Aerospace & Defense Update
Lockheed Martin has entered into a definitive agreement to acquire Sikorsky Aircraft from United Technologies Corp (“UTC”) for $9.0 billion approximately 13.0x Sikorsky’s LTM EBITDA. Lockheed Martin estimates the transaction will generate ~$1.9 billion of tax benefits over the next several years. With the acquisition of Sikorsky, Lockheed Martin will become the world’s largest manufacturer of military helicopters. This move accelerates Lockheed Martin’s goal of shifting focus towards its core capabilities of building defense platforms, as opposed to providing information technology and technology solutions. Lockheed Martin plans to align Sikorsky under its Mission Systems and Training (“MST”) business segment. MST and Sikorsky have already worked together on numerous programs including the VH-92 Presidential Helicopter.
In Boeing’s second quarter earnings call on Wednesday, new CEO Dennis Muilenburg indicated that the Company would take another earnings charge related to continued delays on the KC-46 tanker development. Boeing Commercial Aircraft continued to deliver strong results, with a record of 197 aircraft deliveries. Mr. Muilenburg also hinted that Boeing has the tanker problems sorted out and will not need to invest in any new technology to resolve the issues. Overall, the company reported profit of $1.1 billion in the second quarter, down ~$540 million from the same period last year, bought back 14 million shares for $2.0 billion, and paid $265 million in dividends.
Government Technology Solutions Update
Recent forecasts by International Data Corporation (“IDC”) anticipate a rebound in the Department of Defense’s (“DoD”) IT spending over the near-term. IT spending by the DoD is expected to reach $30.5 billion in FY2016, up 1.6% from the $29.9 billion expected by the end of FY2015, and is projected to growth at a Compound Annual Growth Rate (“CAGR”) of 0.5%. The projected growth reverses the declining spending trends witnessed over the last few years given sequester-led budget cuts. IT spending growth is anticipated to be driven primarily by cloud solutions and enterprise-wide services, which will serve to reinforce the DoD’s focus on fostering coalition partnerships as well as facilitating cross-department ventures.
Lockheed Martin announced that it will conduct a strategic review of its government IT & technical services businesses, likely to result in a spin-off to shareholders or a full sale of the businesses. The programs under review would primarily contain those within Lockheed’s Information Systems & Global Solutions unit, as well as some portion of its Missiles and Fire Control segment. A sale or spinoff of these business units would be expected to significantly shift the government services landscape as the segments under review would constitute one of the larger service providers in the market, with ~$6 billion in estimated 2015 revenue and over 17,000 employees. Additionally, Alion Science and Technology Corporation (“Alion”) announced that it has abandoned plans for its scheduled Initial Public Offering (“IPO”), despite filing preliminary papers with the Securities and Exchange Commission (“SEC”) in April. Backed by private equity firm American Securities, the government and defense contractor has instead opted for a sale to New York-based private equity firm, Veritas Capital. Veritas reportedly plans to commit approximately $300 million in equity to the deal, out of its recently raised $1.9 billion fund.
United Technologies Corp (Down 10.3%) – Shares were down this week as 2Q15 revenue decreased 5.0% YoY.
B/E Aerospace (Down 11.8%) – Shares were down this week in response to 2Q15 earnings missing analyst estimates.
Veritas Capital to acquire Alion Science and Technology, a provider of engineering, information technology, and operational solutions for defense, civilian government, and foreign governments. Terms of the deal were not disclosed.
Blackberry Limited to acquire AtHoc, Inc., a provider of networked crisis communication solutions to the Departments of Defense and Homeland Security. Terms of the deal were not disclosed.
Cyient Ltd. to acquire Pratt & Whitney Global Services Engineering Asia, a provider of repairs, development, and validation for aero gas turbine engine components. Terms of the deal were not disclosed.
ShoreView Industries acquired Esterline’s subsidiary, Pacific Aerospace & Electronics, a manufacturer and supplier of micro-electronic hermetic products and metal components for defense, space, medical, and commercial industries. Terms of the deal were not disclosed.
TASER International BV acquired Tactical Safety Responses Limited, a provider of tactical safety products, services, and training. Terms of the deal were not disclosed.
Lockheed Martin Corp. to acquire Sikorsky Helicopter, a designer and manufacturer of commercial helicopters and fixed-wing aircraft. The deal is worth an estimated $9 billion.