Industry Week in Review – July 27, 2012

Northrop Grumman, Raytheon, and Lockheed Martin all beat second quarter earnings expectations, but each warned of the impending consequences of sequestration.  Northrop saw decreased revenue this quarter, but outperformed expectations by squeezing costs and improving operating margins.  CEO Wes Bush noted that a heightened focus on cost reductions and customer affordability would continue to be critical to facing a tightened procurement environment.  Raytheon touted its diversified revenue base as a potential safeguard against sequestration.  Nearly 40% of the Company’s backlog is driven by international demand, which provides a hedge against potential domestic defense cuts.  Lockheed revealed that it has been preparing aggressively for the possible cuts, but urged Congress and the President’s administration to help the contracting community by providing specific information about where cuts will come from.

Faltering international nuclear talks have heightened tension between Iran and the international community, and have drawn further attention to the potential for conflict in the Persian Gulf.  Iran has markedly improved its ability to strike U.S. naval ships with advanced short-range missiles and refined “swarm” tactics that could overwhelm large carriers in the gulf.  The U.S. has responded to Iran’s ramp-up by sending additional carriers to the Persian Gulf and scheduling military exercises in the area.  Though a conflict is not expected, the increased vulnerability of American vessels has impacted the global discussion regarding Israel, the Strait of Hormuz, and nuclear disarmament.

Big Movers

GeoEye (Up 60.4%) and Digital Globe (Up 31.0%) – Shares of both GeoEye and DigitalGlobe traded up this week after their announced $900 million merger.

GenCorp (Up 23.6%) – Shares traded up this week after GenCorp announced its $550 million acquisition of Pratt & Whitney Rocketdyne.

iRobot (Up 22.0%) – Shares traded up this week after iRobot beat expectations for second quarter revenue and net income.  Performance was driven by the Company’s home-robot business, which grew 50% in the second quarter.

Relevant Transactions

United Technologies obtained regulatory approvals to acquire Goodrich, a producer of aerospace components, systems, and services for commercial, general aviation, defense and space markets.  As expected, the regulatory clearances require that UTC sell Goodrich’s Electric Power Systems business and Goodrich’s Connecticut-based Pumps and Engine Controls business.  Also as expected, UTC will sell Goodrich’s interest in Aero Engine Controls, a joint venture with Rolls-Royce.

DigitalGlobe to merge with GeoEye, a provider of geospacial information and insight for $900 million.  The acquisition enables DigitalGlobe to expand capabilities within earth imagery and geospatial analysis and reduces DigitalGlobe’s reliance on revenue from the U.S. Government.

GenCorp to acquire Pratt & Whiney Rocketdyne, a producer of rocket engines and propulsion products for $550 million.  The acquisition provides additional growth opportunities and complementary capabilities within human space travel and national security launch services.

Renault Trucks Defense to acquire Panhard General Defense, a French manufacturer of light transport vehicles adapted for defense operations.  In 2011, Panhard reported €81 million in revenue and €9.4 million in operating profit.  Terms of the deal were not disclosed.

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