Industry Week in Review – February 26, 2016

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Aerospace & Defense Update

The chairman of the Senate Armed Services Committee (“SASC”), Senator John McCain, stated he will not authorize the Long Range Strike-Bomber (“LRS-B”) if the procurement is on a cost-plus basis.  Senator McCain expressed concern of the additional costs associated with the contract structure and voiced opposition to hear the Air Force’s perspective on the matter.  Following the Senator’s remarks, the Air Force revealed the contract will be divided into two parts, cost-plus and firm fixed price.  The first phase, which consists of engineering and manufacturing development, is currently structured as a cost-plus with incentives.  The Air Force and Senator McCain are scheduled to discuss concerns surrounding the project during closed briefings with the SASC and the House Armed Services Committee in the following weeks.

According to sources familiar with the matter, Honeywell reportedly offered a merger proposal of around $105 billion, including debt, for United Technologies.  The industrial titans have a combined $95 billion in annual revenue and share an extended list of overlapping products and customers.  Following a decade of consolidation among aerospace suppliers, the two Companies are seeking to increase their leverage with their customers by demonstrating their expansive suite of products and technical expertise.  United Technologies expressed concerns around a potential transaction as the merger proposal was a source of unease from major customers and regulators on three continents.  However, Honeywell remains persistent and is continuing its pressure on United Technologies to remain engaged in merger talks.

Government Technology Solutions Update

As part of the Department of Defense’s (“DoD”) Third Offset Strategy, it is reaching out to non-defense technology companies to help increase its technological competencies and harness the benefits of recent IT advancements. The biggest challenge the DoD faces is dispelling the perception that government contracting stifles technology advancement given an arduous and time-consuming acquisition process and a limited ability for vendors to develop internal Intellectual Property (“IP”).  The Defense Innovation Unit Experimental (“DIUx”), located in Silicon Valley, was created to build and strengthen relationships with innovative companies, identify emerging technologies, and serve as a west-coast presence for the DoD.  The department recognizes it has traditionally fallen behind in these areas, and has established DIUx to bolster military capabilities in preparation for technological challenges and opportunities in the future.

The Federal Risk and Authorization Management Program (“FedRAMP”) has postponed launching its high baseline standards for cloud authorization by one to two months in an effort to reduce its existing backlog.  Initially, in 2012, FedRAMP successfully vetted cloud providers in six months; today that process takes anywhere from 12 to 18 months, according to FedRAMP Director Matt Goodrich.  Part of the slowdown has been caused by an increasing number of Cloud Service Providers (“CSPs”) and Third-Party Assessment Organizations (“3PAO”).  To more effectively manage the workload, FedRAMP is working with stakeholders to redesign the authorization process to focus primarily on actual capabilities and security, rather than documentation.  Goodrich expects the redesign to “make every authorization happen in less than six months,” and will provide a six-month FedRAMP update within the next two weeks.

Big Movers

United Technologies (Up 10.7%) – Shares were up this week following the news of a potential merger with Honeywell

Zodiac Aerospace (Down 28.4%) – Shares were down this week after the Company forecasted a recovery that will take longer than the 18 months initially planned

Transactions

CAE, Inc. to acquire Lockheed Martin Commercial Flight Training (“LMCFT”), a provider commercial aviation training products and services.  Terms of the deal were not disclosed.

General Dynamics to acquire Bluefin Robotics, a provider of unmanned undersea vehicles for customers in the defense, scientific, and commercial markets.  Terms of the deal were not disclosed.

Safariland to acquire United Uniform Company, a provider of tactical gear and uniforms for law enforcement and public safety professionals.  Terms of the deal were not disclosed.

Stirling Square Capital Partners acquired Mettis Aerospace, a provider of precision forged and machined components for aerospace and defense customers.  Terms of the deal were not disclosed.

General Atomics to acquire Ducommun Incorporated’s subsidiary, Miltec Corporation, a provider of engineering, technical, and program management services for advanced weapons systems and military defense systems.  The deal is worth an estimated $14.6 million.  KippsDeSanto & Co. acted as the exclusive financial advisor to Ducommun Incorporated.

Oracle Corporation to acquire Ravello Systems, Inc., a provider of cloud-based virtualization software applications and solutions.  The deal is worth an estimated $500.0 million.

Quantech Services, Inc. to acquire KeyW Systems Engineering and Technical Assistance business, a provider of SETA services to Defense agencies.  The deal is worth an estimated $12.0 million.

Rhone Capital to acquire a 45% minority stake in Garda World Security Corporation, a provider of business solutions and security services worldwide.  Terms of the deal were not disclosed.

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Industry Week in Review – February 19, 2016

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Aerospace & Defense Update

The Government Accountability Office (“GAO”) denied Boeing and Lockheed Martin’s protest of the Pentagon’s award of the Long Range Strike Bomber (“LRS-B”) contract to Northrop Grumman. However, Boeing still has the option of pursuing the matter in court, and has suggested it’s considering doing so.    Northrop Grumman was initially awarded the contract on October 27, 2015, but the decision was soon after protested.  Now that the GAO has denied the protest, Northrop Grumman will resume its development and engineering work for the LRS-B, which is tentatively scheduled for initial operating capability in 2025.  The LRS-B contract, which is expected to exceed $55 billion over the program’s lifespan, is the largest military aircraft contract since the F-35 Joint Strike Fighter was awarded to Lockheed Martin.

Airbus Group announced it will not include its border security business in the planned sale of its defense electronics unit.  The decision was driven by the border security business missing its goal to reach a deal by early 2016 on a border project in Saudi Arabia.  For now, the border security business will be retained within Airbus’ Defence and Space division, but it could be sold separately at a later date. According to a source familiar with the matter, the removal of the border security business, which is experiencing substantial declines in revenue over recent years, is not expected to lower the overall valuation of the defense electronics unit (~$1.5 billion).  As a result, the sale process of the defense electronics unit is expected to continue as planned, with a potential announcement likely to come within several weeks.  The sale is part of a company-wide initiative to reduce its exposure in the defense market and further shift its focus to the aerospace market, where growth prospects are expected to be more attractive.

Government Technology Solutions Update

On Thursday, IBM announced that it has agreed to purchase Truven Health Analytics (“Truven”), a provider of health data analytics solutions, from Veritas Capital.  The $2.6 billion acquisition stands to be IBM’s largest purchase in three years, and the Company’s fourth health data-related acquisition in the past 12 months, after Merge Healthcare, Explorys, and Phytel.  The acquisition highlights IBM’s commitment to expanding its presence within the healthcare industry through continued investment in data and technology solutions.  Truven will provide IBM with access to various health-related data points from 300 million patients, allowing the Company to focus on delivering insights into value-based care for patients.  Partially as a result of the acquisition, IBM’s stock rose 5.0% on Thursday, the largest single-day increase for the company in more than four years.  The deal is expected to close before the end of 2016.

The President’s GFY2017 budget request proposes a significant change to how Federal IT modernization should be prioritized.  The GFY17 $89.8 billion Federal IT request includes provisions for a $3.1 billion IT Modernization Fund run by the General Services Administration (“GSA”), which would encourage spending on modernized systems as opposed to continued maintenance of legacy systems.  The latest estimates show that while only approximately 24% of the GFY16 $88 billion Federal IT budget was allocated to Development, Modernization, and Enhancement (“DME”), compared to Operations and Maintenance (“O&M”), the GFY17 request has a proposed 9% hike in spending on new IT systems. David Bray, the Federal Communications Commission (“FCC”) CIO explained that modernizing IT systems should prioritize three things: first and foremost, agility; secondly, resiliency, cybersecurity, and continuity of operations; and finally, improving efficiencies.

Big Movers

Engility Holdings (Up 13.7%) – Shares were up this week after the company won a prime position on the $900 million Joint Enterprise-Contracted Logistics and Services Support (“JE-CLaSS”) contract

ViaSat (Up 15.0%) – Shares were up this week after American Airlines announced it is considering switching its Wi-Fi provider from Gogo Inc. to ViaSat

Transactions

Assured Enterprises, Inc. acquired Nova Defense & Aerospace International, LLC, a provider of intelligence, IT, and business strategy consulting solutions for aerospace, security, and acquisition markets.  Terms of the deal were not disclosed.

IBM to acquire Truven Health Analytics, a provider of health data analytics solutions for Federal and commercial customers in the healthcare industry.  The deal is worth an estimated $2.6 billion.

L-3 Communications Holdings Inc. has acquired Advanced Technical Materials, Inc., a provider of microwave RF components used for satellite communications, military systems, and microwave telecommunication applications.  Terms of the deal were not disclosed.

MW Industries, Inc. has acquired USA Fastener Group, Inc., a provider of various fasteners including studs, nuts and other precision machined parts.  Terms of the deal were not disclosed.

United Flexible, Inc. has acquired Fulton Bellows, LLC, a provider of thin wall precision metal bellows and bellows assemblies.  Terms of the deal were not disclosed.

Hexagon AB has acquired Sigma Space Corporation, a provider of next-generation LiDAR, laser ranging, attitude determination, spectroscopy, and radiometry instrumentation for remote sensing.  Terms of the deal were not disclosed.

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Industry Week in Review – February 12, 2016

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Aerospace & Defense Update

The Securities and Exchange Commission (“SEC”) has launched an investigation to determine whether Boeing properly accounted for the costs and expected sales of the 787 Dreamliner and the 747 jumbo aircraft.  The probe, prompted by a whistleblower’s complaint, concentrates on projections made by the Company about the long term profitability of two of its best known jetliners.  Both aircraft are renowned for the technological advancements they introduced into the aerospace industry.  The SEC investigation will be concentrated on Boeing’s use of program accounting, which allows the Company to average out upfront costs of manufacturing and the anticipated profits of planes over the full duration of production programs.  Though SEC officials have not determined if a case will need to be filed, Boeing’s share prices fell 6.8% on Thursday, marking the second large drop this month.

On Tuesday, the Obama administration released its $582.7 billion Government Fiscal Year (“GFY”) 2017 budget request to Congress.  The Defense Department’s request includes $71.8 billion for research and development (“R&D”), a 4% increase from the enacted $69 billion of last year.  The increase in R&D is expected to provide a foundation for the Third Offset high-tech investment portfolio, the Pentagon’s plan to restore rapidly declining U.S. military technological supremacy.  Over recent years the Pentagon’s budget requests exceeded past caps established by the Budget Control Act, also known as sequestration, however, this year’s request falls under Bipartisan Budget Act (“BBA”) providing the Pentagon with increased certainty on its funding levels.

Government Technology Solutions Update

President Barack Obama cited the Federal government’s portfolio of aging IT systems as a major focus area in his final budget request to Congress. On a combined basis, IT spending for civilian agencies, the DoD, and the intelligence community makes up approximately $90 billion of the budget request. “And I just want to say as an aside here [that] one of the biggest gaps between the public sector and the private sector is in our IT space, and it makes everybody’s information vulnerable,” Obama said.  A critical component of the budget request is for updated IT systems and infrastructure to replace archaic legacy systems.  In addition, the request highlighted the need for additional cloud adoption, the integration of interagency systems, and increased cybersecurity activities.  Currently, 26 Federal agencies are focusing on the successful migration of their IT to cloud based systems and converged agency infrastructure, as well as improving their cybersecurity practices and protocols, a trend likely to continue over the near term.

On Tuesday, the Obama administration announced a national cybersecurity action plan designed to address fundamental security challenges exacerbated by swift technological changes and the migration of Federal systems to the cloud.  The action plan focuses on three areas: (i.) substantially increasing Federal funds dedicated to cybersecurity; (ii.) the appointment of a Chief Information Security Official (“CISO”) that would report directly to Tony Scott, the Federal Chief Information Officer; and (iii.) the expansion of efforts to increase the nation’s cybersecurity workforce and public cyber-education initiatives.  To accomplish these goals, the plan proposes increasing cybersecurity funding to $19 billion, up 35% from last year’s allocation of $14 billion.  The fund would operate out of the General Services Administration, with set benchmarks the program must reach to receive further funding.   The funding will be complemented by a $62 million increase in the currently $4 billion initiative to increase the size of the nation’s cybersecurity corps reserve, as well as the creation of a Federal Privacy Council designed to monitor the progress Federal agencies are making in securing their networks.

Big Movers

Boeing (Down 11.4%) – Shares were down this week after the SEC launched an investigation on the Company’s accounting practices

American Science & Engineering (Down 30.6%) – Shares were down this week after the Company reported disappointing earnings

Transactions

Assured Enterprises has acquired Nova Defense & Aerospace International, a provider of IT and cyber security consulting to sensitive national security clients.  Terms of the deal were not disclosed.

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Industry Week in Review – February 5, 2016

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Aerospace & Defense Update

This week, Defense Secretary Ash Carter previewed the GFY2017 defense budget request in anticipation of the full release next week.  According to Carter, the $583 billion budget takes a “long view” approach, as the U.S. prepares for challenges decades down the road.  The planning of the budget was driven by several key factors including the rise of Russia and China, the threat of North Korea, Iran’s influence in the Gulf Coast, and the current fight against the Islamic State.  For example, Carter stated that the Pentagon will request $7.5 billion for the fight against the Islamic State, representing a 50% increase over GFY2016 levels.  Further budget shifts include cutting five of 48 F-35As from the U.S. Air Force’s original GFY2017 plan.  It remains unclear whether the initial plan to purchase a total of 1,763 aircraft will be reduced.  Despite these changes, the Air Force will fully fund the Long Range Strike Bomber and the KC-46 tanker programs.  Moreover, the budget also includes the Pentagon’s $2 billion request over the next five years to purchase 4,000 Tomahawk weapons and fund the development of more advanced capabilities for ship-based weaponry.  Overall, the GFY2017 budget request marks a “major inflection point” for the department as it looks for new ways to combat challenges in the short, medium, and long term.  To combat all of the outlined challenges, the U.S. will not only focus on air, land, and sea methodologies, but will also increase efforts in areas of cyber, space, and electronic warfare.

Government Technology Solutions Update

Xerox has announced that it intends to split into two separate publicly-traded companies, an $11 billion document technology company and a $7 billion business services company.  The announced split, which will separate Xerox’s hardware business from its services business, effectively reverses Xerox’s $6.4 billion acquisition of Affiliated Computer Services in 2010.  The transaction follows similar strategic moves by Science Applications International Corp. and Hewlett-Packard, and more recently Computer Science Corp. and Lockheed Martin Corporation.  Consistent with these portfolio-shaping activities, Xerox believes that the split will allow both companies to refocus on core capabilities and subsequently be more competitive in the marketplace and increase shareholder value.  Names and management teams of the new entities have not yet been announced, but the tax-free separation is expected to close by year end.

The Department of Defense (“DoD”) GFY2017 budget preview, which was released on February 2nd, includes approximately $7.0 billion for cyberspace operations.  This represents a 27.3% increase over the $5.5 billion GFY16 request.  Defense Secretary Ash Carter has cited the need to bolster network defenses, improve training for personnel, and develop the tools and infrastructure required to provide offensive cyber operations.  The DoD cyber budget is expected to exceed $35.0 billion over the next five years and represents only a fraction of the DoD’s broader IT expenditures.  The Pentagon’s request also includes $71.4 billion for Research and Development (“R&D”), marking the second straight year R&D budgets have grown.  Carter has emphasized that the increased cyber budget and continued growth in R&D marks an inflection point for the DoD, in which the department aims to address long-term strategic challenges posed by U.S. competitors, particularly in cyberspace, electronic warfare, and space.

Big Movers

Esterline Technologies Corporation (Down 32.6%) – Shares were down this week after the Company reported disappointing earnings for the quarter in addition to news breaking out of a pending investigation for potential violations of federal security law

CACI International, Inc. (Up 9.6%) – Shares were up this week after the Company reported positive earnings and increased guidance for 2016

Transactions

Arlington Capital Partners acquired iRobot Corporation, Defense & Security Business, a provider of robotic technologies for defense, public safety, and industrial markets.  The deal is worth an estimated $45 million, which includes a $15 million contingent payment based on 2016 revenue.

Braxton Science & Technology Group LLC to acquire Space/Ground System Solutions Inc., a provider of command-and-control software maintenance.  Terms of the deal were not disclosed.

Liberty Hall Capital Partners acquired AIM Aerospace Inc., a provider of interiors, composites, and ducting and tooling products to airlines and original equipment manufacturers worldwide.  The deal is worth an estimated $220 million.

The Cadmus Group, Inc. acquired Obsidian Analysis, Inc., a provider of management consulting services to decision makers across the full range of homeland security and business resilience domains.  Terms of the deal were not disclosed.

Ball Aerospace & Technologies Corp. acquired Wavefront Technologies, Inc., a provider of systems and network engineering, software development, and analytical services for cyber and mission-focused programs.  Terms of the deal were not disclosed.

FireEye, Inc. acquired Invotas International Corporation, a provider of security automation and orchestration solutions for enterprises worldwide.  Terms of the deal were not disclosed.

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Industry Week in Review – January 29, 2016

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Aerospace & Defense Update

Boeing released its financial guidance for 2016, which included plans to deliver fewer commercial jets this year than last.  The guidance sent shares down 8.9% to end Wednesday trading at $116.58, its lowest close since October 2013.  However, Boeing achieved first flight of its 737 MAX on Friday, hoping to stay competitive against Airbus for the next decade in short-haul airliners.  The first flight comes nine days after the first delivery of the rival Airbus A320neo and begins more than a year of flight tests to achieve certification by the Federal Aviation Administration (“FAA”).  The Company plans to deliver its first jet to Southwest Airlines in the third quarter of 2017.

House Majority Leader Kevin McCarthy and Senate Armed Services Committee Chairman John McCain introduced legislation to repeal a provision that allows the unlimited purchase and use of rocket engines manufactured by the Russian company, NPO Energomash.  The two lawmakers believe NPO Energomash is controlled by friends of Russian President Vladimir Putin, and argue that U.S. purchases enrich the Putin regime and fuel Russia’s military industrial base.  The provision in question was a component of the 2016 omnibus spending legislation that allowed United Launch Alliance (“ULA”) to continue purchasing RD-180 engines from Moscow until a domestic alternative became available.  The Russian engines have powered dozens of ULA and Air Force launches over the past decade.  McCarthy and McCain believe the ban will facilitate a competitive domestic environment that provides the incentive to scale each component required to access space.

Government Technology Solutions Update

On Tuesday, Lockheed Martin officially announced that it has entered into an agreement to separate and combine its Information Systems & Global Solutions (“IS&GS”) business with Leidos.  Since the announcement, investor sentiment has been mixed.  Initially, stock prices for both companies fell considerably and while Lockheed’s share price quickly rebounded, Leidos’ share price closed the week at $46.12, or approximately 15% off of its pre-announcement price.  The $5 billion, tax-free transaction includes a $1.8 billion one-time special cash payment by Leidos to Lockheed.  In addition, Lockheed’s shareholders will receive approximately 50% of Leidos’ outstanding stock, which has an estimated value of approximately $3.2 billion.  In conjunction with the transaction, Leidos also plans to issue a  $1 billion special dividend to its existing shareholders.   To fund both payments, Leidos will rely on cash on hand, existing revolving credit facilities, and approximately $1.5 billion of new debt.  The combined company is expected to reach $10 billion in revenue with approximately $1 billion in adjusted EBITDA, and would become the largest federal IT services provider, surpassing the newly formed CSRA.  Management anticipates approximately $120 million in annual cost synergies by late 2018 and that the transaction will be accretive to adjusted EPS in the second quarter of combined operations.  While the deal is expected to create significant revenue and cost synergies, some investors are concerned about the relatively high valuation of the transaction along with integration risks associated with the mega-merger.

The U.S. Air Force announced awardees to its Platform for Engineering and Integration Tactical and Strategic Systems (“PEITSS”) contract earlier this week.  Of the ten companies that bid, six were awarded spots on the contract, which is valued at $538 million over seven years with expected completion in January 2023.  Companies will support systems within the Air Force that provide tactical and strategic command and control capabilities and battle management.  These capabilities will likely include surveillance, weapons control, and airspace management.

Big Movers

OSI Systems, Inc. (Down 30.2%) – Shares were down this week after the Company announced earnings for Q2 that fell 59% from last year

The Timken Company (Up 9.4%) – Shares were up this week after the Company announced fourth quarter earnings that beat analysts’ estimates

Transactions

Johnson Controls acquired Tyco International, a provider of security products and services, fire detection and suppression products and services, and life safety products worldwide.  The deal is worth an estimated $14.4 billion.

e2v Technologies to acquire Signal Processing Devices Sweden AB, a provider of signal processing solutions for analog-to-digital conversion.  The deal is worth an estimated $14.0 million.

Rockwell Collins to acquire the Matrix Series Projector Product Lines of Christie Digital Systems, a provider of advanced simulation and training projectors and projection systems.  The terms of the deal were not disclosed.

Leidos announced its merger with Lockheed Martin’s IS&GS Business, a provider of IT solutions and cyber security to Federal customers.  The deal is worth an estimated $5.0 billion.

PricewaterhouseCoopers acquired Praxism, a provider of identity and access management consultant services.  Terms of the deal were not disclosed.

SOS International has acquired New World Solutions, a provider of high value technical services to the Intelligence and Defense communities.  Terms of the deal were not disclosed.

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Industry Week in Review – January 22, 2016

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Aerospace & Defense Update

The U.S. State Department approved the sale of more than 33,000 F-16 Block-52 weapons and munitions to Iraq for roughly $2 billion.  According to the Defense Security Cooperation Agency, Iraq will use the weapons systems and logistic services to maintain its F-16 fleet functionality and support pilot training.  Iraq currently operates four F-16 Block 52 aircraft and expects to receive four to five more fighters in the near future. Furthermore, they previously purchased a total 36 F-16 aircraft, which are expected to arrive by November or October of this year. In order to establish maintenance support and training for these incoming aircraft, roughly 400 U.S. government and contractor personnel will need to reside in Iraq until 2020.  There are seven principal contractors for the sale, which are Lockheed Martin, Raytheon, Pratt & Whitney, The Marvin Group, Michael Baker International, and the Royal Jordanian Air Academy.

Boeing has announced that it will cut 747-8 production rates by half in September from twelve to six aircraft a year, citing weakness in the air cargo market. The four-engine aircraft, which was used more frequently for air travel in the past, has been overtaken by a more fuel-efficient twin-engine jet. As a result, its usage has been predominately for passenger air cargo. However, the air cargo market, which has been rebounding since late 2013, has cited weakness in the recent months due to sluggish growth in international trade.  Boeing only booked two 747-8 in 2015 compared to 71 orders for the more popular 787 aircraft. The company will most likely address the announcement in their 4Q 2015 earnings call, which is scheduled on Wednesday, January 27th.

Government Technology Solutions Update

It was announced earlier this week that Leidos Holdings is nearing a deal to merge with Lockheed Martin’s IT services business.  With revenues of $5 billion, the merger would create the largest government services provider in the U.S., surpassing the recently formed CSRA.  The proposed merger would provide Leidos with significant scale in the face of an increasingly competitive market environment as well as improved margins, which are expected to approach 9%.  For Lockheed, the transaction would provide the Company with the ability to pay down a portion of its $8 billion of debt, which is partially attributable to its recent acquisition of Sikorsky.  The proposed merger could take the form of a Reverse Morris Trust, which would be a tax-free event for Lockheed, and could be announced as early as next week.

While protests have been in the headlines frequently, a recent decision by the Department of Veteran Affairs (“VA”) signals a rare move to protest the Government Accountability Office (“GAO”) guidance to reevaluate the basis of its task order of Transformation Twenty-One Total Technology (“T4”) to Booz Allen Hamilton.  Following the VA’s initial task order to Booz, ASM Research filed a protest for which the GAO ruled that the VA should reconsider the task order.  While the GAO’s decision is a suggestion rather than a declaration, it would be highly unusual for the VA to completely ignore the GAO’s directive.  Historically, agencies almost always follow the GAO’s guidance, partially because the GAO submits to Congress a list of agencies which choose not to follow their recommendations.  The GAO has until April 25th to make a decision on the VA’s request.

Big Movers

Chemring Group. (Down 12.8%) – Shares were down this week after the Company announced its full-year loss from continuing operations widened compared to last year

Engility Holdings (Down 51.8%) – Shares were down this week after the Company announced disappointing earnings and guidance

Transactions

Atlas Air Worldwide to acquire Southern Air Holdings, a provider of air cargo charter and aviation solutions including aircraft, crew and maintenance, and insurance services.  The deal is worth an estimated $110 million.

Platinum Equity to acquire PAE, a provider of logistics and stability operations, technical services, and national security solutions for the U.S. government.  The terms of the deal were not disclosed.

OMNIPLEX World Services Corporation acquired Social Intelligence Corporation’s Government Solutions Business, a provider of social media and online data analytics for use in national security, background investigations, and threat detection.  The terms of the deal were not disclosed.

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Industry Week in Review – January 15, 2016

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Aerospace & Defense Update

The U.S. Air Force selected Orbital ATK and SpaceX to develop prototypes of rocket engines as a part of the persistent push to end reliance on the Russian RD-180 boosters for military space launch.  Orbital ATK secured a $47.0 million contract to develop prototypes of its GEM 63XL strap-on solid rocket motor, the common booster segment solid rocket motor, and an extendable nozzle for Blue Origin’s BE-3U engine.  The potential value of the contract, including all options, is estimated at $180 million.  Additionally, SpaceX won a $33.6 million contract to develop the Raptor rocket engine prototype for the company’s Falcon launch vehicles.  The contracts are part of the Air Force’s Evolved Expendable Launch Vehicle (“EELV”), a program that intends to find an American alternative to RD-180 boosters and ensure U.S. access to space.

Government Technology Solutions Update

According to Bloomberg Government, Federal contractors could soon compete for $1.9 billion in funds provided for 40 new programs in the fiscal 2016 omnibus bill.  The recent analysis identified programs by performing a search on the omnibus bill and a companion explanatory statement for which Congress allocated specific funding amounts for the first time.  New projects, such as new vessel construction for the National Oceanic and Atmospheric Administration and headquarter consolidation for the Department of Homeland Security, provide attractive contract opportunities as they offer companies a timely reason to demonstrate how their capabilities would help meet congressional directives.  Under the omnibus appropriations law, defense primes, construction companies, and technology services providers will have the greatest number of newly funded potential opportunities.

Earlier this week, Pentagon officials completed a classified assessment of the efficacy of Defense agencies’ cybersecurity measures.  The aim of the comprehensive review is to determine what threats are being mitigated, and how valuable those mitigation tools and capabilities are to the agencies.  This initial step was conducted by the Defense Information Systems Agency (“DISA”), the Office of the Defense Department Chief Intelligence Officer (“CIO”), and the National Security Agency (“NSA”).  This effort represents part of a broader campaign to evaluate cybersecurity capabilities and deficiencies, which includes a cybersecurity scorecard to grade agencies’ preparedness.  While the specific details of the findings are classified, the report uncovered myriad vulnerabilities which Department of Defense (“DoD”) officials will use as a basis for making future investments in cybersecurity services and solutions.

The final Request for Proposal (“RFP”) for First Responder Network Authority Umbrella (“FirstNet”), a nationwide, wireless, interoperable broadband communications network for first responders, was issued earlier this week.  The $6.5B RFP has over 50 sections, maps, and tables generated from over a year of dialogue as part of a public / private partnership to reach a consensus on the objectives and scope of the overall mission.  Though there is no specific designation as to the types of bidders the RFP is looking for, telecommunications carriers are the clear choice, as the winning bidder will need to build and operate a system with 20 MHz of 700 MHz broadband spectrum.  Despite the recent release of the RFP, the Department of Homeland Security (“DHS”) has already expressed interest in exploiting this emerging mobile communications technology.

Big Movers

Aerojet Rocketdyne (Up 7.1%) – Shares were up this week after the Company announced a partnership with NASA to mature the development of new propulsion systems

BAE Systems (Down 10.1%) – Shares were down this week after Digital Ally, Inc. launched a lawsuit over patent infringement for law enforcement body cameras

Transactions

Aavid Thermalloy, LLC acquired Niagara Thermal Products, LLC, a designer and manufacturer of compact heat exchangers and heat transfer surfaces.  The terms of the deal were not disclosed.

Preferred Systems Solutions, Inc. acquired Tetra Concepts, LLC, a provider of system architecture and software design to the DoD, Intelligence Community, and commercial health firms.  Terms of the deal were not disclosed.

Mission Solutions Group, Inc. acquired Marshall Communications Corporation, a provider of broadband satellite communications and intellectual property (“IP”) multimedia services to Federal agencies and commercial customers.  Terms of the deal were not disclosed.

Battle Resource Management, Inc. (BRMi) has acquired Clearsoft, Inc., a provider of IT services, including custom enterprise software development and systems integration, to Federal and commercial clients.  Terms of the deal were not disclosed.

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Industry Week in Review – January 8, 2016

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Aerospace & Defense Update

Lockheed Martin secured a $5.3 billion contract to deliver 78 C-130J Super Hercules aircraft to the U.S. armed forces from 2016 through 2020.  The C-130J aircraft, one of the longest-running military aircraft programs, is a versatile tactical airlifter used in many different types of missions for the U.S. Air Force, Marine Corps, and Coast Guards.  The contract is primarily for the Air Force, which will receive 72 out of the 78 aircraft, with the remaining six provided to the Marine Corps.  This is the second multi-year contract Lockheed Martin has been awarded to provide C-130Js, with the first one coming from 2003 – 2008 for 60 C-130J aircraft to the U.S. armed forces.  The announcement is a major victory for Lockheed Martin, especially after worries in 2015 that a potential long-term continuing resolution could cause the Air Force to cancel the deal. Looking ahead, Lockheed Martin is eager to provide the C-130J to France, which has indicated the intent to purchase four C-130Js at an estimated $650 million.

BOC Aviation, the aircraft-leasing arm of Bank of China, ordered 30 Airbus A320 narrow-body jets valued at $3.1 billion (at list prices), comprising of 18 A320neo and 12 A320ceo aircraft.  The order is part of the company’s initiative to increase its fleet ahead of its expected 2Q16 $3 billion initial public offering, having previously ordered 22 Boeing 727s only two months ago.  The company is witnessing strong demand, as Asia continues to be one of the fastest growing regions for airlines, with capacity more than doubling since 2010.  Robert Martin, BOC Aviation’s CEO, stated the order underscores their confidence in the reliability and popularity of the A320 family.  However, Airbus recently announced that it had fallen short of its goal to deliver the first A320neo at the end of 2015, citing documentation issues for the delay. That being said, the delay will have negligible financial impact and Airbus expects to deliver the first A320neo within the next few weeks.

Government Technology Solutions Update

The National Institute of Health and Information Technology Acquisition and Assessment Center (“NITAAC’”) lowered contract fees on its three Government Wide Acquisition Contracts (“GWAC”) this week.  CIO-SP3 fees decreased from 1.00% to 0.65%, CIO-SB3 fees decreased from 0.79% to 0.55%, and CIO-CS fees decreased from 0.50% to 0.35%.  As IT acquisition processes become more efficient and streamlined, pressure has been increasing on Federal customers to lower fees while offering access to targeted IT solutions. These fee reductions highlight an increasingly competitive GWAC market between NITAAC, NASA, and the General Services Administration (“GSA”), as agencies lower fees to better align costs with GWACs from other government entities.

The Interior Department (“DOI”) became the first Federal department to transition its financial management system to the cloud, completing the migration of its SAP and Compusearch systems on January 5th.  Unisys and Virtustream aided DOI, and will manage the accounting infrastructure of the department post-transition.  The transition comes as DOI strives to complete its five-year IT modernization plan from 2011.  It also marks a milestone in the broader Federal IT cloud-migration effort, which seeks to promote Federal agency adoption of the cloud to increase government efficiency and cost savings.

Big Movers

The Boeing Company (Down 10.1%) – Shares were down this week as macroeconomic trends outweighed the news that the company reported a record number of deliveries in 2015

BAE Systems (Up 2.5%) – Shares were up this week as tensions between Saudi Arabia (BAE’s third largest customer) and Iran escalated to high levels, potentially increasing future demand for the company

Transactions

Mitcham Industries Inc. acquired L-3 Communications Klein Associates Inc., a designer, developer, and manufacturer of sonar equipment, and waterside security and surveillance/maritime domain awareness systems.  The deal is worth an estimated $10.0 million.

Royal Adhesives & Sealants, LLC acquired Adhesive Systems Inc., a developer, manufacturer, and marketer of engineered adhesives and application solutions for aerospace, aviation, military, and many other applications.  The terms of the deal were not disclosed.

Intel Corp. acquired Ascending Technologies GmbH, a developer and manufacturer of autopilot systems, unmanned aircraft systems, and multi-rotor technology for professional, commercial, civil, and research Unmanned Aircraft System (“UAS”) applications.  The terms of the deal were not disclosed.

Spanawave Corporation to acquire multiple product lines of Giga-Tronics, Inc., a manufacturer of power meter, amplifiers, sensors, and signal generator products for defense electronic and aeronautic applications.  The deal is worth an estimated $1.5 million.

Ascent Aerospace to acquire Gemcor II, LLC, a developer and manufacturer of automated fastening systems that are used by airframe manufacturers throughout the world.  The deal is worth an estimated $44.0 million.

SCST, Inc. acquired Talentscale, LLC, a provider of aircraft maintenance and logistic services.  The terms of the deal were not disclosed.

Phoenix Logistics acquired Silverado Cable Co., a provider of aerospace manufacturing services.  The terms of the deal were not disclosed.

Sage Capital, LLC acquired DIT-MCO International Corporation, a provider of electronic test equipment and automated wiring analyzers for commercial and military aircraft, defense communications, and weapon systems.  The terms of the deal were not disclosed.

Industry Armament acquired Predator Tactical, LLC, a provider of custom firearms and training solutions for the military, law enforcement, and civilian markets.  The terms of the deal were not disclosed.

System One acquired Alta IT Services, a provider of IT consulting services to Federal customers.  Terms of the deal were not disclosed.

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Industry Week in Review – January 1, 2016

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Aerospace & Defense Update

The Israeli Defense Ministry announced that Israeli firms received ~$770 million worth of work from Lockheed Martin in conjunction with a cooperation package associated with Israel’s F-35I stealth fighter purchase.  Elbit Systems, producer of the F-35 helmet mounted display system, and state owned Israel Aerospace Industries, producer of wing sets, were the two largest recipients of the industrial cooperation package.  The industrial cooperation is expected to exceed $4 billion if Israel opts to procure all 75 aircraft approved by the U.S. for export.

The omnibus spending bill passed on December 18th included an increase in funding authorities for the Special Defense Acquisition Fund (“SDAF”) from $100 to $900 million.  The SDAF program allows the State Department to look ahead at what partner nations need to procure in the coming year, and pre-order the systems.  The increase in funding comes at a time when foreign partners, the Pentagon, and members of Congress are raising concerns that the U.S. foreign military sales (“FMS”) process is moving too slowly to keep up with modern threats.  Although foreign partners will still undergo the FMS process, the SDAF enables faster delivery than if the nation had to wait for Congressional approval of the sale in order to start production.

Government Technology Solutions Update

The White House recently issued a cyber deterrence policy outlining U.S. response to cyber attacks in an effort to define the exact measures which will be taken in response to attacks from malicious actors.  Similar to the rationale supporting nuclear deterrence theories, the push by Congress to establish specific criteria for violations and retaliation measures aims to prevent cyber attacks against the U.S.  The policy leverages several avenues for retaliation using cost imposition processes including law enforcement measures, sanctions, and both offensive and defensive cyber operations aided by military force.  This move comes in tandem with increased U.S. support for other countries attempting to build capabilities to combat cybercrime.  In an effort to coalesce cohesive international support, the U.S. encourages countries to join the Budapest Convention on Cybercrime, an organization that defines a framework for deterring cyber attacks and gives law enforcement agencies the necessary authority to investigate and prosecute cybercrime.   This newly implemented policy highlights the continued emphasis on government agencies to combat cyber attacks and bolster defensive capabilities to protect critical systems and sensitive data.

Despite pressure to replace aging legacy systems with modern technology, analysis of Federal spending still shows agencies spending about 80% of their IT budgets maintaining the outdated systems.  Supported by Senators Jerry Moran and Tom Udall, the Cloud Infrastructure Transition Act of 2015 aims to make it easier for agencies to migrate to the cloud.  Currently, agencies have expressed difficulty financing and obtaining authority to transition to commercial cloud systems.  However, the new bill would give the Federal Risk and Authorization Management Program (“FedRAMP”) the authority to quickly offer accreditation to commercial providers, establish a framework for working capital funds earmarked specifically for IT modernization, and establish strict reporting requirements to expose reliance on obsolete technologies.  Although the bill is still in the early planning stage, it will continue to draw attention to the long-term goal of IT system modernization as Federal agencies attempt to migrate to more secure and cost effective cloud solutions.

Big Movers

Triumph Group (Up 15.6%) – Shares were up this week after the company announced the appointment of its new president and CEO, Daniel Crowley

CSRA (Up 7.1%) – Shares were up this week after the Company was awarded a $247 million GSA ARNG EOSS III Task Order

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Industry Week in Review – December 25, 2015

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Aerospace & Defense Update

SpaceX, led by Elon Musk, completed a historic feat by launching an updated version of its Falcon 9 rocket and then landing a large portion of the rocket back on earth.  This unprecedented accomplishment comes just six months after a high-profile launch explosion of its Falcon 9 rocket.  The launch this past Monday delivered 11 commercial satellites into low-earth orbit and then used its thrusters to carefully land the rocket back on earth.  Typically, a large portion of the rockets either fall into the sea or burn up into the atmosphere, however, this accomplishment paves the way for the its goal of developing a reliable fleet of reusable rockets.  The ability to reuse the largest and most expensive sections of boosters can provide significant cost savings and can change the landscape of the industry.

Frank Kendall, the Pentagon’s acquisition chief, stated that the Pentagon and other U.S. government agencies are weeks away from completing a proposal to allow regulators to block proposed mergers based on national security reasons.  Previously, regulators were only allowed to halt potential mergers based on antitrust reasons.  This development followed Kendall’s statements in September, days after the U.S. Justice Department approved Lockheed Martin’s acquisition of Sikorsky Aircraft, when he cited concerns about consolidation in the defense industry reducing innovation and competition.  However, industry giants, such as Lockheed Martin, claim there is no evidence that consolidation will reduce innovation or competition.  Kendall believes it is “unclear” whether or not this proposal will get passed, especially since it will be considered during an election year.

Government Technology Solutions Update

The Department of Defense (“DoD”) recently announced the award of the Cyber Security and Information Systems Technical Area Tasks (“CS TAT”) contract.  The Multiple Award Contract (“MAC”) indefinite delivery / indefinite quantity (“IDIQ”) vehicle has a contract ceiling of $5 billion over 5 years.  Ten contractors were awarded on a Full and Open (“F&O”) basis, while six companies were awarded under a Small Business (“SB”) set-aside basis.  The contract falls within the DoD Information Analysis Centers (“IAC”), and focuses on providing information assurance and management, cyber security, and modeling and simulations.  The vehicle will be available to all agencies, departments, services, and directorates under DoD, and is part of a larger DoD effort to stimulate innovation and technological research across the department.

In order to better utilize and manage new and advancing technologies, the Environmental Protection Agency (“EPA”) is reorganizing its Chief Information Officer’s (“CIO”) office.  This is the office’s first reorganization in over 16 years, as low budgetary visibility created barriers to internal reform.  According to Ann Durkin, EPA’s CIO, the reorganization will focus on the better provision of digital services to external users and constituents.  It anticipates doing so by creating new offices, such as the Office of Customer Advocacy, Policy, and Portfolio Management, as well as the Office of Enterprise Information Programs, devoted to improving the external user’s access and the EPA’s own management of information and services.  The EPA’s reorganization reflects broader trends within the Federal Government, including the Federal IT Acquisition Reform Act, which called for the reorganization of CIO offices across the Federal Government.

Big Movers

Harris Corporation (Up 8.2%) – Shares were up this week after the company received a $66 million in orders to provide a Middle East nation with the Falcon III wideband tactical radios and accessories.

HEICO Corp. (Up 10.4%) – Shares were up this week as the company announced it will acquire Robertson Fuel Systems for $255 million.

Transactions

Cubic Corporation acquired TeraLogics, a provider of real-time Full Motion Video processing, exploitation, and dissemination for the DoD, Intelligence Community, and commercial customers.  The transaction is worth an estimated $39 million. KippsDeSanto & Co. acted as the exclusive financial advisor to TeraLogics, Inc.

Cubic Corporation to acquire GATR Technologies, a provider of inflatable satellite communication antennas and terminals that enable deployment and high-bandwidth communications in remote and hard-to-reach areas.  The transaction is worth an estimated $233 million.

HEICO Corporation to acquire Robertson Fuel Systems, a designer, developer, and manufacturer of primary and auxiliary fuel systems for rotary and fixed winged aircraft and ground combat vehicles.  The transaction is worth an estimated $255 million.

Apax Partners to acquire the Commercial Satellite Communications Business of Airbus Group SE, a provider of satellite communication services for the maritime, mining, energy, and other markets.  The terms of the deal were not disclosed.

Kongsberg Maritime to acquire Ship Modelling & Simulation Centre AS, a provider of maritime courses and simulation of marine operations.  The terms of the deal were not disclosed.

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