Industry Week in Review – October 12, 2018
KippsDeSanto & Co. Industry Week in Review – October 12, 2018
Summary
TransDigm has entered into an agreement to acquire Esterline Technologies Corporation for $4 billion. After key aerospace and defense providers have experienced production issues, the Pentagon is partnering with the Intelligence Community to identify and improve shortcomings in companies’ supply chains. Google has announced it will not submit a bid for the $10 billion JEDI cloud contract due to potential conflicts with its corporate values and IBM files a pre-award protest of the contract. The Government Accountability Office released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s portfolio of weapon systems.
Aerospace & Defense Update
On Wednesday, TransDigm Group Inc. announced that it had entered into an agreement to acquire Esterline Technologies Corporation for a total consideration of approximately $4 billion. Esterline provides engineered components, sensors, and specialized parts to the jetliner industry. The company has strong customer relationships and is a sole-source supplier of certain parts to Boeing and Airbus. TransDigm’s equity purchase price of $122.50 per share represents a 38% premium to Esterline’s closing stock price the day before the transaction was announced. The acquisition continues a trend of industry leaders paying large multiples to condense their supply chain to achieve cost-saving synergies, and TransDigm hopes the acquisition will strengthen its supply chain, cut costs, and increase productivity.
The Pentagon and the Intelligence Community (“IC”) are partnering to audit domestic aerospace and defense companies’ supply chains to identify and improve shortcomings that could hamper U.S military readiness. The Pentagon is particularly concerned about the industry’s ability to effectively increase weapons production and supply a conflict. Boeing’s recent 737 production issues reinforce the need to ameliorate supply chains, as shortages of various production inputs spanning from metal casting to circuit boards have hindered manufacturers’ ability to meet growing demand. Production issues have affected both upstream and downstream suppliers as key providers such as Spirit AeroSystems, GE Aviation, and United Technologies have all experienced production issues, citing late delivery of materials as a contributing factor to their delays. The Pentagon is incentivizing contractors to elevate their performance by offering bonuses for on-time deliveries and are simultaneously diligently working with industry leaders to foster communication and resolve these issues.
Government Technology Solutions
On Monday, Alphabet Inc.’s Google announced it will not submit a bid for the 10-year, $10 billion single-vendor DoD JEDI cloud contract because it may present potential conflicts with its AI principles. The withdrawal comes only a few months after the company decided it will not renew its AI contract with the DoD following significant internal complaints from employees. Google said they would have submitted a compelling solution for the portions that align with its values and fall within its scope had the contract been open to multiple vendors. The company was among a handful of tech giants in the hunt for the cloud contract, including Amazon Web Services, Microsoft Azure, IBM, GDIT (formerly CSRA) and Oracle—many of which have also expressed their displeasure with the winner-take-all award structure. In related news, this Wednesday, IBM filed a pre-award protest on JEDI, following Oracle’s pre-award protest of the contract earlier in the year. IBM is challenging the contract’s request for a single cloud environment for 10 years, as well as the RFP’s stringent requirements, which “mirror one vendor’s internal processes” and “restrict the field of competition”, according to IBM General Manager Sam Gordy. The final deadline for bids is Friday, with the awardee to be selected next April unless the protests cause the timeline to be extended.
This past week, the Government Accountability Office (“GAO”) released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s (“DoD”) portfolio of weapon systems. Because automation and connectivity are fundamental enablers of the DoD’s military capabilities, the potential for cyberattacks poses a serious threat to all network-based weapon systems. According to the report, testers attempting to breach weapons systems routinely were able to gain access to a variety of network connected defense platforms, within one hour; and were then able to take full control of, after a day, manipulating the platform’s system by changing or deleting data. With the report heavily criticizing defense officials for their lack of foresight in developing cyber capabilities for weapon systems, the Pentagon will have to move quickly to address these vulnerabilities. As the GAO prepares to brief Congress on its classified findings, the DoD will receive yet another reminder of the importance of increased cyber functionality and the proactive development of systems to keep up with rapid technological changes.
Big Movers
Astronics Corporation (down 20.7%) and Triumph Group (down 15.6%)– Share prices were among the hardest hit in the Aerospace, Defense and Government Services market after this week’s selloff, which resulted in the worst week for U.S. stocks since March.
Transactions
AE Industrial Partners has acquired The Atlas Group, a provider of manufactured complex assemblies for commercial, business, and military aircrafts. Terms of the deal were not disclosed.
Celestica, Inc. has agreed to acquire Impakt Holdings, a provider of manufacturing solutions for leading OEMs. The deal is worth an estimated $329 million.
Cognosante, LLC has acquired J.Lodge, LLC, a provider of integrated solutions that improve the customer-care experience using artificial intelligence, driven speech analysis, and industry-leading software to analyze contact center interactions and find insights. Terms of the deal were not disclosed.
Decision Point Corporation has acquired CORTEK, Inc., a provider of systems engineering, software engineering, cyber support, and technical analysis and documentation to the Department of Defense, Department of State, and other government agencies. Terms of the deal were not disclosed.
FLYHT Aerospace Solutions Ltd. has acquired the Assets of Panasonic Weather Solutions, a provider of satellite communications systems, aircraft tracking, and Tropospheric Airborne Meteorological Data reporting. The deal is worth an estimated $8.4 million.
Maximus, Inc. has agreed to acquire the Citizen Engagement Centers divestiture of General Dynamics Information Technology, Inc.,a provider and operator of centers that handles government services inquires and management. The deal is expected to be worth an estimated $400 million.
Ravn Air Group has agreed to acquire Assets of Peninsula Airways, Inc., a provider of airline operating schedule passenger and charter throughout Alaska. The deal is worth an estimated $12.3 million.
Seemann Composites, Inc. has acquired Materials Sciences Corp., a provider of products and services to study advanced materials and structures. Terms of the deal were not disclosed.
TransDigm Group, Inc. has agreed to acquire Esterline Technologies Corp., a provider of engineered products and systems for aerospace and defense customers. The deal is worth an estimated $4.064 billion.
Industry Week in Review – October 05, 2018
KippsDeSanto & Co. Industry Week in Review – October 5, 2018
Summary
Updates and overhauls continue to stand out as prevalent trends in the Aerospace, Defense, and Government Technology communities. This week, the U.S. Army came closer to finding a supplier for its defense radar system, and Boeing and Embraer mentioned the prospect of building an assembly line for Embraer’s cargo aircraft to make up for lagging interest from Brazilian buyers. In the Government Technology sector, digital transformation remains a pressure point as agencies pursue alternative avenues to facilitate cloud modernization and increased cyber functions.
Aerospace & Defense Update
The U.S. Army has narrowed its selection of awardees to develop a next-generation air and missile defense radar (“AMD”) system to Raytheon and Lockheed Martin. The Department of Defense Ordnance Technology Consortium originally had awarded contracts to four companies to develop designs for the Patriot AMD radar replacement system but has removed Northrop Grumman’s and Technovative Application’s from the process. The concept design contracts were given a period of performance of 15 months, but the down-select came early. Raytheon currently manufactures the legacy Patriot System while Lockheed Martin currently is developing the Medium Extended Air Defense System as competition. Radar technology is becoming more prevalent as Congress has mandated that the U.S. Army find a way to produce more capable radars that will fit into the future Integrated Air and Missile Defense framework by 2025.
Boeing and Brazilian aerospace company, Embraer, are reportedly discussing the prospect of building an assembly line for Embraer’s KC-390 cargo planes in the United States. This discussion comes on the heels of Boeing’s 80% stake in Embraer’s commercial business, and it is widely speculated that a similar deal on the companies’ defense businesses might be negotiated in the coming months. Boeing and Embraer had previously established agreements in 2012 and 2014, but a defense-related joint venture would allow for the development of much broader market opportunities. The KC-390 is a multi-mission aircraft built to haul cargo, transport passengers, insert special operators, and even help refuel other aircraft. Embraer has struggled to draw serious interest from international buyers as Brazil currently remains its only customer, however Embraer believes this agreement could change that.
Government Technology Solutions
With their innovative and agile solutions offerings, commercial companies have begun to increase their desire to more effectively penetrate the federal contracting space. This is largely driven by a change in the historic reluctance of federal agencies to adopt commercial technologies, given a heightened focus on, and need for, more robust cybersecurity measures and enhancements to outdated legacy systems. Government contractors have turned to partnerships with commercial companies in order to more quickly deliver commercial solutions as contractors typically have required contracting vehicles in place. Raytheon (NYSE: RTN) has been one of the leaders in this movement and recently teamed with Florida-based Cybraics, Inc. and California-based Authentic8, Inc., to deliver cyber and cloud solutions to federal and state and local agencies. Intended solutions include enhanced security for various voting and healthcare platforms. These companies will provide their services through a subscription model, deemed cyber-as-a-service, that will allow Raytheon “to deliver security faster and at a lower total cost,” according to John DeSimone, Vice President of Cybersecurity and Special Missions at Raytheon’s Intelligence, Information, and Services (“IIS”) segment. With government spending at all-time highs, Raytheon’s decision to collaborate with innovative commercial companies could give it a serious competitive advantage as the demand for departmental IT overhauls continues to grow.
On Thursday, the senate passed a bill that solidifies the role of the Department of Homeland Security’s (“DHS”) Cybersecurity and Infrastructure Security Agency (“CISA”). Formerly known as the National Protection and Programs Directorate (“NPPD”), the agency was rebranded amid increasing cyber threats and tasked with securing federal networks and protecting critical infrastructure. The elevation of CISA comes in the wake of a long line of cyber breaches, including alleged Russian meddling in the U.S. election in 2016 and the recent Chinese hardware hack that made its way into Apple and Amazon Web Services’ data center equipment. This move, coupled with the recent passage of the Cyber Deterrence and Response Act in September, further reinforces U.S. prioritization of combatting the increasing cyber vulnerability of federal agencies and commercial companies as they modernize.
Transactions
Air Transport Services group, Inc. has agreed to acquire Omni Air International, LLC, a provider of airline and charter services for commercial and government clients. The transaction is worth an estimated $845 million.
Artech Information Systems, LLC has acquired The Talent & Technology Solutions Business Unit of CDI Corporation, a provider of IT and engineering talent sourcing services and technology solutions to clients across North America. Terms of the deal were not disclosed.
Behrman Capital has acquired kSARIA, a provider of mission-critical connectivity solutions for the aerospace and defense end markets. Terms of the deal were not disclosed.
Bel Fuse, Inc. has acquired BCMZ Precision Engineering Limited, a provider of precision machined components to customers in the automotive, aerospace, defense, telecommunications, fiber optic, and medical industrial sectors. Terms of the deal were not disclosed.
Bytecubed, LLC has acquired InterKN, a provider of proprietary technology platforms that connect enterprise buyers with innovative suppliers by dynamically surfacing available funding, technology needs, and data insights. Terms of the deal were not disclosed.
Gulfstream Aerospace Corp. has acquired a manufacturing line of The Nordham Group, Inc., a provider of nacelles for the Gulfstream G500 and Gulfstream G600. Terms of the deal were now disclosed.
Enlightenment Capital has made a strategic investment in Emagine IT, Inc., a provider of information technology services, with a focus on cyber, data analytics, and cloud, to government and commercial customers. Terms of the deal were not disclosed.
Hilcrest Holdings, Inc., in partnership with Akoya Capital, LLC, has acquired Evolver, Inc. and eVigiliant Security, merging the two to create Converged Security Solutions (“CSS”), a provider of comprehensive converged security managed services solutions spanning cyber and physical security. Terms of the deal were not disclosed.
Standex International Corp. has acquired Regional Mfg. Specialists, Inc. (d.b.a. Agile Mechanics), a provider of high-reliability magnetics, including transformers, inductors, and coils for mission critical applications for blue chip OEMs. The transaction is worth an estimated $39 million.
Industry Week in Review – September 28, 2018
KippsDeSanto & Co. Industry Week in Review – September 28, 2018
Summary
Boeing has been awarded a $9.2 billion contract from the Air Force to supply next-generation training jets. Furthermore, commercial technology companies continue to penetrate into the government contracting market. This week the Air Force announced it will award AT&T and Microsoft cloud Other Transaction Authority (“OTA”) contracts worth up to $121.7 million.
Aerospace & Defense Update
The Air Force announced that it had selected a bid by a Boeing-Saab partnership for the award of a $9.2 billion contract to supply next-generation training jets. This is expected to be the Air Force’s last major aircraft procurement opportunity for the foreseeable future. The Air Force plans to purchase 351 T-X aircraft, 46 simulators, and associated ground equipment with an option to buy up to 475 aircraft and 120 simulators. The new aircraft will provide Air Force pilots with critical training capabilities required to increase operational efficiency. Boeing’s award is its third major contract victory since August, following an $805 million Navy contract to build four MQ-25 unmanned tankers and a $2.38 billion Air Force contract to manufacture Huey replacement helicopters.
Boeing and Lockheed Martin’s joint venture, United Launch Alliance (“ULA”), has chosen Jeff Bezos’ space industry startup, Blue Origin, to provide its BE-4 engine for ULA’s upcoming Vulcan rocket. The first launch of ULA’s Vulcan is tentatively scheduled for 2020, but testing and final certification may push back that date. ULA estimates the project will create over 20,000 direct and indirect jobs. The potential billion-dollar agreement is an important stepping stone for Blue Origin as it seeks to become a major military launch provider. Blue Origin’s penetration into the military launch systems market comes amid significant military and commercial activity in the space industry. The Air Force is seeking to procure a wider range of lower-cost, more diverse launch systems, providing private sector billionaires such as Bezos and Elon Musk an opportunity to expand their presence in the growing space launch markets.
Government Technology Solutions
Commercial technology players continue the push to gain significant presence in the government contracting market, a strategy reinforced by Amazon CEO Jeff Bezos’ presence at Wednesday’s annual Air, Space and Cyber Conference. Mr. Bezos used the platform to encourage the government to leverage more commercial technology, which tends to provide a broad range of solutions to a diverse population of customers, rather than buying what he views as more narrow, costly solutions from traditional federal contractors. The main discriminator for commercial entities, according to the Amazon CEO, is the number of co-customers and strong ecosystem of users they serve that constantly drive innovation and the product forward. The recent wave of large federal contract wins by commercial companies suggests agencies recognize the benefits Bezos alluded and are increasingly becoming more open to adopting commercial technology for their modernization requirements. Amazon is not the only successful commercial player in the federal contracting space, however; the Air Force announced this week it will award AT&T and Microsoft $121.7 million in cloud Other Transaction Authority (OTA) contracts in an effort to modernize IT infrastructure and create a more efficient workforce within the department. Furthermore, commercial contractors are not only winning awards but also beginning to exert influence and earn meaningful seats at the industry table. This week, White House officials announced they will host representatives from IBM, Alphabet Inc., and AT&T on Monday for a quantum information science (“QIS”) summit as agencies continue to look towards NextGen solutions to improve overall efficiency and mission delivery. As the 2018 government fiscal year draws to a close, commercial companies should expect to see the uptick in market share continue moving into 2019.
Transactions
A portfolio company of H.I.G. Capital has acquired Iron Bow Technologies, LLC, a provider of information technology solutions worldwide that serves clients in the government, healthcare, higher education, legal, and non-profit industries. Terms of the deal were not disclosed.
L3 Technologies has acquired ASV Global, a provider of unmanned surface vessel and autonomous vessel control systems
Industry Week in Review – September 21, 2018
KippsDeSanto & Co. Industry Week in Review – September 21, 2018
Summary
Increased defense spending continues to be a primary emphasis for the federal government. Multiple branches of the military have received or will receive increased funding in the foreseeable future. Furthermore, IT modernization and heightened security continues to be an ongoing area of focus for the both the commercial and federal end markets.
Aerospace & Defense Update
U.S. Army weapons and munitions technology development is receiving a large-scale cash injection in the recently passed GFY2019 spending bill, which was passed much earlier this calendar year than in 2018. (“RDT&E”) dollars for weapons and munitions technology increased by $343 million in the bill, representing more than the $40 million in RDT&E funding that the Army had previously requested for 2018. Even though the Army’s budget request had dropped in February of this year, the service has been proactive by forming cross-functional teams to tackle top modernization priorities. These teams are essential to rapidly modernize forces to go up against adversaries such as Russia and China with top priorities being long-range precision munitions and small unmanned aircraft systems.
The U.S. Air Force estimates that creating a Space Force will cost a total of approximately $13 billion over the next five years, including an initial $3 billion cost to start up this program. The proposal, put forth by the Air Force to add a sixth branch of the military, estimates that more than 13,000 personnel will be needed on top of existing space operators to help stand up the Space Force. In addition, the proposal estimates that the Space Force headquarters would be established in GFY2020, and the services would begin transferring the space personnel and programs the following year. Under the proposal, there is a possibility of re-integrating the intelligence community within the newly-formed military space community through the use of the National Reconnaissance Office.
Government Technology Solutions
In the ongoing quest for federal IT modernization and security, Microsoft and Amazon have both ramped up their federal cloud pursuits to capture part of this burgeoning market. Following the integration of Microsoft’s on-premises application software—Azure Stack—with the Azure Government Cloud in August, the Seattle-based software company intends to attract public sector clients with a hybrid cloud approach that addresses latency and connectivity locally. Along with these capabilities, Azure aspires to accelerate the IT modernization timetable, ensuring that “applications can be moved without making any changes in code, DevOps tools, processes, or people skills.” Not to be outdone, Amazon Web Services (“AWS”) established a two-part program to guide and facilitate government customers’ transitions to Amazon’s cloud platform. Amazon understands the inherent competition in such a largescale overhaul and responded to Azure’s announcement with the AWS Public Sector Partner Transformation Program, a 110-day initiative aimed at moving its clients to the cloud. As the market for modernization continues to heat up, signs point to a showdown between Amazon and Microsoft for meaningful federal cloud market share.
The American Council for Technology and Industry Advisory Council (“ACT-IAC”), a partnership that strives to modernize the government via IT implementation, held a meeting this Tuesday which assessed the potential impacts of automating government agencies’ processes. The biggest challenge is not the automation itself, but rather the optimization of legacy processes required beforehand, according to General Services Administration (“GSA”) senior advisor Ed Burrows. Once implemented, however, time and cost savings could be significant. For National Aeronautics and Space Administration (“NASA”), adopting a robotic process automation (“RPA”) for the agency’s grants management system has resulted in $50,000 in savings so far, on an initial investment of only $7,000. Further RPA initiatives at NASA are expected to continue to eliminate low-value manual work—efforts the Trump administration deems inefficient and dated. Shifting away from time-intensive, manual work and towards automation to focus on high-value tasks could potentially attract more technical and skilled graduates into the government space workforce, as evident in initiatives like Harvard’s “Code It Forward” program, which sponsored fellowships performing high-end, “civic tech” work at six federal agencies this past summer.
Transactions:
AEVEX Aerospace, a portfolio company of Trive Capital, has acquired Special Operations Solutions, LLC (“SOS”), a provider of ISR platform modification engineering, custom system design, software development, flight test services and processing, exploitation, and dissemination (“PED”) technical support for special operations in highly complex environments. The terms of the transaction were not disclosed.
BBA Aviation plc has agreed to acquire Firstmark Corp., a provider of highly engineered, proprietary components and subsystems for the aerospace and defense industries. The deal is worth an estimated $97 million.
Braidy Industries, Inc. has acquired NanoAI, LLC, a provider of the design, development, and commercialization of high-end performance aluminum alloys for a diverse set of industries. The terms of the transaction were not disclosed.
Desser Holding Company LLC, a portfolio company of Graham Partners, has acquired AOG Aviation Spares, LLC and Seinus, LLC, providers of component repair, overhaul services, and replacement PMA parts to airline operators. The terms of the transaction were not disclosed.
Kaiser Aluminum Corp. has acquired Imperial Machine & Tool Co., a provider of multi-material additive manufacturing and machining technologies for aerospace and defense, automotive, high-tech, and general industrial applications. The terms of the transaction were not disclosed.
Modern Aviation, a portfolio company of Tiger Infrastructure Partners, has acquired the Centennial Airport assets of Xjet Holdings, LLC, an FBO with more than 50,000 square feet of climate-controlled hangar accommodation. The terms of the transaction were not disclosed.
NewSpring Holdings LLC, the holding company of NewSpring, has acquired The Sentinel Company, a provider of mission-focused consulting and technology-enabled solutions to customers within national security domains. Terms of the deal were not disclosed.
Planned Systems International has acquired KINEX, Inc., a provider of mission-critical technology, modeling and simulation, software development, cybersecurity and data solutions to the Department of Defense (“DoD”) and Intelligence Communities. The terms of the transaction were not disclosed.
Snow Phipps Group has acquired Blackhawk Industrial Distribution, Inc., a provider of cutting tools, abrasives and industrial MRO products used in manufacturing, aerospace & defense, energy, and many other diverse markets. The terms of the transaction were not disclosed.
System One has acquired TPGS, a provider of software engineering and IT consulting for the Department of Defense and intelligence agencies. The terms of the transaction were not disclosed.
Timken Co. has acquired Rollon Group, a provider of the design and manufacture of engineered linear guides, telescopic rails, and linear actuators used in a wide range of industries including the aerospace industry. The terms of the transaction were not disclosed.
Vision Technologies Aerospace, Inc. has acquired MRA Systems, LLC, a provider of the design, development, production, and sale of nacelle systems and their thrust reversers for both narrow-body and widebody aircraft. The deal is worth an estimated $630 million.
Industry Week in Review – September 14, 2018
KippsDeSanto & Co. Industry Week in Review – September 14, 2018
Summary
Boeing CEO Dennis Muilenburg addresses the production slowdown of 737 aircrafts—announcing the company will ramp up monthly production by almost 10% in 2019. Congress approved an additional 16 F-35 Joint Strike Fighters, increasing the authorized 2019 total by over 20%. SAIC’s acquisition of Engility, valued at nearly $2.5 billion, continues the trend of public company government contractors turning to mega-mergers and acquisitions to scale.
Aerospace & Defense Update
At Boeing’s September 12th investor conference, Boeing CEO Dennis Muilenburg appeared confident that 737 aircraft production would recover by year-end with no effect on Boeing’s financial forecasts. As he has mentioned previously, Muilenburg emphasized that the 737 delivery slowdown stemmed from a combination of the latest production-rate ramp-up occurring simultaneously with the production line shift to the MAX variant of the 737. In response to a possible slowdown, Boeing has added about 600 new 737 production workers in recent months, and these workers are expected to stay on as Boeing looks to ramp up its a production rate from 52 aircraft to 57 aircraft per month by next year. Muilenburg expressed that the 737-aircraft line will continue its year-over year growth and Boeing will not need to alter its 2018 forecast.
Congress has approved the addition of another 16 F-35 Joint Strike Fighters on top of the 77 authorized by the 2019 defense policy bill. As usual, appropriators used their annual defense spending bill to offer tweaks to the existing shopping list for military hardware from the previous version of the bill, which President Trump signed into law last month. This new compromise also adds an extra littoral combat ship and six more Bell-Boeing V-22 Ospreys to build a stronger military force moving forward. In all likelihood, these measures are expected to pass before the start of the fiscal year on October 1st to avoid the optics of a government shutdown ahead of upcoming midterm elections in November.
Government Technology Solutions
This past week, Science Applications International Corporation (“SAIC”) announced its intentions to acquire Engility Holdings, Inc. (NYSE:EGL). Engility was spun out from L3 Communications, Inc. (“L3”) in 2012 and proceeded to acquire Dynamic Research Corporation (“DRC”) and The Analytic Sciences Corporation, Inc. (“TASC”) in 2014 and 2015, respectively. SAIC’s acquisition of Engility, valued at nearly $2.5 billion, will position SAIC as the third-largest contractor by revenue in the Government Technology Solutions space. SAIC is the latest in a long line of public company government contractors who have turned to mega-mergers and acquisition in order to achieve increased scale and meaningful cost synergies in today’s active, yet competitive, marketplace. Other notable recent deals of scale in the industry include: DXC Technology’s three-way merger with Vencore and KeyPoint creating Perspecta, Inc., General Dynamics’ $9.7 billion acquisition of CSRA this April, and Leidos’ $4.6 billion acquisition of Lockheed Martin’s IT business in 2016. This race to acquire scale, contracts, and capabilities, stoked by increased government spending and favorable budgetary dynamics, is expected to continue in the near to medium-term. In an investor conference call, SAIC CEO Anthony Moraco said that the combination of SAIC and Engility is a strategic move that “take[s] advantage of near-term market opportunities in this federal market environment, but also provide[s] downside protection against perturbations in the longer-term funding profiles of individual customers.” While integration will likely be the initial focus, the union of these large service providers will also provide SAIC access to Engility’s security cleared labor force. Adding these extra cleared workers will boost SAIC’s ability to compete for new work and allow it to pursue larger contracts as a result. Like SAIC, other large government contractors are turning to M&A to broaden capabilities and customer portfolios in order to access more of the broader market.
Big Movers
Triumph Group, Inc. (up 11.2%) – Share prices were up this week due to winning two contract extensions for HELLFIRE Romeo Missile Components, which are expected to generate more than $11 million in revenue.
SAIC (down 11.5%) – Share prices were down this week following an announcement that SAIC has agreed to acquire Engility Holdings, Inc. and will assume Engility’s $900 million in debt.
Transactions
SAIC has agreed to acquire Engility Holdings, Inc., a provider of technical services to the U.S. Department of Defense, U.S. Department of Justice, U.S. Department of State, Federal Aviation Administration, Department of Homeland Security, and space-related and intelligence community agencies. The deal is worth an estimated $2.5 billion.
Argosy Capital has acquired Capewell Aerial Systems, a provider of engineering products for aerial delivery, life support, and tactical gear for military, law enforcement, and humanitarian agencies.
Coriolis Composites has acquired MF Tech, a provider of robotic filament winding, a technique used to manufacture a wide variety of composite parts.
TAE Aerospace Pty. Ltd acquired Kiddie Aerospace and Defense Australia Pty Ltd., a provider of automatic fire extinguishing systems for military vehicles used by armed forces.
Industry Week in Review – September 7, 2018
KippsDeSanto & Co. Industry Week in Review – September 7, 2018
Summary
Near the end of the government fiscal year, budgetary spending remains a primary emphasis for commercial and federal enterprises. Although Boeing has secured a significant increase in orders, it must deal with an excessive backlog and simultaneously meet customer demands. Also, the U.S. continues to firm up its military relationship with India. In the government technology landscape, modernization remains at the forefront especially with issues of cybersecurity and federal agencies must deal with the “use-it-or-lose-it” spending binge as the fiscal year closes.
Aerospace & Defense Update
A surging global base of airline passengers, with more than 100 million new passengers per year, has created nearly $500 billion worth of new plane orders for Boeing. This increased backlog had led to logistical challenges for Boeing, especially with respect to storage of unfinished aircraft as the company attempts to keep pace with robust demand. As a result of engine and fuselage supply bottlenecks, Boeing has several unfinished 737s at its production facilities in Seattle and lacks sufficient factory space to store them. The company is currently relying on local airports to host excess aircraft to provide short term relief, but it does not plan on this being a long-term solution. Boeing’s management team is developing an overarching recovery plan to match production rates with deliveries to settle these challenges and prevent future production issues.
On Thursday, the United States and India signed a breakthrough security accord that would allow India to purchase advanced U.S. weaponry. With this agreement, India wants to participate in joint military exercises with the U.S. and increase its role in regional naval security. The U.S. sees its alliance with India as a critical measure in countering growing Chinese influence in the region. This deal caps off a budding military relationship between the two countries; over the past decade, weapons sales from the U.S. to India increased from relatively insignificant amounts prior to 2008 to a cumulative $15 billion by 2018. India has already purchased Apache and Chinook helicopters, maritime patrol aircrafts, and M777 howitzers from the U.S. Looking ahead, India is expected to order several F-16 and F-18 fighter jets from Lockheed Martin to modernize its aircraft capabilities, which would replace its existing Russian models.
Government Technology Solutions
On Thursday, the Justice Department charged Park Jin Hyok, a North Korean spy, with conspiracy to commit fraud due to his involvement in both the attack on Sony in 2014 and the Wannacry ransomware attack in 2017, along with a series of other cybercrimes. The accusations came the day after the House of Representatives passed the bipartisan Cyber Deterrence and Response Act of 2018, which calls on the White House to publicize known advanced persistent threat (“APT”) groups in an effort to deter future cyberattacks from state-sponsored operatives. These events substantiate DoD CIO Dana Deasy’s emphasis on the importance of cybersecurity at the 9th Annual Billington Cybersecurity Summit on Thursday. Deasy said that while cloud, AI, and Communications, Command, and Control (“C3”) technologies are key focus areas for modernizing the Department, their integration “will only be fully successful with a robust cybersecurity environment.” As government agencies continue to integrate forward-leaning solutions such as cloud and AI, cybersecurity implementation will continue to be the foundation and first step in these modernization efforts.
The potential increase in year-end government spending continues to be a topic of debate as the government’s fourth quarter draws to a close. Billions of dollars remain unallocated, and the “use-it-or-lose-it” mentality of budget authorities has received considerable criticism. A study by the American Economic Association (“AEA”) hints that this yearly spending binge typically leads to low-value investments and a waste of government funds. Although these spikes in federal spending are not uncommon, this year could see unprecedented levels of fourth quarter spending, as some top federal agencies have yet to spend as much as 40% of their annual budget. Last year, federal agencies spent nearly five times their average weekly spend in the last week of 2017. To curb the potential waste of government funds, several senators contacted CFOs at 13 agencies, warning them to re-evaluate their spending habits and provide evidence against frivolous spending. While this action is unlikely to have a material effect on government spending for the current fiscal year, a more conscious effort to change this established spending trend could shift government contracting and budgeting landscapes in future years.
Transactions:
ByteCubed, LLC has acquired CHIEF, a provider of brand, technology, and communications solutions to government agencies, nonprofits, and corporations. Terms of the deal were not disclosed.
CORE Industrial Partners, LLC has acquired Midwest Composite Technologies, Inc., a prover of additive manufacturing of prototype and low-volume production components for a variety of end markets, including the aerospace market. Terms of the deal were not disclosed.
Coriolis Composites, a subsidiary of Coriolis Group has acquired MF Tech, a provider of robotic filament winding, a technique used to manufacture a wide variety of composite parts. Terms of the deal were not disclosed.
Gooch & Housego plc has acquired Gould Technology, LLC., a provider of research, development and manufacturing of highly reliable fiber optic components and integrated assembly solutions. The deal is worth $16.4 million.
One stop Systems, LLC has acquired Concept Development, Inc., provider of custom high-performance computing systems for airborne in-flight entertainment (IFE) systems. CDI’s capabilities include electrical, mechanical and software design. The deal is worth $5.9 million.
Polaris Industries, Inc. has agreed to acquire WSI Industries, a provider of complex, high-precision parts for a wide range of industries. The deal is worth $23.9 million.
PrecisionHawk, Inc. has acquired InspecTools, Inc., a provider of high-fidelity machine vision software and data analysis tools built for the renewable energy market. Terms of the deal were not disclosed.
PrecisionHawk, Inc. has acquired HAZON, Inc., a prover of extensive aviation experience, standards-based operating procedures, certified drone flight operations, inspection services. Terms of the deal were not disclosed.
Transcat, Inc. has acquired Angel Instrumentations, Inc., a provider of calibration services including RF & electronic test equipment, physical, dimensional, thermal, flow and torque calibrations. Terms of the deal were not disclosed.
Valence Surface Technologies has acquired Triumph Processing, Inc., a provider of metal finishing on parts up to 110 ft in length and 14 feet in width / depth. Terms of the deal were not disclosed.
Big Movers:
Engility Holdings, Inc. (up 4.4%) – Share price were up this week following news that the Company won a prime spot and two task orders on the Army Software Engineering Services contract.
The KeyW Holding Corporation (up 4.5%) – Share prices were up this week after the company was awarded a short-term research, development, and design-related contracts, highlighting KeyW’s ability to develop affordable and timely sensing solutions.
Industry Week in Review – August 31, 2018
KippsDeSanto & CO. Industry Week in Review – August 31, 2018
Summary
Modernization within the government contracting arena continues to be a primary emphasis for both commercial and federal enterprises. Boeing and Lockheed Martin have made significant investments in their capabilities to best fulfill fluctuating customer demands. In the government landscape, entities including the VA and Coast Guard are upgrading their IT infrastructure and software systems to become operationally more efficient and effective.
Aerospace & Defense Update
Lockheed Martin’s venture capital business doubled down on its 2017 investment in Ocean Aero, a producer of autonomous and unmanned undersea and surface level vehicles, through a multi-million-dollar strategic investment. The additional capital will enable Ocean Aero to scale its production and widen its footprint within its growing customer base, especially with respect to its ocean observation and data collection capabilities. Considering that Navy officials have lobbied to increase spending for unmanned systems to $3.7 billion in fiscal 2019, the industry is primed for significant growth opportunities and will continue to be a high-priority area for aerospace and defense companies.
Satellite producers are transitioning away from the production of geosynchronous satellites, now preferring small satellites due to their increased cost efficiencies, information relay speeds, and resiliency to harsh space conditions. By 2028 over 7,000 smallsats, worth nearly $38 billion, are expected to be launched, marking over a 600% proliferation from the 1,200 units launched throughout the past decade. Over the last few weeks, both Lockheed Martin, with its investment in Terran Orbital, and Boeing, with its acquisition of Millennium Space Systems, have expanded their smallsat presence in an attempt to keep pace with evolving market dynamics.
Government Technology Solutions
In a positive sign for the Veteran Affairs’ (“VA”) and the Department of Defense’s (“DoD”) Electronic Health Record’s (“EHR”) overhaul, VA Secretary Robert Wilkie affirmed on Wednesday the department’s commitment to the modernization initiative. Through the VA’s $10 billion MHS GENESIS contract, the department is seeking to create a continuous healthcare record for service people and Veterans, which it hopes will minimize administrative inefficiencies. This initiative is part of a broader effort at the VA to improve customer service, a point Mr. Wilkie also highlighted during his address to the American Legion this week. The VA has also launched the Office of Electronic Health Record Modernization to oversee the fulfillment of Cerner’s modernization activities. Not all at the VA are aligned with this effort, however, as the Office of EHR Modernization’s chief health information officer and implementation lead both resigned last week, citing disagreements over the direction of the program. While these resignations may create some uncertainty, the department plans to press forward with the initiative, indicating yet another instance of federal departments making substantial IT investments to upgrade cumbersome legacy systems in the name of more efficient and effective mission delivery.
The trend of government agencies increasing their reliance on commercial IT companies for higher-end, next generation IT (“NGIT”) solutions continues as the Coast Guard considers commercial software as a replacement for its auxiliary management system. The current system, AuxData, accounts for the operational and administrative activities of its auxiliary members, including safety patrols, search and rescue, aids to navigation, public education, and public affairs. The information obtained by AuxData is then used to make budgetary preparation and manage operations. The Coast Guard is seeking to relocate this data to the cloud, in an effort to make the software more efficient and accessible than their current system, which has become cumbersome and cost-inefficient over the years. Despite the fast-growing IT market, the Coast Guard’s consideration of a commercial solution is another example of large commercial IT companies like Amazon, Microsoft, IBM, and Google becoming key government solutions providers for front-end implementation, while traditional government contractors continue to provide back-end operations and maintenance support.
Transactions:
Inertial Aerospace, a subsidiary of Heico Corp, acquired Optical Display Engineering, LLC, a provider of LCD screen and display module repairs for aviation displays used in civilian and military aircrafts. Terms of the deal were not disclosed.
MAG Aerospace, a portfolio company of New Mountain Capital, has acquired Ausley Associates, a provider of advanced procurement and program development services, as well as unmanned aviation systems lifecycle and configuration management to the NAVAIR community. Terms of the deal were not disclosed.
Omni-Lite Industries Canada, Inc. has agreed to acquire Monzite Corporation, a provider of multi-chip microelectronic components for high performance electronic sensors. Terms of the deal were not disclosed.
SpeedCast International Limited has agreed to acquire Globecomm Systems, Inc., a provider of satellite-based managed network solutions to government, communications service providers, commercial enterprises, and media and content broadcasters in the United States, Europe, South America, Africa, the Middle East, and Asia. The deal is worth an estimated $135.0 million.
Big Movers:
American Outdoor Brand (up 45.4%) – Share price were up this week as company announced it had beat earnings per share estimates for the quarter by over 80%.
KeyW (up 6.4%) – Share prices were up this week after company announced it secured a $$135 Million Remote Sensing, Command Control Communications and Computer IDIQ Contract from the GSA
Industry Week in Review – August 24, 2018
Industry Week in Review – August 24, 2018
Aerospace & Defense Update
While the Pentagon is increasing its focus on intercepting hypersonic and cruise missiles to keep pace with Chinese and Russian advances, the Missile Defense Agency (“MDA”) is continuing to invest in its ballistic missile defense (“BMD”) program. Currently, the MDA is looking for new ways to improve its BMD by utilizing Lockheed Martin’s F-35 to be used as a sensor and also deliver kinetic weapons to intercept such ballistic missiles. While space-based interceptor technology might be on the horizon to protect against ballistic missiles, the technology could be very costly and take a long time to fully develop. Therefore, the MDA is prioritizing air, land, and sea- based terminal interceptors such as the Aegis Ashore site for the time being.
From 2012 to 2017, more than 1,000 small satellites were launched into orbit, however this number is to be significantly surpassed in the next couple years as the Federal Communication Commission has approved the deployment of 5,264 small satellites. These new satellites are manufactured primarily by four main companies: OneWeb, Space Norway, Telesat, and SpaceX. Currently, the satellites are primarily used for Earth observations, but that business is expected to be eclipsed as broadband operators roll out mega-constellations to provide services such as high-speed internet, weather forecasting, encryption keys, and even extrasolar planet detection. This shift in space technology marks an important inflection point moving forward regarding the future of the space industry.
Government Technology Solutions
On Wednesday, Booz Allen Hamilton (“Booz Allen”) was awarded a six-year, $1.03 billion task order to provide agency-tailored cyber platforms for the Continuous Diagnostic and Mitigation’s (“CDM”) Dynamic and Evolving Federal Enterprise Network Defense (“DEFEND”) program. This task order, under the General Services Administration’s (“GSA”) Alliant contract, engages Booz Allen to provide cyber tools for the five “Group D” agencies: GSA, Department of Health and Human Services, NASA, Social Security Administration, Department of the Treasury and the US Postal Service. Booz Allen’s ability to provide “monitoring-as-a-service” dashboards and solutions will allow these agencies to understand, detect, and make informed decisions to combat potential cyber threats. This award is Booz Allen’s second on the DEFEND program, having previously won a task order to provide similar services to the “Group B” agencies in February. With these two wins, Booz Allen now oversees approximately 80% of .gov web domains, translating to about 1.75 million users and establishing the firm as a pre-eminent federal cybersecurity service provider.
In recent weeks, the Pentagon’s Joint Enterprise Defense Infrastructure (“JEDI”) single-source cloud contract has gained significant attention, prompting a pre-award protest from Oracle, filed on August 6. Much of the controversy stems from the fact that the entirety of the $10 billion JEDI contract is being structured as one award given to a single company. Other cloud providers expected to compete for the JEDI contract are comprised mostly of large, commercial IT companies, among them Microsoft, IBM, and Google. These commercial IT companies have become more prominent and increasingly competitive in the federal contracting space in recent years, highlighted in part by awards like JEDI and Amazon’s win of a $600 million private cloud computing contract with the CIA in 2013. Over the last several years, the increased presence of these major commercial IT companies has pushed many government contractors to partner with these commercial firms to perform back-end services work rather than compete directly against them head-to-head. Per former CSRA CEO Larry Prior: “When you’ve got an Oracle and an Amazon squaring off, a lot of us just want to get out of the bursting radius and be prepared to support customers whichever way they go.”
Big Movers
CACI International Inc. (up 3.3%) – Share prices were up this week due to the completion of its acquisition of the systems engineering and acquisition support services business of CSRA LLC, a unit of General Dynamics Information Technology Inc.
Safran S.A. (up 4.8%) – Share prices were up this week after production plans for its LEAP engine are estimated to be higher than previously thought.
Transactions
An unidentified private equity firm has agreed to acquire the Federal Government IT Services Business (“The Federal Business”) of Black Box Corp., a provider of leading-edge data and physical network solutions, including device control and storage, visualization, collaboration, and cabling, for civilian agencies, the armed services, state and local governments, and educational institutions. The deal is worth an estimated $75 million.
Communications & power Industries (CPI) has acquired related companies Orbital Systems, Ltd. and Quorom Communications, Inc., both are providers of design and manufacture antenna positioners and front-end system products that play a key role in communications applications. Terms of the deal were not announced.
Tech Mahindra Ltd. has agreed to acquire Inter-Informatics spol. S.r.o, a provider of aerospace design engineering services. The deal is worth an estimated $6.3 million.
