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Industry Week in Review – November 4, 2011

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As the U.S. and Department of Defense (“DoD”) restlessly await the Super Committee’s November 23rd deadline for a proposal to reduce the country’s deficit by at least $1.5 trillion, all of the branches of the military have expressed concern over the potential for further defense cuts. Army chief of staff, General Ray Odierno, warned that additional budget cuts “would be catastrophic to the military, and, in the case of the Army, would significantly reduce [the] capability and capacity to assure [U.S.] partners abroad, respond to crisis, and deter potential adversaries, while threatening the readiness and, potentially, the all-volunteer force.”

In response to further potential cuts, the military has begun to change its acquisition requirements in order to take into account price, as well as capability. Currently, the Army’s main acquisition programs, the ground combat vehicle (“GCV”) and the armored multipurpose vehicle (“AMPV”), are mandating contractors to rely solely on mature technologies harvested from other programs, like the JLTV or MRAP. The cost relief and improved schedule adherence will benefit the government, while the reliance on previously developed materials will benefit defense companies with solid track records within the industry.

Big Movers

Spirit AeroSystems Holdings, Inc. (Up 8.9%) – Shares rose this week after the company reported strong 3Q2011 results. Revenue rose 12.7%, from the same quarter last year, to $1.1 billion, and the company expects 2011 revenue of $4.7 billion, at the top of its range given in August.

GeoEye, Inc. (Down 29.1%) – Stocks fell this week after the company missed 3Q2011 revenue and EPS estimates. GeoEye reported 3Q2011 revenue and EPS of $85.8 million and $0.51, both below analysts’ estimates of $93.0 million and $0.56, respectively.

Relevant Acquisitions

Kaman Aerospace Group, Inc. to acquire Vermont Composites, Inc., a manufacturer of composite aerostructures and advanced composite medical equipment, for an undisclosed amount. The acquisition supports Kaman’s strategy of supplementing its ongoing growth with targeted, strategic acquisitions, as well as expanding its presence onto a number of additional platforms with solid growth prospects.

Lockheed Martin Corporation acquired Sim-Industries BV, a commercial aviation simulation company located in the Netherlands. The combination of Sim-Industries with Lockheed’s military simulation business will provide airlines, civil pilot training centers, and military customers access to training systems that can be provided more quickly and with lower operating costs. Terms of the deal were not disclosed.

Additionally, this week ITT Corporation completed a spinoff of Xylem Inc., a water company, and Exelis Inc., a defense and information business with notable exposure to Iraq and Afghanistan. The spinoff was planned with the belief that the sum of its parts would be greater than the whole. Exelis has been marked as a potential takeover target, however near term tax implications would likely push back any immediate acquisition proposals. In the event that a sale was to occur, industry sources estimate Exelis could command 7x – 8x 2010 EBITDA ($828 million). Expected revenue in 2011 is roughly $5.8 billion.

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