KippsDeSanto & Co. Industry Week in Review – October 26, 2018
Several aerospace and defense and government technology solutions companies announced positive earnings this week. Healthy global air travel and rising military budgets were cited as primary drivers behind the strong earnings reports. Moreover, the U.S Department of Justice continues to prioritize cybersecurity and has formally charged a Russian national in connection with fabricating disinformation throughout the 2016 election.
Aerospace & Defense Update
Numerous aerospace and defense companies announced positive 3Q18 earnings this past week. Boeing beat earnings per share (“EPS”) estimates by $0.11 (3.2%) and revenue estimates by $1 billion, reporting $25.1 billion of total revenue for 3Q18, reflecting more efficient commercial aircraft production and robust defense business growth highlighted by several major contract awards. Moreover, Lockheed Martin beat EPS estimates by $0.83 (19.3%) and increased year-over-year revenue 16% to $14.2 billion. Lockheed’s strong revenue and earnings growth was led by its Aeronautics business unit, which continues to benefit from increased production of its F-35 combat jet program. Raytheon’s earnings also beat EPS estimates by $0.24 (11.9%) and grew revenue by 8.3% YoY to $6.81 billion, driven by 7% sales growth in its missile systems business unit and 13% sales growth in its intelligence, information and services business units.
StandardAero Aviation Holdings, Inc., a portfolio company of Veritas Capital, is exploring a potential sale that could be worth over $5 billion. StandardAero has a global presence and is one of the largest maintenance, repair, and overhaul providers for Boeing and Airbus’ aircrafts, engines, business jets, and helicopters. Favorable macroeconomic trends including robust global air travel, a proliferating military budget, and the Pentagon’s renewed focus on maintenance and upgrades make StandardAero a desirable acquisition target for a variety of strategic and private equity suitors.
Government Technology Solutions
As it continues its initiative on cracking down on foreign cyber threats, the Department of Justice (“DOJ”) officially charged a Russian national this past week in connection with a disinformation campaign in the wake of the 2016 election. The specifics behind the alleged cybercrime involved funding the creation of fake and politically-contentious information in an effort to stir up political unrest. This public indictment of a foreign national provides one of the first concrete examples of enforcing the U.S. government’s new National Cyber Strategy. The policy, released in September, specified a shift in approach whereby the U.S. would publicly condemn nation states for their involvement in cyberattacks. This year has already seen the DOJ responding to cybercrimes more publicly, including the indictment of nine Iranians for stealing several universities’ data in March, twelve Russians for the Democratic National Committee (”DNC”) hack in July, a North Korean programmer who was involved in some of the biggest cyber-attacks in recent years, and seven Russian military officers earlier this month for the attacks against the World Anti-Doping Agency (“WADA”). As cybercrime is becoming an increasingly popular political weapon for international states, the DOJ intends to respond accordingly publicly condemn and indict foreign cyber criminals, in an attempt to curtail the behavior and lead the way for other Western governments to do the same.
Bombardier (down 15.1%) – Share prices were down this week after Mitsubishi pushed back against claims Bombardier made in a lawsuit that Mitsubishi hired Bombardier engineers and stole trade secrets to expedite production.
General Dynamics (down 10.7%) – Share prices were down this week after the company announced revenue below expectations. Total revenue rose 20% to $9.09 billion but fell short of the $9.38 billion estimated.
Applied Insight acquires Organizational Strategies Inc., a provider of analytics, IT and intelligence, surveillance and reconnaissance (“ISR”). Terms of the deal were not disclosed.
Directional Aviation has agreed to acquired SimCom International, Inc., a provider of initial and recurrent pilot training for jet, turboprop, and piston aircrafts using FAA-qualified flight training device and full-motion simulators. Terms of the deal were not disclosed.
QinetiQ Group, plc. has acquired Inzpire Group, Ltd., a provider of operation training and mission systems for military customers in the UK and internationally. The deal is worth an estimated $30.5 million.
KippsDeSanto & Co. Industry Week in Review – October 19, 2018
On the heels of the Esterline Technologies / TransDigm deal, L3 Technologies has entered into an agreement to combine with Harris Corporation to form another major player in the defense industry. In addition to an active M&A market, federal agencies are recognizing the need and benefit of updating legacy infrastructure and incorporating NextGen technologies to drive increased investment in IT over the next few years.
Aerospace & Defense Update
L3 Technologies and Harris Corporation have agreed to combine in an all-stock deal, which will be the largest-ever defense industry merger. The combination will form a sixth prime defense contractor focused primarily on defense electronics and communications. The newly formed entity, L3 Harris Technologies, will be based in Melbourne, Florida and will be approximately $33.5 billion in combined market value. The two companies are projecting approximately $16 billion in combined revenue this year, which will surpass Huntington Ingalls and BAE Systems. M&A activity continues to be highly active for the defense market, fueled by premium market valuations and favorable defense spending. This merger also represents a further hollowing out of the middle of the U.S. defense market, as larger players continue to seek scale through inorganic growth. This transaction is expected to close mid-way through 2019, pending a review by the Defense Department.
Shortly after midnight on October 17th, the Air Force’s fourth Advanced Extremely High Frequency (“AEHF”) satellite successfully launched aboard an Atlas 5 rocket from Cape Canaveral Air Force Base in Florida. The AEHF satellite provides highly protected communications for the Department of Defense, offering “survivable, global, secure, protected and jam-resistant communication for high-priority military ground, sea, and air assets,“ according to an Air Force statement. The fourth AEHF satellite significantly increases communication speed allowing the transmission of real-time video, battlefield maps, and targeting data to help combatant commanders make optimal tactical and strategic decisions. The prime contractor on this $15 billion Air Force program, Lockheed Martin, is under contract to deliver a total of six AEHF satellites. The launch of the next satellite, AEHF 5, is scheduled for July 2019.
Government Technology Solutions
This week, FedScoop released the results of a study that details shifting patterns in federal IT investment strategies. The report, underwritten by IBM, surveyed 169 federal agency IT and program management executives to assess which IT and cloud deployment models are in the highest demand in the technology solutions market. Agency efficiency has been a key priority for the federal government and the publishers of the survey hope to “break fresh ground in linking how IT investment strategies are helping, and to a certain extent hindering, agencies and their ability to capitalize on many of the benefits cloud computing services can offer,” according to Wyatt Kash, senior vice president of content strategy at Scoop News Group. Nearly 38% of those surveyed are still investing in on-site, government-run data centers, compared to 20% in government-only community clouds, 7% in public / commercial clouds, 16% in hybrid models, and 19% outsourced, privately managed government cloud / data centers. While the on-site approach is the least conducive to digital transformation compared to a hybrid approach, risk tolerance and data sensitivity remain areas of concern for many agencies. Nevertheless, the results of the study indicate a coming shift in investment towards the aforementioned, cloud-friendly approaches that would provide enhanced flexibility and greater scalability for government agencies seeking to retain autonomy over their data. The study indicates that agencies that devote a greater focus on enhancing cloud capabilities also demonstrate a greater propensity to pursue machine learning and AI to increase mission efficiency. Not surprising, cloud forerunners are also more apt to early technology adopters. Federal agency recognition of the need and benefit of updating legacy infrastructure and incorporating NextGen technologies should hopefully drive increased investment in IT over the next few years.
L3 Technologies (up 10.0%) and Harris Corporation (up 9.0%) – Share prices for both entities were among the biggest movers as news of a merger fueled an increase in stock price for both companies.
Harris Corporation and L3 Technologies, Inc. have agreed to merge, the combined entity will create a global defense technology leader, focused on developing differentiated and mission critical solutions. The deal is worth an estimated $18.7 billion.
Luna Innovations, Inc. has acquired Micron Optics, Inc., a provider of innovative optical components and laser-based measurement technologies. Terms of the transaction were not disclosed.
Sonardyne International Ltd has acquired Chelsea Technologies Group Ltd., a provider of underwater acoustic products to both civilian and defense customers. Terms of the transaction were not disclosed.
KippsDeSanto & Co. Industry Week in Review – October 12, 2018
TransDigm has entered into an agreement to acquire Esterline Technologies Corporation for $4 billion. After key aerospace and defense providers have experienced production issues, the Pentagon is partnering with the Intelligence Community to identify and improve shortcomings in companies’ supply chains. Google has announced it will not submit a bid for the $10 billion JEDI cloud contract due to potential conflicts with its corporate values and IBM files a pre-award protest of the contract. The Government Accountability Office released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s portfolio of weapon systems.
Aerospace & Defense Update
On Wednesday, TransDigm Group Inc. announced that it had entered into an agreement to acquire Esterline Technologies Corporation for a total consideration of approximately $4 billion. Esterline provides engineered components, sensors, and specialized parts to the jetliner industry. The company has strong customer relationships and is a sole-source supplier of certain parts to Boeing and Airbus. TransDigm’s equity purchase price of $122.50 per share represents a 38% premium to Esterline’s closing stock price the day before the transaction was announced. The acquisition continues a trend of industry leaders paying large multiples to condense their supply chain to achieve cost-saving synergies, and TransDigm hopes the acquisition will strengthen its supply chain, cut costs, and increase productivity.
The Pentagon and the Intelligence Community (“IC”) are partnering to audit domestic aerospace and defense companies’ supply chains to identify and improve shortcomings that could hamper U.S military readiness. The Pentagon is particularly concerned about the industry’s ability to effectively increase weapons production and supply a conflict. Boeing’s recent 737 production issues reinforce the need to ameliorate supply chains, as shortages of various production inputs spanning from metal casting to circuit boards have hindered manufacturers’ ability to meet growing demand. Production issues have affected both upstream and downstream suppliers as key providers such as Spirit AeroSystems, GE Aviation, and United Technologies have all experienced production issues, citing late delivery of materials as a contributing factor to their delays. The Pentagon is incentivizing contractors to elevate their performance by offering bonuses for on-time deliveries and are simultaneously diligently working with industry leaders to foster communication and resolve these issues.
Government Technology Solutions
On Monday, Alphabet Inc.’s Google announced it will not submit a bid for the 10-year, $10 billion single-vendor DoD JEDI cloud contract because it may present potential conflicts with its AI principles. The withdrawal comes only a few months after the company decided it will not renew its AI contract with the DoD following significant internal complaints from employees. Google said they would have submitted a compelling solution for the portions that align with its values and fall within its scope had the contract been open to multiple vendors. The company was among a handful of tech giants in the hunt for the cloud contract, including Amazon Web Services, Microsoft Azure, IBM, GDIT (formerly CSRA) and Oracle—many of which have also expressed their displeasure with the winner-take-all award structure. In related news, this Wednesday, IBM filed a pre-award protest on JEDI, following Oracle’s pre-award protest of the contract earlier in the year. IBM is challenging the contract’s request for a single cloud environment for 10 years, as well as the RFP’s stringent requirements, which “mirror one vendor’s internal processes” and “restrict the field of competition”, according to IBM General Manager Sam Gordy. The final deadline for bids is Friday, with the awardee to be selected next April unless the protests cause the timeline to be extended.
This past week, the Government Accountability Office (“GAO”) released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s (“DoD”) portfolio of weapon systems. Because automation and connectivity are fundamental enablers of the DoD’s military capabilities, the potential for cyberattacks poses a serious threat to all network-based weapon systems. According to the report, testers attempting to breach weapons systems routinely were able to gain access to a variety of network connected defense platforms, within one hour; and were then able to take full control of, after a day, manipulating the platform’s system by changing or deleting data. With the report heavily criticizing defense officials for their lack of foresight in developing cyber capabilities for weapon systems, the Pentagon will have to move quickly to address these vulnerabilities. As the GAO prepares to brief Congress on its classified findings, the DoD will receive yet another reminder of the importance of increased cyber functionality and the proactive development of systems to keep up with rapid technological changes.
Astronics Corporation (down 20.7%) and Triumph Group (down 15.6%)– Share prices were among the hardest hit in the Aerospace, Defense and Government Services market after this week’s selloff, which resulted in the worst week for U.S. stocks since March.
AE Industrial Partners has acquired The Atlas Group, a provider of manufactured complex assemblies for commercial, business, and military aircrafts. Terms of the deal were not disclosed.
Celestica, Inc. has agreed to acquire Impakt Holdings, a provider of manufacturing solutions for leading OEMs. The deal is worth an estimated $329 million.
Cognosante, LLC has acquired J.Lodge, LLC, a provider of integrated solutions that improve the customer-care experience using artificial intelligence, driven speech analysis, and industry-leading software to analyze contact center interactions and find insights. Terms of the deal were not disclosed.
Decision Point Corporation has acquired CORTEK, Inc., a provider of systems engineering, software engineering, cyber support, and technical analysis and documentation to the Department of Defense, Department of State, and other government agencies. Terms of the deal were not disclosed.
FLYHT Aerospace Solutions Ltd. has acquired the Assets of Panasonic Weather Solutions, a provider of satellite communications systems, aircraft tracking, and Tropospheric Airborne Meteorological Data reporting. The deal is worth an estimated $8.4 million.
Maximus, Inc. has agreed to acquire the Citizen Engagement Centers divestiture of General Dynamics Information Technology, Inc.,a provider and operator of centers that handles government services inquires and management. The deal is expected to be worth an estimated $400 million.
Ravn Air Group has agreed to acquire Assets of Peninsula Airways, Inc., a provider of airline operating schedule passenger and charter throughout Alaska. The deal is worth an estimated $12.3 million.
Seemann Composites, Inc. has acquired Materials Sciences Corp., a provider of products and services to study advanced materials and structures. Terms of the deal were not disclosed.
TransDigm Group, Inc. has agreed to acquire Esterline Technologies Corp., a provider of engineered products and systems for aerospace and defense customers. The deal is worth an estimated $4.064 billion.
KippsDeSanto & Co. Industry Week in Review – October 5, 2018
Updates and overhauls continue to stand out as prevalent trends in the Aerospace, Defense, and Government Technology communities. This week, the U.S. Army came closer to finding a supplier for its defense radar system, and Boeing and Embraer mentioned the prospect of building an assembly line for Embraer’s cargo aircraft to make up for lagging interest from Brazilian buyers. In the Government Technology sector, digital transformation remains a pressure point as agencies pursue alternative avenues to facilitate cloud modernization and increased cyber functions.
Aerospace & Defense Update
The U.S. Army has narrowed its selection of awardees to develop a next-generation air and missile defense radar (“AMD”) system to Raytheon and Lockheed Martin. The Department of Defense Ordnance Technology Consortium originally had awarded contracts to four companies to develop designs for the Patriot AMD radar replacement system but has removed Northrop Grumman’s and Technovative Application’s from the process. The concept design contracts were given a period of performance of 15 months, but the down-select came early. Raytheon currently manufactures the legacy Patriot System while Lockheed Martin currently is developing the Medium Extended Air Defense System as competition. Radar technology is becoming more prevalent as Congress has mandated that the U.S. Army find a way to produce more capable radars that will fit into the future Integrated Air and Missile Defense framework by 2025.
Boeing and Brazilian aerospace company, Embraer, are reportedly discussing the prospect of building an assembly line for Embraer’s KC-390 cargo planes in the United States. This discussion comes on the heels of Boeing’s 80% stake in Embraer’s commercial business, and it is widely speculated that a similar deal on the companies’ defense businesses might be negotiated in the coming months. Boeing and Embraer had previously established agreements in 2012 and 2014, but a defense-related joint venture would allow for the development of much broader market opportunities. The KC-390 is a multi-mission aircraft built to haul cargo, transport passengers, insert special operators, and even help refuel other aircraft. Embraer has struggled to draw serious interest from international buyers as Brazil currently remains its only customer, however Embraer believes this agreement could change that.
Government Technology Solutions
With their innovative and agile solutions offerings, commercial companies have begun to increase their desire to more effectively penetrate the federal contracting space. This is largely driven by a change in the historic reluctance of federal agencies to adopt commercial technologies, given a heightened focus on, and need for, more robust cybersecurity measures and enhancements to outdated legacy systems. Government contractors have turned to partnerships with commercial companies in order to more quickly deliver commercial solutions as contractors typically have required contracting vehicles in place. Raytheon (NYSE: RTN) has been one of the leaders in this movement and recently teamed with Florida-based Cybraics, Inc. and California-based Authentic8, Inc., to deliver cyber and cloud solutions to federal and state and local agencies. Intended solutions include enhanced security for various voting and healthcare platforms. These companies will provide their services through a subscription model, deemed cyber-as-a-service, that will allow Raytheon “to deliver security faster and at a lower total cost,” according to John DeSimone, Vice President of Cybersecurity and Special Missions at Raytheon’s Intelligence, Information, and Services (“IIS”) segment. With government spending at all-time highs, Raytheon’s decision to collaborate with innovative commercial companies could give it a serious competitive advantage as the demand for departmental IT overhauls continues to grow.
On Thursday, the senate passed a bill that solidifies the role of the Department of Homeland Security’s (“DHS”) Cybersecurity and Infrastructure Security Agency (“CISA”). Formerly known as the National Protection and Programs Directorate (“NPPD”), the agency was rebranded amid increasing cyber threats and tasked with securing federal networks and protecting critical infrastructure. The elevation of CISA comes in the wake of a long line of cyber breaches, including alleged Russian meddling in the U.S. election in 2016 and the recent Chinese hardware hack that made its way into Apple and Amazon Web Services’ data center equipment. This move, coupled with the recent passage of the Cyber Deterrence and Response Act in September, further reinforces U.S. prioritization of combatting the increasing cyber vulnerability of federal agencies and commercial companies as they modernize.
Air Transport Services group, Inc. has agreed to acquire Omni Air International, LLC, a provider of airline and charter services for commercial and government clients. The transaction is worth an estimated $845 million.
Artech Information Systems, LLC has acquired The Talent & Technology Solutions Business Unit of CDI Corporation, a provider of IT and engineering talent sourcing services and technology solutions to clients across North America. Terms of the deal were not disclosed.
Behrman Capital has acquired kSARIA, a provider of mission-critical connectivity solutions for the aerospace and defense end markets. Terms of the deal were not disclosed.
Bel Fuse, Inc. has acquired BCMZ Precision Engineering Limited, a provider of precision machined components to customers in the automotive, aerospace, defense, telecommunications, fiber optic, and medical industrial sectors. Terms of the deal were not disclosed.
Bytecubed, LLC has acquired InterKN, a provider of proprietary technology platforms that connect enterprise buyers with innovative suppliers by dynamically surfacing available funding, technology needs, and data insights. Terms of the deal were not disclosed.
Gulfstream Aerospace Corp. has acquired a manufacturing line of The Nordham Group, Inc., a provider of nacelles for the Gulfstream G500 and Gulfstream G600. Terms of the deal were now disclosed.
Enlightenment Capital has made a strategic investment in Emagine IT, Inc., a provider of information technology services, with a focus on cyber, data analytics, and cloud, to government and commercial customers. Terms of the deal were not disclosed.
Hilcrest Holdings, Inc., in partnership with Akoya Capital, LLC, has acquired Evolver, Inc. and eVigiliant Security, merging the two to create Converged Security Solutions (“CSS”), a provider of comprehensive converged security managed services solutions spanning cyber and physical security. Terms of the deal were not disclosed.
Standex International Corp. has acquired Regional Mfg. Specialists, Inc. (d.b.a. Agile Mechanics), a provider of high-reliability magnetics, including transformers, inductors, and coils for mission critical applications for blue chip OEMs. The transaction is worth an estimated $39 million.
KippsDeSanto & Co. Industry Week in Review – September 28, 2018
Boeing has been awarded a $9.2 billion contract from the Air Force to supply next-generation training jets. Furthermore, commercial technology companies continue to penetrate into the government contracting market. This week the Air Force announced it will award AT&T and Microsoft cloud Other Transaction Authority (“OTA”) contracts worth up to $121.7 million.
Aerospace & Defense Update
The Air Force announced that it had selected a bid by a Boeing-Saab partnership for the award of a $9.2 billion contract to supply next-generation training jets. This is expected to be the Air Force’s last major aircraft procurement opportunity for the foreseeable future. The Air Force plans to purchase 351 T-X aircraft, 46 simulators, and associated ground equipment with an option to buy up to 475 aircraft and 120 simulators. The new aircraft will provide Air Force pilots with critical training capabilities required to increase operational efficiency. Boeing’s award is its third major contract victory since August, following an $805 million Navy contract to build four MQ-25 unmanned tankers and a $2.38 billion Air Force contract to manufacture Huey replacement helicopters.
Boeing and Lockheed Martin’s joint venture, United Launch Alliance (“ULA”), has chosen Jeff Bezos’ space industry startup, Blue Origin, to provide its BE-4 engine for ULA’s upcoming Vulcan rocket. The first launch of ULA’s Vulcan is tentatively scheduled for 2020, but testing and final certification may push back that date. ULA estimates the project will create over 20,000 direct and indirect jobs. The potential billion-dollar agreement is an important stepping stone for Blue Origin as it seeks to become a major military launch provider. Blue Origin’s penetration into the military launch systems market comes amid significant military and commercial activity in the space industry. The Air Force is seeking to procure a wider range of lower-cost, more diverse launch systems, providing private sector billionaires such as Bezos and Elon Musk an opportunity to expand their presence in the growing space launch markets.
Government Technology Solutions
Commercial technology players continue the push to gain significant presence in the government contracting market, a strategy reinforced by Amazon CEO Jeff Bezos’ presence at Wednesday’s annual Air, Space and Cyber Conference. Mr. Bezos used the platform to encourage the government to leverage more commercial technology, which tends to provide a broad range of solutions to a diverse population of customers, rather than buying what he views as more narrow, costly solutions from traditional federal contractors. The main discriminator for commercial entities, according to the Amazon CEO, is the number of co-customers and strong ecosystem of users they serve that constantly drive innovation and the product forward. The recent wave of large federal contract wins by commercial companies suggests agencies recognize the benefits Bezos alluded and are increasingly becoming more open to adopting commercial technology for their modernization requirements. Amazon is not the only successful commercial player in the federal contracting space, however; the Air Force announced this week it will award AT&T and Microsoft $121.7 million in cloud Other Transaction Authority (OTA) contracts in an effort to modernize IT infrastructure and create a more efficient workforce within the department. Furthermore, commercial contractors are not only winning awards but also beginning to exert influence and earn meaningful seats at the industry table. This week, White House officials announced they will host representatives from IBM, Alphabet Inc., and AT&T on Monday for a quantum information science (“QIS”) summit as agencies continue to look towards NextGen solutions to improve overall efficiency and mission delivery. As the 2018 government fiscal year draws to a close, commercial companies should expect to see the uptick in market share continue moving into 2019.
A portfolio company of H.I.G. Capital has acquired Iron Bow Technologies, LLC, a provider of information technology solutions worldwide that serves clients in the government, healthcare, higher education, legal, and non-profit industries. Terms of the deal were not disclosed.
L3 Technologies has acquired ASV Global, a provider of unmanned surface vessel and autonomous vessel control systems
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