Aerospace & Defense Update

Airbus and Boeing had a modest showing at this year’s Farnborough Air Show with a combined $62 billion in deals, especially in comparison to last year’s historic $116 billion in orders.  The Farnborough Air Show is typically a high point for aircraft orders and the commercial-aviation industry as a whole.  During the air show, Airbus outpaced Boeing, with $35 billion in orders, bringing its YTD total orders to 380 aircraft.  Boeing, on the other hand, secured $27 billion in orders at the Air Show, increasing its total orders to 321 aircraft for the year.  Although Airbus received more orders than Boeing, it announced plans to slash production of its A380 jumbo jet from 27 aircraft in 2015 to just 12 aircraft per year starting in 2018.  The highly ambitious project is turning out to be too costly for Airbus and may generate a loss after breaking even last year.  However, both Airbus and Boeing are looking to have a strong second half of the year in order to attain their year-end sales goals of 650 orders and 740 orders, respectively.

Lockheed Martin, along with its subcontractors for the F-35, Northrop Grumman and BAE, announced at the Farnborough Air Show new initiatives designed to significantly cut procurement and sustainment costs for the F-35 by billions of dollars.  One of the initiatives will include a $170 million investment to expand the two-year-old “Blueprint for Affordability” program, which is anticipated to decrease the unit cost of the F-35A to $85 million by 2019 and save more than $4 billion over the lifecycle of the program.  Additionally, the three companies are also creating a “sustainment cost reduction initiative” with a $250 million investment designed to cut operations and maintenance costs by 10% from 2018 through 2022.  This initiative is expected to lead to over $1 billion in savings over five years.

Government Technology Solutions Update

The Centers for Medicaid and Medicare Services’ (“CMS”) $25 billion Strategic Partners Acquisition Readiness Contract (“SPARC”) is again making headlines, as a new set of four companies has joined the fight over the heavily disputed vehicle.   LRA-ISI Joint Venture, SGT Inc., SparkSoft Corp., and Syneren Technologies Corp. are the latest companies to protest the contract award; in total there are 19 companies that have filed a protest.  All four of the new protestors are small businesses.  Originally awarded to 81 companies, 54 of which are small businesses, the CMS contract has an expected period of performance of ten years.  The Government Accountability Office (“GAO”) is expected to reach a decision on the protests by mid-October of this year.

According to a report from Govini, a Big Data and analytics firm, the departments of Veterans Affairs (“VA”) and Health and Human Services (“HHS”) are investing heavily in new health IT and technology services.  The report adds that despite the Federal government’s recent budget sequestration, the fiscal year 2017 budget outlook for the two agencies is strong.  63% of HHS’ IT and professional services spending is driven by CMS, while the Transformation Twenty-One Total Technology (“T4”) contract vehicle is driving investment for the VA.  The continued investment in technology geared toward systems modernization, networks, and cybersecurity infrastructure on behalf of both agencies is a reflection of the growing concern over cyber-attacks on Federal agencies.

Big Movers

Airbus Group SE (Up 7.6%) – Shares were up this week after Airbus outpaced Boeing and secured $35 billion aircraft orders at the Farnborough Air Show.

Booz Allen Hamilton, Inc. (Up 9.2%) – Shares were up this week after the company announced that it had been awarded an unmanned aerial system demonstration contract worth $41 million.

Transactions

AE Industrial Partners, LLC has acquired Moeller Manufacturing Company, LLC, a provider of precision machined turbine engine components for the gas turbine aircraft engine and power generation industries.  Terms of the deal were not disclosed.

AGC AeroComposites, Inc. has acquired North Coast Composites, a provider of advanced composites for the aerospace industry.  Terms of the deal were not disclosed.

AGC AeroComposites, Inc. has acquired North Coast Tool and Mold Corp., a provider of molds and tools for the aerospace industry, including resin transfer molds, lay-up molds, compression molds, and plastic injection molds.  Terms of the deal were not disclosed.

Gooch & Housego has acquired Alfalight, Inc., a provider of high reliability, laser based, electro-optic systems for defense and security applications.  The deal is worth an estimated $1 million.

Gooch & Housego has acquired Kent Periscopes Ltd., a provider of periscopes, vehicle sights and related equipment for land based Armored Fighting Vehicles (“AFVs”).  The deal is worth an estimated $12 million.

Halvik Corporation has acquired SP Systems, Inc., a provider of scientific research, engineering data analysis, real-time satellite data processing, and algorithm development solutions to support the Federal government. Terms of the deal were not disclosed.

HNA Aviation Group Co. to acquire an 80% stake in SR Technics Ltd., a provider of integrated airline solutions, including maintenance on aircraft, engines, and components.

MB Aerospace has acquired Vac-Aero, Poland, a provider of protective and performance enhancing coatings for aero-engine and industrial gas turbine components.  Terms of the deal were not disclosed.

Rolls Royce Holdings plc to acquire a 53% stake in Industria de Turbo Propulsores S.A., a provider of engineering, research and development, manufacturing and casting, assembly, and testing of aeronautical engines and gas turbines.  The deal is worth an estimated $795 million.

Thales Alenia Space, a joint venture of Thales S.A. and Finmeccanica SpA, to acquire RUAG Holding AG’s Opto-Electronics and Instruments Product Unit, a provider of scientific satellite instruments and equipment for optical communications in space.  Terms of the deal were not disclosed.

Xator Corporation has acquired Paragon Communications Solutions, Inc., a provider of tactical communications security, networking, and electronic countermeasures solutions. Terms of the deal were not disclosed.

 

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Aerospace & Defense Update

After months of discussion, Airbus and Safran have reached an agreement to create Airbus Safran Launchers, a European rocket joint venture.  The two companies have been working together since 2014 to build the Ariane 5 space launcher and are establishing the new joint venture in order to develop the next generation rocket, the Ariane 6, which is expected to complete its first flight in 2020.  The Ariane 6 aims to lower costs and gain market share, particularly in light of the increasing competition from SpaceX.  To further solidify its market reach, Airbus Safran Launchers is in talks to acquire Arianespace, a European rocket-launch company.  However, the potential deal may lead to issues with the European Commission over anti-trust regulations.

The British vote to leave the EU as a result of the referendum (“Brexit”) was not the outcome desired by the British aerospace and defense market, which employs roughly 300,000 individuals.  Large British industry leaders, such as Airbus and Rolls Royce, had lobbied to remain in the EU and are now hoping for a deal that grants both maximum access to the European single market and has minimum restrictions on the mobility of labor from the region.  To address the short term, Rolls Royce released a statement after the referendum result, stating that there will be no immediate impact on day-to-day operations.  However, the CEO of ADS Group, a UK trade organization representing the aerospace, defense, security, and space sectors, said that the Brexit vote could lead to a future decline in incremental competitiveness for the aerospace and defense sector.  Despite the Brexit, recent financial data released by ADS displays strong industry growth and good financial health for the aerospace and defense market.

Government Technology Solutions Update

The Space and Naval Warfare (“SPAWAR”) Systems Center Atlantic recently made awards on a $750 million Commercial-Off-the-Shelf (“COTS”) Command and Control (“C2”) contract to a group of 21 companies, 17 of which are small businesses.  Under the contract, companies will provide COTS C2 equipment and support services primarily to the Navy, as well as other defense and civilian agencies.  The C2 equipment stipulated in the contract will include video, imagery, and telecom systems, global positioning system equipment, intelligence support systems, as well as tactical displays processors, and workstations. The contract has an expected period of performance that runs through June 2021.

Both Donald Trump and Hillary Clinton’s proposed plans for the Department of Veterans Affairs (“VA”) would increase spending by at least tens of billions of dollars over 10 years.  According to the Committee for a Responsible Federal Budget, a nonpartisan group advocating for fiscal responsibility, Trump’s plan, which would provide all veterans with immediate healthcare from any doctor who accepts Medicare, comes with a much steeper price.  However, Trump contends that giving veterans the option to choose their own healthcare provider will “stop the wait time backlogs and force the VA to improve and compete.”  Clinton’s proposal includes ending the disability compensation backlog, recreating the department’s employee performance evaluation system, and creating a permanent tax credit to boost veteran hiring.

Big Movers

KEYW (Up 12.4%) – Shares were up this week after the company announced that it has closed the previously announced sale of the HawkEye G Product Line Business of Hexis Cyber Solutions to WatchGuard Technologies, Inc.

Safran (Up 5.0%) – Shares were up this week after the company announced that it has concluded months of talks with Airbus to establish a European rocket joint venture and build Europe’s next major rocket, the Ariane 6.

Transactions

FLIR Systems, Inc. acquired Armasight, Inc., a provider of thermal imaging, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions.  The deal is worth an estimate $41 million.

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Aerospace & Defense Update

On Tuesday, the Senate approved the 2017 National Defense Authorization Act, which allocates $602 billion in base defense and war spending.  The bill proposes aggressive acquisition reforms, which include reduced spending on cost-plus contracts and inclusion of more contractors outside the D.C., Maryland, and Virginia area (“DMV”) on Federal contracts.  Additionally, it includes language to close the chief weapons buyer’s office in the Pentagon and transition the responsibilities to two new defense undersecretaries for innovation and acquisitions management.  The Senate’s version of the bill is different from the version of the bill passed by the House in May primarily in its treatment of defense acquisitions reform and defense funding.  After debate in conference, a finalized version of the bill will be sent to the White House for approval by the end of the government fiscal year on September 30^th.

MBDA Missile Systems, a European missile manufacturer, is scheduled to conduct firings of its Brimstone 2 missile from a Boeing AH-64E to persuade the British Army to purchase the weaponry for a new helicopter fleet it is planning to acquire.  Around the time of the Farnborough International Airshow, the British Army will announce whether it plans to buy the AH-64D under its foreign military sales or have Leonardo rebuild AH1’s to match the specifications of the AH-64E.  MBDA is partially owned by three parent companies: Airbus Group, BAE Systems, and Leonardo (F.K.A. Finmeccanica).  Currently, the British Army Air Corps uses Lockheed Martin’s Hellfire missile on its 49 AH1’s.  While Hellfire missiles could potentially be in use until 2040, Lockheed is under a contract with the Department of Defense (“DoD”) to replace the Hellfire on Army Apaches and Black Hawks with the Joint Air-to-Ground Missile (“JAGM”).

Government Technology Solutions Update

The $900 million SOCOM Wide Mission Support (“SWMS”) contract has managed to make headlines again.  Just a week after being awarded to six new companies as a result of bid protests the SWMS award is being protested again, this time by Alion Science and Technology.  More bid protests are expected to come the Government Accountability Office’s way, as 17 companies submitted bids on the contract.  The contract was awarded to Booz Allen Hamilton, CACI International, Raytheon Blackbird Technologies, and MacAulay-Brown in July of 2015 and subsequently awarded to ACADEMI Training Center, AECOM, ARMA Global Corp., Fulcrum IT Services, Jacobs Technology, and Raytheon Technical Services.  The contract has a current period of performance extending through July 2020.

Symantec has agreed to acquire Blue Coat Inc. for approximately $4.65 billion in cash in order to better protect government and enterprise customers from cybersecurity attacks.  Based in Silicon Valley, Blue Coat is a leading network technology, cloud, and security provider.  As a result of the transaction, Symantec “will have the scale, portfolio, and resources necessary to usher in a new era of innovation designed to help protect large customers and individual consumers against insider threats and sophisticated cybercriminals,” explained Symantec chairman Dan Schulman.  With the acquisition, Symantec will enhance its leadership position to define the future of cybersecurity.  It will continue to set the pace for industry innovation.  Blue Coat CEO Greg Clark will take the reins as Symantec’s CEO, as well as join the company’s board of directors.  The combined company is projected to generate $4.4 billion in revenue for fiscal year 2016.

Big Movers

Comtech Telecommunications (Down 31.0%) – Shares were down this week after the company released the pricing for its previously announced public offering at $14 per share, well below the $16.11 share price before the announcement.

Safran (Down 6.5%) – Shares declined this week after the engine manufacturer announced its plans to bid for fellow French aerospace supplier, Zodiac Aerospace SA.

Transactions

Alpha Sintered Metals acquired Precision Products, LLC, a provider of metal injection moldings, serving the aerospace and firearms markets.  Terms of the deal were not disclosed.

Carlisle Interconnect Technologies, Inc. acquired Micro-Coax, Inc., a provider of radio-frequency and microwave solutions for defense, satellite, test and measurement, and other industrial customers.  Terms of the deal were not disclosed.

HGH Infrared Systems, Inc. acquired Electro Optical Industries, LLC, a provider of optronic and infrared systems for security, industrial, and civil applications.  Terms of the deal were not disclosed.

ManTech International Corp. acquired Oceans Edge Cyber, the cyber business of Reston, Virginia-based Oceans Edge Inc. Oceans Edge Cyber focuses primarily on vulnerability research, development, and analysis. Terms of the deal were not disclosed.

Symantec to acquire Blue Coat Inc., a premier network technology and security provider based in Sunnyvale, California. Symantec will pay roughly $4.65 billion in cash for the transaction, which is expected to close in the third quarter of fiscal year 2016.

Xator acquired TSM Corporation, a Reston, Virginia-based national security solutions company which provides training, engineering and logistics services to Special Operations as well as Defense and Law Enforcement communities. Terms of the deal were not disclosed.

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Aerospace & Defense Update

Intended to replace the Hellfire missile, a Joint Air-to-Ground Missile (“JAGM”) was successfully fired from a Gray Eagle unmanned aircraft system and hit its target, a truck traveling at twenty miles per hour.  According to the U.S. Army’s Joint Attack Munition Systems project manager, this is the first time the JAGM missile has been tested on a drone.  Compared to the Hellfire missile, the JAGM missile is not highly dependent on operator skill or latency of the Predator platform.  The missile is currently being developed under Lockheed Martin’s $66 million contract for JAGM missile engineering and manufacturing development with two $60 million options for initial production.

Britain is in the initial stages of creating a new era of space-based tactical communications for its military that will replace the current Airbus Skynet 5 system scheduled to end in 2022.  The Future Beyond Line of Sight (“FBLOS”) program would replace the Ministry of Defense’s (“MoD”) current twenty-year deal with Airbus Defence and Space started in 2003 to provide and support satellite, ground terminals, and control rooms.  The world’s largest satellite builders and service providers, including Airbus, Boeing, and Lockheed Martin, have expressed interest in the upcoming contract, which will likely have several awardees.  Executives competing over the contract believe many new technologies such as solar-powered UAVs and data transmission by laser will emerge over the next decade, thus emphasizing the need for further innovation.

Government Technology Solutions Update

According to officials from the Center for Medicare and Medicaid Services (“CMS”), big data and predictive analytics tools used to fight Medicare fraud have saved taxpayers approximately $1.5 billion dollars over the past five years.  These tools are part of CMS’ Fraud Prevention System (“FPS”), which the agency began using in June of 2011 and runs sophisticated analytics for approximately 4.5 million daily Medicare claims.  FPS’ applications allow CMS to go “beyond the reactive ‘pay and chase’ approach toward a more effective, proactive strategy that aims to prevent these illegitimate payments in the first place,” explained CMS officials.  It is estimated that in 2015, CMS saw a return of $11.60 on every dollar invested in FPS, and as a result is currently working to develop next-generation predictive analytics to further improve the efficiency of mission-critical system.

In an effort to diminish cybersecurity risks within its internal computer systems, Department of Defense (“DoD”) CIO Terry Halvorsen laid out the agency’s new “Cybersecurity Discipline Implementation Plan.”  The comprehensive plan highlights four courses of action and includes the use of a new scorecard to ensure that the DoD is adequately strengthening its cybersecurity defenses.  Each course of action pertains to a unique area of cybersecurity that hackers have exploited to gain access to the agency’s network.  The Defense Readiness Reporting System, another component of the plan, enables supervisors to report their status on meeting these requirements and allows “leadership to review compliance down to a tactical level,” the plan explains.

Big Movers

Zodiac Aerospace (Up 7.3%) – Shares were up this week as the Company reported new business from United Airlines’ upgraded business class seats.

Cobham (Down 16.0%) – Shares declined after the defense group announced a $700m rights issue that allows its investors to purchase shares at a significant discount of 45% to the closing price in order to raise capital to pay off debt.

Transactions

Aerostar Aerospace Manufacturing, LLC acquired Warmelin Precision Products, a provider of highly complex precision components for the global aerospace industry.  Terms of the deal were not disclosed.

Genstar Capital, LLC acquired Infinite RF Holdings, Inc., a provider of engineering grade radio frequency (RF) technology components to the aerospace/defense, industrial, government, consumer electronics, instrumentation, education/medical, and telecommunications markets.  Terms of the deal were not disclosed.

Saint Gobain Performance Plastics Corporation acquired MIPNET Industries, a provider of composite parts designed with the RT2i^TM weaving technology to aerospace industry. Terms of the deal were not disclosed.

United Flexible, Inc. to acquire Kreisler Manufacturing Corp., a provider of precision metal components and assemblies primarily for use in military and commercial aircraft engines, and industrial gas turbines in the United States.  The deal is worth an estimated $35 million.

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Aerospace & Defense Update

The U.S. House of Representatives approved a $582 billion Pentagon budget that shifts major funds to a list of major weapons programs including the F/A-18, F-35, and Army rotorcraft.  The new bill plans to reallocate $18 billion in wartime overseas contingency operations (“OCO”) funding toward base budget requirements, and adds more troops, jet aircraft, shipbuilding, and rotorcraft.  The White House has expressed its opposition to numerous provisions in the bill and the President said he will likely veto the legislation in its current form, as it would drive OCO funding to run out by next April, forcing the next president to seek supplemental funding from Congress.

Congressional restrictions on the use of Russian rocket engines may threaten the financial viability of U.S. civil space programs.  Industry officials project these potential restrictions could increase NASA’s launch costs by hundreds of millions of dollars in future years.  If the supply of Russian-built technology is cut off for Pentagon missions, the annual number of Atlas V launches would drop sharply, likely raising the price of remaining National Aeronautics and Space Administration (“NASA”) missions due to the massive overhead costs that would be spread across fewer launches.  Currently, the anticipated increases in costs pose major challenges for top priority NASA programs, such as unmanned missions for deep-space exploration and cargo transportation to the international space station.  Despite these concerns, senior NASA officials expressed support for Congressional efforts to phase out Russian engines and remain confident in finding a viable U.S. replacement.

Government Technology Solutions Update

The House Committee on Oversight and Government reform released its Federal Information Technology Acquisition Reform Act (“FITARA”) May scorecard for Federal agencies this week.  The Committee scored 24 agencies on a set of metrics to determine an overall grade between “A” and “F.”  As compared to the November scorecard, seven agencies improved, one (The General Services Administration’s score) declined, and 16 remained consistent.  The Department of Commerce received the best overall score of a “B,” with high marks on risk assessment transparency and data center consolidation.  11 agencies received a “D” grade, which is the lowest possible score.

The U.S. Navy is beginning preparations to replace the IT systems and infrastructure that support shipyard and ship maintenance.  The joint project between the Space and Naval Warfare Systems Command and the Naval Sea Systems Command will replace more than 100 systems and applications, some of which are more than 50 years old.  Bruce Urbon, the program manager for the Navy Maritime Maintenance Enterprise Solution – Technical Refresh (“NMMES-TR”), stated “We have systems that are that old that we’re still using to maintain our fleet…It’s a growing concern within the Navy that these systems are going to fail, and that’s going to have an impact on fleet readiness and getting ships ready to deploy.”  The Navy has already held one industry day, and is looking to hold more in preparation for the systems updates.

Big Movers

Booz Allen Hamilton (Up 6.7%) – Shares were up this week after the company reported a backlog that reached a record high for the end of its fiscal year and increased revenue and profit in its latest quarter

Babcock International (Up 4.1%) – Shares were up this week after the company was awarded a contract, estimated at $580 million, by the U.K’s Ministry of Defense to deliver the rotary wing element of the U.K military flight training system

Transactions

Advanced Logistics for Aerospace (“ALA”) to acquire STAG Group, a provider of distribution and supply chain services for the aerospace industry.  Terms of the deal were not disclosed.

AE Industrial Partners acquired AC&A, a provider of composites, metallic parts, and tooling.  Terms of the deal were not disclosed.

Kalex Corp. acquired Herndon Aerospace & Defense Company, a distributer of commercial and defense supply chain management solutions.  The deal is worth an estimated $21.0 million.

KEYW announced the sale of its Hexis Cyber Solutions HawkEye AP product line to Ignite Anlytics, and its Hexis Cyber Solutions HawkEye G product line to an undisclosed private-equity backed strategic player.  HawkEye AP provides data analytics and HawkEye G provides endpoint detection and responses. Terms of the deals were not disclosed.

Magellan Health Inc. acquired Armed Services Corporation (“AFSC”), a provider of behavioral health and specialty services, such as business strategy, management consulting, and HR solutions, to various agencies of the Federal government.  The deal is worth $127.5 million.

National Technical Systems acquired Chesapeake Testing Services, a provider of ballistic experimentation, non-destructive, sports, environmental simulation, and X-ray computed tomography scanning testing services.  Terms of the deal were not disclosed.

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