Industry Week in Review – November 7, 2014

Aerospace & Defense Update

In mid-term elections on Tuesday, November 4th, Republicans gained the Senate majority and strengthened their majority in the House of Representatives.  Specifically, Republicans replaced Democratic Senate incumbents in Arkansas, North Carolina, Iowa, Colorado, South Dakota, West Virginia, Montana, and Alaska.  Moreover, Republicans gained control of governor’s mansions in a number of states previously held by the Democratic Party including Arkansas, Illinois, Maryland, and Massachusetts.   Republican’s success in the mid-term elections will likely hinder President Obama’s legislative agenda over the course of his next two years in office.  However, shortly after the election results were released, President Obama noted that the 113th Congress’ next two months will be critical.  During the lame duck session, lawmakers will address a spending measure to fund the government for the next calendar year as the 2015 Continuing Resolution is set to expire on December 11th.  Additionally, the President indicated that he intends to send this Congress a resolution to formally approve U.S. strikes against the Islamic State of Iraq and the Levant (“ISIL”) through an update to the authorization for the use of military force.  The current Congress is also expected to receive a Presidential request for more than $6 billion directed towards containing and eliminating the Ebola outbreak.

China Aircraft Leasing Group announced an initial agreement to purchase 100 Airbus planes, valued at approximately $10.2 billion.  The deal, which is expected to be finalized before the end of the year, includes 74 of the A320neo aircraft, 16 of the current-generation A320ceo model, and 10 of the A321ceo.  The provisional order comes in response to China’s established position as the world’s fastest growing aviation market, along with the expectation that it will overtake the United States as the busiest market for domestic air travel within the next decade.  As Asian air traffic continues to grow, aircraft leasing firms seek to capitalize on the increase in aircraft demand amongst Chinese airlines.  Specifically, BOC Aviation became one of Airbus’s top ten customers after placing an order for two additional A320ceo aircraft in October, bringing the aircraft lessors total order count to 257.

Government Technology Solutions Update

Senate and House lawmakers have reached agreement on the Federal IT Acquisition Reform Act (“FITARA”) bringing the bill close to passage.  The bill seeks to grant agency chief information officers a more significant role in IT decisions, requires an IT investment portfolio review process for agencies, and lays the foundation for managing intricate Federal IT projects.  FITARA will likely be attached to the GFY2015 National Defense Authorization bill.  However, the Senate and House armed services committees must also sign off before it reaches the President for signing.

NASA’s $20 million Solutions for Enterprise-Wide Procurement V (“SEWP V”) contract for product based IT, network, and audio-visual solutions faces 17 filed protests.  The amount of protests is not expected to increase significantly as companies only have a ten-day window to file protests after agency debriefings.  NASA now has 30 days to respond to filed protests by issuing corrective actions or fighting protests through the Government Accountability Office (“GAO”).  Corrective actions would lead to the quickest resolution, while going through the bid protest decision process would delay SEWP V even further.

Big Movers

Kratos Defense & Security Solutions, Inc. (Down 16.4%) – Shares were down this week after the Company announced third quarter earnings.  Quarterly revenue of $217 million missed estimates of $244 million, while net loss for the period came in at $11.1 million.

Rheinmetall AG (Down 9.2%) – Shares were down this week after the Company reduced its earnings guidance from a range of $250 million – $274 million to roughly $188 million.

Relevant Transactions

Sheltair Aviation Services LLC acquired FlightLevel Aviation Lakeland at Lakeland Linder Regional Airport (“KLAL”), a provider of aviation fuel and ground handling services.  Terms of the deal were not disclosed.

Teradyne, Inc. acquired Avionics Interface Technologies, Inc., a provider of flight simulation models, databus analyzers, and support systems to the aerospace and defense markets.  Terms of the deal were not disclosed.

Optex Systems Holdings, Inc. acquired L-3 Communications Corporation’s Applied Optics Center, a provider of laser protection filters and precision optical assemblies.  Terms of the deal were not disclosed.

Raytheon acquired Blackbird Technologies, a provider of persistent surveillance, secure tactical communications, and cybersecurity solutions to the Intelligence Community (“IC”), and special operations market.  The deal is worth approximately $420 million.

Bridge Growth Partners to acquire CRGT, a provider of custom software development and data analytics to Federal Government agencies.  CRGT is a portfolio company of Veritas Capital.  Terms of the deal were not disclosed.

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