Industry Week in Review – January 26, 2018
Aerospace & Defense Update
After a three-day government shutdown, Congress finalized a new budget extension and passed a continuing resolution (“CR”), reopening the government on Tuesday. The new CR will fund the federal government through February 8th, giving Congress more time to settle a long-term spending deal for the remainder of GFY2018. The government has been under a CR since the beginning of GFY2018, forcing the Pentagon to operate at the previous year’s spending levels. However, the ending of the three-day shutdown is seen as a crucial step towards increasing the Pentagon’s budget as Congress becomes closer to passing a GFY2018 federal budget.
Numerous companies announced 4Q17 earnings this past week with strong results overall. Northrop Grumman exhibited strong performance in 4Q17, beating its earnings per share (“EPS”) estimates by 2.9% and revenue estimates by 4.2% after increasing its revenue by 5.3% year-over-year (“YoY”). The company also forecasted strong 2018 revenue and earnings growth as the company begins the integration of Orbital ATK. Raytheon beat consensus EPS estimates by $0.01 and reported revenue growth of 8.0% in 4Q17, and 5.1% YoY. The company also reported a strong book-to-bill ratio of 1.26 in 4Q17 and 1.09 for full-year 2017, increasing its total backlog by $1.5 billion YoY. General Dynamics beat consensus EPS estimates by 5.0% and reported an 8.2% growth in 4Q17 revenue. The company reported strong growth out of its Gulfstream business with net orders up over 20% YoY and net large cabin orders up by ~30%.
On Tuesday, Boeing announced the formation of a joint venture (“JV”) with Adient, the auto parts business divested by Johnson Controls in 2016. The JV will create seats for commercial aircraft, providing an alternative to the traditional commercial aircraft supply chain players such as Rockwell Collins and Safran. Per Boeing, the JV is in response to delays in aircraft seat production as well as restraints on capacity for its key suppliers. Boeing has been making efforts to vertically integrate its business and develop in-house capabilities such as aviation electronics, specialty manufacturing, and engine components, making the company less dependent on those historical key suppliers. The commercial aircraft supply chain has undergone large-scale changes such as Boeing and Airbus breaking into the higher-margin aftermarket services business, and continued industry consolidation through transformational deals including the acquisitions of Orbital ATK and Rockwell Collins.
Emirates Airlines has purchased 36 Airbus A380 superjumbos, providing a key lifeline to the fledgling program that was at risk of shutting down production. The 36 double decker jets were purchased for an estimated $16 billion in a deal that was originally going to be signed at the Dubai Air Show until Emirates Airlines walked away from the deal over concerns about Airbus’ commitment to the program. This agreement will ensure that Airbus continues production of the A380 for the next 10 years per Airbus’ Chief Sales Officer, John Leahy. Overall, this brings Emirates Airlines’ total A380 commitment to 178 planes, of which 101 are currently in operation.
Government Technology Solutions
The government’s struggle to pass a 2018 budget is now expected to have an impact on current and future government IT operations. As it relates to the central IT fund, which was established by the Modernizing Government Technology Act, government agencies will not be able to allocate the funding. Until Congress reaches an agreement on the budget, government agencies must shift their focus to managing daily operations and delay future planning for IT systems. Moreover, agencies will be reluctant to establish working capital funds, further delaying agencies’ investments into modernizing government technology. As such, agencies have diverted attention to protecting existing strategic plans and implementation timelines against another government shutdown when the continuing resolution ends on February 8th.
At some point this summer, the Government Accountability Office will launch an investigation into the high number of fraudulent identities used to create and broadcast fictional public comments on proposed federal regulations and other government activities. The issue of fake comments in the federal rulemaking process first came to light last year during the Federal Communications Commission’s (“FCC”) vote to repeal net neutrality rules that were put in place during the Obama administration. Surveys show that 57% of comments submitted to the FCC used temporary or duplicate email addresses, and therefore could likely be fictitious. Additionally, the Wall Street Journal reported approximately 7,800 individuals told reporters that comments posted in their names were fake. These comments were posted in response to net neutrality along with other regulations by different agencies, such as the Consumer Financial Protection Bureau and the Department of Labor. As a result, it became difficult to decipher which comments were authentic and which were false, making it impossible for agencies to accurately perceive public opinion.
Big Movers
Bombardier (up 14.3%) – Share prices were up this week after the U.S. International Trade Commission (“ITC”) dismissed a complaint by Boeing of alleged dumping in the case of 75 C Series jets sold to Delta, allowing Bombardier to avoid punitive import tariffs while pursuing other orders in the U.S.
Honeywell (up 4.0%) – Share prices were up this week after the company beat earnings estimates and grew quarterly revenue by 9% YoY, largely driven by a 6% sales growth from the previous quarter in its aerospace unit.
Transactions
Amazon Web Services has acquired Sqrrl, a provider of advanced cybersecurity threat detection services. Terms of the deal were not disclosed.
Celestica, Inc. has agreed to acquire Atrenne Integrated Solutions, a provider of ruggedized electromechanical solutions serving military and commercial aerospace applications. The deal is worth an estimated $139.0 million.
GTCR, LLC has agreed to acquire EaglePicher Technologies, a provider of specialized batteries and advanced power management systems power solutions for customers in the defense, aerospace, and medical end markets. Terms of the deal were not disclosed.
Vectrus, Inc. has acquired SENTEL Corp., a mission-focused business with expertise in logistics and supply chain management, engineering and advanced technology solutions, and intelligence mission support. The deal is worth an estimated $36 million.
