturing, and support of fully-integrated mission-critical systems for unmanned aerial systems and C4ISR missions.  The acquisition expands Lockheed’s offerings in support of its customers’ increased emphasis on these mission areas.  Terms of the deal were not disclosed.

TWD & Associates acquired The Engle Group, a provider of IT services, solutions, and support to the federal government.  The acquisition expands TWD’s capabilities in IT service management, cloud computing, application development, and security, as well as data and organizational change management.  Terms of the deal were not disclosed.

Salient Federal Solutions acquired LIST Innovative Solutions, a provider of information technology, engineering, and intelligence analytic services to agencies in the intelligence, defense, homeland security, cybersecurity, and federal civilian markets.  The acquisition expands Salient’s prime federal software / application development contracts to over 90% of its contracts base.  Terms of the deal were not disclosed.

Westat acquired Geostats Services, a research and technology company with expertise in advanced technologies for the collection, analysis, and presentation of geospatial mobility and physical activity data.  The acquisition helps Westat further expand its research offerings.  Terms of the deal were not disclosed.

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Industry Week in Review – November 09, 2012

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President Obama was re-elected to a second term on Tuesday, providing some insight into the future of defense spending while leaving concerns over budgetary issues intact.  At a base line, defense spending under the Obama Administration will likely decline, though not to drastic levels.  The President’s 2012 – 2017 defense spending proposal had called for relatively flat defense spending, with a slight decline at a (0.9%) CAGR over the five years. 

However, concerns over the near-term effects of the “fiscal cliff” persist.  The Administration and Congress have until the end of the year to come to a budget agreement in order to avoid automatic, across-the-board cuts under sequestration.  Given the lame duck session and the split Congress, reaching an agreement is far from certain, and both the DoD and the defense industry are preparing for the potential reductions in spending.  In a speech on November 5th, DoD acquisition chief Frank Kendall announced that the Pentagon had begun planning for sequestration.  However, leaders from both parties have indicated that the “fiscal cliff” negotiations are a priority and that both sides are open to a compromise.

In other news, the defense sector saw two major resignations on Friday, with CIA Director David Petraeus and incoming Lockheed Martin CEO Chris Kubasik both announcing they would leave their posts that afternoon.  Petraeus resigned in the wake of an extramarital affair.  Kubasik, who was slated to take over the defense contractor from current CEO Bob Stevens, was ousted following an investigation that determined his “close personal relationship” with a subordinate was against the company’s code of ethics.  The company announced that Marillyn Hewson will be taking over as CEO on January 1.

Big Movers

Computer Sciences Corporation (Up 13.2%) – Shares were up for the week after the company announced earnings and issued updated FY13 guidance on Tuesday.  It reported $0.58 EPS for the quarter, beating analyst expectations of $0.49.  CSC provided FY13 EPS guidance of $2.30 – $2.50 per share, compared to consensus estimates of $2.29.

Chemring Group Plc (Down 12.9%) – Shares were down for the week following Carlyle’s announcement that it will not be submitting an offer for the company.  The negotiations, originally announced on August 17th and extended twice, were overshadowed by a series of profit warnings issued by Chemring as well as a management shakeup late last month.

Kratos Defense & Security Solutions (Down 17.3%) – Shares were down for the week following the company’s earnings announcement on Thursday, which met EPS estimates of $0.18, but fell short of Net Income from Continuing Operations estimates of a $2.9m loss with an announced loss of $4.4m.

Relevant Transactions

Thales Group has agreed to acquire Gentex Visionix, a provider of helmet mounted displays and motion tracking systems for defense and aerospace applications, for an undisclosed amount.  The acquisition gives Thales the ability to offer highly capable HMD technology within the market, enhancing its ability to support warfighters with increased situational awareness.

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Industry Week in Review – November 2, 2012

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Over the past week, the Department of Defense (“DoD”) has continued to support Federal Emergency Management Agency (“FEMA”) and other federal partners including U.S. Northern Command and the National Guard to relieve the effects of Hurricane Sandy.  As of Tuesday morning, there were approximately 7,400 National Guard members mobilized in 11 states.  Assistance included evacuation shelters, route clearance, search and rescue and delivery of essential equipment and supplies.  Twelve states and the District of Columbia declared a state of emergency due to the significant flooding and extensive power outages.

In other news, James Clapper, Director of National Intelligence, released a statement on Tuesday noting the FY2012 National Intelligence Programs budget is $53.9 billion, a 1% decrease from the previous year.  Earlier this year, Clapper announced the budget for FY2013 would drop further to $52.6 billion, an additional 2.4% decline.  Separately, the DoD stated the Military Intelligence Program FY2012 budget is $21.5 billion, a roughly 11% decrease over the previous year.

Big Movers

EDAC Technologies (Up 11.1%) – Shares were up this week after the company released strong 3Q12 results including record sales of $27.5 million.  The company reported EPS of $0.29, a 53% increase over 3Q11.

Intevac Inc. (Down 7.3%) – Shares were down this week after the company reported poor 3Q12 results including a net loss of $8.0 million and a $3.0 million bad debt write-off equivalent to $0.08 per share.  President and CEO Kevin Fairbairn noted “As expected, our Equipment business had a challenging quarter driven principally by the difficult economic environment and moderated demand for hard drives.”

Relevant Transactions

Creative Computing Solutions (“CCSi”) acquired a privately held company’s Military Health Solutions division, which held a prime contract position on MHS TRICARE Evaluation, Analysis, and Management Support (“TEAMS”) IDIQ vehicle.  The acquisition expands CCSi’s support to include Health Insurance Portability and Accountability Act (“HIPAA”) Electronic Standards Program Coordination and Analysis, adding to its current work on the Defense Centers of Excellence (“DCoE”) Program Management, Clinical and Program Policy, and Defense Health Board Support.

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Industry Week in Review – October 26, 2012

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Doubts were cast on the potential Carlyle acquisition of Chemring this week after the British defense contractor announced that Chief Executive David Price would step down immediately, with former John Wood Group Plc executive Mark Papworth taking the helm on November 5.  Some analysts have pointed to this sudden transition as a sign that the deal is collapsing, citing the odd timing of a leadership switch just before a potential transaction.

Like many defense firms, Chemring has faced declining budgets in the United States and Europe, resulting in a declining order book and lower profitability.  This led to the company issuing a profit warning in August, just two weeks after it received an expression of interest from Carlyle.  In a statement, Chemring touted Papworth’s achievements at Wood Group, citing the successful turnaround of the company and “substantial improvements in profitability.”  A company spokeswoman has indicated that this decision reflects the board’s position that a leadership changes strengthens the company’s position.  Carlyle has until November 9 to decide whether it will bid or not.

Big Movers

TASER International Inc. (Up 26.5%) – Shares are up this week after the company announced 3Q12 net sales of $28.7 million, an increase of $4.4 million or 18% compared to 3Q11.  The increase in sales versus the prior year was primarily driven by the extended upgrade program for the TASER® X2™ Electronic Control Device.

Spirit AeroSystems Holdings, Inc. (Down 34.2%) – Shares were down this week after the company announced forward loss charges of $590 million for several programs including the 787, G650 Wing, and G280 among others.  To address the charges in the quarter, the company successfully obtained the required lender consent to amend its senior secured loan and credit facility to adjust the senior secured leverage ratio through the first quarter of 2013 and the other financial covenant ratios through the second quarter of 2013.

Relevant Transactions

The Boeing Company acquired Miro Technologies, a provider of enterprise software solutions to manage maintenance, supply, repair, and performance based logistics for assets operating in air, space, sea, and ground environments.  The acquisition provides Boeing with industry-leading MRO and PBL supply chain software capabilities.

TransDigm to acquire Goodrich Pump & Engine Control Systems, a developer and supplier of fuel pumps and controls to commercial and military helicopter OEM engine manufacturers.  The acquisition expands TransDigm’s aftermarket product offerings for a number of engine applications.

EOD Technology to merge with Sterling International, providers of strategic stability operations support and integrated critical solutions for government and corporations worldwide.  The two companies will form Sterling Global Operations, Inc., a company owned by its more than 1,000 employees.

Raytheon Co. acquired Teligy, a provider of custom software and hardware design, development, and testing services for commercial and defense systems.  The acquisition enables Raytheon to cover the entire communication stack for both wired and RF technologies across all relevant platforms, and provides access to emerging markets.

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Industry Week in Review – October 19, 2012

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Over the past week, Hawker Beechcraft announced that it plans to emerge from Chapter 11 protection as a standalone company.  The company is no longer pursuing a transaction with Superior Aviation Beijing Co., Ltd. as the parties could not reach a settlement on the terms of a Plan Sponsorship Agreement.  After Chapter 11, the company plans to rename itself Beechcraft Corporation and will focus on its turboprop, piston, special mission, and trainer / attach aircraft which are the company’s most profitable products.  It will also continue its high margin parts, maintenance, repairs, and refurbishment businesses.

Robert Miller, CEO of Hawker Beechcraft, Inc., said, “We made the decision to proceed with the standalone Plan of Reorganization after determining that, despite our best efforts, the proposed transaction with Superior could not be completed on terms acceptable to the company.  We are disappointed that the transaction did not come to fruition, but we protected ourselves by obtaining a $50 million deposit from Superior that is now fully non-refundable and property of the company.  The go-forward business plan we have developed with our creditors ensures that we will emerge from this process in a strong operational and financial position, with an enhanced ability to compete well into the future.”

Big Movers

Mercury Computer Systems Inc. (Up 6.3%) – Shares are up this week after the company announced that it received a 5-year sole source basic ordering agreement (“BOA”) from the U.S. Navy in support of the continued development of signaling architecture by producing a subset of its latest radar jammer equipment.  The BOA is valued at up to $58 million.

Relevant Transactions

Booz Allen Hamilton to acquire ARINC’s Defense Engineering Services Division, a provider of advanced aviation and maritime engineering, weapons modernization and sustainment, and systems engineering and integration for approximately $154 million.  The acquisition complements Booz Allen’s existing service base, which spans engineering and operations, technology, analytics, and strategy and organization.

Safran SA to acquire Goodrich Electric Power Systems, a provider of aircraft electrical generators and power distribution systems for roughly $401 million.  Goodrich Electric Power Systems is expected to have post sales of $200 million in 2012, with about half coming from spares and maintenance, repair, and overhaul.  The acquisition will also allow Safran to continue to develop new solutions for the electrification of aircraft equipment and closer integration of electrical systems with the aircraft engine.

Eurocopter to acquire Heuliez Aéronautique, a French provider of beating, sliding doors, and canopies for the aeronautical industry.  Heuliez Aéronautique will operate within Helicoptères Aérostructures Services, a subsidiary of Eurocopter.  Terms of the deal were not disclosed.

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Industry Week in Review – October 12, 2012

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Over the past week, the “deal of the decade” between BAE Systems and EADS broke down under political objections between the UK, French, and German governments.  Notably, the UK wanted its counterparts to agree to limit their influence in the merged firm in order to maintain BAE’s strong working relations with the US Pentagon.  Diplomats also believe German chancellor Angela Merkel was unwilling to compromise on certain positions against the structure of the deal.  BAE and EADS had agreed to a unified management and board structure and had identified cost and revenue synergies by the time the deal was cancelled.  Ian King, BAE chief executive, said “We are obviously disappointed that we were unable to reach an acceptable agreement with our various government stakeholders.”

Carl Icahn has made a tender offer to acquire Oshkosh, a maker of armored trucks, for $32.50 per share in cash valuing the business at $3.4 billion.  Icahn is the largest shareholder of the company with a 9.5% stake and recently gained a seat on the board at Navistar, a struggling truck manufacturer.  Icahn has previously suggested the two companies could merge, however he has since rejected the idea.

Big Movers

Oshkosh Corporation (Up 5.8%) – Shares are up this week following Carl Icahn’s tender offer to acquire the company.  The company’s shares have advanced 40% this year.

ESCO Technologies (Down 8.9%) – Shares were down this week following an announcement that the company will close its Chicago manufacturing facility as it consolidates its test segment’s four domestic facilities into three.  The plant’s closing is expected to be completed by January of next year and result in “less than 50” employees losing their jobs.

Relevant Transactions

No relevant transactions for the week

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Industry Week in Review – October 5, 2012

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Negotiations in the proposed EADS / BAE Systems merger ran into new obstacles during the week. Early in the week, Lagardere, which holds a 7.5% stake in EADS, called for a thorough review of the merger, citing concerns that the interests of French shareholders were not being adequately represented in the proposed deal structure.  Further, the German finance ministry claimed that the proposed 60/40 ownership split between EADS and BAE respectively did not accurately reflect the companies’ true values, and sought a structure closer to 70/30.  

Later in the week, talks among the governments of Britain, Germany, and France appeared deadlocked, with the leaders seemingly unable to agree over the governments’ stakes in the combined entity.  Germany and France are reportedly seeking a 9% stake each, but Britain is only willing to accept France’s ownership if it were to guarantee that it wouldn’t go on to purchase Lagardere’s shares.  While it is believed that the French government does not plan on purchasing these shares, the government refuses to provide a written guarantee to that effect. Nevertheless, EADS and BAE continue to work towards their October 10 deadline, citing the fact that the firms haven’t been given any indication from the governments that the deal would be called off.

Big Movers

Ceradyne (Up 43.6%) – Shares were up for the week after the company announced that it has agreed to be acquired by 3M Co. (details below).

Finmeccanica SpA (Up 14.2%) – Shares were up for the week following the company’s announcement of a EUR220 million  contract win from the Milan Metro System.  Earlier in the week CEO Giuseppi Orsi called on the Italian government to support Finmeccanica if it were to look for a merger, leading to speculation about a possible transaction with an American counterpart.

NCI Inc. (Down 17.4%)  –  Shares were down for the week following a notice issued to investors by Wells Fargo on October 4, downgrading the stock to “underperform” from “market perform”.  Separately, Lazard Capital initiated coverage on the stock during the week with a “neutral” rating.

Mercury Computer Systems (Down 22.3%) – Shares were down for the week following the company’s announcement that it is lowering 1Q13 guidance to a loss per share range $0.24 to $0.28, down from $0.03 to $0.08. Revenue for the quarter is expected to be between $48 million to $50 million, compared with prior guidance of $55 million to $61 million.  Management attributes these changes to delayed orders and shrinking gross margins on the SEWIP contract.

Relevant Transactions

Mitsubishi UFJ Lease & Finance has agreed to acquire Jackson Square Aviation, a provider of aircraft leasing services, for $1.275 billion.  The transaction, which is expected to close by year-end, expands Mitsubishi’s leasing division’s geographic presence and aircraft fleet.

3M has agreed to acquire Ceradyne, a manufacturer of ceramics used in defense applications such as helmets and armor, for $35 a share, or $853 million.  The transaction implies an Enterprise Value of $669.6 million, representing an LTM Revenue multiple of 1.30x and an LTM EBITDA multiple of 5.5x. The acquisition expands 3M’s capabilities in ceramics, which has been identified as a growth materials segment in numerous industries, as it is harder and more heat resistant than steel.

BCF Solutions has acquired RedBlack Communications, a provider of communications systems and solutions for the military, from Ultralife Corp for $2.53 million.

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