Aerospace & Defense Update
Over 26,000 individuals attended this year’s annual Association of the United States Army (“AUSA”) conference in Washington D.C. Every year a variety of attendees, from active-duty and retired military leaders to industry professionals worldwide, gather to listen to discussions on important military and national security subjects and view exhibits from defense companies showcasing their best capabilities. In addition, speakers such as John McHugh, Secretary of the Army, and General Mark Milley, the new Army Chief of Staff, spoke on a range of topics, including the increased challenge of growing global threats coupled with declining budgets and future training and mission operations. Moreover, discussion around the need for a viable land force, not just strong air and sea support, was also emphasized, preluding President Obama’s Thursday announcement to maintain the current U.S. troop count in Afghanistan through the end of his term.
Stock prices for both Boeing Co. and Airbus Group fell this week after Richard Anderson, Delta Air Lines Chief Executive Officer, stated during Delta’s 3Q15 earnings call his belief of a “huge bubble” for wide-body airplanes, increasing pressure on pricing and orders for new aircraft. If accurate, Boeing’s 777 is vulnerable to an oversupply of wide-body jets in the marketplace, making it difficult for the current generation 777’s to create sales amid competition. On the contrary, the latest Boeing 787 and Airbus A350 aircraft will be less affected due to their strong order backlog and operational savings. Boeing Commercial Airplanes Vice President of Marketing, Randy Tinseth, acknowledged potential pricing pressures, but downplayed its significance. However, he went on to state that the aircraft market for Delta will be favorable over the next one to three years as prices become lower.
Government Technology Solutions Update
The U.S. Army is creating a new governance process designed to prioritize cyber spending, as a growing number of cyber programs compete for finite dollars. The newly formed Cyber Acquisition Requirements and Resourcing Group will be tasked with analyzing spending requests before the start of each Government Fiscal Year (“GFY”). The main evaluation tool used will be a spin on the IT Box, a framework first launched by the Department or Defense (“DoD”) in 2008 to make sure programs meet cost, schedule, and performance goals. Rather than funding identified purchases years in advance, the new strategy uses the IT Box framework to outline general objectives as part of the traditional budget process, but then directs funding to specific purchases closer to the actual point of execution. Set to debut in GFY 2017, the Army plans to use the new governance process to develop military-specific hardware and software, repair newly-discovered network problems, and buy commercial-off-the-shelf technologies.
Northrop Grumman announced a restructuring of its business segments on Thursday. Effective January 1, the Company plans to consolidate four segments into three distinct businesses. Northrop expects to combine their Electronic Systems sector with portions of the Information Systems sector focused on new capabilities for military and intelligence customers. The remaining IT services business will be combined with the Technology Services sector. While Northrop’s operating margins have been 13.2% and 16.5% in their Aerospace Systems and Electronic Systems segments, respectively, the Information Systems and Technical Services segments had lower operating margins of 9.8% and 9.3%, respectively. Northrop has not released revenue projections for the new business segments; however, the Information Systems business had $6.2 billion of revenue in 2014, which will now be split between Technical Services and Electronic Systems, divisions that posted $2.8 billion and $7.0 billion of revenue in 2014, respectively. Management has emphasized that the rationale behind the restructuring is to more effectively meet customer needs and enhance innovation.
Airbus Group SE (Down 3.7%) – Shares were down this week in response to Delta Air Lines Chief Executive Officer, Richard Anderson, stating his belief of a “huge bubble” for wide-body airplanes during Delta’s 3Q15 earnings call.
Honeywell International (Down 4.1%) – Shares were down this week after management revised full year revenue outlook downwards after posting lower than expected revenue for 3Q15.
L-3 Communications Holdings Inc. acquired ForceX, Inc., a provider of ISR mission manage software and geospatial application technology programs. The terms of the deal were not disclosed. KippsDeSanto & Co. acted as the exclusive financial advisor to ForceX, Inc.
Ultra Electronics Holdings acquired Furnace Parts, LLC, a designer and manufacturer of specialty industrial thermocouples for temperature measurement applications. The deal is worth an estimated $12.0 million.
The Boeing Company acquired Peters Software GmbH, a provider of training content for early stage pilot training. The terms of the deal were not disclosed.
Avon Rubber plc acquired the thermal imaging camera business of E2v Ltd., a designer and manufacturer of thermal imaging cameras for first responders and fire markets. The deal is worth an estimated $5.4 million.