Industry Week in Review – September 14, 2018

KippsDeSanto & Co. Industry Week in Review – September 14, 2018


Boeing CEO Dennis Muilenburg addresses the production slowdown of 737 aircrafts—announcing the company will ramp up monthly production by almost 10% in 2019.  Congress approved an additional 16 F-35 Joint Strike Fighters, increasing the authorized 2019 total by over 20%.  SAIC’s acquisition of Engility, valued at nearly $2.5 billion, continues the trend of public company government contractors turning to mega-mergers and acquisitions to scale.

Aerospace & Defense Update

At Boeing’s September 12th investor conference, Boeing CEO Dennis Muilenburg appeared confident that 737 aircraft production would recover by year-end with no effect on Boeing’s financial forecasts.  As he has mentioned previously, Muilenburg emphasized that the 737 delivery slowdown stemmed from a combination of the latest production-rate ramp-up occurring simultaneously with the production line shift to the MAX variant of the 737.  In response to a possible slowdown, Boeing has added about 600 new 737 production workers in recent months, and these workers are expected to stay on as Boeing looks to ramp up its a production rate from 52 aircraft to 57 aircraft per month by next year.  Muilenburg expressed that the 737-aircraft line will continue its year-over year growth and Boeing will not need to alter its 2018 forecast.

Congress has approved the addition of another 16 F-35 Joint Strike Fighters on top of the 77 authorized by the 2019 defense policy bill.  As usual, appropriators used their annual defense spending bill to offer tweaks to the existing shopping list for military hardware from the previous version of the bill, which President Trump signed into law last month.  This new compromise also adds an extra littoral combat ship and six more Bell-Boeing V-22 Ospreys to build a stronger military force moving forward.  In all likelihood, these measures are expected to pass before the start of the fiscal year on October 1st to avoid the optics of a government shutdown ahead of upcoming midterm elections in November.

Government Technology Solutions

This past week, Science Applications International Corporation (“SAIC”) announced its intentions to acquire Engility Holdings, Inc. (NYSE:EGL).  Engility was spun out from L3 Communications, Inc. (“L3”) in 2012 and proceeded to acquire Dynamic Research Corporation (“DRC”) and The Analytic Sciences Corporation, Inc. (“TASC”) in 2014 and 2015, respectively.  SAIC’s acquisition of Engility, valued at nearly $2.5 billion, will position SAIC as the third-largest contractor by revenue in the Government Technology Solutions space.  SAIC is the latest in a long line of public company government contractors who have turned to mega-mergers and acquisition in order to achieve increased scale and meaningful cost synergies in today’s active, yet competitive, marketplace.  Other notable recent deals of scale in the industry include: DXC Technology’s three-way merger with Vencore and KeyPoint creating Perspecta, Inc., General Dynamics’ $9.7 billion acquisition of CSRA this April, and Leidos’ $4.6 billion acquisition of Lockheed Martin’s IT business in 2016.  This race to acquire scale, contracts, and capabilities, stoked by increased government spending and favorable budgetary dynamics, is expected to continue in the near to medium-term.  In an investor conference call, SAIC CEO Anthony Moraco said that the combination of SAIC and Engility is a strategic move that “take[s] advantage of near-term market opportunities in this federal market environment, but also provide[s] downside protection against perturbations in the longer-term funding profiles of individual customers.”  While integration will likely be the initial focus, the union of these large service providers will also provide SAIC access to Engility’s security cleared labor force.  Adding these extra cleared workers will boost SAIC’s ability to compete for new work and allow it to pursue larger contracts as a result.  Like SAIC, other large government contractors are turning to M&A to broaden capabilities and customer portfolios in order to access more of the broader market.

Big Movers

Triumph Group, Inc. (up 11.2%) – Share prices were up this week due to winning two contract extensions for HELLFIRE Romeo Missile Components, which are expected to generate more than $11 million in revenue.

SAIC (down 11.5%) – Share prices were down this week following an announcement that SAIC has agreed to acquire Engility Holdings, Inc. and will assume Engility’s $900 million in debt.


SAIC has agreed to acquire Engility Holdings, Inc., a provider of technical services to the U.S. Department of Defense, U.S. Department of Justice, U.S. Department of State, Federal Aviation Administration, Department of Homeland Security, and space-related and intelligence community agencies.  The deal is worth an estimated $2.5 billion.

Argosy Capital has acquired Capewell Aerial Systems, a provider of engineering products for aerial delivery, life support, and tactical gear for military, law enforcement, and humanitarian agencies.

Coriolis Composites has acquired MF Tech, a provider of robotic filament winding, a technique used to manufacture a wide variety of composite parts.

TAE Aerospace Pty. Ltd acquired Kiddie Aerospace and Defense Australia Pty Ltd., a provider of automatic fire extinguishing systems for military vehicles used by armed forces.

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