Industry Week in Review – August 26, 2016
Aerospace & Defense Update
The Department of Defense (“DoD”) announced Lockheed Martin has been awarded an indefinite delivery / indefinite quantity (“IDIQ”) contract with the U.S. Air Force for the production of the Super Hercules C-130J transport plane. The decade long contract covers production of an estimated 100 aircraft for domestic and foreign military sales through August 2026 and has a ceiling value of $10 billion. The C-130 is a versatile four-engine aircraft which has transported troops and cargo of up to 44,000 pounds for over 60 years. The U.S. Air Force has purchased over 150 C-130s since 2003 and ~15 countries currently use the C-130 to provide military transport as well as aeromedical evacuation and firefighting. The flexible aircraft continues to evolve to meet new operational requirements and the growing worldwide need for airlift.
Reports have revealed that Boeing has revised its internal sales forecast and plans to sell 535 jetliners this year, a target well below its initial forecast of 740 – 745 aircraft. Wide-body aircraft sales have been hit the hardest this year, with current net orders of less than 20% of its revised FY16 sales goal of 215. Of the wide-body aircraft, the 747 has struggled significantly with only four new orders this year, signaling a possible end to production unless there is an increase in new orders during 4Q16. Additionally, the Company aims to book 88 orders each for its 777 and 787 aircraft, yet has only sold 19 and 8 aircraft so far this year. Boeing maintains that it will not lower prices in order to win orders and instead is focusing on securing orders through active sales campaigns around the world. The slowdown in demand for new aircraft has been caused by weak global growth and low oil prices causing some airlines to choose to fly older planes longer rather than upgrading to new fuel-efficient models.
Government Technology Solutions Update
According to recent research released on Tuesday, government contract spending is likely to see an increase in fiscal 2017 after having declined for the past seven years. The Federal government has typically directed 60% of its spending towards services, a trend that is believed to continue in the near-term. The “knowledge-based services,” such as professional, engineering, and administrative support, are the leading sub-category with $69.8 billion in annual spending. The Department of Defense (“DoD”) continues to be a major catalyst for spending in that sector; the Army, Navy, and Air Force combined for over 40% of all Federal spending on knowledge-based services with the large defense primes, such as Boeing, Raytheon, Lockheed Martin, and Northrop Grumman receiving the largest portion of those contract dollars. Another large, and growing, portion of the Federal budget is funding for technology services and technological equipment, which combine for over $60 billion in annual procurements, and grew at a rate of over 1.5% in 2015 despite the overall decline in spending.
The annual Lowering the Cost of Government with IT Summit was held Thursday, during which industry insiders commented on what they felt were constraints placed on cybersecurity planning by the Federal budgeting process. According to Thomas McDermott, acting deputy assistant secretary for cyber policy at the Department of Homeland Security (“DHS”), the current one-year budgeting process makes it difficult to plan and acquire upgrades to legacy technology, forcing agencies “to patch old, sometimes indefensible IT systems.” As a result, there have been recent efforts to address these concerns. The Obama administration is trying to set up a $3.1 billion revolving fund “outside the appropriations process to help agencies upgrade their legacy IT.” Additionally, DHS has created the Continuous Diagnostics and Mitigation (“CDM”) program, which has saved at least $46 million by allowing agencies to take better advantage of bulk savings. With these efforts, the government is making a more concerted attempt to maximize the efficiency of the procurement process, as well as increase the flexibility of government agencies’ ability to plan long-term improvements to critical IT infrastructure.
Big Movers
Boeing (Down 1.6%) – Shares were down this week after there were reports that Boeing revised its internal sales forecast negatively; however, the Company rebounded after Qantas Airways announced it may add more of Boeing’s 787 in 2017
Thales (Down 2.7%) – Shares were down this week after DCNS (Thales owns a 35% stake) was investigated by India for a submarine data leak
Transactions
Brixey & Meyer Capital has acquired Stillwater Technologies, Inc., a provider of precision machining and resistance welding solutions for the aerospace, defense, and energy sectors. Terms of the deal were not disclosed.
J.F. Lehman & Co. has agreed to acquire Oldenburg Group, Inc.’s Heavy Equipment Group, a provider of heavy equipment systems that meet mission critical requirements in harsh operating environments. The new company, which consists of the defensive and mining business units, will be named Lake Shore Systems, Inc. Terms of the deal were not disclosed.
