Industry Week in Review – December 11, 2015

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Aerospace & Defense Update

The U.S. has brought a World Trade Organization (“WTO”) case against China for their alleged discriminatory taxes on smaller aircraft.  U.S. officials are claiming that China has imposed a 17% value-added tax (“VAT”) on imported aircraft, hurting smaller U.S. made planes and part makers and creating a preferential tax policy for its domestic aerospace industry.  In 2014, the U.S. exported $13.9 billion in civilian aircraft, engines, equipment, and parts to China, more than double that in 2011.  This trade dispute is occurring at a time when the White House is prioritizing the enforcement of existing trade rules in an effort to put forth a comprehensive Pacific trade agreement that does not include China to a congressional vote next year.

Boeing rolled out the first of its 737 MAX jetliner in front of thousands of employees in its Renton, Washington facility.  The 737 MAX is the newest update to Boeing’s 737 model, but is considered to be a “next generation” update rather than an incremental one.   The new aircraft includes more powerful engines and is 14% less costly to operate than the current 737.  The 737 series has become one of the most popular choices for short and medium term flights, but is facing increased competition with rival Airbus’ A320 family of jets.  Airbus expects to deliver its A320neos to its first customer, Qatar Airways, in the next few months, which is significantly sooner than the 737 MAX’s 3Q17 delivery schedule.  However, Boeing has received nearly 3,000 orders from 60 customers worldwide for its 737 MAX series and believes it is poised to capture market share from the A320 family.

Government Technology Solutions Update

The Air Force activated five new cyber squadrons this month, marking an expansion of the department’s effort to improve its cybersecurity capabilities.  The squadrons will be comprised of over 500 cyber professionals that will operate across the Air Force’s air, space, and cyberspace domains to provide information operations support, as well as engineering and infrastructure capabilities.  Further, three cyber professional teams within the newly minted squadrons will focus on defending the Department of Defense’s (“DoD”) most valuable and sensitive networks.  Overall, the Air Force contributes 1,700 individuals to the DoD’s cyber force, including through a newly announced cyber proving ground for development of new ideas and devices.

CACI announced the acquisition of L-3’s National Security Solutions (“NSS”) group, a provider of big data and intelligence operations support to defense and intelligence customers.  The $550 million transaction is expected to add $1 billion in annual revenue, and be at least 10% accretive to CACI’s diluted earnings per share by FY17. The addition of L-3 NSS will enhance CACI’s access within the defense and the Intelligence Community (“IC”).  The transaction will also expand CACI’s capabilities in the areas of intelligence support, data analytics, and cybersecurity.  The acquisition is CACI’s largest since its acquisition of intelligence contractor Six3 Systems in October 2013 for $820 million.

Big Movers

AeroVironment (Up 14.4%) – Shares were up this week after the Company announced profits increased 23% due to strong sales of its unmanned aircraft systems.

Airboss of America Corp. (Down 6.6%) – Shares were down this week after the market reacted to director Rick Crowe selling 9,500 shares of the Company’s stock.

Transactions

CACI International acquired L-3’s National Security Solutions (“NSS”) group, a provider of big data and intelligence operations support to defense and intelligence customers.  The transaction is worth an estimated $550 million.

Tronair Inc. acquired Eagle Industrial Truck Manufacturing LLC, a provider of tow tractors and tugs for commercial aviation and military customers.  The terms of the deal were not disclosed.

Trescal S.A. acquired Laboratory MCI, a provider of calibration services for aeronautics and defense applications.  The terms of the deal were not disclosed.

Trescal S.A. acquired Quality Systems Laboratory, a provider of calibration and validation services for aeronautics and life science applications.  The terms of the deal were not disclosed.

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Industry Week in Review – December 04, 2015

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Aerospace & Defense Update

I / ITSEC, the largest modeling, simulation, and training conference, was held this past week from November 30 – December 4th in Orlando, FL.  At the conference, Maj. General James Lukeman, the commander for Marine Corps Training and Education Command, stressed the importance for affordable high-fidelity training devices that can be deployed with Marines where they fight.  In an increasingly budget-conscious era, Lukeman was optimistic about the potential for affordable mobile simulation training available to Marines and sailors.  As the Marines turn their operations toward the sea after more than a decade of war focused on land, Lukeman also highlighted training for ship mechanics, crew members, and staff as a growth opportunity.  The burgeoning selection of mobile solutions would enable Marines across all of their operations to train more frequently, without being removed from their daily operations.

The U.S. Air Force Secretary Deborah James Lee announced the service’s interest to buy 100 Long Range Strike-Bombers (“LRS-B”), a figure at the high-end of the 80 to 100 aircraft purchase the service predicted earlier.  The Air Force faced increased pressure in recent months to procure more LRS-Bs than the projected 80 to 100 in order to mitigate rising security concerns.  Critics, who include lawmakers and security analysts, called for as many as 200 next-generation bombers in order to project power in an increasingly uncertain security situation.  A study released November 18th by retired Lt. General Michael Moeller stated that, “limiting production of the new bomber, LRS-B, to 100 airframes would severely decrease the options available to national decision-makers during times of crisis or periods of instability.”  The recent development provides a rare glimpse into the Air Force’s plans for the contract recently awarded to Northrop Grumman.

Government Technology Solutions Update

A review of government security standards following this year’s high-profile Internal Revenue Service (“IRS”) and Office of Personnel Management (“OPM”) breaches has identified several potential areas for security improvement.  Significant investment will be required in select priority areas, including the overhaul of aging legacy systems, thorough employee training programs and security awareness, revamped recruiting and hiring efforts, and increased information-sharing technology, all with the purpose of bolstering security capabilities and functionality.  Legacy systems like Common Business Oriented Language (“COBOL”) are still used by many agencies, despite the fact that its largely outdated capabilities have failed to meet the robust demands of today’s sophisticated cyberattacks.  With this increased focus on modernizing legacy systems, improving existing processes, and launching new programs, the expected increase in spending will potentially translate into significant opportunities for security-focused contractors.

On November 30th, CSRA Inc. debuted as a newly formed public company, signaling the closing of the merger between SRA International and the North American Public Sector division of Computer Sciences Corporation.  CSRA represents the largest pure-play government services firm in the market, with an estimated $5.5 billion in annual revenue and 19,000 employees.  Under the terms of the deal, CSC common stock holders received one CSRA common share for every CSC common share held, representing an 85% stake in the combined company, with SRA shareholders receiving the remaining 15%.  CSRA opened trading on the New York Stock Exchange (“NYSE”) Monday morning at $29.39 per share and closed the week at $29.00.

 Big Movers

VSE Corporation (Up 7.6%) – Shares were up this week after the Company announced $59 million in new contract awards received since October 1, 2015.

 Computer Sciences Corporation (Down 55.4%) – Shares were down this week after the Company completed its separation with CSRA

Transactions

FLIR Systems acquired DVTEL, a provider of thermal imaging, visible-light imaging, locator, measurement and diagnostic, and threat-detection systems.  The deal is worth an estimated $92 million.

Stellar Capital partners Limited to acquire Tellumat, a provider of electronic and related technology products for aviation, communications, defense, and electronic contract manufacturing markets.  The deal is worth an estimated $11.6 million.

UTC Aerospace Systems acquired N2 Imaging Systems, a provider of infrared imaging systems used for soldier vision enhancement, surveillance, and threat detection-and-targeting under low visibility.  The terms of the deal were not disclosed.

Moog acquired a majority stake in Linear Mold and Engineering, a provider of metal additive manufacturing for aerospace, defense, energy, and industrial markets.  The terms of the deal were not disclosed.

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Industry Week in Review – November 27, 2015

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Aerospace & Defense Update

President Obama signed the annual defense authorization bill on Wednesday, marking it the 54th consecutive year the bill has passed.  One of the major highlights of the bill is an overhaul of the military retirement system, which is expected to provide a form of retirement compensation to roughly four out of five service members, a significant improvement from the current system that benefits only one out of five members.  The current 20 year “all-or-nothing” retirement plan will no longer be in place for newly enlisted troops starting in 2018. The new system will be a hybrid between an investment and pension system that presents an opportunity for personal contributions to be matched by the Government.  However, the signing of the authorization bill is only half of the annual budget process, as the defense appropriations bill, which will start new defense programs and acquisitions plans, has yet to be signed.  Congressional leaders are hopeful the defense appropriations bill will be signed by December 11th, the deadline set forth by the current continuing resolution.

As demand for air travel in China continues to grow, three of the region’s top aircraft leasing companies are expected to file for an Initial Public Offering (“IPO”) in the medium term.  Two of the companies, BOC Aviation and China Development Bank’s leasing business (“CDB Leasing”), are expecting to raise between $1.0 – $1.5 billion in IPO’s next year.  BOC Aviation and CDB Leasing fleet size of 253 and 180 aircraft respectively, are significantly smaller than AerCap Holdings fleet size of 1,300 aircraft, the world’s largest aircraft leasing company.  However, BOC Aviation has already committed to purchase 203 more aircraft, while CDB Leasing plans to double its fleet size.  With rising incomes for the middle class and strong growth in air travel, the top Chinese aircraft leasing companies are poised for strong growth prospects in the near future.

Government Technology Solutions Update

The Air Force has added 10 companies to its Cyber Security and Information Technical Area Tasks project.  The 10 companies were added under the large business portion of the contract, and joined the six small-business companies already on the program.  The 5-year contract is a multiple-award indefinite-delivery / indefinite-quantity (“IDIQ”) and is worth $5 billion.  The program will focus on research and development (“R&D”), and test and evaluation services for data management and sharing, software analysis, and simulations.  Companies will be awarded work through task orders under the program, which will determine the location and specific type of work.

In order to address what some consider a capabilities gap within the cyber domain, the Army recently began its Cyber Innovation Challenge to focus on developing, acquiring, and deploying cyber situational awareness capabilities.  The program will utilize the Department of Defense’s (“DoD”) “Other Transaction Authority,” which allows the DoD to purchase prototype products through fast-moving, streamlined transactions outside of traditional contract procedures.  The challenge will bring in a host of industry, government, and academic experts, including companies that do not traditionally work with the DoD, to develop important cyber products.  The DoD will purchase completed products in small amounts to test in the field before entering into larger procurements, allowing for a faster and more responsive acquisition process better able to meet the cyber needs of soldiers in the field.

Big Movers

BBA Aviation (Down 10.4%) – Shares were down this week in response to concerns for future air travel, as tensions between Russia and Turkey rise due to the downed Russian fighter jet.

Wesco Aircraft (Up 4.8) – Shares were up this week after the Company announced it has extended an agreement with Triumph Group to provide integrated supply chain services for aerospace C-class hardware.

Transactions

Chemring Group plc to acquire Wallop Defence Systems Ltd., Certain Assets, a provider of infrared decoy flare countermeasure products used by military forces in the protection of aircraft from air-to-air and ground-to-air missiles.  Chemring Group acquired these assets from Esterline Corporation as part of Esterline’s long-announced portfolio review.  The terms of the deal were not disclosed.

VIC International Holding Corporation to acquire AIM Aviation Ltd., a designer, manufacturer, and marketer of cabin interiors for airlines, airframe OEMs, and regional aircraft manufacturers.  The terms of the deal were not disclosed.

Comtech Telecommunications Corp. to acquire TeleCommunications Corp., a provider of wireless communication technology across the world, serving both commercial and government customers.  The deal is worth an estimated $431 million.

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Industry Week in Review – November 20, 2015

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Aerospace & Defense Update

The annual National Business Aircraft Association (“NBAA”) conference, one of the largest meetings of business and general aviation manufacturers and suppliers, was held this past week, November 17-19th, in Las Vegas.  There were mixed messages surrounding the business jet market, as various suppliers and original equipment manufacturers (“OEMs”) are witnessing a weaker larger-cabin market, while small / midsize cabin markets are expecting growth.  Weakness in the larger-cabin market can be attributed to weaker demand, and oversupply.  In Honeywell’s annual Global Business Aviation Outlook and Forecasts, demand for new airplanes from 2015 – 2025 is expected to be 9,200 units, down from last year’s 9,450 forecast.  The decline is largely attributed to weakness in emerging markets that represent significant sources of demand such as China, Russia, and Brazil.  In addition, the total number of airplanes less than 10 years old, which typically compete with new airplanes for sale by OEMs, increased moderately to ~640 aircraft.

On the other hand, there is excitement revolving around new developments announced at NBAA.  GE introduced its entry into the turboprop engine market by launching a family of advanced turboprop (“ATP”) engines following its selection by Textron to power the Company’s next-generation single-engine aircraft.  The new GE offering contests Pratt & Whitney’s (“P&W”) dominance in the business and general aviation turboprop market and is set to compete with P&W’s popular PT6 engine.  Cessna, a Textron company, also revealed the Longitude and Hemisphere jets in an ongoing effort to move upmarket.  After years in which demand for light and medium jets staggered behind larger jets from the likes of Bombardier, Dassault, and Gulfstream, Cessna’s new offerings expand its focus to the middle and upper-middle market segments.  The Hemisphere is the Company’s first large-cabin jet and is expected to enter service in 2020, and the Longitude will fit between the Hemisphere and midsize Latitude in size and range.

Government Technology Solutions Update

Department of Defense (“DoD”) agencies have submitted budget requests for GFY2016, giving the government contracting community insight into developing trends and priority spending areas.  Rather than altering their overall goals, DoD agencies are instead shifting the way they evaluate and acquire new technologies.  The current budget deal funds the government through December 11th and raises spending caps in GFY2016 by $50 billion as agencies continue to prioritize spending on cyber and cloud capabilities.  The Army saw its GFY2016 IT budget request increase 3% to $7.6 billion as it attempts to leverage the use of commercial cloud applications and unified communications capabilities.  Similarly, the Air Force IT budget request increased 5% to $5.3 billion as the branch looks to incorporate more advanced cyber and Intelligence, Surveillance, and Reconnaissance (“ISR”) capabilities.  Lastly, the Navy saw an increase in their GFY2016 IT budget request of nearly 4%, bringing the total to $6.5 billion.  Specifically, the Navy looks to increase its data modeling, mining, and predictive analytics competencies as part of a broader focus to enhance existing command and control systems.

On November 18th, the Federal Acquisition Regulations Council released a newly proposed rule that will provide greater opportunities for future competition and reduce costs to taxpayers.  Currently, a proprietary number provided by Dun & Bradstreet, referred to as a DUNS number, has allowed the government to uniquely identify entities receiving Federal awards.  According to the executive director of the Data Transparency Coalition, Hudson Hollister, the DUNS system uses proprietary data standards to prevent public information from being freely shared and consumed.  The current contract was awarded to Dun & Bradstreet in 2010 and is set to expire in 2018 with a total estimated cost of $154 million.  One of the major critiques of the DUNS system is that information is paid for repeatedly every time it is used, rather than once when it is initially generated.  While the government does not plan on replacing the DUNS system overnight, it is currently asking agencies and vendors for input on establishing a more transparent process to explore alternatives.  This newly proposed rule has gained the support of Congress, industry players, and even Dun & Bradstreet as a means to create a fairer and open environment for contractors.

Big Movers

OSI Systems Inc. (Up 15.4%) – Shares were up this week in response to a contract award to deliver explosive detection system units to Charles de Gaulle and Orly international airports.

Textron (Up 6.4%) – Shares were up this week after the Company introduced its new Hemisphere and Longitude jet.

Transactions

NEXEYA acquired Tech S.A.T GmbH Technische Systeme Fur Avionic Und Test, a provider of design, integration, testing, and maintenance of embedded aircraft systems.  The terms of the deal were not disclosed.

Magellan Aerospace acquired Lawrence Ripak Co., a provider of nondestructive testing and metal finishing services.  The deal is worth an estimated $24 million.

Honeywell International to acquire Satcom1 Aps, a provider of aeronautical satellite communication solutions and support.  The terms of the deal were not disclosed.

Kraken Sonar Systems acquired Marine Robotics, a developer of underwater robotics technology, intellectual property, and related physical assets.  The terms of the deal were not disclosed.

ParkerGale Capital acquired Aircraft Technical Publishers, a provider of information management and services for manufacturers, owners / operators, and maintenance providers in the general aviation industry.  The terms of the deal were not disclosed.

Senior Plc to acquire Steico Industries, a provider of precision tube and welded assemblies for the aerospace, medical, and high-tech industry.  The deal is worth an estimated $75 million.

TransDigm Group to acquire Breeze-Eastern Corporation, a developer of products and services for engineered mission equipment in specialty aerospace and defense applications.  The deal is worth an estimated $194 million.

AUSY North America to acquire Celerity, provider of digital business solutions including mobile app development, agile methodologies, and enterprise IT integration.  Terms of the deal were not disclosed.

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Industry Week in Review – November 13, 2015

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Aerospace & Defense Update

The 2015 Dubai Airshow had very few contract announcements, as commercial and defense customers were not very active during the show.  There were no major orders announced on the first day, which is disappointing in contrast to the record $192 billion orders on the first day of the 2013 Dubai Airshow.  While many expected commercial orders to be low considering commercial aircraft needs have already been met, the relative inactivity during the first day still came as a surprise to many.  However, on the second day of the Dubai Airshow, Boeing received an $8 billion order from India’s Jet Airways for 75 737 Max 8 narrow-body jetliners.  The deal, which was previously listed as an order from an undisclosed customer, includes upgrading its prior commitment of 25 current version 737’s for the new “Max” jetliner, in addition to a provision to purchase 50 more aircraft.  The 737 Max jetliner will be introduced in 2017, but Jet Airways won’t receive its first delivery until 2018.  India’s growth in air passenger travel is one of the key drivers of the agreement, as domestic airplane passengers are expected to double over the next seven to eight years according to Jet Airways Chairman Naresh Goyal.

Government Technology Solutions Update

Federal spending on Big Data and cloud services is likely to increase according to a recent Deltek analysis.  Deltek projects that Federal demand for cloud computing services and Big Data will increase by a Compound Annual Growth Rate (“CAGR”) of 21.4% and 14.4%, respectively, between GFY15 and GFY20, growing from a combined $4.0 billion in GFY15 to a combined $9.4 billion in GFY20.  The growing trend reflects concerns about cybersecurity as well as an increased emphasis on improving efficiency. While these technologies exist within Federal agencies already to some degree, the near-term focus of Federal cyber officials will be on better understanding the entire spectrum of capabilities available, as well methods to procure them under traditional acquisition procedures.

As part of a broader effort to improve cybersecurity at the Department of Homeland Security (“DHS”), the Office of Personnel Management (“OPM”) approved the hiring of 1,000 new cyber professionals at DHS.  The new hires will be on-boarded between now and June 30, 2016.  Since OPM has yet to establish specific qualifications for cyber professionals, DHS needed special hiring authority to increase the number of its cyber-focused personnel.  The new employees will be tasked with aiding DHS’s already significant cybersecurity mission, conducting risk and strategic analyses, incident handling, and vulnerability assessments, among other duties.

Big Movers

KEYW (Down 22.7%) – Shares were down this week in response to the company reporting worse than expected loss during its 3Q15 earnings.

Boeing (Down 3.6%) – Shares were down this week as macroeconomic influences outweighed its announcement of receiving an $8 billion order with India’s Jet Airways.

Transactions

Kaman Aerospace Group to acquire GRW Bearing GmbH, a developer and manufacturer of high-precision miniature ball bearings for manufacturing operations.  The terms of the deal were not disclosed.

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Industry Week in Review – November 6, 2015

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Aerospace & Defense Update

The Boeing-Lockheed Martin team has filed a formal protest against the Air Force’s award of the $80 billion LRS-B contract to Northrop Grumman. The protest process will likely take a minimum of three months to play out, further delaying the start of one of the highest-priority Air Force programs.  Northrop Grumman issued a statement saying that the company “is disappointed that its former LRS-B competitors have decided to disrupt a program that is so vital to national security.”

Lawmakers reduced the 2016 defense policy bill by $5 billion in order to satisfy the requirements of the two-year budget deal between Congress and the President. Under the new plan, fiscal 2016 spending would be increased to $607 billion, compared to the $612 billion top-line authorizers budgeted before the deal.  The reduction includes $2.6 billion in “adjustments” to acquisition programs.  The new budget deal will provide stability and increase the likelihood of finalizing a budget agreement before the end of the Continuing Resolution (“CR”), avoiding a government shutdown.  The cuts were imposed across several dozen line items, including a $230 million decrease in funds for the Long Range Strike-Bomber (“LRS-B”) due to repeated delays in the contract award, and several other aircraft programs, such as the unmanned MQ-9 Reaper, C-130, and H-1 helicopter.  The source of the savings were found in negotiations between the House and Senate authorizers, and defense appropriators, according to House Armed Services Committee Chairman Rep. William “Mac” Thornberry.  Apart from programs, the largest source of savings was ~$1 billion from fuel costs that were lower than previous projections.

Government Technology Solutions Update

Under the new budget deal, the $5 billion spending reduction to the defense policy bill would affect few IT programs and would only require modest budget cuts in IT logistics, Army intelligence, and electronic warfare. The revised plan trims approximately $10 million from the Army’s Distributed Common Ground System, a multibillion-dollar program for sharing and analyzing intelligence.  Other notable programs receiving cuts include $12.5 million less for the Defense Contract Management Agency’s IT development program and $6.5 million less for the Joint Electronic Advanced Technology Program.  Many contractors are generally pleased due to the relatively small magnitude of the cuts and the increased visibility for agencies to plan their budgets accordingly.  Though the bill would require slight reprioritization within the Department of Defense (“DoD”), members of the IT Alliance for Public Sector as well as Paul Brubaker, former DoD deputy CIO, agreed that the budget deal, currently passed in the House, sends a positive signal to the defense contracting base.

The Defense Information Systems Agency (“DISA”) held its industry day on November 2nd in Washington, D.C. The event served as a platform for DISA to outline forthcoming contracts covering programs ranging from enterprise resource planning (“ERP”) to cybersecurity analytics.  One of the major contracts unveiled, Telecommunication Services and Enterprise Acquisition Services (“TSEAS”), aims to support DISA’s back-office needs through a comprehensive ERP solution with the Request for Proposal (“RFP”) expected to be released in 2Q16.  Additionally, DISA used the event to showcase the overhaul it underwent in January to be more responsive to industry demands and an increased emphasis on transitioning to automated processes.  An estimated 80% of all emails received by DoD accounts are comprised of spam, phishing, or other forms of junk mail.  As part of their response, the agency is looking to evolve from manually intensive tools to automated capabilities, particularly for cybersecurity needs and will soon release an RFP for an Enterprise Email Security Gateway Solution.

Big Movers

DigitalGlobe (Up 14.5%) – Shares were up this week in response to an announcement of an increase in the Company’s share repurchase program of $130 million

Leidos (Up 4.9%) – Shares were up this week in response to a $662 million award to upgrade the Army’s Airborne Reconnaissance Low-Enhanced (“ARL-E”) fleet

Transactions

Point Blank Enterprises acquired The Protective Group, a provider of ballistic armor and system integration. The terms of the deal were not disclosed 

PAS Technologies acquired Bolton Aerospace, a supplier of precision machined products to commercial, aerospace, and defense manufacturers. The terms of the deal were not disclosed

Resonetics acquired Mound Laser & Photonics Center, a laser micro / nano fabrication center, which provides laser machining services. The terms of the deal were not disclosed

IAP Worldwide Services acquired the Aviation and Logistics Business of DRS Technologies, a provider of aircraft repair management, logistics, and mission support services. The terms of the deal were not disclosed

IAP Worldwide Services acquired the Tactical Communications & Network Solutions Business of DRS Technologies, a provider of engineering, information technology, and communications support solutions to the U.S. Department of Defense and other agencies

Honeywell to acquire Satellite Equipment business of COM DEV International, an international provider of space-based wireless communications products and subsystems. The deal is worth an estimated $345 million

Rift Valley Equity partners acquired Arlington Machine and Tool Co., a provider of CNC machining services to the aerospace, defense, industrial, semiconductor, and healthcare sectors. The terms of the deal were not disclosed

Aerospace Turbine Rotables to acquire the Aircraft Battery and Power Supply Repair divisions of Foxtronics, Inc., an FAA and EASA 145 certified repair station and battery services center, which provides service, new product sales, and support throughout the U.S. The terms of the deal were not disclosed.

Booz Allen Hamilton acquired the Software Services Business of SPARC, LLC, a provider of software development services for Federal and commercial sectors, including the Space and Naval Warfare Systems Command (“SPAWAR”) and Veterans Affairs (“VA”), among others. Terms of the deal were not disclosed.

Preferred Systems Solutions acquired GSM Consulting, Inc., a provider of innovative software and IT solutions for the Federal Government and Fortune 500 companies. Terms of the deal were not disclosed.

Oasis Systems acquired MAR, Incorporated, a provider of systems engineering and integration, IT / cybersecurity, specialized facilities management, and intelligence and special programs. Terms of the deal were not disclosed.

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Industry Week in Review – October 30, 2015

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Aerospace & Defense Update

Northrop Grumman was awarded the Air Force’s Long Range Strike Bomber (“LRS-B”) contract, the largest military aircraft contract since the Joint Strike Fighter (“JSF”) award to Lockheed Martin in 2001. Northrop beat out the team of Boeing and Lockheed Martin to build a new fleet of aircraft to replace the Air Force’s B-52’s and B-1s.  The contract, which is expected to exceed $55 billion over the life of the program, is divided into a cost-plus contract and a fixed-price agreement, which will cover the first five low-rate initial production lots.  The first five lots will cover the production of 21 aircraft.  According to the House Armed services Committee Chairman Rep. William “Mac” Thornberry, Boeing and Lockheed will likely submit a bid protest, which could possibly delay the start of the program.

The Senate approved a bipartisan budget agreement that approves spending for domestic and defense programs, while raising the debt ceiling to fund the government into 2017. The budget deal would lift sequester spending caps and increase discretionary spending by ~$80 billion, which is split evenly among defense and civilian programs over the next two years.  This implies that there would be no fiscal standoffs and threats of government shutdown for more than a year.  The agreement was negotiated by former Speaker John Boehner, alongside the White House and three other congressional leaders.  The measure now moves to the White House, where President Obama has said he will sign it.

Government Technology Solutions Update

Department of Defense (“DoD”) Chief Information Officer (“CIO”), Terry Halvorsen, announced this week that the Department is planning to ramp-up DoD and private sector cyber exchanges in the coming months. As part of the initiative, private sector employees from up to 10 firms will be placed within Halvorsen’s CIO staff or military services’ CIO offices.   The exchange program is rooted in the notion that bringing commercial cyber security expertise into the Pentagon is essential to keeping pace with cyber threats and defense.  The goal of the program is threefold: (i) to improve the DoD’s understanding of economic drivers within the cyber security industry; (ii) to better cooperation between the DoD and private businesses; and (iii) to access and improve state-of-the-art cyber security technology.  Modular data center technology for data center consolidation, and software-defined networking have been identified as particular areas of interest.

In response to calls from the Obama administration to improve IT procurement, the Office of Federal Procurement Policy (“OFPP”) has launched the Digital Service Contracting Professional Training and Development Program. The program has brought together acquisition professionals from across the Federal government to better the procurement of agile technologies and programs.  As a result of traditional acquisition vehicles and procedures, Federal agencies have found it increasingly difficult to keep pace with technological innovation.  The program seeks to educate professionals on how to work within Federal acquisition procedures to procure the necessary IT technologies and programs in a quick and efficient manner.  OFPP expects this program to have a wide ranging impact, as the professionals within the program return to their home agencies as experts in IT and agile procurement, allowing for more agile procurement within these agencies going forward.

Big Movers

B / E Aerospace (Up 8.1%) – Shares were up this week in response to a $260 million award from a major international airline to outfit its new aircraft with first class suites

Northrop Grumman (Up 4.4%) – Shares were up this week in response to the LRS-B contract award

Transactions

The Blackstone Group to acquire MB Aerospace Holdings, an engine component manufacturer and repair business in the aerospace and defense markets in North America and Europe. The terms of the deal were not disclosed.

Nautic Partners acquired Aerostar Aerospace Manufacturing, Inc., a provider of machined components and assemblies to aerospace, defense, medical, and commercial customers. The terms of the deal were not disclosed.

CTS Corp. acquired Filter Sensing Technologies, a provider of radio frequency measurement and control sensors for passenger car, commercial vehicle, off-road, and other transportation applications. The terms of the deal were not disclosed.

Tempus Applied Solutions acquired Proflight Aviation Services, an operator of a Federal Aviation Administration approved flight school. The terms of the deal were not disclosed.

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Industry Week in Review – October 23, 2015

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Aerospace & Defense Update

President Barack Obama vetoed the National Defense Authorization Act, which authorized $612 billion in military spending over the next year. The Obama administration has criticized the bill for failing to resolve spending caps known as sequestration, and impeding on the President’s ability to close the U.S. detention facility in Guantanamo Bay, Cuba.  Additionally, the administration is not satisfied that the bill provides increased funding to the Overseas Contingency Operations, which is not subject to budget caps. The House is scheduled to vote on November 5th to potentially override the veto.   

United Technologies Corp, the maker of Pratt & Whitney jet engines, Otis elevators, and Carrier air-conditioning equipment, announced a $12 billion increase of its stock buyback plan.  The Company aims to buy back $16 billion worth of stock through 2017 in order to take advantage of “a big disconnect” between the Company’s value and its share price.  The accelerated buyback follows troubles in China, a static Europe, and the increasing cost of new engine production.  The Company also faced issues with a new logistics center in New Hampshire, leading to a 55 unit decline in engine deliveries in the third quarter to 109, compared to the previous year.  Chief Executive Greg Hayes says they have corrected the problems in the New Hampshire facility, and will have made up for the lost time on engine deliveries by the end of the year.  Mr. Hayes said the Company will remain open to acquisitions up to “a couple billion dollars.’”

Government Technology Solutions Update

The General Services Administration (“GSA”) issued the long-awaited Request for Proposal (“RFP”) for its Network Services 2020 (“NS2020”) Enterprise Infrastructure Solutions contract earlier this week.  The 15 year contract is part of GSA’s initiative to replace the Networx contract, and has a ceiling of $50 billion.  Efforts to craft the RFP have been underway for over two years, with the GSA attempting to balance needs of the Federal government and telecommunication industry.  NS2020 was originally scheduled to be released in July, but was pushed back due to an overwhelming response to the draft RFP.  The contract will provide agencies with a list of preapproved venders for telecommunication services, such as cloud services, web hosting services, and call centers.  Interested vendors will have until January 15, 2016 to submit proposals, with an award date expected towards the end of 2016.

The Office of Management and Budget (“OMB”) released its proposed overhaul of A-130, the rulebook for computer and information security within the Federal government, with a 30-day period for the public to comment.  The revision, ordered by Congress, was prompted by the outdated state of the rulebook, which was last updated in November 2000.  The proposed changes seek to centralize the policy updates of various agencies into a single cybersecurity and information governance manual.  The new policy would include changes made under the Federal IT Acquisition Reform Act, as agencies would need to create IT Portfolios that include estimates for necessary spending on technology.  In addition, the new A-130 would incorporate an increased emphasis on timely IT acquisitions, with awards needing to be granted within 180 days of solicitation and IT products delivered within 18 months.  As part of this timely approach, agencies would be required to constantly revaluate ongoing IT projects and their current IT systems to make sure their systems are up-to-date.  Further, as part of an increased focus on data, the new rulebook would mandate that public facing government data be in a usable, discoverable, and accessible format.

Big Movers

United Technologies (Up 8.2%) – Shares were up this week in response to an announcement of an increase in the Company’s stock buyback plan of $12 billion

Taser (Down 9.2%) – Shares were down this week after Motorola Solutions, Inc. announced its entry into the body camera segment with the Si500 and Si300 Video Speaker Microphones

Transactions

Whitcraft Group to acquire Berkshire Manufactured Products, Inc., a provider of precision engineered, critical jet engine components to the aerospace industry.  The terms of the deal were not disclosed.

Triumph Group, Inc. acquired Fairchild Controls Corporation, a provider of proprietary thermal management systems, auxiliary power generation systems, and related aftermarket spares and repairs.  The terms of the deal were not disclosed.

Imaginetics LLC to acquire Azmark Aero Systems LLC, a provider of precision machined parts, component sub-assemblies, line replaceable units, electro-mechanical sub-systems, and power systems.  The terms of the deal were not disclosed

E-Sicherheits-Holdings GmbH acquired ESG Elektroniksystem-und Logistik-GmbH, a provider of electronic and IT systems for the military, public authorities, and companies in Germany.  The terms of the deal were not disclosed.

Benchmark Electronics to acquire Secure Communication Systems, a provider of customized high-performance electronics, subsystems, and component solutions for military applications.  The deal is worth an estimated $230 million.

Summit Partners acquired Aeryon Labs, a provider of advanced micro unmanned aerial vehicle systems.  The deal is worth an estimated $46 million

Thales to acquire Vormetric, a developer of data protection technology for physical, virtual, and cloud infrastructures.  The deal is worth an estimated $440 million.

Dell to acquire EMC Corp, a provider of data-storage hardware and data-center software.  EMC shareholders will receive $24.05 a share in cash, with a tracking stock linked to a portion of EMC’s interest in VMware.  The deal is worth an estimated $67 billion.

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Industry Week in Review – October 16, 2015

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Aerospace & Defense Update

Over 26,000 individuals attended this year’s annual Association of the United States Army (“AUSA”) conference in Washington D.C.  Every year a variety of attendees, from active-duty and retired military leaders to industry professionals worldwide, gather to listen to discussions on important military and national security subjects and view exhibits from defense companies showcasing their best capabilities.  In addition, speakers such as John McHugh, Secretary of the Army, and General Mark Milley, the new Army Chief of Staff, spoke on a range of topics, including the increased challenge of growing global threats coupled with declining budgets and future training and mission operations.  Moreover, discussion around the need for a viable land force, not just strong air and sea support, was also emphasized, preluding President Obama’s Thursday announcement to maintain the current U.S. troop count in Afghanistan through the end of his term.

Stock prices for both Boeing Co. and Airbus Group fell this week after Richard Anderson, Delta Air Lines Chief Executive Officer, stated during Delta’s 3Q15 earnings call his belief of a “huge bubble” for wide-body airplanes, increasing pressure on pricing and orders for new aircraft.  If accurate, Boeing’s 777 is vulnerable to an oversupply of wide-body jets in the marketplace, making it difficult for the current generation 777’s to create sales amid competition.  On the contrary, the latest Boeing 787 and Airbus A350 aircraft will be less affected due to their strong order backlog and operational savings.  Boeing Commercial Airplanes Vice President of Marketing, Randy Tinseth, acknowledged potential pricing pressures, but downplayed its significance.  However, he went on to state that the aircraft market for Delta will be favorable over the next one to three years as prices become lower.

Government Technology Solutions Update

The U.S. Army is creating a new governance process designed to prioritize cyber spending, as a growing number of cyber programs compete for finite dollars.  The newly formed Cyber Acquisition Requirements and Resourcing Group will be tasked with analyzing spending requests before the start of each Government Fiscal Year (“GFY”).  The main evaluation tool used will be a spin on the IT Box, a framework first launched by the Department or Defense (“DoD”) in 2008 to make sure programs meet cost, schedule, and performance goals.  Rather than funding identified purchases years in advance, the new strategy uses the IT Box framework to outline general objectives as part of the traditional budget process, but then directs funding to specific purchases closer to the actual point of execution.  Set to debut in GFY 2017, the Army plans to use the new governance process to develop military-specific hardware and software, repair newly-discovered network problems, and buy commercial-off-the-shelf technologies.

Northrop Grumman announced a restructuring of its business segments on Thursday.  Effective January 1, the Company plans to consolidate four segments into three distinct businesses.  Northrop expects to combine their Electronic Systems sector with portions of the Information Systems sector focused on new capabilities for military and intelligence customers.  The remaining IT services business will be combined with the Technology Services sector.  While Northrop’s operating margins have been 13.2% and 16.5% in their Aerospace Systems and Electronic Systems segments, respectively, the Information Systems and Technical Services segments had lower operating margins of 9.8% and 9.3%, respectively.  Northrop has not released revenue projections for the new business segments; however, the Information Systems business had $6.2 billion of revenue in 2014, which will now be split between Technical Services and Electronic Systems, divisions that posted $2.8 billion and $7.0 billion of revenue in 2014, respectively.  Management has emphasized that the rationale behind the restructuring is to more effectively meet customer needs and enhance innovation.

Big Movers

Airbus Group SE (Down 3.7%) – Shares were down this week in response to Delta Air Lines Chief Executive Officer, Richard Anderson, stating his belief of a “huge bubble” for wide-body airplanes during Delta’s 3Q15 earnings call.

Honeywell International (Down 4.1%) – Shares were down this week after management revised full year revenue outlook downwards after posting lower than expected revenue for 3Q15.

Transactions

L-3 Communications Holdings Inc. acquired ForceX, Inc., a provider of ISR mission manage software and geospatial application technology programs.  The terms of the deal were not disclosed. KippsDeSanto & Co. acted as the exclusive financial advisor to ForceX, Inc.

Ultra Electronics Holdings acquired Furnace Parts, LLC, a designer and manufacturer of specialty industrial thermocouples for temperature measurement applications.  The deal is worth an estimated $12.0 million. 

The Boeing Company acquired Peters Software GmbH, a provider of training content for early stage pilot training.  The terms of the deal were not disclosed.

Avon Rubber plc acquired the thermal imaging camera business of E2v Ltd., a designer and manufacturer of thermal imaging cameras for first responders and fire markets.  The deal is worth an estimated $5.4 million.

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Industry Week in Review – October 9, 2015

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Aerospace & Defense Update

The U.S. Senate approved the 2016 defense policy bill on Wednesday, just six days after it was passed by the House of Representatives. The bill will now be presented to President Obama, who is expected to veto it due to its loophole that provides additional funding to defense via the Overseas Contingency Operations (“OCO”) account. The bill increases the OCO account by nearly $38 billion, creating authorization to spend money on a variety of programs; however, it bypasses the spending caps implemented by the Budget Control Act, a key concern to those who oppose the bill. President Obama has ten days to veto the bill, after which it will go back to Congress for a potential override. Despite already passing the Senate with over a two-thirds majority, Minority Leader Harry Reid said that Democrats will sustain President Obama’s veto. Both sides have until December 11th to reach a long term budget deal or pass another short term extension to avoid a government shutdown.

Global Jet Capital has agreed to purchase General Electric’s corporate jet unit for $2.5 billion, as it expects more companies and wealthy individuals to rent instead of buy plush planes. Having launched last year, Global Jet Capital provides leasing and lending solutions for large-cabin and long-range private jets.   Since its launch, it has closed several international transactions; however, this deal increases its exposure to the U.S. market, as it will have access to General Electric’s portfolio of 300 aircraft. The pending deal, one of the largest ever involving corporate aircraft, demonstrates Global Jet Capital’s confidence in the long-term growth prospects of the large-cabin and long-range private jet market.

Government Technology Solutions Update 

The General Services Administration’s (“GSA”) agile-focused contract vehicle, 18F, launched its first vertical, “Digital Economy Practice,” this week. The new vertical seeks to combine technical agile expertise with functional business knowledge to both afford the greater flexibility associated with agile methods while better addressing agency challenges. The new approach will allow 18F to not only focus on individual, pre-identified Information Technology (“IT”) projects, but also on helping agencies shape near-term digital strategies across their infrastructure. The vertical comes as agencies are searching for increased flexibility in IT acquisitions in order to better meet constituent needs while spending less in the midst of uncertain budget environments. As currently structured, the new vertical focuses on financial projects, with 18F citing the myRA retirement tool at the Treasury Department and the Tick Size Pilot initiative at the Securities and Exchange Commission (“SEC”) as possible projects suited for the vertical’s proficiencies.

Efforts to give U.S. Cyber Command (“CYBERCOM”) more purchasing power are gaining momentum as the Department of Defense (“DoD”) seeks to develop, enhance, and protect its technological infrastructure. In line with the DoD’s emphasis on strategic flexibility, the new initiative looks to give CYBERCOM special procurement authority outside of the DoD’s conventional weapons procurement process to facilitate faster IT acquisitions. Officials cited the unique nature of cyber procurements, which are cheaper and shorter in duration than typical weapons systems in order to keep pace with quickly evolving needs and challenges, as justification for the special authority. The initiative comes in the midst of a large CYBERCOM expansion, evidenced by the Command’s five-year $460 million contract announced in September, and its current effort to recruit over 6,000 cyber specialists in order to support operations worldwide.

Big Movers

Magellan Aerospace (Up 9.4%) – Shares were up this week in response to being awarded a follow on contract to provide nose and main landing gear components and kitted assemblies to Messier-Bugatti-Dowty for major commercial aircraft customers.

Com Dev International Ltd. (Up 20.2%) – Shares were up this week after it announced that it is in talks with potential acquirers.

Transactions

Achilles Technology Solutions to acquire Materials and Electrochemical Research Corporation, a provider of fuel cells, batteries, coatings, composites, fullerenes / nanotubes, metal alloys, and gas storage systems. The terms of the deal were not disclosed.

Kaman Aerospace Group to acquire Timken Alcor Aerospace Technologies, Inc., a producer and supplier of direct replacement parts for gas turbine engines and components in the aviation industry. The terms of the deal were not disclosed.

Global Jet Capital to acquire Corporate Aircraft Financing Portfolio of GE Capital Corporation, a provider of loans and leases as well as more than 300 fixed-wing aircraft. The deal is worth an estimated $2.5 billion.

Raytheon Company acquired Foreground Security, an operator of the Virtual Security Operations Center (“V-SOC”) and Automated Threat Intelligence Platform (“ATIP”), and a provider of advanced cyber monitoring, threat hunting, and professional services capabilities. Terms of the deal were not disclosed.

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