Industry Week in Review – August 23, 2013

After two weeks of continued violence in Egypt, American military aid to the country is coming under scrutiny.  Annually, the U.S. provides $1.3 billion in military aid to Egypt in the form of tanks, helicopters, aircraft, infantry vehicles, and ammunition.  On August 22, the European Union unanimously agreed to suspend export licenses for all military technology to Egypt.  In response, the U.S. government has temporarily delayed the delivery of four F-16 jets, 10 Apache helicopters, and 125 Abrams tanks to Egypt.

Despite the current suspension of foreign military aid, analysts do not see the U.S. permanently ending its support as Egypt’s geographic location makes it a regional linchpin.  Egypt is one of the few Arab countries to have a peace treaty with Israel, a key U.S. ally, and the U.S. relies on access to Egyptian airspace for military flights and the Suez Canal for oil transportation.  U.S. officials worry that other parties will fill the void were military aid permanently suspended, as a group of Persian Gulf states have already offered $12 billion in aid if the U.S. assistance program ends.  Ultimately, analysts believe military aid will continue as U.S. strategic concerns remain the primary catalyst behind the decision.

The decision on military aid also has implications for defense contractors, as Egypt presents opportunities to provide products and assembly assistance services.  In 2011, General Dynamics won a $395 million award from the U.S. Army to provide Abrams tanks to the Egyptian military, and last year won an additional $50 million award to provide technical assistance at Egyptian tank assembly plants.  The Egyptian military has consistently shown a strong preference for U.S. defense products, and any U.S. suspension in aid would have a large impact on the U.S. defense industry.

In the government services space, NASA awarded a $1.76 billion contract to SAIC to provide biomedical, medical, and health services for NASA’s human spaceflight programs at Houston’s Johnson Space Center.  Additionally, SAIC named Samuel Gordy as the head of the Company’s National Security Sector integrated systems group.  This division will be a key part of Leidos when SAIC splits into two companies later this year.

Big Movers

Kratos Defense and Security Solutions (Up 11.8%) – Shares continued their upward climb this week after the Company announced 2Q13 earnings above analyst estimates.  Additionally, Kratos recently announced they had won a position on the Department of Homeland Security’s five year, $6 billion Continuous Diagnostics and Mitigation contract to provide government-wide cybersecurity products

Relevant Transactions

Sparton Corporation to acquire Aydin Displays, Inc.,a provider of flat panel display and touch-screen solutions with application-critical performance for military, aerospace, and civil marine customers.  Sparton will use the acquisition to expand its electromechanical capabilities and gain further penetration into the Boeing P8A Poseidon program.

Gen Cap America, Inc. acquired Renaissance Electronics Corporation, a provider of radiofrequency, microwave, and millimeter wave solutions for military and commercial applications.  Gen Cap will use the acquisition to expand its portfolio and strengthen customer relationships in the military, avionics, industrial, and consumer sectors.  Terms of the deal were not disclosed.

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