Industry Week in Review – September 7, 2018
KippsDeSanto & Co. Industry Week in Review – September 7, 2018
Summary
Near the end of the government fiscal year, budgetary spending remains a primary emphasis for commercial and federal enterprises. Although Boeing has secured a significant increase in orders, it must deal with an excessive backlog and simultaneously meet customer demands. Also, the U.S. continues to firm up its military relationship with India. In the government technology landscape, modernization remains at the forefront especially with issues of cybersecurity and federal agencies must deal with the “use-it-or-lose-it” spending binge as the fiscal year closes.
Aerospace & Defense Update
A surging global base of airline passengers, with more than 100 million new passengers per year, has created nearly $500 billion worth of new plane orders for Boeing. This increased backlog had led to logistical challenges for Boeing, especially with respect to storage of unfinished aircraft as the company attempts to keep pace with robust demand. As a result of engine and fuselage supply bottlenecks, Boeing has several unfinished 737s at its production facilities in Seattle and lacks sufficient factory space to store them. The company is currently relying on local airports to host excess aircraft to provide short term relief, but it does not plan on this being a long-term solution. Boeing’s management team is developing an overarching recovery plan to match production rates with deliveries to settle these challenges and prevent future production issues.
On Thursday, the United States and India signed a breakthrough security accord that would allow India to purchase advanced U.S. weaponry. With this agreement, India wants to participate in joint military exercises with the U.S. and increase its role in regional naval security. The U.S. sees its alliance with India as a critical measure in countering growing Chinese influence in the region. This deal caps off a budding military relationship between the two countries; over the past decade, weapons sales from the U.S. to India increased from relatively insignificant amounts prior to 2008 to a cumulative $15 billion by 2018. India has already purchased Apache and Chinook helicopters, maritime patrol aircrafts, and M777 howitzers from the U.S. Looking ahead, India is expected to order several F-16 and F-18 fighter jets from Lockheed Martin to modernize its aircraft capabilities, which would replace its existing Russian models.
Government Technology Solutions
On Thursday, the Justice Department charged Park Jin Hyok, a North Korean spy, with conspiracy to commit fraud due to his involvement in both the attack on Sony in 2014 and the Wannacry ransomware attack in 2017, along with a series of other cybercrimes. The accusations came the day after the House of Representatives passed the bipartisan Cyber Deterrence and Response Act of 2018, which calls on the White House to publicize known advanced persistent threat (“APT”) groups in an effort to deter future cyberattacks from state-sponsored operatives. These events substantiate DoD CIO Dana Deasy’s emphasis on the importance of cybersecurity at the 9th Annual Billington Cybersecurity Summit on Thursday. Deasy said that while cloud, AI, and Communications, Command, and Control (“C3”) technologies are key focus areas for modernizing the Department, their integration “will only be fully successful with a robust cybersecurity environment.” As government agencies continue to integrate forward-leaning solutions such as cloud and AI, cybersecurity implementation will continue to be the foundation and first step in these modernization efforts.
The potential increase in year-end government spending continues to be a topic of debate as the government’s fourth quarter draws to a close. Billions of dollars remain unallocated, and the “use-it-or-lose-it” mentality of budget authorities has received considerable criticism. A study by the American Economic Association (“AEA”) hints that this yearly spending binge typically leads to low-value investments and a waste of government funds. Although these spikes in federal spending are not uncommon, this year could see unprecedented levels of fourth quarter spending, as some top federal agencies have yet to spend as much as 40% of their annual budget. Last year, federal agencies spent nearly five times their average weekly spend in the last week of 2017. To curb the potential waste of government funds, several senators contacted CFOs at 13 agencies, warning them to re-evaluate their spending habits and provide evidence against frivolous spending. While this action is unlikely to have a material effect on government spending for the current fiscal year, a more conscious effort to change this established spending trend could shift government contracting and budgeting landscapes in future years.
Transactions:
ByteCubed, LLC has acquired CHIEF, a provider of brand, technology, and communications solutions to government agencies, nonprofits, and corporations. Terms of the deal were not disclosed.
CORE Industrial Partners, LLC has acquired Midwest Composite Technologies, Inc., a prover of additive manufacturing of prototype and low-volume production components for a variety of end markets, including the aerospace market. Terms of the deal were not disclosed.
Coriolis Composites, a subsidiary of Coriolis Group has acquired MF Tech, a provider of robotic filament winding, a technique used to manufacture a wide variety of composite parts. Terms of the deal were not disclosed.
Gooch & Housego plc has acquired Gould Technology, LLC., a provider of research, development and manufacturing of highly reliable fiber optic components and integrated assembly solutions. The deal is worth $16.4 million.
One stop Systems, LLC has acquired Concept Development, Inc., provider of custom high-performance computing systems for airborne in-flight entertainment (IFE) systems. CDI’s capabilities include electrical, mechanical and software design. The deal is worth $5.9 million.
Polaris Industries, Inc. has agreed to acquire WSI Industries, a provider of complex, high-precision parts for a wide range of industries. The deal is worth $23.9 million.
PrecisionHawk, Inc. has acquired InspecTools, Inc., a provider of high-fidelity machine vision software and data analysis tools built for the renewable energy market. Terms of the deal were not disclosed.
PrecisionHawk, Inc. has acquired HAZON, Inc., a prover of extensive aviation experience, standards-based operating procedures, certified drone flight operations, inspection services. Terms of the deal were not disclosed.
Transcat, Inc. has acquired Angel Instrumentations, Inc., a provider of calibration services including RF & electronic test equipment, physical, dimensional, thermal, flow and torque calibrations. Terms of the deal were not disclosed.
Valence Surface Technologies has acquired Triumph Processing, Inc., a provider of metal finishing on parts up to 110 ft in length and 14 feet in width / depth. Terms of the deal were not disclosed.
Big Movers:
Engility Holdings, Inc. (up 4.4%) – Share price were up this week following news that the Company won a prime spot and two task orders on the Army Software Engineering Services contract.
The KeyW Holding Corporation (up 4.5%) – Share prices were up this week after the company was awarded a short-term research, development, and design-related contracts, highlighting KeyW’s ability to develop affordable and timely sensing solutions.
