Industry Week in Review – April 29, 2016
Aerospace & Defense Update
Many aerospace & defense companies announced earnings this week, reporting mixed results across the board. Boeing’s Defense segment posted strong results, as revenues increased 18.5%; however, margins were down for the Commercial Airplanes division due to over $300 million in pretax charges on its new Air Force refueling tanker and 747-8 jetliner. Airbus also posted weaker than expected earnings, announcing profits fell 50% during the quarter, as the company struggled to fulfill production promises to buyers and investors. Lockheed Martin, on the other hand, posted encouraging results, raising its earnings forecast for the rest of the year, due to strong sales from both the F-35 program and the recently acquired Sikorsky business. Lastly, General Dynamics, Northrop Grumman, and United Technologies all beat Wall Street estimates for both revenue and earnings during the quarter.
House Armed Services Committee members voted to increase 2017 wages for troops by 2.1% this week, passing the $610 billion defense policy bill by a 60-2 vote. The bill includes 27,000 more troops then requested by the White House and revamps the defense medical care system. Furthermore, the bill provides $18 billion in additional funding for many programs including the F-18 and the F-35. Supporters of the bill believe it will fully supply the armed forces with the necessary resources to continue operating; however, critics believe it creates more problems than it solves, pointing to the use of a budgeting gimmick. The bill will shift $18 billion in temporary war funds to the base budget and will only leave enough money for overseas operations to last roughly halfway through GFY2017. Despite this shortfall, industry professionals expect the next president to fill this deficit with a supplemental budget request post inauguration.
Government Technology Solutions Update
Recent controversy over the prevalence of Lowest Price Technically Acceptable (“LPTA”) government contracts has caused concern both from vendors and Federal agencies. While vendors argue that LPTA techniques are improperly applied to wide swaths of contracts, the government has replied that the issue has been over exaggerated given the lack of any specific mandates requiring LPTAs. On Thursday, the House Armed Services Committee passed the Defense authorization bill containing a provision authorizing a thorough analysis of the degree to which LPTA contracts are used and whether their use complies with Department of Defense (“DoD”) guidance. The review will focus on formal and informal policies that describe when LPTA is and is not appropriate, as well as aggregate data on how often the DoD used LPTA to buy goods and services and what they bought in 2015 and 2016. The primary concern from contractors is that although LPTA guarantees the lowest price in the short-term, it excludes companies who could provide the Government with creative solutions and innovative technological capabilities that could end up improving operations and saving money in the long-term.
A recent move by the Intelligence Community (“IC”) will allow analysts and developers to test-drive thousands of commercial data analytics tools through a classified marketplace for cloud technologies. The new marketplace, which opened last week, is integrated into the private cloud Amazon Web Services built for the Central Intelligence Agency (“CIA”) as part of the Intelligence Community Information Technology Environment (“ICITE”). While the IC declined to disclose precisely which tools it plans to include in the marketplace, there are expected to be over 2,000 IT products available to IC staff instantaneously, allowing them to avoid the timely and expensive procurement channels Federal agencies often are restricted to. The new marketplace allows users to evaluate various software tools, development platforms, and entire operating systems for a small fee so that they can explore potential capabilities and viability before making substantial commitments to purchase them. In addition to being instrumental in ICITE’s broader aims to cut IT costs, leadership within the IC believes its cloud plans in particular are necessary to keep U.S. intelligence technologies on pace with the private sector and maintain an intelligence advantage over potential adversaries.
Bombardier (Up 11.7%) – Shares were up this week after the company received an order from Delta Air Lines worth an estimated $5.6 billion for 75 CS100 jets
Oshkosh (Up 22.0%) – Shares were up this week after the company reported earnings per share well above consensus estimates