Aerospace & Defense Update
Based on a new report by the General Aviation Manufacturers Association (“GAMA”), shipments of general aviation airplanes totaled $9 billion during the first six months of 2017, representing a 3.4% decrease year-over-year (“YoY”). However, Original Equipment Manufacturers (“OEMs”) supplied a total of 995 business jets, piston aircraft, and turboprops during this period, representing a 2.7% increase YoY. Between the OEMs, Textron Aviation achieved the highest number of shipments, including 142 Beechcraft and Cessna aircraft as well as 31 Cessna 172 Skyhawks in 2Q17 alone. Among business and luxury jet makers, Bombardier delivered 36 business jets during 2Q17, including 15 Global 5000 / 6000s. Gulfstream supplied 30 total shipments whereas Embraer and Dassault delivered 24 and 17 shipments, respectively.
After months of strategy discussions within the Trump administration about U.S. troop involvement in Afghanistan, President Trump and his national security team, including Defense Secretary James Mattis, Secretary of State Rex Tillerson and National Security Adviser H.R. McMaster, will meet at Camp David on Friday to discuss the best path forward for U.S. troop involvement in the region. The team is assessing a wide array of options, including large troop increases, large troop decreases, and using additional private military contractors. Previously, Tillerson, Mattis, and McMaster have backed a proposal to deploy additional troops focused on training the Afghan special forces with the intention of demonstrating U.S. commitment to the region and dissuading counterinsurgency.
Government Technology Solutions
CACI International (“CACI”) posted strong organic growth in the second half of its most recent fiscal year, primarily as the result of its two largest-ever acquisitions – Six3 Systems and L-3 Communication’s National Security Solutions (“NSS”) division. With two large contract wins with yet-unnamed agencies in its fourth quarter, which ended June 30, CACI recorded its sixth-straight three-month period of at least $1 billion in new awards. CACI has generated $4.35 billion in FY2017, which exceeded analysts’ expectations and represented 16% year-over-year growth. The company is forecasting 2-4% top-line growth in FY2018. After lowering its debt to adjusted EBITDA ratio to 3.2 from a high of 4.2, just following the NSS acquisition, CACI now has more “dry powder” for more acquisitions. CEO, Ken Asbury, said he is particularly interested in adding new machine learning and data analytics capabilities to CACI’s portfolio. Only 10% of CACI’s contracts are up for recompete in its next 12-months, which is well below the industry average of 15-20%.
Leidos just lost its second chance at a $564.3 million Army Corps of Engineers contract due to the perceived riskiness of the company’s acquisition of Lockheed Martin’s Information Systems and Global Solutions (“IS&GS”) segment. Lockheed had previously pursued this contract, which was later awarded to SAIC, before the IS&GS divestiture was completed. In its justification, the Army Corps of Engineers cited Leidos’ press release section titled “Cautionary Statement Regarding Forward Looking Statements”, which noted uncertainties from the merger including business disruption, operational problems, financial loss, and legal liability. Such warnings, primarily directed towards investors, are commonplace in Securities & Exchange Commission (“SEC”) filings, but the Army Corps of Engineers saw Leidos’ as cause for concern. This is the second time the U.S. Government Accountability Office (“GAO”) backed the Army’s position on the protest after originally doing so last October. Similar uncertainties over the IS&GS acquisition also played a role in Leidos not winning a contract to manage the Nevada National Security Site in July.
HEICO (down 3.6%) – Share prices were down this week after the company agreed to purchase AeroAntenna Technology for $316.5 million in cash, plus a $20 million earnout payment if AAT meets earnings targets.
Elbit Systems (up 6.3%) – Share prices were up this week after the company confirmed that a jury found Hughes Network Systems to have infringed an Elbit Systems patent.
B&E Group, LLC has acquired Safe Fuel Systems, Inc., a provider of testing, repair, overhaul and modification of fuel systems, hydraulics and accessories for major domestic and international civil transport and military aircraft. Terms of the deal were not disclosed.
HEICO Corp. has agreed to purchase AeroAntenna Technology, Inc., a provider of high performance active antenna systems for critical defense applications, precision guided munitions, commercial aircraft. The deal is worth an estimated $316.5 million.
H.I.G. Capital has completed the tender offer to acquire NCI, Inc., a provider of IT and professional services and solutions, primarily big data and data analytics, agile development, and intelligence-to-operations initiatives to defense, intelligence, healthcare, and civilian government agencies worldwide. The deal is worth $283 million.
HPS Partners, LLC and Tennenbaum Capital Partners, LLC have agreed to acquire EagleTree Capital Portfolio Company Globecomm Systems Inc., a provider of design, integration, and operation of complex communication solutions with capabilities in satellite and wireless. Terms of the deal were not disclosed.
JW Hill Capital has acquired Bandy Machining, Inc., a provider of complex, close-tolerance hinges that are used on numerous commercial and military aerospace platforms. Terms of the deal were not disclosed.