The Pentagon plans to increase the number of drone flights per day from its current 61 flights to 90 flights by 2019, representing a 50% increase over the next three years. This is the first significant increase since 2011, as pressure has been mounting on military efforts to address recent global events.
For many government contractors, the final quarter of the government fiscal year (“GFY”), from July to September, presents an opportunity to secure additional funding as agencies attempt to spend the remainder of their budget for the year. This concentration in spending can be partially explained by a few factors.
Warren Buffet’s Berkshire Hathaway has agreed to purchase Precision Castparts (“PCP”) for $37 billion, approximately 14x PCP’s LTM EBITDA. This deal is the largest purchase by Mr. Buffet to date, and demonstrates confidence that airlines will continue to drive positive momentum for the aerospace manufacturing market.
In an effort to increase national defense spending, defense contractors have ramped up lobbying efforts in Washington. In the second quarter of 2015, the top 50 defense contractors spent over $58 million on lobbying, an increase of 28% from the same quarter last year. The two firms with the largest investments, General Dynamics and Lockheed Martin, spent a combined $6.2 million during 2Q15 on defense issues.(1) Since 2011, the defense base budget has decreased from $528 billion to $496 billion due to budget caps.
Italian aerospace and defense group Finmeccanica has taken DRS Technologies off the market following results that beat expectations for the first half of 2015. Finmeccanica acquired DRS, a U.S. defense electronics business, in 2008 before major cuts in defense spending. Last summer, CEO Mauro Moretti indicated his plans to sell DRS as part of a business review and debt reduction program.
Lockheed Martin has entered into a definitive agreement to acquire Sikorsky Aircraft from United Technologies Corp (“UTC”) for $9.0 billion approximately 13.0x Sikorsky’s LTM EBITDA. Lockheed Martin estimates the transaction will generate ~$1.9 billion of tax benefits over the next several years.
Bombardier Aerospace will likely experience delays on another program in the coming months as it has announced a “full review” of its new Global 7000 and 8000 business jet programs. The announcement of the review follows continuing revenue pressure, cost overruns, and other demands from the CSeries airliner as well as its halt in production of its Learjet 85 program.
For the second consecutive government fiscal year, the Small Business Administration announced that the Federal government had exceeded its spending goal for small business (“SB”) prime contracting (the most recent previous year where this was achieved was FY2006).