Industry Week in Review – November 21, 2014

Aerospace & Defense Update

The Department of Defense (“DoD”) announced Monday that Sikorsky Aircraft Corp. was awarded contract modifications with the U.S. Army and Navy worth upwards of $1.3 billion in fiscal year 2015.  The Army’s contract modification, scheduled to be complete in June, is for $779.1 million and includes 41 UH-60M Black Hawk helicopters, 24 HH-60M medical evaluation helicopters, and associated support tasks.  Meanwhile, the Navy’s $535.2 million award is for eight MH-60S and 29 MH-60R Seahawk helicopters, as well as sustainment engineering, program management, systems engineering, and other integrated logistics support functions.  Earlier this year, a Navy budget proposal suggested that the multi-year Sikorsky deal be cancelled.  However, the recent contract modification awards indicate that Sikorsky deliveries under the initial $8.5 billion, 653 aircraft deal will continue to run through 2017.

Army Chief of Staff General Ray Odierno addressed the Pentagon’s current defense strategy at the Defense One Summit this past Wednesday.  Specifically, he expressed his concern regarding declining active duty troop numbers in addition to the challenges posed should Congress keep the 2011 Budget Control Act in place.  In 2012, Army officials adopted a plan to reduce the number of active duty troops from 490,000 to 450,000, with sequestration budget cuts possibly dropping that number as low as 420,000.  However, Odierno suggests that the assumptions made in 2012 when determining future troop levels are no longer applicable.  Notably, the Army assumed U.S. troops would no longer be in Iraq and U.S. military involvement in Europe would take a step back.  Alternatively, the U.S. currently has 1,500 soldiers in Iraq, with an additional 1,600 expected within the next 45 days.  Furthermore, the fight against the Islamic State of Iraq and the Levant (“ISIL”), Russia’s aggression towards Europe and the Ukraine, and the Ebola outbreak in Africa all continue to stretch U.S. military resources thin.  Odierno acknowledged that he intends to address these concerns with Congress in an effort to enhance military readiness and reduce risks associated with emerging global threats.

Government Technology Solutions Update

The Department of Veterans Affairs (“VA”) has allocated an additional $60 million to its cybersecurity efforts, putting its total cybersecurity budget at $220 million per year.  The redirection of funds is in response to the Government Accountability Office (“GOA”) report released this week which revealed that the VA failed its cybersecurity audit for the 16th consecutive year.  The infusion of money will be used to address the consistent problems of access control, configuration management, security management, and other vulnerabilities identified by the GOA’s report.

The National Geospatial Intelligence Agency (“NGA”) is the first in the Intelligence Community (“IC”) to directly seek open source through GitHub, a commercial code management platform for both open source and private projects.  The NGA is using open source solutions to drive innovation and capitalize on talent in both public and private sectors.  This approach poses higher security and cyber security concerns; however, the NGA has set up risk management processes and believes that the innovation it receives is worth the risk.

Big Movers

Wesco Aircraft Holdings, Inc. (Down 18.4%) – Shares were down this week after the Company announced fourth quarter earnings.  Wesco reported a 9.1% decline in quarterly earnings over the same period last year and earnings per share of $0.30, missing analysts’ estimates of $0.37 by 18.9%.

Avon Rubber plc (Up 10.2%) – Shares were up this week after the Company reported a rise in profits for the year, with adjusted pre-tax profits up from $21.5 million to $26.0 million.

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