Industry Week in Review – December 2, 2016

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Aerospace & Defense Update

The U.S. House of Representatives and Senate have agreed on a $619 billion defense budget for 2017, which will be finalized with votes over the next week.  This bill marks a $3.2 billion increase over President Obama’s budget request.  Democrats had pushed for an equal increase in domestic spending, but the provision was not accepted.  When compared to the President’s original 2017 defense budget request, highlights from the new bill include adding or retaining 36,000 total military personnel, a top military brass reduction of 110 generals and admirals, and no added acquisition plans for the F-35, Apache Helicopter, and F-18 Super Hornets.

Airbus will be cutting up to 1,164 jobs of its total workforce of 136,000 in an effort to execute the previously announced restructuring plan to streamline its organizational set up and increase its margin profile.  Also, more jobs may be under scrutiny as the a380 fails to procure significant new orders.  The cut jobs mostly center around communications and back office support roles, and the majority of the reductions will be in France and Germany, with the remainder in Britain, Spain, and India.  Airbus will start by asking for early retirements and voluntary departures, but the company may utilize forced reductions if it fails to meet targets.  The company hopes to have agreements in place with labor unions by mid-2017.

Government Technology Solutions Update

On Monday, Booz Allen Hamilton announced that it had signed an agreement to acquire Aquilent, also known as eGov Holdings, Inc., for $250 million.  Aquilent provides cloud and web-development solutions for the Federal government, with its major customers being the Department of Health and Human Services (“HHS”) and the General Services Administration (“GSA”).  This acquisition is slightly larger than acquisitions Booz Allen has made in previous years, such as its $53 million acquisition of agile development firm SPARC in 2015, but is consistent with the firm’s strategy to pivot its core focus away from pure-play consulting by investing in software development and other technical services.  Booz Allen has differentiated itself, historically, from some other government contractors by avoiding larger-scale deals. Instead, it has concentrated on acquiring strategically valuable capabilities and using its existing infrastructure to rapidly deploy them at scale.  Upon close, the acquisition of Aquilent will contribute roughly $35 million to Booz Allen’s top line during the remainder of its fiscal 2017, which ends on March 31st. The deal is also expected to add approximately 350 employees to Booz Allen’s burgeoning technology business.  Shortly after the deal was announced, Booz Allen’s equity partner, Carlyle Group LP, announced that it would sell its remaining 11% stake in the firm.  This would complete Carlyle’s draw-down of its ownership stake in Booz Allen, which it had originally acquired in 2008 for $2.54 billion.

On Wednesday, the Senate voted unanimously to pass the GAO Civilian Task and Delivery Order Protest Authority Act of 2016.  This bill grants the Government Accountability Office (“GAO”) jurisdiction to hear bid protests for all contracts with civilian agencies which are over $10 million in value.  While such jurisdiction for the GAO for defense contracts has been permanent since 2008, the same ability to hear protests on civilian contracts relied on the 2012 National Defense Authorization Act (“NDAA”).  That authority briefly ended when the sunset provision on the 2012 NDAA expired on September 30th.  Since then, the GAO has declined to hear or otherwise dismissed protests on several tasks orders, some as large as $200 million.  This had also affected task orders whose end customers were defense agencies, as long as those agencies were using civilian vehicles, such as Alliant or OASIS, to make procurements.  The new bill does not provide any mechanism to retroactively reinstate jurisdiction for the GAO over protests made during the interim period between the expiration of the 2012 NDAA and this new bill.  As of right now, it is unknown if the GAO will decide whether or not they will decide to hear any outstanding protests made since September.

 Big Movers

 Rockwell Collins (up 2.4%) – Shares were up this week after news broke that an investor activist was pressuring Rockwell Collins to reconsider the B/E Aerospace deal.

Textron (up 3.4%) – Shares were up this week after Textron was selected to supply its Advanced Architecture Phase Amplitude and Time Simulator (“A2PATS”) to support F-35 testing.

 Transactions

Blackwatch International has acquired FutureWorld Technologies Inc., a provider of IT services to state and Federal agencies.  FutureWorld holds a marquee contract with the Defense Microelectronics Activity (“DMEA”), designing and testing microprocessors for the Department of Defense (“DoD”).  Terms of the deal were not disclosed.

Booz Allen Hamilton Holding Corporation has agreed to acquire Aquilent (also known as eGov Holdings, Inc.), a provider of website and mobile development solutions, as well as cloud services for Federal government customers.  The deal is worth $250 million, and is expected to close by the end of 2016.

Cubic Corp. has acquired Vocality International Ltd., a provider of embedded technology that unifies communications platforms, enhances voice quality, and optimizes data throughput.  The deal is worth an estimated $10 million.

FLIR Systems, Inc. has acquired Prox Dynamics AS, a provider of nano-class unmanned aerial systems (UAS) for military and para-military intelligence, surveillance, and reconnaissance applications.  The deal is worth an estimated $134 million.

Trelleborg AB Business Unit Trelleborg Sealing Solutions has acquired CoorsTek, Inc. Subsidiary Tetrafluor, a provider of high-precision seals and bearings produced from high performance polymers and metals.  Terms of the deal were not disclosed.

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Industry Week in Review – November 25, 2016

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Aerospace & Defense Update

Boeing recently announced it has hired Kevin McAllister, former chief of GE Aviation services, to run its commercial aircraft business.  McAllister is the first outsider to lead Boeing’s commercial jet division and the most senior external company hire since 2005.  McAllister had been employed by GE since 1980, initially working as a product engineer developing commercial and military engines and moving into GE’s customer support operation in 1998.   Boeing CEO Dennis Muilenburg views McAllister’s hire as a concrete step towards Boeing’s goal of tripling service revenues over the next decade to $50 billion per year and growing Boeing’s share of the commercial market from 7% today. McAllister had a long working relationship with Boeing in his prior role at GE, and more than half of Boeing’s impressive backlog of 5,600 jetliners are powered by GE engines.  Boeing also announced its plans to merge the service arms of its commercial and defense and space operations into a new Dallas-based business unit with 20,000 employees.

Lockheed Martin and the U.S. Air Force announced they have successfully repaired 13 of the 15 F-35s that had been grounded in September due to an issue with the coolant tubes inside the aircraft fuel tanks.  Lockheed contractors and Air Force maintainers began work on the aircraft on October 7th and removed and replaced all deficient insulation.  Another 42 F-35s that are currently in production have the faulty insulation, but will be repaired and delivered by the end of 2017.  Lockheed is unsure how many more aircraft will be delivered during 2016.

Government Technology Solutions Update

According to Representative Will Hurd, there is a possibility that the Modernizing Government Technology (“MGT”) Act could pass through the Senate before the end of 2016.  The MGT Act was originally passed in the House of Representatives back in September, and was briefly put on hold prior because of the Presidential election.  Mr. Hurd, who was instrumental in pushing both the MGT Act and its predecessor act, the Modernizing Outdated and Vulnerable Equipment and Information Technology (“MOVE IT”) Act, was recently re-elected to the House and has continued to push the passing of this bill.  Mr. Hurd thinks that the Trump administration will be amendable towards a more efficient, streamlined, and updated policy for upgrading the Federal IT infrastructure.  If the Senate passes the MGT Act, it would make it easier for individual agencies to both upgrade their technology and to repurpose funds to do so. It also would lay the foundation for a centralized, government-wide fund, which could be used to finance larger IT projects.  However, many have noted that Congress has been preoccupied with issues surrounding the continuing budget resolution and as a result, time for other initiatives has been limited.  While it is possible that the MGT Act could slip into next year, Hurd still believes that there is both enough time and support for the bill to be passed in the next several weeks.

The Department of Defense (“DoD”) will soon decide on what changes to make to its procurement process for IT solutions.  According to Jane Rathburn, deputy director for Defense business systems, the DoD wants to make IT procurement as streamlined as the system the agency uses for weapons acquisition.  According to insiders, the DoD is being urged to make increased use of commercial, off-the-shelf solutions.  One of the issues that the agency runs into is high costs of customized software and IT systems which are then tailored specifically to each individual agency and application.  Such made-to-order solutions are more expensive to both acquire and maintain, relative to commercial solutions.  In order to update its processes, according to insiders, the DoD is focusing on increased cooperation between functional leaders and acquisition officers in each agency.  Doing that would enable the agency to first find problems and gaps that need fixing, identify what the ideal solution would be, and determine how IT can be used and procured to address those problems. This would allow the agencies to find commercial, and potentially cheaper, solutions.

Big Movers

Airbus (up 9.4%) – Shares were up this week after the U.S. issued a second license to Airbus for the sale of commercial aircraft to Iran.

Boeing (up 2.5%) – Shares were up this week after Boeing named Kevin McAllister the new CEO of the commercial aircraft division.

Transactions

Abaco Systems, Inc. has acquired 4DSP, LLC, a provider of commercial off-the-shelf (“COTS”) high speed digital signal processing and data acquisition solutions for the aerospace industry.  Terms of the deal were not disclosed.

L-3 Communications has acquired MacDonald Humfrey (Automation) Ltd., a provider of automated airport-checkpoint security scanners.  The deal is worth an estimated $280 million.

Industry Week in Review – November 18, 2016

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Aerospace & Defense Update

Congress has decided to extend the Continuing Resolution (‘CR”), which was set to expire on December 9th, causing government and military budgets to be delayed until at least April 2017.  This marks the eighth consecutive year where the Department of Defense will not have received an appropriations bill by year end.  Many important military programs, such as Northrop Grumman’s B-21 Long Range Strike Bomber, are anticipated to be negatively impacted as a result of the uncertainty of getting long-term funding.  Additionally, it is unclear whether the CR will include funding for the Pentagon’s recent supplemental request for additional spending in the Middle East and Afghanistan.

Boeing’s share price dropped after United Continental Holdings announced a deferral of orders valued at $5 billion as part of a cost-saving initiative.  United originally planned to convert orders for 61 Boeing 737 jetliners into the newer 737 MAX model over the next two years, but is now unsure which size MAX planes to order and when those jetliners will be delivered.  However, Boeing has stated that it will not alter its planned increase to 737 production rates as its large backlog gives it flexibility to meet the order revisions.   Boeing also recently announced plans to consolidate its defense and space business over the next four years, resulting in the closure of several facilities.  The decision will ultimately result in the elimination of 500 jobs.

Government Technology Solutions Update

On Monday, Arlington Capital Partners announced the formation of a new government services contractor, Polaris Alpha, through the merger of EOIR Technologies, PROTEUS Technologies, and Intelligent Software Solutions (“ISS”).  While the acquisition of EOIR Technologies was announced in June, according to Managing Partner Michael Lustbader, all three companies were being actively and concurrently pursued as part of an overarching strategy to create a niche player in the technology solutions market which has strong foundational relationships with customers in the Department of Defense (“DoD”) and Intelligence Community (“IC”).  By combining the capabilities of EOIR, ISS, and PROTEUS, Polaris Alpha will be able to offer a full range of cybersecurity, big data analytics, and software development solutions, as well as some additional research and development work, for its DoD and IC clients.  The new company will employ roughly 1,100 people and is expected to generate revenue of approximately $250 million next year.  According to Michael Lustbader, Polaris Alpha will pursue double digit growth through both organic and inorganic means as it continues to enhance its suite of high-end technology service offerings.

On Wednesday, the Professional Services Council (“PSC”) held its Vision Federal Market Forecast, during which it discussed future growth drivers and opportunities within the Federal marketplace.  While roughly 80% of the Federal IT budget is earmarked for maintenance and sustainment of legacy IT systems, according to PSC, new initiatives and government IT modernization legislation may reduce that amount slightly.  PSC also noted that the annual growth rate of the civilian IT budget from 2017-2022 will be roughly half of what it was between 2012 and 2017.  However, despite the slowdown in overall growth in the Federal IT budget, PSC estimates that there will be several areas in which spending and growth will likely remain strong.  Most of these areas are related to IT modernization.  The overhaul, upgrade, and replacement of legacy IT systems represents an ideal opportunity for Federal contractors according to PSC.  Cybersecurity will continue to remain a critical focus of the government, while the use of cloud computing and “X-as-a-service” is becoming increasingly ubiquitous in Federal agencies.  On the defense side, PSC estimates that Health IT, data analytics, and automation are going to be the key growth drivers in the near-term.

Big Movers

TransDigm (down 8.2%) – Shares were down this week after TransDigm’s guidance for FY17 seemed to question whether major commercial aerospace manufacturers will be able to continue their cyclical strength.

AAR (up 7.4%) – Shares were up this week after AAR announced its partnership with Air New Zealand to provide cost-per-flight-hour inventory support to the airline.

Transactions

American Industrial Acquisition Corp. has acquired Bradford Engineering B.V., a provider of equipment for satellites and spacecraft, including attitude and orbit control systems (“AOCS”), propulsion, avionics, and thermal solutions.  The deal is worth an estimated $1.0 million.

Arlington Capital Partners has acquired Intelligent Software Solutions, Inc. and PROTEUS Technologies., a developer of a suite of data analytics solutions for Federal, international, and commercial clients, and a provider of cybersecurity research, remediation, and response services for a variety of Federal customers, respectively.  Terms of the deal were not disclosed.

Chengdu Aerospace Superalloy Technology has agreed to acquire Gardner Aerospace Ltd., a provider of metallic aerostructure details, equipment, and engine components.  The deal is worth an estimated $405.0 million.

Sysorex Global Holdings Corporation has agreed to acquire the assets of Integrio Technologies LLC, a provider of IT network integration and engineering, application lifecycle, and acquisition services for DoD, IC, and State and Local government clients.  The deal is worth an estimated $6.1 million.

ViaSat, Inc. has acquired Arconics Ltd., a provider of wireless In-flight Entertainment (“IFE”), Electronic Flight Bag (“EFB”), Airline Document Management, and Cabin Management solutions.  Terms of the deal were not disclosed

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Industry Week in Review – November 11, 2016

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Aerospace & Defense Update

After President Elect Donald Trump’s unexpected win on Tuesday, U.S. defense firms such as Raytheon, Northrop Grumman, and General Dynamics saw significant stock gains on Wednesday.  The gains are likely attributed to expectations that President Elect Trump will seek to increase U.S. defense spending over current levels.  Byron Callan of Capital Alpha Partners, a strategic policy research firm, believes spending will be “at least $18 billion more for GFY17 than the [Obama] Administration’s request.”  Additionally, foreign defense stocks like BAE, Thales, Tokyo Keiki, and Korea Aerospace Industries all had significant gains Wednesday.  These foreign gains can be sourced to Mr. Trump’s past criticisms of the U.S. providing excessive foreign military aid and industry expectation that foreign governments will have to increase military spending with its own respective domestic contractors to compensate.

On Monday, November 7, Arconic announced a $1 billion multi-year contract to provide proprietary aluminum alloys to Airbus jetliners.  The contract begins in January 2017, and Arconic will be the sole supplier of some wing, fuselage and structural components for Airbus.  After formally separating from Alcoa on November 1, 2016, this win marks the first major contract for Arconic and the first use of Arconic’s industry leading metal stretching technology, which allows Arconic to produce some of the strongest and largest aircraft wing ribs.  With roughly $1.6 trillion in order backlogs between Airbus and Boeing,  Arconic is hopeful for more aerospace contracts in the future.

Government Technology Solutions Update

According to industry experts, now that the 2016 Presidential and Congressional elections have taken place, we have some enhanced visibility into likely near-term policy changes that could impact government IT priorities and initiatives.  Republican Will Hurd of Texas and Senator Ron Johnson were both re-elected on Tuesday night.  Hurd, who introduced the Modernizing Outdated and Vulnerable Equipment and Information Technology (“MOVE-IT”) Act and its successor, the Modernizing Government Technology Act (“MGT”), and Johnson are expected to provide crucial support to IT modernization initiatives moving forward.  There is less certainty surrounding President-elect Donald Trump.  Trump did not make IT initiatives a key part of his campaign and there is disagreement regarding the level of importance the Trump administration will put into upgrading or otherwise overhauling IT systems across the Federal government. However, we will have more insight into his likely pursuits after his first 100 days in office once he has made key cabinet selections.  Industry experts are also carefully watching to see if the Trump administration will increase outsourcing of certain government functions under Circular A-76, the use of which had been mostly prohibited in President Obama’s administration.  Many believe that with the new Republican-majority government in place, there could be an increased desire to seek private-sector solutions to government issues.

CSRA held its Emerging Technology Day last week, during which the Company heard from, and held meetings with, eight different technology companies in order to discuss potential partnership efforts.  The companies showcased a variety of capabilities, from cloud infrastructure and search engine technology, to machine learning and cybersecurity.  CSRA used the time to better understand the potential uses of these capabilities and how they could potentially use their own experience and resources to leverage the skills and technology of smaller, commercial companies across the Federal marketplace.   According to CSRA’s Chief Technology Officer (“CTO”), Yogesh Khanna, innovation is becoming an increasingly crucial component of government contracting.  CSRA hopes that, by meeting with and speaking to companies closer to the forefront of innovation, it can better understand how to create unique and innovative solutions for the Federal marketplace.

Big Movers

Astronics (down 4.3%) – Shares were down this week after Astronics reported 3Q16 revenue of $155 million, down from 3Q15 revenue of $200 million.

General Dynamics (up 12.5%) – Shares were up this week after industry expectations suggest President Elect Trump will increase U.S. defense spending over current levels.

Transactions

ESCO Technologies, Inc. has acquired Mayday Manufacturing Co., Inc. and its affiliate, Hi-Tech Metal Finishing, Inc.  Mayday Manufacturing provides mission-critical bushings, pins, sleeves, and precise-tolerance machined components while Hi-Tech provides full service metal processing to aerospace OEM’s and Tier 1 suppliers.  Terms of the deal were not disclosed.

Med-Eng Holdings ULC has agreed to acquire Pacific Safety Products, a provider of body armor to protect against ballistic, stab and fragmentation threats, ballistic blankets to reduce blast effects, tactical clothing, and protective products against chemical and biological hazards.  The deal is worth an estimated $15.4 million.

National Response Corp. has acquired Boom Technology, Inc., a provider of environmental and emergency response solutions for marine and land oil spills.  Terms of the deal were not disclosed.

Ontic Engineering and Manufacturing, Inc. has agreed to acquire a portfolio of legacy avionics products from GE Aviation, which provides legacy avionics parts servicing the military and commercial aviation markets, including electro mechanical, barometric, gyroscopes and electronics products.  The deal is worth an estimated $61.5 million.

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Industry Week in Review – November 4, 2016

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Aerospace & Defense Update

The National Business Aviation Association (“NBAA”) hosted its annual Business Aviation and Convention Exhibition in Orlando from November 1st through the 3rd.  During the week, roughly 27,000 visitors from executive management, flight department personnel, sales and marketing, and finance / legal firms visited over 1,100 exhibitors to network, view the newest products, and keep up with the latest trends.  In advance of the conference, Honeywell had released a fairly pessimistic business jet forecast where the Company lowered its 10-year total jet delivery forecast from 9,200 jets to 8,600 jets.  However, the atmosphere at the NBAA conference was still filled with high energy and excitement.

After more than a year of negotiations with Lockheed Martin concerning the ninth lot of Low Rate Initial Production (“LRIP”) for the F-35, the Pentagon has given a unilateral price ultimatum of $6.1 billion to the aircraft manufacturer for production of 57 F-35 aircraft.  The $6.1 billion contract value equates to a price of $107 million per F-35, a 3.7% average decrease over the lot eight price per plane in 2014.  The decision to end negotiations would mark the largest unilateral action in the Department of Defense (“DoD”) history.  F-35 spokesman, Joe DellaVedova, explained the unilateral action saying, “[the Pentagon] believed further negotiations would not result in the government and Lockheed coming to an agreement on total price.”  At this stage, Lockheed must either accept the $6.1 billion dollar terms or appeal the contract.

Government Technology Solutions Update

On Monday, the Court of Federal Claims issued an oral ruling in favor of Palantir Technologies Inc. in a lawsuit the company filed against the U.S. Army.  Palantir claimed that the Army was in violation of the 1994 Federal Acquisition Streamlining Act when it decided to bypass pre-existing commercial solutions in building out the latest phase of its Distributed Common Ground System (“DCGS”).  DCGS is an Army platform which collects and analyzes surveillance and other intelligence in order to promote situational awareness and support the decision-making capabilities of battlefield leaders.  Palantir, which specializes in big data analytics and data mining, claimed that its Gotham platform was robust, proven, and versatile enough to be used by the Army for DCGS, and tried unsuccessfully to compete for the contract.  The ruling from the Court of Federal Claims is one of the first upholding the Acquisition Streamlining Act, which compels Federal agencies to seek existing commercial solutions before attempting to proprietarily develop them. If this decision is upheld and more strictly enforced, it could prove to be a momentous shift in the manner through which Federal agencies procure future solutions.

During its third-quarter earnings call on Thursday, Leidos announced that it had already met its 2016 cost savings target after its $4.6 billion acquisition of Lockheed Martin’s Information Systems & Global Solutions segment, which closed earlier this year.  Leidos had originally estimated that it would likely recognize approximately $25 million in cost synergies in 2016 alone, but it is now on pace to surpass this figure.  The company further projects that the total cost savings in future years could be worth as much as $350 million.  A large portion of identified savings comes from the upgrade and integration of IT systems and back office accounting and finance systems, a reduction in pension costs, and the paring down of real estate assets, all of which Leidos hopes will increase efficiency and eliminate redundancy in the newly merged entity. Leidos attributes the timely recognition of these synergies to the effective pursuit and execution of diligence and integration preparation efforts against an aggressive timeline.

Big Movers

Leidos (up 5.7%) – Shares were up this week after Leidos raised its revenue and earnings per share guidance and announced it had already met its 2016 cost saving targets resulting from the acquisition of Lockheed Martin’s Information Systems & Global Solutions segment.

Spirit AeroSystems (up 6.4%) – Shares were up this week after Spirit AeroSystems announced share repurchases worth $600 million

Transactions

Altamira Technologies Corp. has acquired APG Technologies, Inc., a provider of advanced data management, private cloud engineering, as well as information assurance and cybersecurity services for a variety of DoD and IC clients.  Terms of the deal were not disclosed.

 EDAC Technologies Group has acquired Flanagan Industries, a provider of precision machined and fabricated aerospace engine components and assemblies.  Terms of the deal were not disclosed.

EQT Partners AB has agreed to acquire CHEP Aerospace Solutions, a provider of lightweight pooling solutions and a range of ULDs that include aluminum and lightweight containers, standard and heavy-duty pallets, as well as specialty ULDs.  The deal is worth an estimated $130.0 million.

Ferro Corporation has acquired Electro-Science Laboratories, Inc., a provider of thick-film pastes and ceramic tape systems that enable important functionality in a wide variety of industrial and consumer applications.  The deal is worth an estimated $75.0 million.

Global Aviation Services, LLC has acquired D&D GSE, a provider of leading ground support equipment maintenance.  Terms of the deal were not disclosed.

Huntington Ingalls Industries Inc. has agreed to acquire Camber Corporation, a provider of engineering and technical solutions, including agile software development and cybersecurity, to Department of Defense (“DoD”), Intelligence Community (“IC”), and Civilian customers within the Federal government.  The deal is worth $380 million and is expected to close this quarter.

Mercury Systems, Inc. has agreed to acquire CES Creative Electronic Systems, SA, a provider of subsystems solutions including primary flight control units, flight test computers, mission computers, and command / control processors.  The deal is worth an estimated $38.0 million

Satcom Direct, Inc. has agreed to acquire TrueNorth, Inc., a provider of satellite communications solutions for business jets and avionics OEMs.  Terms of the deal were not disclosed.

Industry Week in Review – October 28, 2016

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Aerospace & Defense Update

Rockwell Collins announced that it inked a deal to buy B/E Aerospace for ~$8.3 billion, valuing B/E at $62 / share, a 22.5% premium over the prior Friday’s closing share price. The proposed deal would consolidate two of the biggest aircraft systems manufacturers, increasing their ability to cross-sell electronics and plane fittings, as well as position Rockwell to lead the development of the “smart” aircraft. This acquisition will allow Rockwell to improve its content on aircraft, as well as give it more direct exposure to commercial airlines.

GE recently abandoned its bid to purchase the German 3D printer maker SLM Solutions for $745 million, and instead purchased a privately held German 3D printing firm, Concept Laser, for $599 million. Elliot Advisors, which acquired a blocking stake of 20% of SLM, rejected GE’s bid blocking GE from meeting its 75% minimum acceptance threshold. GE also raised its bid to purchase Arcam to $696 million. Arcam, Concept Laser, and SLM are three of the world’s top makers of machines for metals-based 3D printing. GE’s recent investment in 3D printing allows it to produce parts more efficiently than traditional production methods used by competitors.

Government Technology Solutions Update

The Defense Logistics Agency (“DLA”) recently made public the Government Accountability Office’s (“GAO”) ruling which rejected Oakland Consulting Group’s protest on the $6 billion J6 Enterprise Technology Services (“JETS”) contract. Oakland had originally filed a protest against DLA when the agency eliminated the company from competition on JETS. DLA cited a lack of detail from Oakland on its original proposal, and that the thoroughness of the original proposal was inadequate to sufficiently address the requirements DLA was seeking. GAO’s decision to deny the protest was made, in part, because in its protest Oakland was “repeating – essentially verbatim – the statements made in its initial protest.” With the GAO’s decision, DLA is now free to begin making awards on JETS, expecting to make awards to bidders in three different levels of competition – 8(a), small business, and full & open – and across 21 various IT task areas.

The General Services Administration (“GSA”) kicked off the next phase of its “Making it Easier” initiative which aims to reduce barriers to entry which have historically prevented or significantly dissuaded some small businesses from engaging with the Federal government. One of the initiatives rolled out was a quick start guide for the IT Schedule 70 Roadmap. The GSA hopes that this can be used as a reliable resource for potential contractors to use to guide them through the process of winning Federal business. Recently, the GSA has also placed emphasis on making the contracting processes faster and more efficient, especially for smaller startup companies, which they believe can bring crucial and innovative solutions to the Federal marketplace. According to numbers released by the GSA alongside the announcement of these new initiatives, the average time it takes for a small business to get on a Federal schedule is only 31 days – and two days for a contract modification – as a result of efforts made in the past year to increase engagement with smaller businesses.

Big Movers

B/E Aerospace (up 17.6%) – Shares were up this week after Rockwell Collins announced it has entered into a definitive agreement to acquire B/E Aerospace.

Curtiss-Wright (up 6.9%) – Shares were up this week after Curtiss-Wright announced its profit increased 36% since 3Q15.

Transactions 

Cognosante, LLC has acquired Business Information Technology Solutions, Inc. (BITS), a provider of IT consulting, health solutions, enterprise resource planning, and business analytics primarily to healthcare clients in the Department of Defense (“DoD”), Department of Health and Human Services (“HHS”), and the Department of Veterans Affairs (“VA”). Terms of the deal were not disclosed.

General Electric Co. has agreed to acquire a 75% stake in Concept Laser GmbH, a provider of powder-bed based laser additive manufacturing machines. The deal is worth an estimated $599 million.

Hearst Corp. has agreed to acquire CAMP Systems International, Inc., a provider of software-as-a-service (“SaaS”) solutions that manage and track the maintenance of jets, turbo prop aircraft, and helicopters. Terms of the deal were not disclosed.

Precision Castparts Corp. has acquired Atlantic Precision, Inc., a provider of 3D metal printing and additive manufacturing technologies for customers in the aerospace and defense industries. Terms of the deal were not disclosed.

Rockwell Collins, Inc. has agreed to acquire B/E Aerospace, Inc., a provider of cabin interior products for commercial aircraft and business jets. The deal is worth an estimated $8.3 billion.

Industry Week in Review – October 21, 2016

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Aerospace & Defense Update

Orbital ATK successfully launched an unmanned Antares rocket into space this past week, almost two years after an engine malfunction caused the rocket to explode immediately after take-off. Orbital ATK replaced its older-designed Russian engines with more advanced Russian built engines which allow the rocket to carry transport cargo in excess of two tons. This launch was the third flight of the reengineered capsule which has a greater pressurized cargo capacity and improved solar panel arrays. The National Aeronautics and Space Administration (“NASA”) has contracted Orbital ATK to transport cargo into orbit over the next decade, as the agency has opted to rely on corporate cargo vehicles and company-built capsules to service the space station. Orbital ATK also aims to launch midsize commercial and scientific payloads for customers other than NASA.

After the November election, 70 House lawmakers are hoping to increase appropriations for F-35 purchases in the FY17 budget. Both the Marine Corps and Air Force recently declared initial operating capability, adding a sense of urgency to the production of F-35s. These lawmakers feel F-35 production must be increased in order to meet future threats and anticipate that an increase in production would help to lower unit costs. While the House bill requests 11 F-35s, the Senate bill only requests four F-35s. The Senate bill also requests an increase in the advance procurement of F-35s by $100 million to allow the Air Force to increase its F-35 production rate in 2018. The 70 House lawmakers are advocating an increase in funding so the Air Force can reach its goal of 120 U.S. aircraft per year as soon as possible.

Government Technology Solutions Update

On Monday, Engility Holdings Inc. announced that they won a five-year, $369 million award to provide a variety of professional services for the U.S. Department of Transportation’s (“DOT”) Volpe National Transportation Systems. At just under $75 million per year, this is the largest contract that Engility has won to date since it was spun off from L-3 Communications in 2012, marking a major milestone as the Company continues to shift its focus towards larger business opportunities. Engility has aggressively pursued this goal both organically and inorganically through increased bidding on larger-scale contracts as well as through its strategic acquisition of TASC Inc. in 2014, which helped to increase their average contract bid to $20 million in 2015. Given recent strategic shifts to focus on larger procurements, it is expected that this figure could double by the end of 2016. These efforts have put Engility on pace to grow the total value of submitted bids to $5 billion, up from $3 billion in 2013.

According to a recent presentation made by the Federal Risk Authorization and Management Program (“FedRAMP”), recent efforts made by the organization to streamline the authorization process for cloud services have shown considerable signs of success. Authorization for new cloud services has increased 85% since the strategy was initially announced in August, leading to the authorization of more than 75 cloud service providers, with an additional 50 providers currently in line for imminent approval. The effort aims to reduce the lead-time for authorizations without compromising on the program’s stringent security standards, with the goal of giving Federal agencies the “go-ahead” to consider these services in as little as three months. The recently launched FedRAMP Dashboard also lends additional transparency to the process by allowing the Federal community to view the available services as well as which agencies are utilizing them.

Big Movers

Leonardo – Finmeccanica (up 9.0%) – Shares were up this week after Leonardo – Finmeccanica increased its stake in Avio.

Orbital ATK (Up 3.4%) – Shares were up this week after Orbital ATK’s unmanned Antares rocket launched into space.

Transactions

Aavid Thermalloy, LLC has acquired Thermacore, Inc., a provider of high performance thermal management, electronics cooling, and materials solutions. Terms of the deal were not disclosed.

Orangewood Partners, LLC has acquired George Industries, LLC, a provider of mission critical engineered components for the aerospace, defense, and industrial end markets. Terms of the deal were not disclosed.

Saab AB has acquired Nordic Defence Industries A/S, a provider of mine disposal charge systems for the naval defense industry. Terms of the deal were not disclosed.

Space2 and Leonardo – Finmeccanica have agreed to acquire Avio Space Propulsion, a provider of advanced technologies for space launchers and missiles. The deal is worth an estimated $334 million.

xG Technology, Inc. has agreed to acquire the assets of the Vislink Communication Systems division, a provider of secure video communications and mission-critical solutions for law enforcement, defense, and homeland security applications. The deal is worth an estimated $16 million.

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Industry Week in Review – October 14, 2016

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Aerospace & Defense Update

Boeing landed an agreement with Qatar Airways for up to 100 jets, comprised of orders for 10 777s, 30 787s, and a signed letter of intent for up to 60 737s, with a combined total list price of $18.6 billion.  This sale comes after Qatar Airways CEO, Akbar Al Baker, publicly criticized Airbus over its delays with the A320neo and A350 in June.  However, due to Boeing’s widebody sales slump this year, even with this new order, the company still needs to procure ~40 more 777 sales by year end in order to maintain its production target of building 7.0 777 aircraft per month in 2017, which is already down from the current production rate of 8.3 per month.  Additionally, with Qatar Airways’ intent to buy up to 60 737s, the sale marks an important shift from the Middle East carrier’s current strategy of only using Airbus A320s for its narrowbody fleet.

Lockheed Martin disclosed its partners in its bid to design the U. S. Airforce’s next Intercontinental Ballistic Missiles (“ICBMs”), which will be put into operation in the late 2020s.  Lockheed intends to partner with General Dynamics on the weapon system command and control, Draper Laboratories on guidance navigation and control systems, Moog on cross-vector control systems, and Bechtel for launch facilities.  Additionally, Lockheed selected Aerojet and Orbital ATK for missile propulsion in hopes that competition between the two firms will allow Lockheed to procure the technology and parts at a cheaper cost.  Lockheed is not alone in its bid for designing the new ICBM; in stark contrast, both Boeing and Northrop have confirmed they are vying for the contract but have not disclosed their partners.

Government Technology Solutions Update

Vectrus formally filed a bid protest this week roughly two weeks after the company lost its Kuwait Base Operations and Security Support Services (“KBOSSS 2.0”) contract to a KBR-Triple Canopy joint venture (“JV”).  KBOSSS 2.0 currently represents over a third of Vectrus’ 2016 revenue, having contributed roughly $218 million of Vectrus’ $618 million in year-to-date revenue.  Vectrus has held KBOSSS 2.0 for five years, during which time it provided logistics and engineering services at a variety of military bases and facilities in the Middle East.  This is the second major Army contract that Vectrus has lost in the second half of 2016 alone, coming after the company lost its recompete on the Army Prepositioned Stock-5 (“APS-5”) contract in early September.  Combined, the two contracts contributed more than $300 million to Vectrus’ top line in the first six months of 2016.  As a result, shares in Vectrus have fallen sharply, and are currently down over 50% since the end of August when the company was trading near its all-time high.  The Government Accountability Office (“GAO”) will make a decision on Vectrus’ APS-5 and KBOSSS 2.0 protests by the end of December and January, respectively.

According to a recent report, the Department of Homeland Security’s (“DHS”) contracting obligations will continue to expand in fiscal 2017 (“FY2017), with a particular emphasis on acquiring technology solutions such as IT and software upgrades.  The agency’s top spender, the Office of Procurement Management (“OPO”) has earmarked over $1.2 billion to be spent on a variety of cybersecurity programs, including the National Cybersecurity Protection System and National Cybersecurity and Communications Integration Center.  Other agencies within DHS will be focusing on upgrading legacy technology.  In the case of the U.S. Customs & Border Protection (“CBP”), funds will be flowing towards the procurement of updated biometrics systems and IT modernization initiatives, while the Transportation Security Administration (“TSA”) will spend roughly $200 million on upgrading baggage checking systems.  This will be the fifth straight year of growth in DHS’ contract obligations, with the agency seeing total growth of over 21% since FY2013.

Big Movers

Cubic (Down 11.3%) – Shares were down this week after Cubic lowered its profit guidance due to Department of Defense funding delays.

Magellan Aerospace (Up 4.4%) – Shares were up this week after Magellan secured multi-year 777X and 787 contracts.

Transactions

Delair-Tech has acquired Gatewing UAS, a provider of turnkey unmanned aircraft systems (UAS) for terrain mapping and surveying. Terms of the deal were not disclosed.

DigiGlobe, Inc. has agreed to acquire The Radiant Group, a provider of geospatial information analysis services to the U.S. intelligence sector.  The deal is worth an estimated $140 million.

Nammo A/S has acquired Berger Bullets, LLC, a provider of premium rifle bullets for varmint hunting, target shooting, game hunting and tactical use.  Terms of the deal were not disclosed.

Preferred Systems Solutions, a CM Equity Portfolio Company, has acquired Synaptic Solutions, Inc., a provider of cloud architecture, engineering, and other advanced technology solutions to the Intelligence Community.  Terms of the deal were not disclosed.

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Industry Week in Review – October 7, 2016

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Aerospace & Defense Update

For the year through September 27th, Boeing has garnered 357 gross orders, a sharp decrease from 499 orders last year during the same time period.  The slowdown in orders has caused the Company’s book to bill ratio to drop to 0.5 compared to 0.7 during the same period last year.  Widebody sales have been most affected, with Boeing only procuring 59 gross orders through the end of September, while receiving 158 orders during the same time last year.  In order to reach a book to bill ratio of 1.0, Boeing needs 380 new orders by year-end to match likely deliveries of about 750 jets.  Contrary to analyst opinions, Boeing CEO, Dennis Muilenburg, maintains the situation is not a pressing issue and affirms that “we continue to trend towards a book to bill of about one.”

During the Association of the US Army conference (“AUSA”), Air Force Chief of Staff General David Goldfein stated that he expects repairs of the recently grounded F-35A to be completed by December. The Air Force grounded the joint strike fighter after a problem was found in coolant line insulation, which could ultimately lead to structural damage to the aircraft if not fixed.  Even though the General believes the problems for the F-35 are short term, this new repair marks yet another issue with a project for which costs have almost doubled the original program budget of $200 billion.  The Air Force also continues to investigate an incident on September 23rd when a F-35 erupted in flames during an engine startup.

Government Technology Solutions Update

According to inside sources, Harris Corporation has begun seeking a sale of its IT services business housed within its Critical Networks division.  It is estimated that such a divestiture might be worth as much as $500 million, according to industry insiders.  This move comes roughly two months after activist hedge fund Jana Partners LLC acquired a ~2% stake in the company in August.  At that time, there had been speculation that this move was an attempt on the part of Jana Partners to unlock value by identifying and shedding non-core or otherwise underperforming assets and businesses within the Harris umbrella.  This move would be one of the largest in a string of Harris divestitures in recent years, and highlights the trend of government contractors realigning strategic priorities by carving out certain business lines that are not believed to be critical to value creation for the parent company.

The U.S. Army completed 21 major upgrades to its IT infrastructure in 2016, with another 44 planned for completion within the next fiscal year.  The upgrades are a result of objectives aimed at consolidating the Army’s IT infrastructure while reducing fragmentation and unnecessary complexity in its organization.  According to officials, these upgrades were among the first modernization initiatives implemented Army-wide in over a decade.  By implementing these changes en masse, the government hopes to capture major cost saving via bulk procurement of critical IT products and services.  Future goals include the procurement of software-as-a-service (“SaaS”) solutions which would increase the mobility of soldiers, as well as the implementation of a more centralized, complete, and robust cybersecurity architecture.

Big Movers

Honeywell (Down 8.3%) – Shares were down this week after Honeywell lowered its third quarter earnings guidance.

TASER (Down 21.6%) – Shares were down this week after the New York Police Department awarded a five-year body-camera contract to a competitor.

Transactions

Accenture plc has agreed to acquire Defense Point Security, LLC, a provider of advanced cyber defense and response capabilities, cyber operations, cyber analytics, and security engineering for Federal government customers.  Terms of the deal were not disclosed.

Attain LLC has acquired ACF Solutions, a provider of cloud-based technology solutions and Salesforce customer relationship management (“CRM”) systems to education and nonprofit customers. Terms of the deal were not disclosed.

Calspan Holdings has acquired Triumph Aerospace Systems – Newport News, Inc., a provider of aerospace hardware and prototype systems for ground test and flight applications.  Terms of the deal were not disclosed.

Carlisle Companies, Inc. has acquired Star Aviation, Inc., a provider of design and engineering services, testing and certification work, and manufactured products for in-flight connectivity applications.  Terms of the deal were not disclosed.

Handy & Harman Ltd. has acquired ElectroMagnetic Enterprise, a provider of complex, custom engineered electric motors and generators, including a wide range of customized electromagnetic products.  The deal is worth $64.5 million.

L-3 Communications Corporation has acquired Aerosim Technologies, Inc., a provider of simulation-based training products for pilots as well as maintenance technicians in the aviation industry. Terms of the deal were not disclosed.

Micross Components, Inc. has acquired RTI International’s Microsystem Integration and Packaging (MIP) Group, a provider of value-added semiconductor processing services for government and commercial clients.  Terms of the deal were not disclosed.

MilDef AB has acquired The Rugged Computer Product Lines of American Reliance, Inc., a provider of rugged computers, providing COTS, modified COTS, and customized rugged solutions to the defense, industrial, and public safety sectors.  Terms of the deal were not disclosed.

MRO Holdings has acquired Flightstar Aircraft Services, a provider of heavy aircraft MRO services, including heavy maintenance and inspection services, as well as modification services for narrow body air transport aircraft. Terms of the deal were not disclosed.

QTS Realty Trust has acquired the government cloud business of VMware, an infrastructure-as-a-service, FedRAMP-compliant platform for the implementation of cloud storage solutions.  Terms of the deal were not disclosed.

Winchester Electronics Corporation has acquired Tekna Seal, LLC, a provider of hermetically sealed connectors, glass-to-metal feedthroughs, lithium battery seals and ceramic-to-metal seals.  The deal is worth $10.5 million.

 

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Industry Week in Review – September 30, 2016

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Aerospace & Defense Update

Safran, a French engine manufacturer, recently announced it has entered into exclusive talks with private equity firm Advent International Corp. about the sale of its Morpho identity and security business for $2.7 billion.  Advent plans to combine Safran’s identity and security business with Oberthur Technologies, which was acquired by Advent back in 2011.  This proposed deal allows Safran to be focused exclusively on aerospace and defense, as it sold off its explosives detection business earlier this year.  The identity and security business, currently located in France, employs 7,800 workers and generated revenues of ~$1.7 billion during 2015.  The deal is expected to close next year, pending regulatory approvals in the U.S. and Europe.

Congress passed a Continuing Resolution (“CR”) this past week funding the government and military through December 9th.  The CR keeps military spending at its current levels and does not implement the 2017 defense budget increase that was targeted to begin at the end of this week.  The House of Representatives (“House”) and Senate strongly disagree over the proposed $18 billion increase in spending proposed in the 2017 defense budget.  The House believes a spending hike will allow the military to be prepared for an immediate crisis and to purchase new aircraft and ships.  The Senate opposes the increase because they feel it will take funding away from the overseas war fund causing it to run out of money in April. Because of the inability of Congress to pass a budget, the Department of Defense has had difficulty developing long-term planning projections and goals.  Congress plans to resume negotiating the 2017 defense budget after the November election.

Government Technology Solutions Update

Microsoft’s Customer Relationship Manager Online received a provisional authority to operate via the Federal Risk and Authorization Management Program’s (“FedRAMP”) new accelerated system.  It took Microsoft only 15 weeks for its cloud services to be reviewed and approved, which is roughly seven times faster than the average time it took to gain approval under the old system.  According to FedRAMP Director, Matt Goodrich, the accelerated approval process focuses on taking a more iterative and efficient approach, with a much heavier emphasis on a review of capabilities compared to documentation review, which had been the main area of focus of the older system.  The accelerated process was created in an attempt to reduce the length of time and resources spent on authorizing new cloud services.  Ideally, the accelerated FedRAMP process will reduce the average authorization timeline for new proposals to six months, compared to the current average of nine to eighteen months.

Oracle Corporation recently made the decision to leave the General Services Administration’s (“GSA”) schedule program for third-party reselling opportunities within the Federal government.  This decision was based, in part, on what Oracle and many other industry insiders view as inefficiencies in the GSA’s schedule program, and that the litigation risk of doing business through GSA schedules outweighs the benefits of using them.  The Department of Justice (“DoJ”) has recovered over $26 billion through the False Claims Act, with Oracle alone paying $350 million in settlements over the past 10 years.  As a result, Federal contractors have been attempting to reduce their exposure to business being done through GSA schedules, instead pursuing other contract opportunities and vehicles which they see as less litigious.  Oracle’s decision to leave the GSA schedule program makes it one of the most high-profile contractors to do so, with some in the industry fearing that an increasing number of businesses may follow suit.

Big Movers

Vectrus Inc. (Down 46.9%) – Shares were down significantly this week after Vectrus announced that the U.S. Army did not renew its contract to provide support services in Kuwait.

Mercury Systems (Up 4.5%) – Shares were up this week after Mercury Systems received $11.7 million in follow-on orders from an unnamed defense prime contractor.

Transactions

Acorn Growth Companies has acquired Raisbeck Engineering, Inc., a provider of systems that increase productivity and safety for aircraft through the infusion of advanced technology into in-service and new production aircraft.  Terms of the deal were not disclosed.

Vista Equity Partners has acquired GovDelivery, Inc., a provider of digital marketing and professional solutions, including digital engagement, training, and open data services for government organizations.  The deal is worth $153 million.

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