Industry Week in Review – January 22, 2016

Aerospace & Defense Update

The U.S. State Department approved the sale of more than 33,000 F-16 Block-52 weapons and munitions to Iraq for roughly $2 billion.  According to the Defense Security Cooperation Agency, Iraq will use the weapons systems and logistic services to maintain its F-16 fleet functionality and support pilot training.  Iraq currently operates four F-16 Block 52 aircraft and expects to receive four to five more fighters in the near future. Furthermore, they previously purchased a total 36 F-16 aircraft, which are expected to arrive by November or October of this year. In order to establish maintenance support and training for these incoming aircraft, roughly 400 U.S. government and contractor personnel will need to reside in Iraq until 2020.  There are seven principal contractors for the sale, which are Lockheed Martin, Raytheon, Pratt & Whitney, The Marvin Group, Michael Baker International, and the Royal Jordanian Air Academy.

Boeing has announced that it will cut 747-8 production rates by half in September from twelve to six aircraft a year, citing weakness in the air cargo market. The four-engine aircraft, which was used more frequently for air travel in the past, has been overtaken by a more fuel-efficient twin-engine jet. As a result, its usage has been predominately for passenger air cargo. However, the air cargo market, which has been rebounding since late 2013, has cited weakness in the recent months due to sluggish growth in international trade.  Boeing only booked two 747-8 in 2015 compared to 71 orders for the more popular 787 aircraft. The company will most likely address the announcement in their 4Q 2015 earnings call, which is scheduled on Wednesday, January 27th.

Government Technology Solutions Update

It was announced earlier this week that Leidos Holdings is nearing a deal to merge with Lockheed Martin’s IT services business.  With revenues of $5 billion, the merger would create the largest government services provider in the U.S., surpassing the recently formed CSRA.  The proposed merger would provide Leidos with significant scale in the face of an increasingly competitive market environment as well as improved margins, which are expected to approach 9%.  For Lockheed, the transaction would provide the Company with the ability to pay down a portion of its $8 billion of debt, which is partially attributable to its recent acquisition of Sikorsky.  The proposed merger could take the form of a Reverse Morris Trust, which would be a tax-free event for Lockheed, and could be announced as early as next week.

While protests have been in the headlines frequently, a recent decision by the Department of Veteran Affairs (“VA”) signals a rare move to protest the Government Accountability Office (“GAO”) guidance to reevaluate the basis of its task order of Transformation Twenty-One Total Technology (“T4”) to Booz Allen Hamilton.  Following the VA’s initial task order to Booz, ASM Research filed a protest for which the GAO ruled that the VA should reconsider the task order.  While the GAO’s decision is a suggestion rather than a declaration, it would be highly unusual for the VA to completely ignore the GAO’s directive.  Historically, agencies almost always follow the GAO’s guidance, partially because the GAO submits to Congress a list of agencies which choose not to follow their recommendations.  The GAO has until April 25th to make a decision on the VA’s request.

Big Movers

Chemring Group. (Down 12.8%) – Shares were down this week after the Company announced its full-year loss from continuing operations widened compared to last year

Engility Holdings (Down 51.8%) – Shares were down this week after the Company announced disappointing earnings and guidance


Atlas Air Worldwide to acquire Southern Air Holdings, a provider of air cargo charter and aviation solutions including aircraft, crew and maintenance, and insurance services.  The deal is worth an estimated $110 million.

Platinum Equity to acquire PAE, a provider of logistics and stability operations, technical services, and national security solutions for the U.S. government.  The terms of the deal were not disclosed.

OMNIPLEX World Services Corporation acquired Social Intelligence Corporation’s Government Solutions Business, a provider of social media and online data analytics for use in national security, background investigations, and threat detection.  The terms of the deal were not disclosed.

Click here to review comparable company analysis.