Industry Week in Review – December 26, 2014

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Aerospace & Defense Update

The Pentagon approved another $3 billion in foreign arms sales to Iraq for General Dynamic’s M1A1 Abrams tanks and for AM General’s Humvee armored cars.  Pending congressional approval, the deal would bring the total U.S. weapons sales to Iraq to almost $15 billion.  Military arms deals with Iraq have grown significantly, with sales tripling in the past year.  In order for Congress to approve these deals, some lawmakers require reassurances that weapons will not fall into enemy hands and that Iraq will remain able to pay despite falling oil prices.  If approved, the increase in demand will help to keep AM General operating as it slows production rates and considers job cuts.

On December 24, Astronics Corporation announced that it will acquire Armstrong Aerospace for approximately $51 million.  Armstrong Aerospace is headquartered in Itasca, Illinois and provides engineering, design, and certification solutions for commercial aircraft, specializing in connectivity, in-flight entertainment, and electrical power systems.  The target’s 2014 sales are expected to be $27 million suggesting a 1.9x enterprise value to LTM revenue multiple.  The acquisition builds on Astronics’ range of capabilities, specifically in the connectivity and power niche for commercial airlines.  Armstrong’s experience in providing certifications for OEMs, integrators, and airlines made it a fit for Astronics, which adjusted its 2015 revenue to be between $680 million and $725 million.

Government Technology Solutions Update

A potential flaw within a Department of Veterans Affairs (“VA”) patient database may have exposed veterans’ information including name, address, date of birth, phone number, and VA patient identification number.  The database in question is managed by a contractor vendor who has assured the VA the information was only leaked to vendor and VA staff and the flaw has been corrected.  This breach is in line with current cybersecurity concerns of insider threats and the challenge of evaluating if a contractor systems is secure.  To mitigate issues such as these, the VA is spending an additional $60 million on cybersecurity efforts in GFY2015.

The General Services Administration (“GSA”) is planning on soliciting feedback from government customers and industry on an overhaul of its largest buying program, the Multiple Award Schedules (“MAS”).  The GSA is looking to reduce acquisition burdensome regulations and processes while decreasing price variability.  Already in process is “horizontal pricing,” which compares proposals to current contracts in addition to commercial market prices.  Additionally, the GSA is already planning on automating and expanding modifications, the review process, and eBuy opportunities.

Big Movers

Astronics Corporation (Up 10.8%) – Shares were up this week after the Company announced that it will acquire Armstrong Aerospace.

Transactions

Astronics Corporation to acquire Armstrong Aerospace, Inc., a provider of aviation engineering, designing, and manufacturing services.  The deal is worth an estimated $51 million.

Krauss-Maffei Wegmann GmbH to acquire Diehl Defence Land Systems GmbH, a manufacturer of different track types for tanks and armored vehicles.  Terms of the deal were not disclosed.

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Industry Week in Review – December 19, 2014

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Aerospace & Defense Update

The Aerospace Industries Association (“AIA”), a premier trade association representing major aerospace and defense companies, released it 2014 Year-End Review and Forecast earlier this week.  The report found that military aviation sales remained relatively flat at $87.3 billion in 2014.  Despite flat military aviation sales, defense exports experienced strong growth of roughly 9.2% while Department of Defense (“DoD”) space spending increased by 5.5% to $48.8 billion.  Aerospace industry profitability also saw an uptick in 2014, reaching an estimated $25.5 billion, up from $22.2 billion in 2013.  Furthermore, the AIA anticipates steady growth for the aerospace industry over the next year, with aerospace sales increasing 5.3% from $228 billion in 2014 to $240 billion in 2015.  This growth is largely attributable to commercial aircraft sales, which are forecasted to exceed $79.8 billion next year.  Despite numerous domestic and foreign challenges, the AIA also projects small gains in the defense aviation market to accompany the strong growth likely in civil aviation.

On Wednesday, the DoD’s Joint Program Office announced that the F-35 Joint Strike Fighter program has selected Japan and Australia to provide airframe and engine maintenance work in the northern and southern Pacific regions, respectively.  Australia will be the initial center of heavy engine maintenance work starting in 2018 with Japan assuming a role as an engine maintainer three to five years afterwards.  Notably, Australia is the only full F-35 partner in the Pacific, with plans to buy 100 of the aircraft.  Meanwhile, Japan is categorized as an F-35 foreign military sales customer scheduled to purchase 42 of the fighters.  The deals, which could be worth billions of dollars over the 40-year life of the program, follow last week’s announcement that maintenance in Europe will be handled by Italy and Turkey.

Government Technology Solutions Update

House chairmen of Veterans Affairs and Small Business committees have opened a Federal Acquisition Regulations case with the Office of Federal Procurement Policy (“OFPP”) to address agencies’ use of reverse auctions.  The case is a follow up to a December 2013 report from the Government Accountability Office (“GAO”) and recent bid protests decisions, which have shown concern over reverse auctions.  Although reverse auctions promote efficiency, when used improperly, they can cause decreased competition and result in agencies paying higher than necessary prices.  As a result, the GOA and House lawmakers are pushing for the OFPP to issue reverse auction guidance and best practices for agencies to follow.

The General Services Administration (“GSA”) is looking to standardized factors for agencies to consider when determining if a contractor can conform to security standards.  Specific concerns federal agencies are looking to mitigate include, but are not limited to, information security, financial and managerial controls, malicious software, and insider threats.  While the National Institute on Science and Technology and the Federal Risk and Authorization Management Program have issued guidance on the subject, private companies have no obligation to comply with these frameworks.  A Request for Information has been issued by the GSA to seek information on indicators for vendor IT security assessments and to close the disconnect between guidance and company action.

Big Movers

B/E Aerospace (Down 20.1%) – Shares were down this week after the Company completed its spinoff of aerospace logistics business KLX, Inc., distributing all outstanding shares of KLX stock at a ratio of one share for every two shares of B/E Aerospace stock.

Heico Corp. (Up 10.6%) – Shares were up this week after the Company announced fiscal year 2014 fourth quarter results.  Heico reported $0.48 earnings per share for the quarter, beating analysts’ estimates of $0.46 earnings per share.

Transactions

Wärtsilä Corporation to acquire L-3 Marine Systems International Business, a supplier of complete electrical systems, as well as integrated navigation, automation, communications, and power and propulsion systems for naval vessels.  The deal is worth an estimated $355.9 million.

Hexcel Corporation acquired Formax UK Limited, a manufacturer of carbon fiber and specialty composite reinforcement materials.  Terms of the deal were not disclosed.

Alcoa, Inc. to acquire TITAL GmbH, a manufacturer of titanium and aluminum investment casting products.  Terms of the deal were not disclosed.

COM DEV International Ltd. to acquire MESL Microwave Limited, a provider of components and subsystems for the radar, communication, defense, aerospace, space, security, medical, and transportation industries.  The deal is worth an estimated $20.1 million.

Cubic Corporation acquired DTECH LABS, a leading provider of modular networking and baseband communications equipment.  The deal is worth up to $114.5 million inclusive of a $15 million earnout.

Atos to acquire Xerox’s Information Technology Outsourcing (“ITO”) business, a provider of IT solutions within a global business services, technology, and document management company.  The deal is worth an estimated $1.1 billion.

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Industry Week in Review – December 12, 2014

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Aerospace & Defense Update

This week, both Boeing and Airbus announced cuts to monthly production rates of their respective wide-body jets.  The Companies have cited a decrease in demand for their long-range, wide-body jets as airlines have opted for smaller, twin-engine jetliners and the cargo market has proven less robust than expected.  In response, Airbus will decrease production of the A330 to 9 per month in 2015 with further cuts planned for 2016.  The A330 is currently an important contributor to profitability and decreases will negatively affect overall sales and profit.  Boeing concurrently reduced production rates of its 747-8 jetliner to 1.3 per month from 1.5 per month, the second iteration of cuts to the program.  Production rates for the smaller, 737 and A320 remain high and will help offset losses from the wide-body jet.

Lockheed Martin released information about its top-secret “Skunk Works” business.  The program develops advanced weapons systems for the Pentagon and has remained strictly confidential except for a few instances.  In an effort to protect its brand and win new orders, the Company dissented from this policy and published a brochure describing the 10 main focus items for “Skunk Works” going forward.  The business unit will focus on keeping costs low, working closely with the government, and building prototypes.  The move, provoked by fierce competition and pressure from smaller competitors like SpaceX, demonstrates the effects of the shrinking government budget and the importance of remaining nimble in the changing environment.  Last quarter, aeronautics margins fell by about 10% and last year, aeronautics sales fell 6%.  Despite lack-luster financials, Marillyn Hewson has plans to boost R&D by 5%, to the highest percentage of sales ever.  The combination of these trends increases pressure on the “Skunk Works” program and may lead to further public exchanges.

Government Technology Solutions Update

Late Thursday night, the House of Representatives and Senate both passed a two day Continuing Resolution (“CR”) to prevent a government shutdown.  While the House narrowly approved an appropriations bill 219-206, the two day extension provides additional time for the Senate to debate the bill.  The “cromnibus” (continuing resolution and omnibus) bill funds most of the government through October 2015, allows a 1.0% pay raise for military, blue-collar, and General Schedule employees, and maintains the $1.1 trillion level of spending from last year’s bipartisan deal.  Of the total, $492 billion is allocated for civilian agency operations, while $521 billion is for defense spending.  A full year of funding enables longer term budget planning within agencies.

However, as the exception to the bill, the Department of Homeland Security (“DHS”) will only be funded through February 27, 2015 under a CR.  This portion of the bill, drafted by Republican leaders, aims to push out funding so that immigration concerns are addressed next year when Republicans control both the House and the Senate.  The funding for DHS, along with riders that amend parts of the Doff-Frank Act and Federal Election Campaign Act, are currently the main points of debate between parties.

Big Movers

Airbus Group N.V. (Down 7.4%) – Shares were down this week after the Company announced production rate decreases for the A330 and that despite confirmed earnings targets, cash flow would be negative.

Comtech Telecommunications (Down 22.7%) – Shares were down this week after the Company announced first quarter of fiscal year 2015 results.  Comtech reported $76.4 million in revenue for the quarter, compared to $83.4 million for the same period last year.

Transactions

BAE Systems to acquire Esterline Corporation’s Eclipse Electronic Systems, Inc., a provider of intelligence, surveillance, and reconnaissance products and services.  The deal is worth an estimated $28 million.

Burtek Group acquired Process Fab, Inc., a provider of flight hardware, ground support equipment, and tooling to the spaceflight, aerospace, and defense markets.  Terms of the deal were not disclosed.

Periscope Holdings, a portfolio company of Parthenon Capital Partners, acquired BidSync, a provider of cloud-based procurement and bid notification solutions for the public sector.  Terms of the deal were not disclosed.

Preferred Systems Solutions (“PSS”) acquired Government Contract Solutions (“GCS”), a provider of program management, acquisition lifecycle management, and systems engineering and integration to federal customers such as the Intelligence Community and the Department of Homeland Security.  Terms of the deal were not disclosed.

Vistronix acquired Agency Consulting Group (“ACG”), a provider of information technology support services to intelligence clients. Terms of the deal were not disclosed.

Vistronix acquired Objective Solutions Inc. (“OSI”), a provider of big data, cyber, collection, and advanced analytics to the Intelligence Community. Terms of the deal were not disclosed.

Vistronix acquired ExaTech Solutions Inc., a provider of software, systems and network engineering support to the Intelligence Community. Terms of the deal were not disclosed.

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Industry Week in Review – December 5, 2014

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Aerospace & Defense Update

In the wake of Chuck Hagel’s resignation, President Obama formally nominated Ashton Carter as his candidate for Secretary of Defense early next year, pending Senate confirmation.  Carter served as the Undersecretary of Defense for acquisition, technology, and logistics from 2009 to 2011 before being appointed Deputy Defense Secretary, where he served as the Pentagon’s number 2 civilian officer until December 2013.  In 2010, Carter helped lead the Pentagon’s Better Buying Power program, one of the largest acquisition reform packages in recent years, and is expected to continue advocating for innovative acquisition practices.  Additionally, Carter will presumably push for an increased top line budget above the spending caps imposed by sequestration, a broadened scope of technological priorities, and a pragmatic approach to major defense acquisition initiatives, including resetting the F35 Joint Strike Fighter program.

House and Senate negotiators reached agreement on a compromise 2015 National Defense Authorization Act (“NDAA”) earlier this week.  The legislation provides $519 billion to the defense spending base budget and an additional $63.7 billion to the Overseas Contingency Operations (“OCO”) account.  Notably, the compromise language prevents the U.S. Air Force from retiring its A-10 Warthog aircraft fleet, instead allocating $350 million to fund operations and maintenance efforts for the aircraft.  Similarly, the measure forbids any funds from being used to “transfer, divest, or prepare to divest any KC-10 aircraft” in fiscal 2015, another aircraft that the Air Force has previously expressed intentions to retire.  Furthermore, the OCO section of the agreement includes funding requested by the White House for operations against the Islamic State of Iraq and the Levant (“ISIL”).  Specifically, it provides $3.4 billion to U.S. operations against ISIL and an additional $1.6 billion to train and equip Iraqi forces.  Moreover, the compromise fully funded the Obama administration’s request for special operations forces, in addition to authorizing a new $1.3 billion Counter Terrorism Partnership Fund.  Congress is expected to begin its deliberations on the measure this week.

Government Technology Solutions Update

Congress is working towards passing a funding bill or continuing resolution by December 12th to avoid the possibility of a government shutdown.  Currently under consideration is an appropriations bill that would fund all government agencies, except the Department of Homeland Security (“DHS”), through the end of GFY2015.  DHS would likely only be funded through March or April 2015.  If the bill were to pass, DHS would continue to operate under the uncertainty of a continuing resolution, while all other government agencies would have more secure funding.

The Office of Federal Procurement Policy (“OFPP”) administrator, Anne Rung, released a memo this week detailing a three-pronged acquisition improvement plan.  The plan road maps an increasingly data-driven procurement system based on category management, acquisition workforce talent development, and stronger vendor relationships.  Additionally, the OFPP plans to clean up outdated or burdensome regulations, and is committed to receiving input from all stakeholders in order to do so.

Big Movers

Leidos Holdings, Inc. (Up 7.4%) – Shares were up this week after the Company announced third quarter 2014 results.  Leidos reported operating income of $72 million, compared to an operating loss of $5 million for the same period last year.

Rolls Royce (Up 6.5%) – Shares were up this week after the Company received Nuclear Regulatory Commission certification to use its Spinline modular digital instrumentation and control platform in U.S. nuclear power plants.

Transactions

AIP Aerospace acquired AREVA TA’s Aerospace Integration Business, a provider of turnkey solutions for the design, planning, and implementation of assembly lines for major pieces of aerospace equipment.  Terms of the deal were not disclosed.

Littlejohn Capital & Co. acquired ArmorWorks, Inc., a provider of armor, survivability, and security products to military and enforcement agencies.  Terms of the deal were not disclosed.

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Industry Week in Review – November 28, 2014

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Aerospace & Defense Update

This week saw two transformational leadership announcements.  Defense Secretary, Chuck Hagel, resigned from office Monday afternoon in a move prompted by weeks of disagreement with the current Administration.  The recipient of two purple hearts reportedly found fault with what he saw as indecisiveness by the White House Security Council.  The transition comes as the military advance of the Islamic extremists in Iraq and Syria has prompted fundamental reassessment of U.S. defense policy.  Hagel will remain in office until his successor takes office which will likely not occur until early 2015.  Initial replacement candidates included Michele Flournoy, a former undersecretary of defense, and Senator Jack Reed of Rhode Island; however, both have declined in order to fulfill other duties.  This has left Ashton Carter, a former deputy defense secretary as the leading candidate for succession.

Secondly, United Technologies Corporation CEO, Louis Chenevert, suddenly stepped down in an act which stunned investors.  Although the move was not attributed to financial performance, it cannot be fully ruled out as shares have dropped 3.1% this year.  During his six year tenure, Chenevert led the company through its acquisition of Goodrich Corporation and reshaped its building-services business lines by combining Otis elevators, Carrier climate-control, and its fire and security divisions.  The 25-year veteran of UTC will walk away with about $172 million in vesting options, performance-based restricted-stock awards, and a pension.  The Board of Directors chose current CFO, Gregory Hayes to succeed Chenevert.  The bold move suggests that the Company will undergo strategic assessment and change in the future with a growing likelihood that focus will shift towards the building services side.

Government Technology Solutions Update

The General Services Administration (“GSA”) is preparing to launch the second generation of the Veterans Technology Services (“VETS”) contract.  VETS is used by Federal agencies to purchase a wide range of IT products and services from service-disabled, veteran-owned small businesses and makes it easier for agencies to meet socio-economic category goals.  The GSA is currently involving VETS stakeholders in the development of the follow-on vehicle to align VETS II with agency IT needs.

The Department of Veteran Affairs (“VA”) released a request for information (“RFI”) for a commercial off-the-shelf (“COTS”) patient scheduling system.  The COTS solution would replace the current system which has been partially blamed for long physician wait times.  Additionally, it will integrate with the existing Veterans Health Information Systems and Technology Architecture (“VistA”) to better coordinate Veteran care.

Big Movers

Cubic Corporation (Up 11.4%) – Shares were up this week after the Company announced fourth quarter and full year 2014 earnings.  Cubic reported $1.22 earnings per share, beating estimates of $.94, and record fourth quarter sales of $396.4 million.

AeroVironment (Down 6.4%) – Shares were down this week after the Company reported a double-digit decline in income for the year and inferior gross margins.

Transactions

ATLAS North America LLC acquired assets of Marine Sonic Technology Ltd., a developer and manufacturer of ultra-high resolution side scan sonar systems.  Terms of the deal were not disclosed.

U.S. private equity firm to acquire G4S Government Solutions, Inc., to be rebranded as Centerra Group, LLC, a provider of protective services to the Federal Government.  The deal is worth an estimated $135 million.

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Industry Week in Review – November 21, 2014

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Aerospace & Defense Update

The Department of Defense (“DoD”) announced Monday that Sikorsky Aircraft Corp. was awarded contract modifications with the U.S. Army and Navy worth upwards of $1.3 billion in fiscal year 2015.  The Army’s contract modification, scheduled to be complete in June, is for $779.1 million and includes 41 UH-60M Black Hawk helicopters, 24 HH-60M medical evaluation helicopters, and associated support tasks.  Meanwhile, the Navy’s $535.2 million award is for eight MH-60S and 29 MH-60R Seahawk helicopters, as well as sustainment engineering, program management, systems engineering, and other integrated logistics support functions.  Earlier this year, a Navy budget proposal suggested that the multi-year Sikorsky deal be cancelled.  However, the recent contract modification awards indicate that Sikorsky deliveries under the initial $8.5 billion, 653 aircraft deal will continue to run through 2017.

Army Chief of Staff General Ray Odierno addressed the Pentagon’s current defense strategy at the Defense One Summit this past Wednesday.  Specifically, he expressed his concern regarding declining active duty troop numbers in addition to the challenges posed should Congress keep the 2011 Budget Control Act in place.  In 2012, Army officials adopted a plan to reduce the number of active duty troops from 490,000 to 450,000, with sequestration budget cuts possibly dropping that number as low as 420,000.  However, Odierno suggests that the assumptions made in 2012 when determining future troop levels are no longer applicable.  Notably, the Army assumed U.S. troops would no longer be in Iraq and U.S. military involvement in Europe would take a step back.  Alternatively, the U.S. currently has 1,500 soldiers in Iraq, with an additional 1,600 expected within the next 45 days.  Furthermore, the fight against the Islamic State of Iraq and the Levant (“ISIL”), Russia’s aggression towards Europe and the Ukraine, and the Ebola outbreak in Africa all continue to stretch U.S. military resources thin.  Odierno acknowledged that he intends to address these concerns with Congress in an effort to enhance military readiness and reduce risks associated with emerging global threats.

Government Technology Solutions Update

The Department of Veterans Affairs (“VA”) has allocated an additional $60 million to its cybersecurity efforts, putting its total cybersecurity budget at $220 million per year.  The redirection of funds is in response to the Government Accountability Office (“GOA”) report released this week which revealed that the VA failed its cybersecurity audit for the 16th consecutive year.  The infusion of money will be used to address the consistent problems of access control, configuration management, security management, and other vulnerabilities identified by the GOA’s report.

The National Geospatial Intelligence Agency (“NGA”) is the first in the Intelligence Community (“IC”) to directly seek open source through GitHub, a commercial code management platform for both open source and private projects.  The NGA is using open source solutions to drive innovation and capitalize on talent in both public and private sectors.  This approach poses higher security and cyber security concerns; however, the NGA has set up risk management processes and believes that the innovation it receives is worth the risk.

Big Movers

Wesco Aircraft Holdings, Inc. (Down 18.4%) – Shares were down this week after the Company announced fourth quarter earnings.  Wesco reported a 9.1% decline in quarterly earnings over the same period last year and earnings per share of $0.30, missing analysts’ estimates of $0.37 by 18.9%.

Avon Rubber plc (Up 10.2%) – Shares were up this week after the Company reported a rise in profits for the year, with adjusted pre-tax profits up from $21.5 million to $26.0 million.

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Industry Week in Review – November 14, 2014

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Aerospace & Defense Update

CFM International reached 100 hours of flight testing for its Leap 1C engine on the Boeing 747.  The turbofan engine is designed for the Comac C919 narrowbody and features new, lighter weight pylons that improve performance and decrease operating costs.  The engine is strategically positioned to fulfill the current demand to reduce component weight, increase reliability, and improve efficiency seen throughout the commercial aerospace industry.  Through its joint venture with GE Aviation, CFM will continue testing with its integrated propulsion system.  The engine is up for initial certification in 2015 and will be integrated into the Airbus A320neo and Boeing 737 Max with its Leap 1A and 1B variants.  CFM has already collected orders for the Leap 1A variant from China’s Zhejiang Loong Airlines to supply nine A320neos.

The A-10 Warthog has a strong backing from Republicans to keep the fleet alive.  In particular, Senator John McCain has vocalized his avid support for the fleet and will make it a priority item as he takes on his expected new role as Senate Armed Services Committee Chairman.  Defense of the program follows the Air Force move to shut down three A-10 squadrons, which equates to about 72 aircraft.  The aircraft continues to be a favorite among ground troops as its accuracy and power are unparalleled in comparison to any current aircraft.  McCain cited a June friendly fire accident involving a B-1 bomber that killed five American troops as a major reason to keep the A-10 as the B-1 simply could not replace the close-air support.  However, the A-10 fleet may lead to further delays of the F-35 as it withholds maintenance personnel that could have been allocated to the F-35 fleet.

Government Technology Solutions Update

The Department of Defense is expected to release an updated cloud policy to speed up the procurement process in the next week.  Currently, all DoD cloud contracts are passed through the Defense Information Systems Agency (“DISA”).  However, the new policy will decentralize cloud procurement and give individual agencies purchasing power for approved commercial cloud services.  DISA will no longer be the only contracting office for DoD cloud contracts, but it will give input on cloud security to other agencies.  With the faster procurement process, the DoD will be looking to increase the number of cloud contractors.

Veterans Affairs (“VA”) Secretary Bob McDonald announced the reorganization of the VA this week.  The announced plan ensures Veteran needs are more easily met and VA employees are better equipped with the products and services to meet those needs.  The VA will be establishing a new VA-wide customer service organization, a single regional framework, and a national Community Veteran Advisory Council.  Additionally, the reorganization will realign the VA’s internal structure and processes in order to better leverage shared service frameworks.  This announced restructuring is the largest the VA has undergone since its establishment.

Big Movers

KeyW Holding Corporation (Up 8.3%) – Shares were up this week after the Company announced that it has been awarded a $17 million prime contract with the Air Force Research Laboratory to develop and transition next generation ISR sensor systems.

Taser International, Inc. (Up 9.0%) – Shares were up this week after the Company announced multiple large quantity weapons orders, including a one from Virginia’s Langley Air Force Base, which bought 259 X26s Smart Weapons with 20 Taser cam recorders.

Relevant Transactions

Exchange Income Corporation to acquire Provincial Aerospace Ltd., a provider of airborne and maritime surveillance solutions for industrial, military, and government markets.  The deal is worth an estimated $246 million.

Harbert Private Equity Fund III, L.P. acquires Flight Display Systems Avionics Corp., a designer, developer, and light manufacturer of cabin electronics for business and commercial aircraft, including cabin management systems and in-flight entertainment solutions, and ruggedized special mission military monitors and other retrofit solutions requiring adherence to military specifications.  Terms of the deal were not disclosed.

Fort Sill Apache Industries acquired Advanced Information Services Inc., a provider of consulting services for companies with product data management and enterprise document management software.  Terms of the deal were not disclosed.

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Industry Week in Review – November 7, 2014

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Aerospace & Defense Update

In mid-term elections on Tuesday, November 4th, Republicans gained the Senate majority and strengthened their majority in the House of Representatives.  Specifically, Republicans replaced Democratic Senate incumbents in Arkansas, North Carolina, Iowa, Colorado, South Dakota, West Virginia, Montana, and Alaska.  Moreover, Republicans gained control of governor’s mansions in a number of states previously held by the Democratic Party including Arkansas, Illinois, Maryland, and Massachusetts.   Republican’s success in the mid-term elections will likely hinder President Obama’s legislative agenda over the course of his next two years in office.  However, shortly after the election results were released, President Obama noted that the 113th Congress’ next two months will be critical.  During the lame duck session, lawmakers will address a spending measure to fund the government for the next calendar year as the 2015 Continuing Resolution is set to expire on December 11th.  Additionally, the President indicated that he intends to send this Congress a resolution to formally approve U.S. strikes against the Islamic State of Iraq and the Levant (“ISIL”) through an update to the authorization for the use of military force.  The current Congress is also expected to receive a Presidential request for more than $6 billion directed towards containing and eliminating the Ebola outbreak.

China Aircraft Leasing Group announced an initial agreement to purchase 100 Airbus planes, valued at approximately $10.2 billion.  The deal, which is expected to be finalized before the end of the year, includes 74 of the A320neo aircraft, 16 of the current-generation A320ceo model, and 10 of the A321ceo.  The provisional order comes in response to China’s established position as the world’s fastest growing aviation market, along with the expectation that it will overtake the United States as the busiest market for domestic air travel within the next decade.  As Asian air traffic continues to grow, aircraft leasing firms seek to capitalize on the increase in aircraft demand amongst Chinese airlines.  Specifically, BOC Aviation became one of Airbus’s top ten customers after placing an order for two additional A320ceo aircraft in October, bringing the aircraft lessors total order count to 257.

Government Technology Solutions Update

Senate and House lawmakers have reached agreement on the Federal IT Acquisition Reform Act (“FITARA”) bringing the bill close to passage.  The bill seeks to grant agency chief information officers a more significant role in IT decisions, requires an IT investment portfolio review process for agencies, and lays the foundation for managing intricate Federal IT projects.  FITARA will likely be attached to the GFY2015 National Defense Authorization bill.  However, the Senate and House armed services committees must also sign off before it reaches the President for signing.

NASA’s $20 million Solutions for Enterprise-Wide Procurement V (“SEWP V”) contract for product based IT, network, and audio-visual solutions faces 17 filed protests.  The amount of protests is not expected to increase significantly as companies only have a ten-day window to file protests after agency debriefings.  NASA now has 30 days to respond to filed protests by issuing corrective actions or fighting protests through the Government Accountability Office (“GAO”).  Corrective actions would lead to the quickest resolution, while going through the bid protest decision process would delay SEWP V even further.

Big Movers

Kratos Defense & Security Solutions, Inc. (Down 16.4%) – Shares were down this week after the Company announced third quarter earnings.  Quarterly revenue of $217 million missed estimates of $244 million, while net loss for the period came in at $11.1 million.

Rheinmetall AG (Down 9.2%) – Shares were down this week after the Company reduced its earnings guidance from a range of $250 million – $274 million to roughly $188 million.

Relevant Transactions

Sheltair Aviation Services LLC acquired FlightLevel Aviation Lakeland at Lakeland Linder Regional Airport (“KLAL”), a provider of aviation fuel and ground handling services.  Terms of the deal were not disclosed.

Teradyne, Inc. acquired Avionics Interface Technologies, Inc., a provider of flight simulation models, databus analyzers, and support systems to the aerospace and defense markets.  Terms of the deal were not disclosed.

Optex Systems Holdings, Inc. acquired L-3 Communications Corporation’s Applied Optics Center, a provider of laser protection filters and precision optical assemblies.  Terms of the deal were not disclosed.

Raytheon acquired Blackbird Technologies, a provider of persistent surveillance, secure tactical communications, and cybersecurity solutions to the Intelligence Community (“IC”), and special operations market.  The deal is worth approximately $420 million.

Bridge Growth Partners to acquire CRGT, a provider of custom software development and data analytics to Federal Government agencies.  CRGT is a portfolio company of Veritas Capital.  Terms of the deal were not disclosed.

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Industry Week in Review – October 31, 2014

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Aerospace & Defense Update

On the evening of Tuesday, October 28th, an unmanned Orbital Sciences Corp. rocket carrying cargo for the international space station endured a catastrophic failure moments after liftoff.  Although there were no injuries, launch facilities suffered significant damage.  The explosion will likely ground the Antares rocket for at least a few months as the National Aeronautics and Space Administration and the Company analyze and fix associated problems.  Insurance is expected to cover a portion of damages on the $200 million rocket and capsule and the Company will maintain its financial guidance for the rest of the year.  CEO, David Thompson, does not expect the failure to slow the planned merger with Alliant Techsystems, Inc. however, it is still too early to decide whether to delay the planned December 9th shareholder vote regarding the deal or take further time to review long-term financials.  Expectations for close date have already been pushed to early 2015 due to regulatory approvals.

Lockheed Martin announced a $4.55 billion agreement with the U.S. Department of Defense to build its eighth batch of F-35 jets.  The Company will build 43 additional jets at a 3.6% lower average cost than under previous contracts.  This order includes 29 U.S. aircraft, 19 of which are F-35As, six are F-35Bs, and four are F-35Cs the remaining aircraft are F-35As intended for foreign partner nations including Israel, Japan, Norway, Italy, and Britain.  The aircraft will now feature Pratt & Whitney engines under a contract modification with a total value of $1.05 billion.  The agreement was initially supposed to finalize in May or June, however, negotiations were delayed after engine failures grounded the entire fleet.

Government Technology Solutions Update

The Department of Defense (“DoD”) now requires senior officials to review major acquisitions before programs move into the technology development phase.  This review, known as Milestone A, is part of the Better Buying Power 3.0 (“BBP”) initiative, which focuses on driving technical excellence into systems bought by the military.  The review will ensure well-defined user’s needs, thorough alternatives analysis, and significant program support.  This new step if the acquisitions process seeks to eliminate discrepancies between the original acquisition strategy and requests for proposals (“RFP”) that are issued.

The Army is seeking to modernize the Army Knowledge Online-Enterprise System (“AKO-ES”) through the use of a four-year indefinite delivery / indefinite quantity (“IDIQ”) contract.  A draft of the performance work statement (“PWS”) was issued on October 29th.  The contract will cover a broad range of technical support services to manage the system’s operations and maintenance, as well as the reuse and redesign of existing systems.  The Army will consider closing down applications, systems, and facilities in order to redevelop and repurpose existing systems.

Big Movers

Engility Holdings, Inc. (Up 19.6%) – Shares were up this week after the Company announced the close of its $1.1 billion acquisition of TASC, Inc.

Sturm, Ruger & Co. (Down 19.0%) – Shares were down this week after the Company reported a sharp drop in firearms sales with revenue decreasing to $98.3 million from $170.9 million one year ago.

Relevant Transactions

Delta Information Systems, Inc. acquired Ampex Data Systems Corporation, a developer and manufacturer of digital storage systems.  Terms of the deal were not disclosed.(1)

Outdoor Venture Corporation acquired Sotera Defense Solutions, Engineered Solutions Division, a provider of testing and engineering services to the aerospace and energy markets.  Terms of the deal were not disclosed.

Gen Cap America, Inc. acquired AeroSystems Engineering, a provider of testing and engineering services to the aerospace and energy markets.  Terms of the deal were not disclosed.

Acentia acquired Optimos, Inc., a provider of mission-centric information technology solutions to public sector customers.  Terms of the deal were not disclosed.

Booz Allen Hamilton acquired Epidemico, Inc., a provider of early insights, continuous monitoring, and consumer engagement for varied aspects of population health.  Terms of the deal were not disclosed.

Engility entered into a definitive agreement to acquire TASC, Inc., a provider of professional services to the national security and public safety markets.  The deal is an all-stock transaction valued at approximately $1.1 billion.

Lockheed Martin entered into a definitive agreement to acquire Systems Made Simple, Inc., a provider of health information technology solutions to the U.S. Federal Government.  Terms of the deal were not disclosed.

(1) KippsDeSanto & Co. acted as the exclusive financial advisor to Ampex Data Systems Corporation

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Industry Week in Review – October 24, 2014

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Aerospace & Defense Update

The National Business Aviation Association’s 2014 Business Aviation Convention & Exhibition (“NBAA 2014”) took place in Orlando earlier this week.   NBAA 2014 showcased approximately 1,100 exhibitors and attracted more than 26,000 business aviation professionals.  Gulfstream announced its new G500 and G600 business class jets in the week leading up to the show, which subsequently provided the company with a grand stage to flaunt the new aircrafts’ capabilities.  Other highlights of the convention include Bombardier introducing the mockup of its new Challenger 650 and Embraer obtaining the type certificate for its Legacy 500.  Next year’s convention is scheduled for November 17th – 19th, 2015 in Las Vegas, NV.

On Wednesday, Boeing announced third quarter earnings of $2.14 per share, up from $1.80 per share for the same period one year ago and beating analysts’ estimates of $1.97 per share.  The company’s revenue increased from $22.1 billion in 3Q13 to $23.8 billion for 3Q14, while its quarterly profit rose 18%, largely driven by rising commercial aircraft demand.  Highlights for the third quarter include growing backlog to a record $490 billion, adding 501 net new orders for commercial aircraft, launching the 737 MAX 200 model, securing a NASA Commercial Crew Transportation contract worth $4.2 billion, and returning $1.5 billion to shareholders through share repurchases and dividends.  Despite strong third quarter performance, Boeing’s shares slid 4.3% on Wednesday.

Government Technology Solutions Update

The Department of Justice (“DOJ”) has recently restructured its National Security Division (“NSD”) to shift its focus towards efforts on cybersecurity.  The department made new appointments to refocus on countering state-sponsored cyber terrorism and espionage.  Most new appointees have a background in cybersecurity litigation.  In addition to new appointments, the DOJ also created a new Deputy Assistant Attorney General role within the NSD which has been filled by Luke Dembosky.  The Deputy Assistant Attorney General will oversee the protection of national assets and critical infrastructure by leading a cybersecurity focused team of prosecutors spread across each district office of the National Security Cyber Specialists network.

The One Acquisition Solution for Integrated Services (“OASIS”) Small Business (“SB”) contract is open for business and off to a strong start.  Thus far, five Federal agencies have issued task orders worth up to $68 million under OASIS SB.  The largest task order, with a $57 million ceiling value, was awarded by the Security and Exchange Commission to Amyx Inc.  Task orders seek services such as acquisition and contract life cycle management support.  OASIS SB currently includes 123 companies, however, the GSA expects to use an on-ramp process to transition companies that have outgrown SB designation to the unrestricted portion of the contract after five years.

Big Movers

General Dynamics Corporation (Up 9.6%) – Shares were up this week after the Company reported third quarter profits of $696 million, compared to $651 million for the same period last year.  General Dynamics’ earnings per share increased from $1.84 to $2.06 and beat analysts’ estimates of $1.91.

FLIR Systems, Inc. (Up 10.3%) – Shares were up this week after the Company released its third quarter earnings report and noted a 5% increase in third quarter revenue to $375 million, as well as a backlog of $579 million, up 18% YTD.

Relevant Transactions

Selex ES acquired Tactical Technologies Inc., a provider of electronic warfare analysis software and services.  Terms of the deal were not disclosed.

BAE Systems entered into a definitive agreement to acquire Perimeter Internetworking Corp., doing business as SilverSky, a provider of cloud-based email and network managed security services.  The deal is worth an estimated $232.5 million.

StoneCalibre acquired NetPlus, a provider of Telecom Infrastructure Management software solutions for commercial and government entities.  Terms of the deal were not disclosed.

Booz Allen Hamilton acquired Genova Technologies’ healthcare unit, a provider of IT solutions and strategy for the Centers for Medicare & Medicaid Services.  Terms of the deal were not disclosed.

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