Aerospace & Defense Update

The prototype rotorcraft vying to replace the Army’s Black Hawk is scheduled to take its first flight in 2017.  The prototypes are being developed for the Army’s Joint Multi-Role Technology Demonstrator project, commissioned in 2013 after considering various new technologies, by a Sikorsky and Boeing team and Bell Helicopter.  The project will be a part of the Army’s Future Vertical Lift program, a vast effort to replace all helicopters, which include the AH-64 Apache, CH-47 Chinook, and the OH-58.  In order to meet the Army’s shifting needs the rotorcraft will be designed to fly higher, faster, and farther with increased cargo capacity.  Sikorsky and Boeing are currently building the SB-1 Defiant, a high-speed coaxial helicopter, and Bell is building the V-280 Valor, a tiltrotor aircraft.  Both are slated for their first flights in the latter half of 2017 with first orders from the army expected in 2030.

The Association for Unmanned Vehicles Systems International (“AUVSI”) hosted XPONENTIAL 2016 in New Orleans, with more than 8,000 industry leaders and professionals from over 55 countries in attendance to discuss the latest innovations in the unmanned systems market.  The conference, which acts as a platform for providing information about the future of unmanned systems policy, regulations, and technology, featured an announcement from Federal Aviation Administration (“FAA”) Administrator Michael Huerta regarding a new drone advisory committee to be chaired by Intel CEO Brian Krzanich.  As a first step towards easing regulation, the FAA will allow students to operate unmanned aerial systems.  The drone advisory committee anticipates the measure to spur innovation, with the ultimate goal of positioning the U.S. as a leader in the marketplace.  The committee also plans to help identify and prioritize integration challenges and improvements.

Government Technology Solutions Update

Information security incidents at Federal agencies experienced double digit growth in 2015, despite agencies taking increased measures to better protect networks, according to the FY2015 Office of Management and Budget’s (“OMB”) report to Congress on information security.  A total of 77,200 incidents were reported in 2015, up from 69,900 reported in 2014.  While cyber attack incidents still grew at double digit levels in 2015, the growth was less than any other year since 2003.  External scans, probes, and attempted access accounted for the majority of incidents, followed closely by insider threats, such as policy violations and equipment loss.  The sheer number of reported incidents, as well as the continuation of significant year-over-year growth, reinforces the growing need for more effective network monitoring and automated security tools to better prevent and address threats.

Federal Agencies are attempting to minimize the lag between when they receive data and when they analyze data by more effectively using big data analytic methods.  Agencies have sought to increase the manpower at their disposal through analysis training programs, but the amount of data limits the effect of increased manpower.  By reaching out to industry partners, agencies have been slowly decreasing this data analysis lag.  The Department of Homeland Security (“DHS”) has decreased its analytical backlog to around one month, while Centers for Medicare and Medicaid Services (“CMS”) has decreased its lag time from one year to three months by utilizing real-time analysis techniques.  In order to better utilize the sheer amount of data at their disposal, agencies are looking for creative solutions from industry partners while increasing the cyber manpower available within the Federal government, a trend that will likely continue over the near term.

Big Movers

Kratos Defense & Security Solutions (Down 19.4%) – Shares were down this week after the company reported weak earnings for the first quarter

Tutor Perini (Up 22.9%) – Shares were up this week after the company reported increased project opportunities in its earnings report

Transactions

Altamira Technologies Corp acquired Prime Solutions LLC, a provider of engineering and information technology services.  Terms of the deal were not disclosed.

Convergint Technologies, LLC. acquired Total Recall Corporation, a provider of citywide surveillance networks.  Terms of the deal were not disclosed.

DLH Holdings Corp acquired Danya International, Inc., a provider of evidence-based health, education, and food security technology-enabled solutions.  The transaction was valued at $38.8 million.  KippsDeSanto & Co. acted as the exclusive financial advisor to Danya International, Inc.

Fortem Technologies acquired the Detect and Avoid Radar Technology Line of IMSAR, LLC., a provider of collision avoidance radar for UAS.  Terms of the deal were not disclosed

FTG Circuits, Inc., to acquire the Printed Circuit Technology Business of Teledyne Technologies, a provider of rigid-flex printed circuit boards and assemblies.  The deal is worth an estimated $9.3 million.

PEI-Genesis, Inc. acquired Filconn, Inc., a provider of filtered, electromagnetic pulse suppression, and custom configuration connectors.  Terms of the deal were not disclosed

Silverfleet Capital to acquire Sigma Precision Components Ltd., a provider of precision components for aerospace and high technology markets.  The deal is worth an estimated $91.2 million.

UES International Pty Ltd., acquired Panther Engineering, Inc., a provider of design, engineering, and high precision CNC parts, tooling, dyes, and molds.  Terms of the deal were not disclosed.

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Aerospace & Defense Update

Airbus’s space unit and partner OneWeb are expected to announce plans for a new Florida factory capable of producing small, advanced communications satellites at an unparalleled rate.  The joint venture will build the highly automated facility designed to assemble and test as many as 15 satellites in a week with production currently slated to begin sometime next year.  The joint venture, financed by Airbus, chip maker Qualcomm, and Virgin Galactic, hopes to assemble and launch more than 640 satellites to provide internet access in developing regions by the end of 2019.  The first prototypes are now undergoing testing by Airbus in France and are scheduled to go into orbit early next year.

The House Armed Services Seapower and Projection Forces Subcommittee urged the Air Force to buy as many as 200 next-generation B-21 bombers in its markup of the 2017 defense policy bill.  Both top military officials and consultants outside the Pentagon have recommended the Air Force acquire more than the 100 planned Northrop bombers in order to ensure enough aircraft are available to meet combatant commander requirements and counter growing threats around the world.  The legislation would direct the secretary of the Air Force to submit a report to the congressional defense committees by February 2017, with an estimate of the number of B-21s necessary to meet security demands.  The report also requires a transition plan to integrate the B-21 into the current bomber fleet until 2040.

Government Technology Solutions Update

The Department of Defense (“DoD”) is currently collaborating with its allies across the globe to integrate common commercial IT platforms, systems, and standards with the aim of improving their warfare capabilities in cyberspace.  According to DoD CIO Terry Halvorsen, the goal is to share IT commonalities across the board with its European allies within the next three to five years.  The integrated systems have the potential to greatly augment information sharing in an increasingly digital age and would also provide significant opportunities to leverage commercially-available solutions.  In response to the recent decision by DoD that requires all agencies and military branches to transition to Windows 10 by January 31, 2017, and a similar mandate by the U.K.’s Ministry of Defense to transition all branches to Microsoft’s Azure cloud, Halvorsen has pressed other allies to follow suit in developing a common Windows 10 baseline.  A common system would not only improve communication and information sharing, but would also facilitate the instantaneous exchange of data at much lower costs.

Nearly a year ago, the Department of Homeland Security (“DHS”) required agencies to fix all critical cybersecurity vulnerabilities within one month.  However, 39 of the more than 360 original issues still remain unresolved.  Part of the problem is that some agencies are running on antiquated, legacy IT systems, which are considered to have significant critical vulnerabilities but can be incredibly expensive to update, especially for smaller agencies with limited resources.  The inability of Federal agencies to address critical security concerns became very apparent following the Juniper software hack incident, which affected 12 agencies, three of which (the Treasury, NASA, and the Department of Commerce) were unable to properly install the security patch to their systems for more than 50 days following the incident.  The concern is that in many cases agencies use complex systems containing multiple outdated, legacy components that may not be compatible with various security fixes, leaving entire systems vulnerable to cyber-attacks.

Big Movers

Zodiac Aerospace (Up 17.3%) – Shares were up this week in response to a potential acquisition offer from Safran SA

Macdonald Dettwiler & Associates (Up 7.0%) – Shares were up this week after analysts boosted the Company’s 1Q16 earnings estimates

Transactions

Reiser Simulation and Training GmbH acquired Innovative Control Systems, Inc., a provider of avionics, test systems, and custom engineering services for the aerospace industry.  The terms of the deal were not disclosed.

Smiths Group plc to acquire Morpho Detection, Inc., a provider of detection systems for explosives, narcotics, and chemical, biological, radiological, and nuclear material.  The deal is worth an estimated $710 million.

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Aerospace & Defense Update

The aviation maintenance, repair, and overhaul (“MRO”) industry converged in Dallas, TX this week for Aviation Week’s MRO Americas, the industry’s largest trade show dedicated to MRO.  Roughly 13,000 people attended the conference including corporate executives, industry analysts, and media personnel.  During the conference, ICF VP, Kevin Michaels, noted consolidation is likely to continue affecting the aftermarket primarily among mid-tier companies building scale around technology.  Beyond consolidation, industry professionals expressed varied views on the future of the MRO market, with some suggesting a potential downturn based on oversold airframe order backlog, unnaturally low interest rates, and a shortage of financing for used aircraft and exchange rates.  Others, however, voiced that aircraft aftermarket activity is trending upwards due to higher levels of aircraft utilization coupled with low fuel prices.

Though Pentagon officials, industry executives, and international leaders agree the foreign military sales (“FMS”) process needs to be improved, Congressional sources and industry analysts believe reform is unlikely before the end of this presidential term.  Change is not expected within the next ten months based on the complex and sensitive nature of weapon sales and a myriad of other factors including the upcoming election, a compacted congressional calendar, and gridlock on Capitol Hill.  Among the most vocal about changing the process is Secretary of the Air Force Deborah Lee James, who aims to make it easier for those fighting against the Islamic State to receive weapons quickly and efficiently.  While there seems to be little chance for reform this year, reforms for better prioritization and synchronization among agencies within international defense is expected to reignite after a new president enters office.

Government Technology Solutions Update

Earlier this week, the General Service Administration (“GSA”) Office of Integrated Technology Services released the pre-solicitation for the Veterans Technology Services 2 (“VETS 2”) contract, the $5 billion successor to its government-wide VETS contract established in 2007.   Similar to its successor, VETS 2 will have a five-year base period of performance with a five-year optional extension and the same $5 billion ceiling value.   VETS 2 will serve as a general contract for a number of federal agencies to purchase a wide-range of IT services.  Also consistent with its predecessor contract, only service-disabled, veteran-owned small businesses (“SDVOSB”) will be able to compete for a spot on the contract.  The actual solicitation is expected to be released on April 21st, with awards expected in 2017.

The GSA recently unveiled its “Making it Easier” initiative focused on providing the tools necessary for helping vendors and start-ups gain more comfort with the Federal contracting process on IT Schedule 70.  This push to bolster efficiency and accessibility of the agency’s largest contract vehicle reflects similar moves at the Department of Defense (“DoD”) and Department of Homeland Security (“DHS”), which have both launched efforts in Silicon Valley to familiarize start-ups with their procurement processes.  In addition to increasing agencies’ and vendors’ awareness and familiarity with federal contracting nuances, the GSA program is designed to streamline the contracting acquisition process, reducing what once took an average of 110 days for various procurement efforts down to 45.  Approximately 80% of the agency’s Multiple Award Schedules (“MAS”) contractors are small companies, yet, they represent only 36% of the roughly $40 billion that flows through the schedules annually.  According to GSA Administrator Denise Turner Roth, the changes are expected to spread across the agency’s other MAS contracts within a month.

Big Movers

CPI Aerostructures (Down 6.5%) – Shares were down this week after the company’s earnings results fell short of analyst expectations

Smith & Wesson (Down 16.1%) – Shares were down this week after analysts downgraded the stock due to FBI figures detailing increased background checks in the month of March

Transactions

Aero Precision, Inc. acquired Fall Machining Company, Inc., a provider of precision machined products for aerospace and other markets.  The terms of the deal were not disclosed.

Alaska Air Group, Inc. to acquire Virgin America, Inc., a provider of scheduled air travel services.  The deal is worth an estimated $2.6 billion.

Hartzell Engine Technologies, LLC acquired the Aircraft Starters and Solenoids product line of Sky-Tec Partners, a provider of complete line of starters for Lycoming and Continental engines.  The terms of the deal were not disclosed.

MB Aerospace Holdings to acquire Centrax Turbine Components Ltd., a provider of compressor and turbine aerofoil, discs, shafts, and casings.  The terms of the deal were not disclosed.

Molex, Inc. acquired Interconnect Systems, Inc., a provider of high density silicon packaging with advanced interconnect technologies for OEMs. The terms of the deal were not disclosed.

Novaria Holdings, LLC to acquire Elastic Stop Nut Corporation of America, a provider of nylon inserts and metal fasteners to the commercial aerospace, military ground, and navy nuclear markets. The terms of the deal were not disclosed.

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Aerospace & Defense Update

Alphabet, Google’s parent company, announced its plans to sell Boston Dynamics, the legged-robot maker, as a result of internal disagreements and concerns about the Company’s ability to develop a marketable product within the next few years.  Alphabet acquired Boston Dynamics and six other companies in 2013, as part of an acquisition spree to develop a robotics unit dubbed Replicant.  Due to organizational conflicts, Alphabet recently dissolved Replicant and reassigned its employees to the Company’s X division, a future innovations arm that focuses on “moonshots”.  However, Alphabet executives struggled to find a proper fit for Boston Dynamics, as Boston Dynamics executives resisted Alphabet’s demands to abandon humanoid robots in order to work towards solving transportation or logistics problems.  Additionally, Boston Dynamics robots’ distinguishing feature, their ability to walk on two or four legs, is primarily useful for military applications creating further conflicts of fit as Alphabet stated it would not sell robots for military purposes.

Government officials and U.S. aerospace companies are striving to develop new cockpit-equipment standards that would eventually allow aircraft to tap into local satellite-navigation systems across the globe.  Recent efforts to draft regulations and common technical benchmarks aim to enhance airline safety by supplementing signals from U.S.-operated Global Positioning Satellites (“GPS”) with broadcasts from separate regional or ground-based technology.  Although the concept has been discussed in principle for years, many industry leaders and regulators are increasingly advocating for joint standards with the ultimate goal of enabling more precise and redundant location information worldwide, regardless of airline or aircraft type.  Industry leaders also outlined the importance of establishing signal integrity and availability requirements in order to address potential increases in intentional signal interference or hacking.

Government Technology Solutions Update

In preparing its 2015 FISMA report, the Office of Management and Budget (“OMB”) found that Federal agencies reported over 77,000 cyber incidents in 2015, an increase of ~10% from 2014.  The 2015 figure continues a decade-long trend of increasing Federal cyber incidents dating back to 2006 in which only 5,500 incidents were reported.  Despite an increase in total incidents, the OMB found 30% were unrelated to cyber-intrusion, including mishandling of sensitive information, loss of physical data records, and policy violations.  To understand if agencies’ cyber capabilities are successfully adapting to evolving threats, the 2015 Federal Inspectors General implemented an Information Security Continuous Monitoring (“ISCM”) framework to assess capabilities.  Their findings revealed 21 of the 24 CFO Act agencies implemented low-level ISCM maturity; only the General Services Administration (“GSA”) received a favorable score of 91%, exceeding the 68% average.  While there is still room for improvement, the OPM has cited significant improvement for areas targeted in last year’s cyber sprint, and is hopeful the $19 billion provision for cyber improvements in the President’s FY2017 budget request will accelerate this effort.

The GSA established its initial dedicated cloud computing effort nearly seven years ago; however, given the scale of the project, the agency continues its work of migrating to the cloud in pursuit of enhanced capabilities and reduced costs.  In order to expedite this process for the GSA and other Federal agencies, the Office of Citizen Services and Innovative Technologies (“OCSIT”) recently released a Request for Information (“RFI”) to gain a better understanding of vendors’ capabilities in the space.  The primary aim is to create a robust portfolio of cloud products, tools, platforms, and services that can support Federal agencies as they transition to the cloud.  The RFI focuses on five critical areas focused on both government experience and suggested contractor responsibilities. Primarily, the OCSIT is looking for contractors who not only understand the challenges that are inherent to government operations, but also that bring distinctive and innovative perspectives.   By encouraging creativity and calculated risk-taking on smaller projects, the OCSIT hopes to leverage any insights learned from successes or failures to improve processes on significant projects in the future.

Big Movers

Mercury Systems (Up 11.2%) – Shares were up this week after the Company announced plans to acquire certain businesses from Microsemi Corporation

Smith & Wesson (Down 9.7%) – Shares were down this week after Sportsman’s Warehouse projected a decrease in firearm sales for FY2016

Transactions

FTG Aerospace acquired Airco Industries, Inc., a provider of displays and control panels for military and commercial airborne and ground communications and navigation systems.  Terms of the deal were not disclosed.

Mercury Systems to acquire Embedded Security, RF and Microwave, and Custom Microelectronics businesses from Microsemi Corporation, a provider of high-frequency components and subsystem solutions for defense electronics, homeland security, and other government end-use applications.  The deal is worth an estimated $300 million.

Micro Focus International to acquire Serena Software, a provider of orchestrated IT solutions and application lifecycle management for Global 2000 companies and Federal customers.  The deal is worth an estimated $540 million.

Novaria Group to acquire Ferco Aerospace, a provider of high-strength and temperature resistant brackets, tube assemblies, and other exotic metal fabrications.  Terms of the deal were not disclosed.

Sirius Computer Solutions to acquire Force 3, a provider of infrastructure and security services, including next generation networking and IT support for Federal agencies.  Terms of the deal were not disclosed

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Aerospace & Defense Update

Almost five months after the Air Force awarded Northrop Grumman a contract to provide the Long Range Strike-Bomber (“LRS-B”), Air Force secretary Deborah Lee James finally disclosed seven major contractors who will join Northrop in building, what is now officially designated, the B-21.  James announced that Pratt & Whitney will build the B-21 engines at its facility in East Hartford, Connecticut.  James also noted the Air Force’s decision not to go with GE aviation on the engines reflects a departure from the legacy B-2 stealth bomber.  The other partners that will supply the airframe or mission systems include BAE Systems, GKN Aerospace, Janicki Industries, Orbital ATK, Rockwell Collins, and Spirit AeroSystems.  James did not disclose additional details about which B-21 component each contractor will build.  The Air Force’s decision to release the names of the key contractors is the first major step in the on-going effort to increase transparency and build support for the program.

Orbital ATK featured a wide range of satellite and space launch, propulsion, and logistics technologies during the Satellite 2016 conference and exhibition.  The Company highlighted their ability to design, build and deliver products to orbit for a variety of commercial and government customers around the world.  During the conference, Orbital ATK announced it is close to signing a pioneering contract with Intelsat to launch robotic space tugs to extend the life of geriatric satellites circling the Earth.  In addition to repositioning satellites, the tug would eventually fuel or repair ailing craft with robotic technology, which would permit satellites to be blasted into space with minimum fuel on board, generating substantial weight and cost savings.  The deal is expected to be announced as early as next month and would cap a lengthy struggle to turn in-orbit satellite servicing into a commercial reality.

Government Technology Solutions Update

The Department of Veteran’s Affairs (“VA”) announced the awardees to its $22.3 billion Transformation Twenty-One Total Technology Next Generation Acquisition (“T4NG”) program this week.  21 contractors won spots on the program, including 10 service-disabled veteran owned small businesses (“SDVOSB”), two small businesses, and nine large businesses, with all 21 having the ability to bid on any of the task orders (“TOs”) released under the vehicle.  The contracts have a base period of five-years and a one-year option period. The program seeks to foster private-public sector strategic cooperation in order to provide information technology (“IT”) services and solutions to support “MyVA” initiatives, including health IT, telecommunications, cybersecurity, and cloud mobility to further support and improve veteran care.

As part of the Executive Branch’s initiative to improve IT interoperability, the White House plans to release the plans for a pilot program that will call for the sharing of source code amongst Federal agencies.   The plan will call for agencies to release at least 20% of their new code as open-source in order to support improved access to the custom codes of these agencies.  Custom codes are defined as those codes developed by third parties for specific agencies.  As noted by U.S. Chief Information Officer (“CIO”) Tony Scott, “this policy is consistent with the Federal Government’s long-standing policy of technology neutrality through which we seek to ensure that Federal investments in IT are merit-based, improve the performance of our government and create value for the American people.”  To support the initiative, the Office of Management and Budget (“OMB”) will launch “Project Open Source” to aid agencies in implementing the White House’s guidance within 90 days of announcement.

Big Movers

Comtech Telecommunications (Up 7.3%) – Shares were up this week following a dividend announcement of $0.30 per share, representing a $1.20 dividend on an annualized basis and a yield of 5.57%

Finmeccanica (Up 7.3%) – Shares were up this week after the Company announced contract awards totaling around $130 million for air traffic control management systems

Transactions

Drew Marine, Inc. to acquire NAL Research Corporation, a provider of iridium satellite modem and tracking terminal services.  The terms of the deal were not disclosed.

Jet Aviation AG, a subsidiary of General Dynamics, to acquire AvJet Corporation, a provider of private jet management services.  Terms of the deal were not disclosed.

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