Industry Week in Review – May 10, 2013

Over the past week, members of the Senate Armed Services Committee (“SASC”) put increased pressure on Defense Secretary Chuck Hagel to provide the DoD’s 2013 sequestration plan for the first portion of planned military cuts.  The Presidential, House, and Senate budgets did not factor in the first year of sequestration cuts, about $40 billion that must be eliminated from the military’s 2013 budget.

Given the delay in providing cuts for 2013, SASC Committee Chairman Senator Carl Levin and Ranking Member Senator James Inhofe further requested that the Defense Secretary provide a package of reductions to the 2014 defense budget by no later than July 1, 2013 in order to meet the $52 billion savings requirement as established by the Budget Control Act.  In their note to Defense Secretary Hagel, the bipartisan Senators wrote “We believe that the identification of these specific reductions will serve both to help Congress and the Department prepare for the possibility that we will be unable to avoid another round of sequestration and to show Congress and the public how unpalatable that outcome would be.”

Big Movers

Ducommun Inc. (Down 24.5%) – Shares were down this week after the company announced first quarter earnings of $0.35 per share, well below analyst expectations of $0.47 per share.  The company reported first quarter revenue of $175.9, roughly $10 million below analyst expectations for the quarter.

Relevant Transactions

HEICO Corp. to acquire Reinhold Industries, Inc., a provider of advanced custom composite components and complex composite assemblies for commercial aviation, defense, and space applications.  Reinhold has been a portfolio company of The Jordan Company since being acquired in late 2006.  Terms of the deal were not disclosed.

Haystax Technology, Inc. acquired FlexPoint Technology, LLC, a provider of cloud computing and enterprise content management services to government customers.  The acquisition complements Haystax’s existing capabilities in big data analytics and mobile solutions after its acquisition of Digital Sandbox in mid-April.  Terms of the deal were not disclosed.

Greenbriar Equity Group completed the acquisition of EDAC Technologies Corporation following its tender offer of $17.75 per share dated March 17, 2013.  Since the initial offer by Greenbriar, EDAC had also received a tender offer from MidOcean Partners worth $18.25 per share, however this offer was subsequently withdrawn.

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Industry Week in Review – January 6, 2012

This week, President Obama unveiled a new plan for defense spending and strategy officially titled: Sustaining Global Leadership: Priorities for 21st Century Defense.  The plan outlines more than $487 billion in cuts and ultimately calls for a “leaner” and more “agile” military that uses smaller conventional ground forces amid cuts in federal spending.  With the shifting threat environment, the U.S. will no longer focus on the ability to fight two land wars at the same time, but rather strengthen new capabilities in special operations forces, C4ISR, unmanned systems, space and cybersecurity.  Furthermore, the military will shift its focus away from the Middle East and more towards the Asia Pacific region as growing threats and regional influence from China ensue.

The strategy also intends to reduce the U.S. nuclear stockpile, trim ground forces, and invest in weapons that can penetrate denied regions.  Though specific program cuts were not addressed, they are expected to be unveiled with the 2013 defense budget proposal, which the White House is scheduled to send to congress next month.

Big Movers

CPI Aerostructures Inc. (Up 9.7%) – Share rose this week after the company announced a purchase order from Boeing Defense, Space & Security valued at $12.7 million, as well as announcing that new business awards from all customers for 2011 was approximately $83.6 million compared to $61.7 million for all of 2010.

SPX Corporation (Up 8.5%) – Shares are up this week after the company announced a strategic joint venture with Shanghai Electric Group to supply products to the power sector in China. Shanghai Electric in one of China’s leading diversified heavy equipment manufacturers, with 2010 revenue of $9.5 billion. SPX aims to grow its presence in China through leveraging Shanghai Electric’s strong relationships among utilities, power plant builders, and engineering procurement companies.

Relevant Transactions

IBM Corporation to acquire Green Hat Software Limited, a provider of software quality and testing solutions for the cloud and other environments. The acquisition allows IBM to offer a complete software development and testing solution to its customers and capitalize on growing software testing markets. Terms of the deal were not disclosed.

Grey Mountain Partners acquires Global Security Glazing, a provider of security and architectural glazing solutions for correctional facilities, courthouses, and government security buildings. The acquisition demonstrates the heightened focus on safety and security for government buildings as well as the increasing demand for energy efficient glazing solutions. Terms of the deal were not disclosed.

Clearview Capital acquires Gregory C. Rigamer & Associates, Inc., a provider of consulting services and technology solutions for aviation, elections, energy, and public safety sectors. The acquisition will allow Clearview to provide consulting services for various growing industries. Terms of the deal were not disclosed.

Blue Wolf Capital Partners acquires Channel Technologies Group, a provider of piezo-electric ceramics, transducers and complex systems and services. The acquisition allows Blue Wolf Capital to take advantage of the increased requirements of the U.S. Government and other Channel Technologies customers. Terms of the deal were not disclosed.

Kratos Defense & Security Solutions acquires selected assets of an unnamed security and public safety system integration business, which designs, engineers, deploys, manages and maintains specialty security systems for the U.S. Government for $20 million. The acquisition is significant as Kratos essentially acquired one of its most formidable competitors. Furthermore, it will significantly expand its capabilities, qualifications, customer relationships, contract portfolio and geographic depth and breadth.

Electronic Consulting Services, Inc. (ECS) acquires Paradigm Technologies, Inc., a provider of product oriented management and technical services for federal government customers. The acquisition provides ECS with access to new customers, including the Missile Defense Agency, Navy PEO IWS 3.0, United States Marine Corps, and the US Marshal Service. Terms of the deal were not disclosed.

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Industry Week in Review – November 4, 2011

As the U.S. and Department of Defense (“DoD”) restlessly await the Super Committee’s November 23rd deadline for a proposal to reduce the country’s deficit by at least $1.5 trillion, all of the branches of the military have expressed concern over the potential for further defense cuts. Army chief of staff, General Ray Odierno, warned that additional budget cuts “would be catastrophic to the military, and, in the case of the Army, would significantly reduce [the] capability and capacity to assure [U.S.] partners abroad, respond to crisis, and deter potential adversaries, while threatening the readiness and, potentially, the all-volunteer force.”

In response to further potential cuts, the military has begun to change its acquisition requirements in order to take into account price, as well as capability. Currently, the Army’s main acquisition programs, the ground combat vehicle (“GCV”) and the armored multipurpose vehicle (“AMPV”), are mandating contractors to rely solely on mature technologies harvested from other programs, like the JLTV or MRAP. The cost relief and improved schedule adherence will benefit the government, while the reliance on previously developed materials will benefit defense companies with solid track records within the industry.

Big Movers

Spirit AeroSystems Holdings, Inc. (Up 8.9%) – Shares rose this week after the company reported strong 3Q2011 results. Revenue rose 12.7%, from the same quarter last year, to $1.1 billion, and the company expects 2011 revenue of $4.7 billion, at the top of its range given in August.

GeoEye, Inc. (Down 29.1%) – Stocks fell this week after the company missed 3Q2011 revenue and EPS estimates. GeoEye reported 3Q2011 revenue and EPS of $85.8 million and $0.51, both below analysts’ estimates of $93.0 million and $0.56, respectively.

Relevant Acquisitions

Kaman Aerospace Group, Inc. to acquire Vermont Composites, Inc., a manufacturer of composite aerostructures and advanced composite medical equipment, for an undisclosed amount. The acquisition supports Kaman’s strategy of supplementing its ongoing growth with targeted, strategic acquisitions, as well as expanding its presence onto a number of additional platforms with solid growth prospects.

Lockheed Martin Corporation acquired Sim-Industries BV, a commercial aviation simulation company located in the Netherlands. The combination of Sim-Industries with Lockheed’s military simulation business will provide airlines, civil pilot training centers, and military customers access to training systems that can be provided more quickly and with lower operating costs. Terms of the deal were not disclosed.

Additionally, this week ITT Corporation completed a spinoff of Xylem Inc., a water company, and Exelis Inc., a defense and information business with notable exposure to Iraq and Afghanistan. The spinoff was planned with the belief that the sum of its parts would be greater than the whole. Exelis has been marked as a potential takeover target, however near term tax implications would likely push back any immediate acquisition proposals. In the event that a sale was to occur, industry sources estimate Exelis could command 7x – 8x 2010 EBITDA ($828 million). Expected revenue in 2011 is roughly $5.8 billion.

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Industry Week in Review – October 21, 2011

Deposed Libyan leader Moammar Gadhafi’s death Thursday will bring significant change to the people of Libya, however it may also bring transformation to how the U.S. engages in future conflict. Defense experts are pointing to the quick planning, small footprint, and limited duration utilized by NATO during the eight month involvement in Libya as the new template for military intervention. “The days of strategic warning, watching forces mobilize, stage, and move are gone,” said a senior defense official. “We will need the capability to respond on very short notice in geographic areas where we have little or no infrastructure.

In contrast to past engagements, the U.S. initially led the alliance during the opening days of the conflict, but then moved to more of a support role, quickly handing responsibility and most airstrikes over to European forces.

Future interventions may not look the same as Libya, potentially involving less airpower and more special operations troops on the ground, however the common elements will stay the same: a small footprint combined with little time to plan the mission. And, as the eight month conflict in Libya cost the U.S. just over $1 billion dollars, compared to the nearly $1 trillion dollar price tag of the eight years spent in Iraq, collective action could gain further support from voters.

Big Movers

Safran SA (Down 12.6%) – Shares fell this week, despite a 5.2% gain in 3Q2011sales to roughly $3.8 billion, after demand for spare parts came in at the bottom end of Safran’s forecast for the full year of 10 percent to 15 percent.

EADS (Down 11.2%) – Shares fell this week after British Airways’ CEO stated that China’s new single-aisle plane design represents a serious competitor to Airbus SAS

Relevant Transactions

The Parsons Corporation to acquire Cobham Analytic Solutions, a manufacturer of weapon, tactical, and space systems, missiles, and network-centric warfare, for $350 million. The acquisition enhances Parsons’ ability to offer mission-oriented technical and professional services to new and existing customers in the U.S. national security marketplace

AAR Corp to acquire two businesses of Teleflex Incorporated, Telair International GmbH, a manufacturer of cargo-loading systems for passenger and cargo jets, and Nordisk Aviation Products, a producer of pallets and cargo containers for airlines, for $280 million. AAR Corp expects the acquisitions of Telair and Nordisk to add over $225 million to revenue and Teleflex chief executive Benson Smith said in a separate statement that the deal was part of the company’s strategy to transform from a cyclical, diversified-industrial conglomerate into a pure-play medical technology company.

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Industry Week in Review – July 15, 2011

White House Chief of Staff Bill Daley announced Monday that the U.S. will delay $800 Million in Pakistan Aid, citing a “low point” in the relationship following the May 2nd raid that killed Osama bin Laden. Daley cited concerns over recent actions taken by Islamabad, such as arresting an army general accused of aiding the CIA in the operation and expelling more than 100 U.S. military personnel.

Additionally, President Barack Obama noted during a televised press conference his belief that the proposed cuts by the Simpson-Bowles Commission of $1 Trillion over the next decade are too deep for a country still at war, reiterating his recommendation of a $400 Billion cut target. Despite his lower goal, the Pentagon seems to be preparing for an even leaner budget, with General James Cartwright, Vice Chairman of the Joint Chiefs of Staff, revealing that he is preparing budget drills well over the President’s request.

Notes on some big movers:

AeroVironment, Inc. (Down 13.0%): Shares fell for the week as Raymond James and Lazard Capital downgraded the Company’s shares from “outperform” and “buy” ratings to “market perform” and “neutral” ratings, respectively

FLIR Systems, Inc. (Down 15.5%): Shares fell for the week as the Company announced that it projects 2Q 2011 revenue and EPS to be approximately $390 million and $0.18; Results for the Company’s Commercial Systems division remained strong, while continued weak demand in the Government Systems division negatively impacted results for the quarter

Notes on some relevant transactions:

Moelis Capital Partners announced Monday that it will acquire CyberCore Technologies LLC, a provider of cyber security, systems integration and secure supply chain management services for an undisclosed amount. Moelis Capital lauded CyberCore’s impressive management team and growth prospects furnished by strong customer relationships.

Precision Castparts Corp. announced Monday that it will acquire Primus International, a provider of complex components and assemblies, including swaged rods, advanced composites, and machined components to the global aerospace industry, for $900 million in cash. The transaction expands Precision Castparts’ overall product and service offerings, particularly in its aerostructures business which has complimentary but no overlapping capabilities.

Ayelet Investments LLC announced Tuesday that it has agreed to acquire Conmed Healthcare Management Inc., a provider of correctional healthcare services to county and municipal detention centers in the United States for $57.2 million, representing LTM Revenue and EBITDA multiples of 0.92x and 15.5x, respectively.

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Industry Week in Review – July 8, 2011

The Department of Defense (“DoD”) announced on Thursday that Deputy Secretary of Defense William Lynn will resign his post after completing the current budget review.  Having worked in defense strategy since 1982, his accomplishments as Deputy Secretary included leading the DoD’s budget process, playing a key role in developing a new cyber strategy, and developing a new operational energy strategy.  Many believe his departure will mark significant changes in the DoD staff, with a number of top officials retiring in the near future. 

Additionally, the Pentagon has asked Congress to shift $5 Billion in its budget request. Funds would be shifted away from Ground Combat Vehicle and Air-to-Ground missile development in order to replenish about $375 million worth of artillery inventory used in Operation Odyssey Dawn in Libya.  Other areas of augmentation include funds for unemployment compensation, increasing price of fuel, and UAV development.

Notes on some big movers:

Aeroflex Holding Corp (Down 17.2%):  Shares fell after Aeroflex revised its fourth quarter 2011 guidance, expecting revenue and adjusted EBITDA of $200 million to $59 million, respectively, missing analyst expectations of $219 million in revenue and $65 million EBITDA.

AAR Corporation (Up 10.1%):  Shares rose as the company announced that it has been awarded a five-year contract to provide lightweight, multi-purpose shelters for the U.S. Army valued up to $14 million.

No relevant transactions in the past week.

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