Industry Week in Review – March 23, 2012

This week, USAF Secretary Michael Donley announced that the latest restructuring of the $382 billion program should allow the program to proceed with the “least risk,” a message repeated by the Pentagon’s F-35 program manager, chief weapons buyer and the Air Force acquisition chief at a separate House of Representatives subcommittee hearing. Lockheed Martin is building three variants of the radar-evading supersonic warplane for the military and eight countries that are helping to fund its development. Navy Admiral David Venlet, program manager for the F-35, told reporters after the House hearing that he was in close touch with the eight partner countries, plus Israel and Japan, and while some might scale back or delay their purchase of planes, none had said anything about withdrawing from the program completely. Nonetheless, Donley maintained that any further cost growth would cut the total number of planes bought. The Pentagon’s fiscal 2013 budget proposed postponing production of 179 F-35 planes to save $15.1 billion over the next five years, as the military begins to implement $487 billion in spending cuts over the next decade.

Big Movers

Smith & Wesson Holding Corp. (Up 15.6%) – Shares rose this week after the gun maker hiked its full-year sales forecast on a higher order backlog, reflecting strong demand for its guns and rifles. The company, which competes with Sturm Ruger & Co, Glock Inc and Taurus, reported a 168.9% surge in firearm backlog in the third quarter. In addition to the rise in demand was a strong third quarter performance, with revenue and up 23.8% YoY and net income at $5.4 million compared to a net loss of $2.7 million in the previous year.

AAR, Corp. (Down 13.4%) – Shares fell upon news that plane shortages and higher costs led to poor performance at two of its businesses. This is expected to persist into the 4th quarter so that improvement is expected only in early next fiscal. The company on Wednesday blamed unscheduled maintenance inspections and delayed receipt of aircraft, as well as higher maintenance costs for the poor performance at its airlift operations business. Also, AAR said it experienced higher-than-expected start-up costs and cost overruns on certain programs at its precision machining business.

Relevant Transactions

HEICO Corporation’s Electronic Technologies acquires Ramona Research, Inc., a designer and manufacturer of RF and microwave amplifiers, transmitters and receivers primarily used to support military communications on unmanned aerial systems (“UAS”), other aircraft, helicopters and ground-based data/communications systems. The acquisition is expected to improve HEICO’s position on growing UAS programs and to accretive to its earnings per share within the year following the purchase. Terms of the deal were not disclosed.

API Technologies to acquires C-MAC Aerospace, a portfolio company of Francisco Partners and Shah Capital Partners, for a total purchase price of 20.95 million pounds sterling (approximately $33 million USD). C-MAC is a leading provider of high-reliability electronic systems, modules, and components to the defense, aerospace, space, industrial, and energy sectors. The company brings to API a large portfolio of proprietary and differentiating products along with an increased European and international presence. The offer value for the transaction was approximately 0.93x C-MAC’s FY 2011 revenue of 22.5 million pounds sterling (approximately $36 million USD).

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