Aerospace & Defense Update
Boeing, Lockheed Martin, Northrop Grumman, and Raytheon all announced year-end earnings this week, with only Boeing receiving a positive market reaction from the earnings calls. Boeing beat forecasted quarterly earnings and raised guidance on its 2017 cash flow and profit compared to 2016, even as the company faces questions transitioning from the 777 to the 777X program. The company also hopes to increase 737 output by 15 planes per month to reach 57 planes per month by the end of the decade.
While Boeing had an overall positive earnings outlook, Lockheed, Northrop, and Raytheon guidance dropped below market expectations. Lockheed Martin tried to assuage investor fears spurned from President Trump about F-35 cost overruns by announcing the program will become more profitable even as the price per plane dips below $100 million. This good news was overshadowed by Lockheed’s initial 2017 profit guidance falling short of expectations. Northrop Grumman reported strong 12% revenue growth in 4Q16 stemming from 20% aerospace systems growth, and the unit is now larger than the company’s mission systems division in terms of revenues. However, similar to Lockheed, Northrop lowered its 2017 profit guidance, which cause the stock to drop. Lastly, Raytheon had 4Q YoY revenue decline and quoted 2017 revenue of ~$25 billion, which fell below analyst expectations of ~$25.5 billion. Though earnings announcements caused these stocks to fall, the stock prices for these three companies have since rebounded.
Government Technology Solutions Update
The Federal CIO Council recently released a report titled “The State of Federal IT,” for the Trump administration’s use. The report provides a foundation for understanding the current status of the nation’s IT infrastructure, as well as a glimpse of how various Federal agencies are planning on modernizing legacy systems and /or processes. The report suggests that the new administration work with Congress on setting up a working, centralized fund for the procurement of modernized IT systems. An attempt to do this was made towards the end of last year, with the Modernizing Government Technology Act (“MGT”). This effort, spearheaded by Representative Will Hurd, was not able to pass through the Senate, due in part to the roughly $9 billion cost attributed to the bill. The report makes several other recommendations, including the use of centralized IT systems for smaller government agencies, which they believe could be useful in reducing inefficiencies, and serve as a proof-of-concept for similar IT centralization in the future for larger government agencies.
On Friday, Harris Corporation announced the sale of its government IT services business to Veritas Capital, a New York-based private equity firm, for $690 million. This transaction comes roughly three months after the $425 million sale of Harris’ CapRock energy and maritime business; it also comes roughly five months after Jana Partners acquired a 1.9% stake in Harris, which fueled speculation that Harris would be pressured to sell off some of its non-core assets by the hedge fund. The sale of the government IT business is just the latest in a spate of divestitures by Harris. Harris exited its commercial healthcare solutions business in 2015, its $210 million aero structures business last February, and the aforementioned CapRock Communications in November. However, Harris will maintain ownership of its air traffic control business, which is currently working on a $3.5 billion contract for the FAA. The government IT business, which mainly serves NASA, among other Federal agencies, is expected to have roughly $1.07 billion of revenue in 2017.
Boeing (up 5.1%) – Share prices were up this week after the Company raised its 2017 cash flow and profit guidance.
KeyW (down 14.3%) – Share prices were down this week after the Company announced its plans to price 8.5M additional common stock shares at $10.50 per share.
Millstein & Co. has acquired the government services business of PRA Group, which provides technology, revenue enhancement and discovery, compliance, and consulting services to government customers. The deal is worth $91.5 million.
Octo Consulting Group has acquired Aquilent’s SeaPort business unit, a provider of strategic sourcing, systems, and program management, including the operation of the SeaPort-e portal. Terms of the deal were not disclosed.
Veritas Capital has acquired Harris Corporation’s Government IT Services business, a provider of IT, communications, and engineering services to Federal and civilian customers, with a particular focus on serving NASA’s Space Communications Network and Deep Space Network programs. The deal is worth an estimated $690 million.