Space & Missile Defense Report

The second half of 2011 could be “very strong” for mergers and acquisitions in the aerospace and defense industry following a pace in the second quarter that largely resembled 2010 levels, a business consulting firm said recently.

PricewaterhouseCoopers (PwC)said the second quarter of 2011 featured 13 deals worth $50 million or more for a combined $5.3 billion, roughly the same as the $5.2 billion in the same period last year. But deal volume for the first six months of 2011 grew by 39 percent from the first half of 2010, with 30 deals valued at a combined $15.2 billion.

Even though deals in the second quarter of 2011 were off pace from the first quarter, PwC said there were already signs the rate in the second half of the year could climb to levels not seen since the record set in 2007.

“Deal activity during the second quarter declined somewhat from the first quarter of 2011, but this appears to be more of a result of the robust nature of (mergers and acquisitions) activity during the first quarter than the start of a long term trend,” Scott Thompson, a US aerospace and defense analyst at PwC, said. “In fact, the increases in the first half of this year compared to last year demonstrate an ongoing appetite for deals in the sector.”

Most of the deals–62 percent–in the second quarter were driven by divestures as businesses sought to spin off units with slower defense growth, a trend expected to be on the rise, PwC said.

“Financial investors should continue to find attractive investment opportunities as sector constituents continue to seek to shed certain defense assets, which tend to have relatively stable cash flows from longer-term government contracts,” Thompson said.

One of the most notable divestures of the year was Northrop Grumman’s [NOC] spinning off of its shipbuilding division, which became Huntington Ingalls Industries [HII] on March 31, 2011.

“While strategic investors are narrowing their focus on businesses that are believed to be more resilient to defense spending cuts, they are also shifting from diversified strategies toward building competencies in specific defense niches, which could drive additional mega deals,” Thompson said.

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Northrop Grumman [NOC] recently said it successfully completed the first test to demonstrate real-time cueing of the Airborne Infrared (ABIR) sensor for the Ballistic Missile Defense System (BMDS) with the Integrated Sensor Manager (ISM).

The company’s ISM completed the early intercept proof-of-concept exercise by participating as an associated operation in the Missile Defense Agency (MDA) FTX-17 test on July 8.

ISM is a prototype capability Northrop Grumman is developing for MDA to enable more accurate tracking and threat identification for intercepting a missile earlier in flight.

These improvements are required for the MDA’s Phased Adaptive Approach (PAA) that is expected to integrate incremental capabilities over several years to enhance defense against emerging ballistic missile threats.

During the test, ISM received 2-D measurements from space-based sensors observing the FTX-17 target, which was drop-launched from the rear of a C-17 cargo aircraft over the Pacific Ocean Test Range off the California coast.

ISM formed and provided 3-D tracks to MDA’s Experimentation Laboratory (X-Lab).

After receiving a command from the X-Lab, ISM sent a cue to the ABIR sensor at Vandenberg AFB, Calif., and continued to provide cue updates as new measurement data was received.

“ABIR is a critical element for the PAA and our successful test shows we can command that sensor to generate actionable information to enable earlier intercept,” said Kelley Zelickson, vice president of air and missile defense systems for Northrop Grumman Information Systems. “It’s a significant achievement to execute the ISM’s first-time live cueing of an ABIR sensor to bring us closer to the desired Aegis launch-on-remote capability.”

MDA’s current operational concept envisions the ABIR platform and sensors forward in theater for early detection and surveillance of the threat.

The ISM FTX-17 exercise used a ground-based ABIR sensor. Complexity will be added in future experiments with the addition of multiple airborne sensors and more complicated scenarios over the next two years.

ISM is being developed under an MDA Joint National Integration Center Research and Development Contract task order. The task order requires participation in flight and ground tests to validate performance. The prototype capability will demonstrate improved ability to task sensors for acquisition, correlation and tracking; generate position, velocity and acceleration data of objects in flight; perform target feature extraction and discrimination for early identification of threats; and optimize the use of limited sensor and interceptor resources to defend against growing missile threats.

Lockheed Martin [LMT] recently announced that its new Guided Multiple Launch Rocket System-Plus (GMLRS+) extended-range rocket successfully completed a 120-kilometer mission at White Sands Missile Range, N.M., an improvement in range of approximately 50 kilometers (31 miles) over the current GMLRS round.

According to a company press release, a team of engineers from Lockheed Martin and Aerojet, the GMLRS rocket motor manufacturer, are developing GMLRS+ as a proposed follow-on version of the existing GMLRS to extend the rocket’s range, add a capability for a “scalable-effects” warhead, and allow it to operate within the current High Mobility Artillery Rocket System (HIMARS) and MLRS M270A1 launcher force structure. Lockheed Martin is the prime contractor on the GMLRS program.

The company added that this test was the first of two Lockheed Martin-funded GMLRS+ launches planned for 2011. The second test in late fall will evaluate the scalable-effects warhead designed to offer multiple distinct outputs, which can be selected before launch.

Aerojet [GY], a world-recognized producer of missile and space propulsion systems and defense armaments, was selected for the test phase as the GMLRS+ warhead and rocket-motor supplier after a two-month evaluation and selection process.

The Navy has extended a contract with Lockheed Martin [LMT] to continue maintaining the Tactical Tomahawk Weapons Control System (TTWCS), a system that integrates the launch hardware and software to provide weapons control for the Tomahawk Land Attack Missile, the company said recently.

The initial value of the option is $13 million but could reach $50.2 million if the remaining three options are exercised, Lockheed Martin said.

“We will continue to apply our systems, software, and hardware engineering expertise to ensure that Tomahawk remains a viable and responsive weapon system,” said Jim Quinn, the vice president of C4ISR Systems at Lockheed Martin.

Lockheed Martin will also provide software development, systems engineering, and software and hardware deployment support needed to upgrade TTWCS under the contract. The work will be done at Lockheed Martin’s Valley Forge, Pa., facility.

The Air Force has completed developmental testing of the newest version of the laser-guided Maverick air-to-ground missile, paving the way for operational testing (OT), Raytheon [RTN] said recently.

The latest variant of the Maverick, or AGM-65 E2/L, offers new capabilities that include allowing the launch aircraft to use onboard laser designators to put the weapon on the target. Earlier Mavericks only permitted buddy-and ground-based laser targetting. It also has an enhanced laser seeker and new software that reduces the risk of collateral damage, Raytheon said.

“The joint testing community conducted a series of very demanding tests, including two where the missile contended with targets moving at 65 and 72 mph,” said Harry Schulte, vice president of Raytheon Missile Systems’ Air Warfare Systems products. “As we begin OT, the warfighter will have an opportunity to put the new laser-guided Maverick through its paces, clearing the way for entry into the inventory of the U.S. and its international partners.”

The Air Force and Navy launched the Maverick A-10, F-16, AV-8B and F/A-18 aircraft during the recent round of testing. The Navy is expected to complete its testing this summer and refers to the Maverick as AGM-65 E2, Raytheon said.

The Army wants information from industry for a Short Range Precision Strike System (SRPSS) that Special Operations Force personnel could use for precision engagements.

The U.S. Army Aviation and Missile Command (AMCOM) Program Executive Office (PEO) Missiles and Space (M&S), Project Manager (PM) Joint Attack Munition Systems (JAMS) released the Request for Information (RFI) for the system Aug. 3 on FedBizOps, with responses due in 45 days.

The entire system is required to be man-portable, so it is “strongly desired” that it weigh less than 65 pounds and be smaller than 48x6x6 inches including all cables, power source, fire control and any other required accessories, the RFI said. Also, the SRPSS should be capable of engaging at a threshold maximum range of not-less-than six (6) kilometers and an objective maximum range of not-less-than 15 kilometers, and have the ability to be used in direct fire at a minimum range of not-greater-than 100 meters if needed; intent of the engagement is a K-kill.

The system must be able to be used day and night in all weather conditions to engage enemy personnel in the open, light structures, and vehicles. The enemy vehicles could be stationary or moving commercial SUVs, pick-ups, or sedans, it said.

At a minimum, the RFI said, the system should include a Global Positioning System/Inertial Navigation System (GPS/INS) and Semi-Active Laser (SAL) terminal homing guidance system.

Additionally, it is “desirable” to have additional guidance modes such as, but not limited to, millimeter wave radar, synthetic aperture radar, imaging infrared or Light- Detection and Ranging (LIDAR).

The system also should be able to be used from vehicles either stationary or on the move.

While the sources sought is directly related to ground-to-ground engagements it is highly desirable that the system be compatible with UAVs and rotary-wing aircraft, the document said.

If the government awarded a contract as a result of a formal solicitation, it would want SRPSS offerings to be available for technical demonstration firings within 12 months of the date of contract award.

For more information or questions, contact Bernadine Stokes, [email protected], (256)842-7141.

Raytheon [RTN] recently said a series of laboratory tests on the Small Diameter Bomb II (SDB II) tri-mode seeker demonstrated that it exceeds anticipated performance parameters.

The SDB II’s seeker fuses millimeter-wave radar, uncooled imaging infrared (IIR) and semiactive laser sensors on a single gimbal. The result is a powerful, integrated seeker that seamlessly shares targeting information between modes, enabling the weapon to engage fixed or moving targets around-the-clock in adverse weather conditions.

“We kept SDB II affordable by designing it to meet–not exceed–government requirements. The fact that the uncooled IIR sensor surpasses design specifications is a win for the warfighter and the taxpayer,” said Harry Schulte, vice president of Air Warfare Systems for Raytheon Missile Systems. “These tests prove there’s no need to increase the cost of a tri-mode seeker by adding a cooled IIR seeker when an uncooled IIR will work just as well.”

Raytheon is currently producing integrated tri-mode seekers in the world’s only operational factory specifically designed to assemble such seekers.

“Raytheon pioneered tri-mode seeker technology, and we’re the only company that can claim its tri-mode seeker is reliable and consistently accurate,” said Tom White, Raytheon’s SDB II program director. “In addition to being effective, uncooled IIR sensors are affordable and have a reduced total life-cycle cost.”

The SDB II successfully completed a critical design review for the Air Force, a significant point for Raytheon and teammate Boeing [BA], which are competing for the Joint Air-To-Ground (JAGM) program against a Lockheed Martin [LMT] team. SBD II and JAGM share essentially the same tri-mode seeker.

South Africa’s Denel Land Systems said it has developed an artillery piece that can directly fire three shells through the same hole–at a distance of one kilometer.

The locally developed artillery piece is extremely accurate and can fire at a range of 30 km and deliver 50 percent of its projectiles within the size of a soccer field, the company said in an Aug. 4 statement.

This degree of accuracy was achieved when the latest version of DLS’s 105mm Stryker was recently tested at the Alkantpan testing range in South Africa’s Northern Cape. The Stryker LAV III LSPH (Light Self-propelled Howitzer) differs from previous versions in that it can now be serviced by a crew rather than being remotely fired.

The company has worked with General Dynamics [GD] on the system, an earlier version of which was shown in the spring of 2004 with a Stryker and 105, in the United States.

Denel Land Systems CEO Stephan Burger says the firing tests were witnessed by members of the South African defense community. The tests underline the world-class characteristics of the gun and the quality of the engineering team responsible for its development, he said.

The 105mm Stryker is a joint project formed by DLS, General Dynamic [GD] Systems and Rheinmetall Denel Munitions, another subsidiary of Denel, South Africa’s largest manufacturer of defense products.

Research and Development work on the system started in the 1990s when a Denel/Armscor project team was given the task to produce 155mm, 39 caliber artillery range, accuracy and lethality from a 105mm system. The end product was an artillery piece with the weight of a 105mm howitzer, but the range and terminal performance of a 155mm System–with better precision.

The latest version tested at Alkantpan has a crew of three–a driver, commander/gunner and loader. Because the system fires off its wheels, it can be quickly deployed in action. The system weighs 18,200 kilograms with 36 rounds on board and is air-transportable with a C-130 aircraft.

Burger says the range of the artillery is between 6 and 30 km, depending on the configuration of the projectile and propellant charge.

Its accuracy is exceptional, the company said. During the firings, error margins of less than 0.3 percent of range was consistently achieved at maximum range. This kind of performance was made possible through the system engineering approach that was followed in developing the gun, the charges and the projectiles as an integrated system.

Burger says the system has generated significant international interest since it was first unveiled at the African Aerospace and Defence Exhibition in 2000. The turreted version of the 105mm System will also be able to fire from Finland’s Patria AMV vehicle, currently the platform for the South African Badger family of Infantry Combat Vehicles.

The Navy last week picked ATK (ATK) and teammate BAE Systems over competitor Lockheed Martin [LMT] for a $109-million contract for the Engineering and Manufacturing Development (EMD) phase of the Joint and Allied Threat Awareness System (JATAS).

The JATAS provides advanced missile warning capability, aircrew warning of laser-based weapon systems and hostile fire indication (HFI) for small arms, rockets, and other unguided threats. It will interface with the existing AN/ALE-47 Countermeasures Dispensing System. The service awarded the contract on July 20.

“The ATK-BAE Systems industry team brings tremendous engineering and operations expertise that is focused on making JATAS a success,” said Mike Kahn, President of ATK Missile Products Group. “Our collective experience in the design, development and production of combat-proven aircraft survivability equipment brings together the very best capabilities of our industry to successfully execute and deliver JATAS for our customer.”

Lockheed Martin and the ATK team both competed under a Technology Demonstration (TD) phase contract in October 2009 in preparation for the downselect award by the Navy. Lockheed Martin recently said it was “disappointed” about losing.

The ATK team will begin the 48-month EMD phase focusing on transitioning the design from development prototypes to production representative systems. Work is expected to be completed in September 2015. Other members of the JATAS industry team include DRS [DRS] and Goodrich [GR].

Facing the same headwinds as other defense companies, Alliant Techsystems [ATK] recently reported lower earnings and sales in its first quarter but was able to mitigate the decline in earnings due to improved operating efficiencies.

Moreover, as with other defense firms, ATK boosted its earnings guidance for the year, in part driven by a lower than expected share count as the company repurchased $50 million of its stock in the quarter.

Net income declined 4 percent to $71.5 million, $2.13 earnings per share (EPS), from $74.6 million ($2.24 EPS), a year ago topping consensus estimates by 14 cents. Earnings benefited from two non-operational events, including a one-time tax benefit due to a state tax law change, which added 11 cents EPS, and the sale of a land parcel, which added 10 cents EPS.

The one-time gains were partially offset by higher pension and interest expenses.

Excluding the land sale gain, operating margins improved 50 basis points to 11.6 percent.

John Shroyer, ATK’s chief financial officer, attributed the improved margins to improved efficiencies and business execution combined with cost management. He said the company expects to sustain margins in the mid-11 percent range for the fiscal year.

Sales in the quarter fell 11 percent to $1.1 billion from $1.2 billion due to reduced volume at the Army Radford Ammunition plant, less work for NASA, less work on non-standard ammunition, a drop in defense electronics revenues due to timing of awards and a drop in commercial ammunition business. Bookings in the quarter were light at $678 million but are still expected to roughly equal sales for the fiscal year, Shroyer said.

Despite a soft environment for defense, ATK is not going to “surrender” its long-term objective of boosting organic growth, Mark DeYoung, the company’s president and CEO, said.

Free cash flow was negative $193 million but is still expected to be between $225 million and $250 million for the year.

All four of ATK’s operating segments posted declines in revenues while Aerospace Systems and Missile Products were able to boost their bottom lines by 19 percent and 3 percent, respectively. Aerospace Systems’ profits increased mainly due to the land sale, which added $5.4 million to the bottom line, improved operating efficiencies and higher sales of flares and decoys.

At Missile Products, operating profit benefited by improved operating efficiencies and a higher profit rate on tactical rocket motor programs.

Share repurchases, sustainable margins and the one-time gains enabled ATK to boost its earnings guidance to between $8.50 and $9 from the prior outlook of between $8 and $8.60 EPS. Despite soft sales in the first quarter, ATK maintained its sales guidance for the year at between $4.6 billion and $4.8 billion as it expects a stronger second half of the year.

Sales drivers in the second half of the fiscal year include continued production of the Advanced Anti-Radiation Guided Missile, a ramp up of work on the Joint and Allied Threat Awareness System for Navy and Marine Corps aircraft and next-generation ammunition for the Army’s Abrams Main Battle Tank, and demand for commercial ammunition and related tactical accessories, Shroyer said.

While ATK hasn’t pulled the trigger on an acquisition lately, the company is still actively reviewing potential purchases, DeYoung said. The company is also wrapping up its portfolio review and DeYoung said to expect some direction here in the coming months. DeYoung disclosed the portfolio review in May during ATK’s fourth quarter earnings call, saying divestitures would also be considered as the company looks to boost margins to the goal of 12 percent.

DeYoung also said that development work the company is doing on composite structures for Airbus’ new A350 aircraft is on track under a revised plan after problems arose that resulted in a charge as part of ATK’s third quarter results. Financial issues related to the development work are also tracking well, he said.

As the Pentagon enters a time of austerity, defense leaders said they are rethinking weapon systems plagued by cost and schedule problems and looking for a new acquisition chief with industry knowledge.

Defense Secretary Leon Panetta and Chairman of the Joint Chiefs of Staff Adm. Michael Mullen told reporters recently the Pentagon is well positioned for the first round of defense cuts called for in the deficit-reduction act President Barack Obama signed into law on Tuesday. That’s because the Pentagon is nearing the end of a comprehensive review intended to find $400 billion in longterm savings, and the new deficit deal calls for $350 billion in defense-related reductions over the next decade.

What Panetta is very concerned about, he reiterated to the press recently, is a second part of the deficit plan that says if a forthcoming super committee of lawmakers and Congress can’t agree on up to $1.5 trillion in additional government savings by the end of the year, the Pentagon automatically will be cut by $500 billion or $600 billion by 2021.

Panetta called this trigger a “kind of Doomsday mechanism” that would result in “a further round of very dangerous cuts across the board, defense cuts that I believe would do real damage to our security, our troops and their families, and our military’s ability to protect the nation.”

Panetta said the results of the Pentagon’s comprehensive review will inform the first round of $350 billion in defense-related cuts. The service chiefs, though, have not yet made their cost-savings recommendations to him, he said.

Mullen said the review is looking at areas including administrative overhead and weapon systems.

“I think programs that can’t meet …their cost and schedule requirements are very much in jeopardy and will be very much under scrutiny, if you will, as we go forward,” he said at the Pentagon. He said he is “confident” the Pentagon can meet the first round of cuts.

Amid the talk of military budget cuts in Washington this week, Obama announced Tuesday he will nominate Pentagon acquisition czar Ashton Carter to replace William Lynn as the deputy secretary of defense.

Regarding Carter’s successor, Panetta said recently: “I’ve obviously asked for a whole list of individuals that we think can replace him and that have (defense) industry knowledge that I think is important to that job.”

Carter’s deputy is Frank Kendall, a former Raytheon [RTN] executive.

Panetta rejected the argument that Carter, who came to the Pentagon from Harvard University, lacked enough industry experience.

“I just find him to be someone who is serious-minded and very capable and a good manager for the department,” Panetta said. “And that’s the primary interest that I have, is making sure the deputy understands this department and can help me manage this department.”

Regarding the deficit agreement, Panetta said he is not drawing up contingency plans in case those $500 billion or $600 billion in additional Pentagon cuts are triggered through a so-called sequestration process because of Congress’ inability to agree on additional savings later this year. The threat of those large defense cuts, which Obama and Panetta do not support, is intended to compel lawmakers on the forthcoming super committee to make tough government-spending choices.

Panetta said he and other Pentagon leaders “have a responsibility to really educate the leadership on the Hill…of the dangers if they allowed sequestration to take place.”

Mullen said if those second-round cuts were to materialize, his and the service chiefs’ “view is that’s very dangerous for the country.”