Aerospace & Defense Update
Numerous aerospace and defense companies have announced positive 1Q18 earnings throughout the past week. Boeing reported a strong quarter, beating consensus earnings per share (“EPS”) estimates by $1.05 (28.8%) and reported revenue growth of 6.6% year-over-year (“YoY”) to $23.4 billion, driven by a 9% increase in commercial aircraft deliveries and a 13% increase in Defense, Space, & Security segment revenues. Lockheed Martin also reported a solid quarter, beating EPS estimates by $0.60 (14.9%) and increasing revenue by 3.8% YoY to $11.6 billion. Lockheed’s highlight of the quarter was the conclusion of the System Design and Development phase of the F-35 program. Northrop Grumman also had a favorable quarter and beat EPS estimates by $0.57 (13.5%) while increasing revenue by 5.1% YoY to $6.7 billion, driven by higher Manned Aircraft volume at Aerospace Systems and higher Sensors and Processing volume at Mission Systems. All three companies beat consensus revenue estimates and raised EPS guidance for 2018, citing industry tailwinds from the ramp up in defense spending and a lower tax rate environment.
United Technologies beat EPS estimates by $0.26 (14.7%) and increased revenue by 10.1% YoY to $15.2 billion due to robust military sales and strong aftermarket sales from its large installed base of engines. General Dynamics beat EPS estimates by $0.17 (6.4%) and raised its revenue by 1.3% YoY to $7.5 billion, citing growth in its defense business revenues, particularly within its Combat Systems segment. Lastly, Raytheon beat EPS estimates by $0.09 (4.1%) and increased its revenue by 5.0% YoY to $6.3 billion. Both United Technologies and Raytheon beat consensus revenue estimates and raised 2018 EPS guidance. While General Dynamics missed quarterly revenue estimates, the company reaffirmed previous 2018 EPS guidance, expecting continued strength in global demand for its integrated air and missile defense systems.
Government Technology Solutions
According to the International Data Corporation (“IDC”), spending on artificial intelligence (“AI”) and machine learning is expected to grow from $12 billion in 2017 to $57.6 billion in 2021. This growth is attributed to the increased efficiencies and cost-cutting opportunities delivered through AI that government personnel are beginning to realize. The greatest need for AI is in cybersecurity defense because agencies are currently spending significant resources and manhours to defend against potential cyber threats, while hacker technology is consistently evolving. AI will be able to improve security measures and protect against malware without requiring people to reprogram layers of code. While the technology is not currently available for implementation throughout the government, 79% of respondents in a survey conducted by Meritalk believe that AI and machine learning will have a place within the government once the technology is safe and effective.
The Global Cyber Alliance’s (“GCA”) recent survey shows that only one of the fifty largest federal IT contractors have adopted an email security measure to protect against phishing. Engility is the only firm using the Domain-based Message, Authentication, Reporting, and Conference (“DMARC”) protocol to guard against this type of cyberattack. DMARC creates a public record for verifying whether an email sender is authorized to send or receive messages within the domain. The Department of Homeland Security (“DHS”) ordered federal agencies to implement DMARC by January 15th of this year. While the agencies have complied, hackers will continue to target federal contractors to collect sensitive U.S. government information until their systems are better protected. For example, a 2014 investigation by the Senate Armed Services Committee found that Chinese hackers had breached contractors to the U.S. Transportation Command approximately twenty times, however the command was only aware of two intrusions.
Safran (up 4.3%) – Share prices were up this week after the company reported strong first quarter revenue growth of 12% and expects to reach the high-end of its 2018 EPS target.
Raytheon (down 10.3%) – Share prices were down this week as a result of easing tensions within the Korean peninsula.
Ducommun, Inc. has acquired Certified Thermoplastics Co., a provider of precision profile extrusions and extruded assemblies of engineered thermoplastic resins, compounds and alloys for aerospace, defense, medical, and industrial applications. Terms of the deal were not disclosed.
Ian, Evan & Alexander Corp. (IEA), a portfolio company of Enlightenment Capital, acquired RAI Government Services, LLC, a subsidiary of Maxar Technologies Ltd., a provider of intelligence services to clients in the U.S. Intelligence Community, local and federal law enforcement and the Department of Defense. Terms of the deal were not disclosed
Peraton Corp., a portfolio company of Veritas Capital, has acquired Strategic Resources International, Inc., a provider of highly-adaptable communications infrastructure in anticipation of critical, global communications needs. Terms of the deal were not disclosed.
QinetiQ Group plc has agreed to acquire E.I.S. Aircraft GmbH, a provider of aerial training services, threat representation, and combat battle simulations. The deal is worth an estimated $85.5 million.