Week in Review

Industry Week in Review – June 7, 2013

On Wednesday, the U.S. House Armed Services Committee (“HASC”) began marking up the 2014 National Defense Authorization Act proposed by Committee Chairman Rep. Howard McKeon.  In its current stage, referred to as the “chairman’s mark”, the bill would authorize the Department of Defense (“DoD”) to spend $552.6 billion in baseline dollars and an additional $85.8 billion for operations overseas for FY2014, totaling roughly $164 billion over the spending cap set by the Budget Control Act of 2011. 

The HASC bill addresses plans for special operations forces, cyber defense, drone strikes, and military space launches, while also introducing some highly debated programs such as the East Coast missile shield.  HASC Ranking Member Rep. Adam Smith, D-Wash., presented concerns about unnecessary and wasteful spending included in the bill, specifically identifying a half-billion dollars in the Strategic Forces subcommittee that was not requested by the DoD.  The House-Senate panel will meet in the summer or fall of this year to collaborate on a final version of the Pentagon-authorization bill.  

On a similar note, the House Appropriations defense subcommittee has proposed a bill that would allocate $512.5 billion to the Pentagon’s base budget and $85 billion for war funding, emulating the HASC authorization bill.  The Appropriations subcommittee’s bill cut $2 billion from the enacted 2013 procurement level, but still exceeds the sequestered Pentagon budget by roughly $28 billion.  The bill includes $98.4 billion for the purchase of combat platforms, $29 billion for certain special weapon programs, and $66.4 billion for R&D. 

Big Movers

Kratos Defense & Security Solutions (Up 6.9%) – Shares were up for the week after the company received two contract awards totaling $8.1 million.  One of the awards, from an existing customer, relates to the production of specialty products for an electronic attack and electronic warfare program.  The second award is for specialized equipment for undisclosed radar and National Security programs.

Astronics Corporation (Up 6.4%) – Shares rose this week after the company announced its plans to acquire the outstanding shares of PECO, Inc. one week ago for $136 million. 

Relevant Transactions

MB Aerospace acquired Delta Industries, Inc., a provider of engineering, manufacturing, and repair services for a variety of intake, compression, combustion, and exhaust products used in ground based turbines and jet engines.  The acquisition expands MB Aerospace’s technical capabilities in the fabrication and robotic welding of complex aero engine components.  The terms of the deal were not disclosed.

Quantum Research International acquired J2 Technologies, Inc., a specialist in aviation and missile defense architecture, defense technology assessments, software and prototype development, and integration support for the U.S. Government and the DoD, for an undisclosed amount.  The acquisition enhances Quantum’s portfolio of prime contracts in the cybersecurity and defense areas.

Click here to review comparable company analysis.

Industry Week in Review – April 20, 2012

A recent DoD report, released on April 18, suggests that Congress should lift restrictions on commercial satellite exports to eliminate existing headwinds in the U.S. space manufacturing market.  Currently, commercial satellite exports are regulated by the U.S. Munitions List (“USML”), grouped with other defense-related artifacts such as firearms, missiles, military vehicles, and warfighter training equipment.  The Obama Administration’s current proposal suggests moving commercial satellites to the Commerce Department’s Commerce Control List in an effort to reduce pressure on the U.S. commercial satellite industry and alleviate associated risks to broader national security.  The revision of the regulations is part of a comprehensive strategy to rebuild the USML and introduce new export control reforms, with an overall goal to create “higher walls around fewer items.”

In a related story, the Air Force announced this week its intention to launch the second Advanced Extremely High Frequency (“AEHF”) communications satellite on May 3, as part of the effort to replace the legacy Milstar constellation and provide secure, high-integrity, jam-resistant communication support to senior military and government officials.  The third AEHF satellite is expected to launch in September 2013, a fourth satellite is on contract, and two more are expected to be procured by the end of the upcoming summer.

Big Movers

MAXIMUS, Inc. (Up 7.0%) – Shares rose this week after the company announced that it has signed a definitive agreement to acquire Denver, CO-based Policy Studies Inc. (“PSI”) for $67 million.  PSI helps administer various government health programs, including Medicaid and the Children’s Health Insurance Program, welfare-to-work programs, and child support enforcement initiatives.  The acquisition is expected to help bolster MAXIMUS’ position in the increasingly lucrative government health market.

TransDigm Group Incorporated (Up 5.4%) – Shares rose this week after analysts reported confidence that the company will raise adjusted earnings-per-share (“EPS”) estimates meaningfully during reports next month.  Analysts rationalize the higher EPS estimates through a combination of further McKechnie upside, AmSafe accretion, and continued aftermarket strength.

Relevant Transactions

HEICO Subsidiary Radiant Power Corp. acquires the aerospace assets of Mortiz Aerospace, a designer / manufacturer of next generation wireless cabin control systems, solid state power distribution and management systems, and fuel level sensing systems for business jets, military / defense aircraft, and general aviation consumers.  The acquisition enables Radiant Power to provide a full suite of power control and cabin electronics solutions.  Terms of the deal were undisclosed.

Venture Aircraft, LLC acquires certain assets of Swift-Cor Aerospace, Inc., a producer of precision computer numerical control (“CNC”) machined and sheet metal parts, as well as assemblies, for commercial jets, business jets, and military aircraft, among other aerospace platforms.  The combined entity will now operate as Impresa Aerospace; management views the acquisition as instrumental towards being able to tackle growing demand driven by rapidly increasing aircraft build rates.  Terms of the deal were undisclosed.

Waveland Investments acquired NTE Aviation, an aftermarket reseller of airplane engine and airframe components.  NTE engages in the sourcing and reselling of engine and airframe parts to / from MRO facilities, OEMs, airline operators, and leasing companies.  The company is well recognized within the aviation industry as a specialist in the regional airline turboprop engine and airframe segment, in addition to Boeing 737 Classic applications.  Terms of the deal were undisclosed.

Click here to review comparable company analysis.

Industry Week in Review – November 4, 2011

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.

Click here to review the comparable company analysis.