Industry Week in Review – March 9, 2012

With the backdrop of across-the-board budget pressures and a tightening procurement environment, DoD officials this past week commented that U.S. defense contractors that survived the Pentagon’s 2013 budget proposal should fare well in subsequent years, with the assumption that sequestration does not go into effect.  “We’re going to continue to think through our situation and make adjustments and so forth as we go forward because this is a slow process of making a very major transition,” remarked Defense Secretary Ashton Carter.  Rep. Adam Smith (D-Washington), the ranking Democrat on the House Armed Services Committee, remarked, “I think that the likely scenario is that the tax cuts expire, sequestration doesn’t happen, and we go into January fighting.”  Officials also highlighted the ever-apparent need to increase investment in several strategic areas, including cybersecurity and electronic warfare.

In related news, the Pentagon’s sharpened focus on reducing expenditures continues to manifest itself in one of the DoD’s highest-priority programs, the F-35.  Given the demands within the 2013 budget proposal to slow the jet’s production by removing 179 aircraft over the next five years, procurement officials are currently in negotiation with prime contractor Lockheed Martin for a lower price on the fifth batch of 30 low-rate, initial production (“LRIP”) aircraft. 

Despite the apparent pull-back, the Air Force continues to voice support for the Joint Strike Fighter, with USAF chief of staff Gen. Norton Schwartz commenting that it is “the future of tactical aviation for the Air Force.”  The Pentagon anticipates continued cost revisions for the F-35 program; the Pentagon’s last official estimate pegged development and production costs nearing $380 billion for more than 2,800 U.S. and international aircraft.

Big Movers

Smith and Wesson Holding Corporation (Up 35.5%) – Shares rose this week after the company reported net sales from continuing operations for 3Q of $98.1 million, reflecting a 23.8% increase over 3Q of last year.  The company’s gross margins also grew in 3Q year-over-year (“YoY”), rising from 24.5% to 30.6%, driven by increased sales volume and absorption due to higher production levels, as well as completion of the consolidation of its Thompson / Center Arms business.

John Bean Technologies Corporation (Down 11.0%) – Shares fell this week after the Company reported 4Q results and missed analyst estimates at both the revenue and earnings-per-share (“EPS”) levels.  The Company reported 4Q revenues of $271.5 million, missing analyst estimates of $287.0 million and reflecting a 5.3% contraction from 4Q of last year.  Additionally, the Company reported Non-GAAP EPS of $0.25, missing the consensus estimate of $0.53 and reflecting a 56% decline YoY.

Ducommun Inc. (Down 9.1%) – Shares fell this week after the Company reported a slight revenue miss relative to analyst estimates ($188 million versus $195 million) and substantially lower-than-expected operating margins in its Ducommun Aerostructures business (4.9% vs. 8.5%).  However, the Company did post a record backlog of $636 million, and reported that its integration of LaBarge was “effectively complete.”

Relevant Transactions

Plasan Sasa Ltd. acquired Artis LLC, a provider of contract research and development (“R&D”) and analysis services for health, military, and security markets.  The Company’s analysis services focus on defining the military utility of future technologies, especially distributed sensor networks and robotics systems.  Plasan expects the acquisition to enhance its ability to provide superior survivability solutions against current and future threats, leveraging Artis’ leading Iron Curtain Active Protection System (“APS”) products.  Terms of the deal were not disclosed; SC&H Capital served as the exclusive financial advisor to Artis LLC.

A group of private investors, including Weinberg & Bell Group, has acquired AeroRepair and Hemico.  AeroRepair provides services in the repair and overhaul of brake assemblies, wheel assemblies and landing gear for regional airlines, corporate airlines and military aircraft, while Hemico manufactures and distributes aircraft parts.  TD Bank and Huntington Capital provided financing for the transaction.

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