Industry Week in Review – July 27, 2018
Aerospace & Defense Update
Numerous aerospace and defense companies announced positive 2Q18 earnings this past week. Boeing beat EPS estimates by $0.06 (1.8%) and increased revenue 5% year-over year (“YoY”) to $24.3 billion, reflecting a higher volume of commercial deliveries and defense contract volume. General Dynamics (“GD”) beat EPS estimates by $0.13 (5.2%), while increasing its revenue 19.7% YoY to $9.2 billion. GD’s strong quarter was driven by a lower tax rate and increased aerospace margins despite the non-recurring costs related to the CSRA transaction. Lockheed Martin also beat EPS estimates by $0.13 (3.2%) and increased its revenue by 6.6% YoY to $13.4 billion. Lockheed’s strong revenue and earnings growth was led by its Missile & Fire Control business unit. Raytheon’s earnings also beat EPS estimates by $0.43 (18.3%) and grew revenue 0.6% YoY to $6.6 billion, reflecting strong growth in domestic bookings.
The House passed its final version of the $716 billion John S. McCain National Defense Authorization Act (“NDAA”) in a 395-to-54 vote on Thursday, sending the bill to the Senate floor for final congressional approval on Tuesday, July 31st. Earlier drafts of the bill mentioned the shuttering of the Department of Information Systems Agency (“DISA”) and other “fourth estate” agencies, although these agencies were spared in the final version passed by the House. Lawmakers backed plans for 77 F-35s and authorized $40.8 billion to purchase and repair worn out military aviation equipment. The bill also delayed the delivery of F-35s to Turkey and pushed off President Trump’s plans to create a Space Force as a sixth standalone branch in the military.
Government Technology Solutions
As the Government fiscal year draws to a close, federal agencies have only two months to spend billions of funding dollars allocated under the 2018 spending bill. While spending pushes are common at the end of every government fiscal year, agencies have even more unspent dollars this year as the budget bill was passed several months late and included significant increases. Most federal agencies received a budget increase in GFY18 and collectively defense and civilian agencies received $80 billion and $63 billion of net increases, respectively. Despite being the recipients of greater funding increases, defense agencies are better positioned to spend their end-of-the-year money as they were anticipating such increases and were spending accordingly even before the budget was finalized in March. Civilian agencies, on the other hand, spent more conservatively before the budget was finalized, as they were expecting budget cuts, which were initially proposed for GFY18. As a result, contracting obligations at the end of the third quarter revealed that civilian agencies had spent 6% less year-to-date in GFY18 than over the same time period in GFY17, despite receiving a 12% increase in funding. These dynamics should result in a flurry of contract award activity over the next two months.
On Thursday, the Department of Defense (“DoD”) released the final solicitation for its Joint Enterprise Defense Infrastructure (“JEDI”) contract without changing its award structure. The $10 billion IDIQ cloud contract will be awarded to a single contractor, with an initial two-year period of performance and option periods extending it to as many as ten years. The single source nature of the contract was a point of contention throughout the industry; in their April 30th letter to Congress, the IT Alliance for Public Sector (“ITAPS”), comprised of several large technology companies, expressed concern that a single award would ultimately hurt the quality of performance on the contract. Nevertheless, the DoD is proceeding with the JEDI contract as a single award, with questions regarding the proposal now due on August 16th and bids due on September 17th. Many observers view ITAPS member, Amazon Web Services (“AWS”), as the favorite to win the award, seeing the JEDI program as a logical fit for the cloud provider’s capabilities. Fellow ITAPS members, Microsoft (through their Azure platform) and Google (with its Google Cloud platform), are also expected to compete for the contract.
Leidos Holdings (up 6.4%) – Share prices were up this week after the company announced that it beat earnings per share estimates for the quarter.
Cobham (down 6.3%) – Share prices were down this week after the company announced that Boeing was withholding payments for its work on the KC-46 aerial refueling program.
Hitachi Vantara, a subsidiary of Hitachi, Ltd., has agreed to acquire REAN Cloud LLC, a provider of global cloud systems integration, managed services, and developed solutions of cloud-native applications. Terms of the deal were not disclosed.
ISR, Inc., a subsidiary of Cubic Corporation, has acquired Shield Aviation, Inc., a provider of autonomous aircraft systems for intelligence, surveillance, and reconnaissance services. Terms of the deal were not disclosed.
Staple Street Capital and the Senior Management Team of Dominion Voting Systems has acquired Dominion Voting Systems, a provider of election tabulation solutions to government customers. Terms of the deal were not disclosed.