Aerospace & Defense Update
Boeing released its financial guidance for 2016, which included plans to deliver fewer commercial jets this year than last. The guidance sent shares down 8.9% to end Wednesday trading at $116.58, its lowest close since October 2013. However, Boeing achieved first flight of its 737 MAX on Friday, hoping to stay competitive against Airbus for the next decade in short-haul airliners. The first flight comes nine days after the first delivery of the rival Airbus A320neo and begins more than a year of flight tests to achieve certification by the Federal Aviation Administration (“FAA”). The Company plans to deliver its first jet to Southwest Airlines in the third quarter of 2017.
House Majority Leader Kevin McCarthy and Senate Armed Services Committee Chairman John McCain introduced legislation to repeal a provision that allows the unlimited purchase and use of rocket engines manufactured by the Russian company, NPO Energomash. The two lawmakers believe NPO Energomash is controlled by friends of Russian President Vladimir Putin, and argue that U.S. purchases enrich the Putin regime and fuel Russia’s military industrial base. The provision in question was a component of the 2016 omnibus spending legislation that allowed United Launch Alliance (“ULA”) to continue purchasing RD-180 engines from Moscow until a domestic alternative became available. The Russian engines have powered dozens of ULA and Air Force launches over the past decade. McCarthy and McCain believe the ban will facilitate a competitive domestic environment that provides the incentive to scale each component required to access space.
Government Technology Solutions Update
On Tuesday, Lockheed Martin officially announced that it has entered into an agreement to separate and combine its Information Systems & Global Solutions (“IS&GS”) business with Leidos. Since the announcement, investor sentiment has been mixed. Initially, stock prices for both companies fell considerably and while Lockheed’s share price quickly rebounded, Leidos’ share price closed the week at $46.12, or approximately 15% off of its pre-announcement price. The $5 billion, tax-free transaction includes a $1.8 billion one-time special cash payment by Leidos to Lockheed. In addition, Lockheed’s shareholders will receive approximately 50% of Leidos’ outstanding stock, which has an estimated value of approximately $3.2 billion. In conjunction with the transaction, Leidos also plans to issue a $1 billion special dividend to its existing shareholders. To fund both payments, Leidos will rely on cash on hand, existing revolving credit facilities, and approximately $1.5 billion of new debt. The combined company is expected to reach $10 billion in revenue with approximately $1 billion in adjusted EBITDA, and would become the largest federal IT services provider, surpassing the newly formed CSRA. Management anticipates approximately $120 million in annual cost synergies by late 2018 and that the transaction will be accretive to adjusted EPS in the second quarter of combined operations. While the deal is expected to create significant revenue and cost synergies, some investors are concerned about the relatively high valuation of the transaction along with integration risks associated with the mega-merger.
The U.S. Air Force announced awardees to its Platform for Engineering and Integration Tactical and Strategic Systems (“PEITSS”) contract earlier this week. Of the ten companies that bid, six were awarded spots on the contract, which is valued at $538 million over seven years with expected completion in January 2023. Companies will support systems within the Air Force that provide tactical and strategic command and control capabilities and battle management. These capabilities will likely include surveillance, weapons control, and airspace management.
OSI Systems, Inc. (Down 30.2%) – Shares were down this week after the Company announced earnings for Q2 that fell 59% from last year
The Timken Company (Up 9.4%) – Shares were up this week after the Company announced fourth quarter earnings that beat analysts’ estimates
Johnson Controls acquired Tyco International, a provider of security products and services, fire detection and suppression products and services, and life safety products worldwide. The deal is worth an estimated $14.4 billion.
e2v Technologies to acquire Signal Processing Devices Sweden AB, a provider of signal processing solutions for analog-to-digital conversion. The deal is worth an estimated $14.0 million.
Rockwell Collins to acquire the Matrix Series Projector Product Lines of Christie Digital Systems, a provider of advanced simulation and training projectors and projection systems. The terms of the deal were not disclosed.
Leidos announced its merger with Lockheed Martin’s IS&GS Business, a provider of IT solutions and cyber security to Federal customers. The deal is worth an estimated $5.0 billion.
PricewaterhouseCoopers acquired Praxism, a provider of identity and access management consultant services. Terms of the deal were not disclosed.
SOS International has acquired New World Solutions, a provider of high value technical services to the Intelligence and Defense communities. Terms of the deal were not disclosed.