Industry Week in Review – April 28, 2017
Aerospace & Defense Update
Boeing, Lockheed Martin, and Northrop Grumman all announced 1Q17 earnings this past week with mixed results. Boeing raised its forecast for full-year earnings after it reported a ~19.0% year-over-year (“YoY”) increase in profit for 1Q17. However, Boeing’s revenue decreased ~7.3% YoY and missed consensus analyst estimates by ~$330 million (~1.5%). In contrast, Lockheed lowered its full-year earnings outlook but raised its revenue forecast for the remainder of the year. Lockheed’s revenue during 1Q17 missed consensus analyst estimates by ~$170 million (~1.5%), but still showed a YoY increase of ~$690 million (~6.6%). Lastly, Northrop Grumman raised its full-year earnings outlook after beating consensus analyst estimates for revenue by ~$125 million (~2.0%). Northrop’s Aerospace Systems division, responsible for producing the center sections of the F-35 jets, increased revenue ~13.0% YoY.
On Friday, Congress approved a one-week, stopgap spending bill allowing the government to stay open through May 5th as it negotiates a budget for the remainder of GFY2017. The government was operating under a Continuing Resolution (“CR”) that was set to expire on April 29th. House Appropriations Committee Chairman Rodney Frelinghuysen is hopeful a funding package will be completed shortly. There is speculation that the supplemental defense spending amendment will be close to half of President Donald Trump’s initial $30 billion request. Additionally, President Trump is expected to lay out his 2018 funding proposal for GFY2018 over the next few weeks.
Government Technology Solutions Update
On Friday, Representative Will Hurd reintroduced his Modernizing Government Technology Act (“MGT”) to the House of Representatives. Mr. Hurd had proposed an earlier version of the bill in late 2016, but despite being passed by the House, it was unable to get traction in the Senate. The end goal of the bill remains relatively unchanged from prior iterations, giving agency Chief Information Officers (“CIOs”) access to funds which will enable them to upgrade and modernize legacy IT infrastructure. While this new version of the bill follows a similar pattern of its predecessor, proposing a centralized fund as well as setting up individual agency funds for the procurement of major IT upgrades, the original MGT was more expensive and less appealing for lawmakers. The bill Mr. Hurd introduced on Friday asks for $500 million in total compared to the $9 billion price tag assessed to the original bill by the Congressional Budget Office (“CBO”). Mr. Hurd hopes that the smaller central fund, more appealing CBO score, and high-profile support will give the bill enough momentum to pass both the House and the Senate this time around.
The House Armed Services Committee held its Emerging Threats and Capabilities subcommittee hearing on Wednesday, during which members of Congress and other industry experts pressed for the Department of Defense (“DoD”) to overhaul and modernize the way the agency procures and implements new IT, saying that there are too many inefficiencies in the way it currently conducts acquisitions. Industry insiders noted that the DoD should prioritize finding proven, commercial solutions before attempting the creation of proprietary systems. Mr. Terry Halvorsen, retired DoD CIO, said that the agency often over-allocates both funds and resources towards the customization and testing of commercial solutions compared to using technology which has been certified to industry standards. Industry insiders also argued that the DoD needs to become more flexible in the manner through which small purchases are funded. They note that current policies make it difficult to quickly procure smaller items, and that the acquisition process itself is currently overly burdensome. Several in attendance proposed that Congress should enact legislation which would allow the more streamlined integration of commercial technology, and which would also give agency officials the authority they need for the flexible acquisition of IT systems
Big Movers
Airbus (up 5.6%) – Share prices were up this week after the Company reported growth in all its segments except defense during 1Q17.
TE Connectivity (up 5.1%) – Share prices were up this week after the Company raised its full-year sales and profit forecast.
Transactions
Dubai Aerospace Enterprise has agreed to acquire AWAS, a provider of customized aviation solutions. Terms of the deal were not disclosed.
