CHICAGO, April 25, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Aerospace & Defense, including Triumph Group, Inc. (NYSE:TGI), United Technologies Corporation (NYSE:UTX), SAIC Inc. (NYSE:SAI) and Alliant Techsystems Inc. (NYSE:ATK).
The big defense operators armed with strong balance sheets are expanding their operations through acquisitions. The U.S. Defense department also endorses mergers among U.S. defense companies, provided they don't involve the top five or six suppliers acquiring each other. For that matter, the industry encourages acquisitions as the highest-priority investment area for a company with a sizeable cash balance looking for growth amid significant defense budget cuts.
In fact, the four main strategies to stimulate growth are joint ventures, foreign military sales, international expansion and mergers and alliances. Among important mergers and acquisitions, we begin with The Boeing Company which acquired CPU Technology Inc.'s Acalis business in February this year. The acquisition would address the need of Boeing's global customers to protect warfighters from information-assurance attacks.
Acalis provides security-on-a-chip that can help defend manned and unmanned aircrafts. This acquisition will help the company to better differentiate its offerings and provide long-term value for its global aerospace and defense customers.
Last month,Triumph Group, Inc. (NYSE:TGI) completed the acquisition of Goodrich Corporation (Goodrich Pump & Engine Control Systems) from United Technologies Corporation (NYSE:UTX). We also saw last month Erickson Air-Crane acquire Evergreen Helicopters, Inc.
Sometimes, instead of acquiring a particular firm, defense companies enter into contracts to purchase certain assets in order to acquire capabilities that enhance their ability to expand into attractive adjacent market opportunities. For instance, in January this year, Lockheed Martin entered into an agreement with Aveos Fleet Performance, Inc. to purchase certain assets of the engine maintenance, repair and overhaul ("MRO") business.
Meanwhile, SAIC Inc. (NYSE:SAI) is progressing well on its plan to split SAIC into two independent, publicly traded companies. In its announcement, SAIC said it intends one company to focus on government technical services and enterprise information technology. The other will focus on science and technology solutions in national security, engineering and health. The split is expected to occur in the second half of fiscal year 2014.
Overall, these acquisitions and even spin-offs help the defense pros in fulfilling task orders and contracts.
Agreements and Contracts
Currently, the world's five largest military spenders are the U.S., China, Russia, U.K. and France. Following suit are Saudi Arabia, India, Germany, Italy, Brazil, South Korea, Australia, Canada and Turkey.
The aerospace and defense companies generate revenue from international orders and foreign military sales ("FMS"). Since the domestic defense sector is faced by budget cuts and a constrained spending environment from the U.S. government, the industry is looking for growth from international orders.
In January this year, General Dynamics received a contract for the procurement and production of 69 Saudi M1A2 Abrams tanks for the Kingdom of Saudi Arabia. The Foreign Military Sales contract was awarded by the U.S. Army TACOM Life Cycle Management Command for the Royal Saudi Land Forces. Again, in Jan 2013, Alliant Techsystems Inc. (NYSE:ATK) entered into a contract with Israel Aerospace Industries under which it will provide the solar array to power the flagship Israeli company's 5-ton Earth satellite AMOS-6.
In February, under another FMS sales program, Alliant Techsystems received a contract for the production of rocket motors for AIM-9P Sidewinder customers.
The rapidly evolving security challenges and the need for countries to modernize aging inventories keep demand alive in international markets. However, in Europe, the continuous financial crisis is forcing governments to institute austerity measures that will negatively impact defense spending in the near term. The initiatives taken up would constrain their defense budgets and fiscal priorities in current and future periods.
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