Canadian military ditches plan to paint new search-and-rescue planes grey, will stick with familiar yellow

On the same subject

• 

  June 29, 2020 | Local, Aerospace

  After The Shock: Implications For M&A In The Aerospace & Defense Market

  By Adil Khan, Jim Adams and Steve Beckey Forbes; KPMG Contributor Jun 23, 2020 The current economic disruption—coming on the heels of the 737MAX suspension—has varying impact across A&D segments. The impact on commercial aerospace has been immediate and extensive, while the defense sector has largely remained unscathed. However, it is hard to see how it will remain so, given the extensive fiscal measures being taken. What will this mean for M&A in A&D? Some trends are beginning to emerge that will affect the entire deal life-cycle (from deal strategy through integration and value creation). Yet, as in other times of economic disruption, new opportunities will emerge, which leads us to believe that the slowdown of M&A activity will be short-lived. As we enter this next phase, deal makers who adapt quickly to the realities of the new industry landscape could be well positioned to maximize value. Pre COVID-19 environment Not too long ago, commercial aerospace was booming, with year-over-year ramp ups in build rates and record backlogs. There were expectations of another golden decade — further extending the unprecedented 14-year “super up-cycle”, defying the long-standing cyclicality of the sector. However, in 2019, the historic correlation between GDP, air-traffic growth, carrier profitability, orders and build rates was suddenly disrupted. GDP and airline profitability levels remained relatively healthy, but new orders and build rates dropped as the industry grappled with the 737MAX shock, as well as a slowdown in the twin-aisle segment. Other undercurrents also emerged — slowdowns in world trade from escalating tariff tensions, weakness in high-growth geographic markets such as China and India, and declining consumer confidence. In contrast, U.S. defense spending was on the rise, averaging 4 percent1 annual growth over the past 5 fiscal years; the $738 billion FY2020 defense bill2 ensured this momentum would continue. The government services sector was also set to benefit from continued funding increases to modernize IT infrastructure and address evolving national security challenges. With general confidence in the long-term fundamentals of the sector and a favorable budgetary environment, players in certain A&D segments pursued M&A to build scale. Others “re-realized” that content matters and initiated vertical and horizontal integration strategies to capture more value and drive cost competitiveness, or acquired targeted niche capabilities and emerging technologies. We also saw the emergence of Super Tier I's through scale-driving consolidation aimed at broadening capabilities and potentially exerting greater influence on OEMs. Deal volume in the A&D sector reached record levels — almost doubling over the last 5 years and outpacing the broader M&A market by 40 percent.3 Valuations remained elevated on the strength of high bidder interest, limited supply of attractive assets, high A&D stock valuations (which outperformed the S&P 500 by 8 percent),4 as well as healthy balance sheets and strong cash positions. TEV/EBITDA multiples for A&D transactions averaged 11x,5 outpacing increases in the overall M&A market. Although, deal volumes moderated in the second half of 2019, amid elevated uncertainty about defense spending heading into a presidential election year, the overall outlook remained optimistic. COVID-19 impact COVID-19 caused a precipitous collapse in air traffic. With travel restrictions and stay-at-home orders, carriers around the globe made unprecedented cuts to capacity, idled fleets, and began deferring or canceling new aircraft deliveries. Also, the MRO (maintenance, repair, and overhaul) and aftermarket segments, which had benefited from the prolonged 737MAX grounding and high fleet utilization, suddenly faced stiff headwinds. Thus far, the defense industrial base has not experienced a COVID-19 demand shock. There is no noticeable disruption in appropriations or major delays and cancellation of military programs. However, as in the commercial sector, defense contractors are actively monitoring their supply base and taking steps to preserve liquidity, minimize supply chain disruption, and taking measures to comply with CDC and local government guidelines. The range of scenarios for defense spending is bookended by two scenarios: an elevated national security threat that would preserve or accelerate funding, or a reordering of budget priorities to fund social and other mandatory programs, resulting in sequestration-type measures, similar to 2011. With these developments, volatility in the financial markets, lack of access to financing, alternative more pressing liquidity needs by corporates and most importantly, uncertainty in the marketplace, deal flow in A&D has come to an immediate standstill. Several “in-flight” processes have been halted, new deals in the pipeline have been deferred, and even some announced transactions terminated. Access to the new public offering market is effectively closed. The gap in expected valuations between buyers and sellers has widened considerably, due to disparate perceptions of the extent of economic disruption caused by COVID-19; contrasting views on reopening of the economy and the pace of return to normal; and diverse perspectives on what the post-COVID-19 new reality looks like. This has rendered financial forecasts and pre-COVID-19 market perspectives obsolete. Further, the extent and nature of unusual and non-recurring events6 impacting financials, present considerable challenges for deal makers to form a credible view of normalized earnings and cash flows. With the lack of reliable projections, it is nearly impossible to form a credible view on valuations let alone bridge this gap. Additionally, although M&A teams have attempted to navigate through practical challenges with offsite due diligence, virtual facility tours, video conferences, etc., adapting to a virtual M&A environment, especially for cross-border deals, has been challenging. Developments to watch as economies reopen Given the health concerns, changes in social behaviors (some of which may be slow to reverse) and anticipated lead-time to an effective vaccine, a V-shape recovery in air traffic appears increasingly unlikely. As governments move from combating coronavirus to reopening economies, the pace and extent of the economic recovery is expected to vary significantly around the world. Further, some long-lasting or permanent developments may trigger some dramatic shifts in the sector: KPMG Implications for M&A trends and outlook KPMG Although we probably do not expect to see M&A activity return to the pre-crisis levels immediately, we expect M&A activity to drive realignment of the industry landscape in the post COVID-19 environment. Implications for M&A Capabilities As we enter the next phase, deal makers will need to adapt to the realities that impact how deals get done. Examples include: KPMG While the challenges are intimidating, the opportunities will be vast, and those who move quickly and decisively are likely to be rewarded for years to come. Those who take this unique opportunity to prepare and are ready to act will stand ready to reshape the A&D industry. 1. 2019 DoD Comptroller Data (Green Book) 2. Department of Defense 3. CapIQ, Institute for Mergers, Acquisitions, and Alliances 4. Year return, S&P A&D index vs S&P 500 5. Trailing 12-month average to June 2019 and avg. 16x for deals >$500M in value; CapIQ, Dacis Company reports and Press releases 6 Worker furloughs, facility shut-downs, loss of business or order cancellation, idled or underutilized facilities, CARES Act funding, changes to performance-based compensation structures or payouts, health and sanitization related measures, IT infrastructure investments to adapt to remote working environment, deferral of payroll taxes, carryback of NOLs, increased interest expense tax deduction, etc KPMG Contributor

• 

  February 12, 2020 | Local, Naval

  Canada's submarine fleet spent 'zero days' at sea last year: government documents

  All four of Canada's submarines were tied up last year for repairs and maintenance — news that has the opposition Conservatives questioning whether the Liberal government can keep the second-hand fleet afloat for another two decades. In response to a written question before Parliament, the Department of National Defence said the boats "spent zero days at sea" in 2019, but three of the four would return to service at some point this year. Over the year, HMCS Victoria, HMCS Windsor, HMCS Chicoutimi and HMCS Corner Brook were in various stages of repair and maintenance. They also went into drydock for long-term upgrades meant to ensure the submarines remain operational until the end of the next decade. The Liberal government's 2017 defence policy does not envision replacing the subs until 2040, but a written statement recently put before the House of Commons indicates the navy wants to keep the boats "operationally effective until the mid-2030s." Conservative defence critic James Bezan said the acquisition of new submarines is not something Canada can put off for 20 years — and the Department of National Defence and the Liberal government should begin seriously looking for replacements. 'Do they have a plan?' "The boats are getting older and need to be replaced sooner, but I'm not sure that's resonating with the minister's office or the [Prime Minister's Office]," Bezan said. "You have to ask yourself the questions. Do they have a plan to replace the submarines? And do they even care that we have submarines?" The boats were docked last year after an intense sailing schedule for two of the four submarines over 2017 and 2018. HMCS Chicoutimi spent 197 days at sea helping to monitor sanctions enforcement off North Korea and visiting Japan as part of a wider engagement in the western Pacific. HMCS Windsor spent 115 days in the water during the same time period, mostly participating in NATO operations in the Atlantic. Bezan said he is not questioning Canada's need for submarines, pointing out that the navy has three coastlines to monitor, countries such as China and India are investing heavily to build up their own fleets and Russian submarine activity in the North Atlantic has surpassed Cold War levels. "The best way to fight a submarine is with a submarine," said Bezan. "There is a growing need for submarines to ensure our sovereignty around North America. It is also the best way to patrol our Arctic waters." Frigates first The Liberal government has just started the process of replacing the country's patrol frigates — the backbone of the navy — through an estimated $60 billion program that will roll out over the next two decades. Following the release of the federal government's new defence policy in June 2017, a senior government official, speaking on background, cited the cost and complexity of rebuilding the surface fleet as justification for postponing the purchase of new submarines. The commander of the navy, Vice-Admiral Art McDonald, said that after some early struggles, the submarine program has reached what he described as "a steady state," and he's convinced the boats can be operated safely for years to come. "We know there's still excellent life in the Victoria-class submarine. I've seen that personally," McDonald told CBC News in a recent interview. "We'll be able to operate those boats into the 2030s, but to do that we'll have to continue with the routine investments we've made in them." Submarines are not cheap. Defence department figures tabled before Parliament show the navy has invested upward of $325 million in submarine maintenance, repairs and upkeep each year for the last two years. The bulk of the cash went to repairing HMCS Corner Brook, which has been undergoing an extended upgrade since 2015 following an accident four years earlier when it smashed into the bottom of the ocean off British Columbia. The boat is one of the three Canadian subs expected to be back in the water this year for "contractor trials" meant to confirm the repairs. The Chrétien government bought the submarines second-hand from Britain in 1998 at a cost of $750 million. Since then, National Defence has pumped billions into repairing and converting them for Canadian use. The program suffered a major setback in 2004 when HMCS Chicoutimi caught fire on its maiden voyage, killing one sailor. Almost a decade ago, navy planners started making a case for a replacement program. They told the former chief of the defence staff, the now-retired general Walt Natynczyk, that the military needed bigger, quieter submarines that could perform stealth missions, launch undersea robots and fire guided missiles at shore targets. The briefing was obtained in 2012 by The Canadian Press under access to information legislation. A year later, the commander of the navy at the time, the now-retired vice-admiral Paul Maddison, told a Senate committee the navy meant to operate the boats until at least 2030. https://www.cbc.ca/news/politics/submarines-canada-fleet-repairs-canadian-navy-1.5458632

• 

  April 24, 2023 | Local, Aerospace

  DND expands contract for SAR lifesaving technology - Skies Mag

  The Canadian Department of National Defence has extended its use of CENTUM?s Lifeseeker for Royal Canadian Air Force search-and-rescue operations.