Aerospace & Defense Update
The Aerospace Industries Association (“AIA”), a premier trade association representing major aerospace and defense companies, released it 2014 Year-End Review and Forecast earlier this week. The report found that military aviation sales remained relatively flat at $87.3 billion in 2014. Despite flat military aviation sales, defense exports experienced strong growth of roughly 9.2% while Department of Defense (“DoD”) space spending increased by 5.5% to $48.8 billion. Aerospace industry profitability also saw an uptick in 2014, reaching an estimated $25.5 billion, up from $22.2 billion in 2013. Furthermore, the AIA anticipates steady growth for the aerospace industry over the next year, with aerospace sales increasing 5.3% from $228 billion in 2014 to $240 billion in 2015. This growth is largely attributable to commercial aircraft sales, which are forecasted to exceed $79.8 billion next year. Despite numerous domestic and foreign challenges, the AIA also projects small gains in the defense aviation market to accompany the strong growth likely in civil aviation.
On Wednesday, the DoD’s Joint Program Office announced that the F-35 Joint Strike Fighter program has selected Japan and Australia to provide airframe and engine maintenance work in the northern and southern Pacific regions, respectively. Australia will be the initial center of heavy engine maintenance work starting in 2018 with Japan assuming a role as an engine maintainer three to five years afterwards. Notably, Australia is the only full F-35 partner in the Pacific, with plans to buy 100 of the aircraft. Meanwhile, Japan is categorized as an F-35 foreign military sales customer scheduled to purchase 42 of the fighters. The deals, which could be worth billions of dollars over the 40-year life of the program, follow last week’s announcement that maintenance in Europe will be handled by Italy and Turkey.
Government Technology Solutions Update
House chairmen of Veterans Affairs and Small Business committees have opened a Federal Acquisition Regulations case with the Office of Federal Procurement Policy (“OFPP”) to address agencies’ use of reverse auctions. The case is a follow up to a December 2013 report from the Government Accountability Office (“GAO”) and recent bid protests decisions, which have shown concern over reverse auctions. Although reverse auctions promote efficiency, when used improperly, they can cause decreased competition and result in agencies paying higher than necessary prices. As a result, the GOA and House lawmakers are pushing for the OFPP to issue reverse auction guidance and best practices for agencies to follow.
The General Services Administration (“GSA”) is looking to standardized factors for agencies to consider when determining if a contractor can conform to security standards. Specific concerns federal agencies are looking to mitigate include, but are not limited to, information security, financial and managerial controls, malicious software, and insider threats. While the National Institute on Science and Technology and the Federal Risk and Authorization Management Program have issued guidance on the subject, private companies have no obligation to comply with these frameworks. A Request for Information has been issued by the GSA to seek information on indicators for vendor IT security assessments and to close the disconnect between guidance and company action.
B/E Aerospace (Down 20.1%) – Shares were down this week after the Company completed its spinoff of aerospace logistics business KLX, Inc., distributing all outstanding shares of KLX stock at a ratio of one share for every two shares of B/E Aerospace stock.
Heico Corp. (Up 10.6%) – Shares were up this week after the Company announced fiscal year 2014 fourth quarter results. Heico reported $0.48 earnings per share for the quarter, beating analysts’ estimates of $0.46 earnings per share.
Wärtsilä Corporation to acquire L-3 Marine Systems International Business, a supplier of complete electrical systems, as well as integrated navigation, automation, communications, and power and propulsion systems for naval vessels. The deal is worth an estimated $355.9 million.
Hexcel Corporation acquired Formax UK Limited, a manufacturer of carbon fiber and specialty composite reinforcement materials. Terms of the deal were not disclosed.
Alcoa, Inc. to acquire TITAL GmbH, a manufacturer of titanium and aluminum investment casting products. Terms of the deal were not disclosed.
COM DEV International Ltd. to acquire MESL Microwave Limited, a provider of components and subsystems for the radar, communication, defense, aerospace, space, security, medical, and transportation industries. The deal is worth an estimated $20.1 million.
Cubic Corporation acquired DTECH LABS, a leading provider of modular networking and baseband communications equipment. The deal is worth up to $114.5 million inclusive of a $15 million earnout.
Atos to acquire Xerox’s Information Technology Outsourcing (“ITO”) business, a provider of IT solutions within a global business services, technology, and document management company. The deal is worth an estimated $1.1 billion.