Industry Week in Review – May 30, 2014

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President Obama announced this week that the U.S. plans for approximately 9,800 American troops to remain in Afghanistan in 2015, following the scheduled completion of combat operations in the country this year.  The 9,800 U.S. troops, along with some allied forces, staying in Afghanistan would get cut roughly in half by the end of 2015.  Furthermore, by the end of 2016 and less than a month before Obama leaves the White House, the U.S. military presence would scale down to what officials described as a “normal” embassy security contingent to provide embassy security and engage in cooperative security efforts with the host government and military.  With roughly 32,000 troops currently in Afghanistan, senior political officials have stated the number of U.S. service members in Afghanistan beyond 2016 will likely be around 1,000, symbolizing an end to the U.S. military mission that began as a response to the 9/11 terrorist attacks.  Tony Blinken, Obama’s deputy national security adviser, stated that the U.S. will spend about $20 billion on the continued military presence in Afghanistan after 2014.  Although a final decision on troop levels is still contingent upon Afghanistan’s next president signing a bilateral security agreement, both candidates have indicated they will sign the security pact.

A recent survey conducted by Deltek found that government contractors are expecting a 14% increase in revenue in FY15, citing a more stable budgetary environment over the near-term as a primary reason.  Contractors pointed towards recent events in Congress, such as the passage of both the Bipartisan Budget Act (“BBA”) of 2013 and the Consolidated Appropriations Act (“CAA”) of 2014, as key indicators for greater funding visibility over the near-term.  Additionally, recent procurement data shows spending on federal contracts in the second quarter of GFY14 increased 58% over spending levels a year ago, while the number of solicitations and task orders in GFY14 have increased 54% over comparable GFY13 levels, and contractors are expecting these trends to continue into GFY15.  While not all areas of the Federal market are expected to grow throughout GFY14 and GFY15, Deltek analysts see intelligence and cybersecurity as key priorities over the near-term.

Big Movers

KBR, Inc. (Up 4.2%) – Shares were up this week after the Company announced it had been awarded a contract by Maersk Oil for topsides front-end engineering and design (“FEED”) work as a part of the Culzean Project, an ultra high-pressure, high-temperature (“uHPHT”) gas condensate development project in the North Sea.  The contract value was not disclosed, but expected revenue from the contract will be included in Backlog of Unfilled Orders for KBR’s Hydrocarbons segment in the second quarter of 2014.

Booz Allen Hamilton Corporation (Down 7.7%) – Shares were down this week after the Company announced the sale of 10 million shares of its Class A common stock by an affiliate of The Carlyle Group to Citigroup Global Markets, Inc. and Barclays Capital, Inc., who will act as the underwriters in the registered offering of the shares.  Booz Allen Hamilton will not sell any shares of common stock in the offering, and will not receive any of the proceeds.  The offering is expected to close and settle on June 3, 2014.

Relevant Transactions

Lockheed Martin Corporation to acquire Astrotech Corporation’s Space Operations, a provider of satellite launch processing services to government and commercial customers sending satellites to low-earth-orbit or geosynchronous orbit.  Lockheed Martin will pay $61 million for the acquisition.

Winchester Electronics Corporation acquired TRU Corporation, a provider of high performance RF connectors and cable assemblies for aerospace, military, semiconductor, and test and measurement end markets.  Terms of the deal were not disclosed.

Triumph Group, Inc. to acquire GE Aviation’s Hydraulic Actuation Business, a provider of landing gear actuation systems, door actuation, nose-wheel steering, hydraulic fuses, manifolds, flight control actuation, and locking mechanisms for the commercial, military and business jet markets.  Triumph will pay $70 million for the acquisition.

The Boeing Company to acquire AerData Group BV, a provider of integrated software solutions for lease management, engine fleet planning and records management.  Terms of the deal were not disclosed.

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Industry Week in Review – May 23, 2014

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Airbus confirmed this week it plans to increase seating on its A320 aircraft from 180 to 186 seats, while maximum capacity on A321 aircraft will increase from 220 to 240 seats.  Although full details will not be revealed until next month, the European Aviation Safety Agency also confirmed Airbus’ “process for significant modification” has already started.  Airbus officials admitted that its A320 aircraft had disadvantages in sales campaigns in competition with other carriers due to seating limits.  In comparison, Boeing’s 787-800 aircraft seats a maximum of 189 passengers.  Notably, Airbus’ move was triggered by low-cost carrier Vueling’s firm order of 62 A320 aircraft, where a promise to fit 186 seats in the cabin was a key factor in Airbus winning the order.  A continuing trend in the industry, Airbus is not the only company that has done significant interior redesign with much more planned.  Many airlines, including Boeing, have announced plans to install slim backrest seats that allow airlines to reduce pitch and gain space for several more seat rows.

The General Services Administration announced the 74 full-and-open (“F&O”) awardees for its One Acquisition Solution for Integrated Services (“OASIS”) vehicle this week.  The $60 billion contract vehicle was developed in collaboration with industry partners over the last two years as part of a family of contracts meant to streamline services contracting. No protests have been filed thus far in relation to the F&O portion of this professional services contract; however, 10 protests were filed after the release of the small business awards back in February.

Big Movers

Kratos Defense & Security Solutions, Inc. (Up 13.5%) – Shares were up this week after the Company announced it won a $9 million award from an undisclosed customer to support prototype development of the railgun fire control system and hypervelocity guided projectile.  Additionally, the Company’s Chairman, William Hoglund, acquired 200,000 shares of the company’s stock in a transaction worth approximately $1.4 million.

Relevant Transactions

The Boeing Company to acquire ETS Aviation Ltd., a provider of fuel-efficiency management and analystics software to commercial airlines and corporate flight departments.  Terms of the deal were not disclosed.

Warburg Pincus LLC to acquire Wencor Group LLC, a designer and manufacturer of aircraft parts for repair stations, operators of general aviation aircraft, and airlines worldwide.  Terms of the deal were not disclosed.

Cobham plc to acquire Aeroflex Holding Corporation, a provider of radio frequency and microwave integrated circuits used in high-performance aerospace equipment for harsh environments and wireless communication systems.  The deal is worth an estimated $1.4 billion.

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Industry Week in Review – May 16, 2014

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International competition between the aerospace giants, Airbus and Boeing, continues to heat up as both companies secured multi-billion dollar orders in China this week.  China Southern Airlines Company announced an order of 50 Airbus A320neo aircraft, as well as 30 A320 jets, with a combined order value of approximately $7.3 billion.  On Boeing’s side, China’s Juneyao Airlines Company ordered 50 single-aisle 737 model aircraft in a deal worth approximately $3.8 billion.  Both orders come at an opportune time when a growing middle class in China continues to fuel a travel boom, with Airbus predicting the Chinese aviation market will overtake the U.S. as the largest market by 2032.  The trend is further supported by China’s Civil Aviation Administration stating earlier this year it would loosen regulations and study tax breaks to encourage low-cost travel and budget carriers.  Airbus plans to begin delivery of its aircraft in 2016, while Boeing expects the aircraft in its order to be in operation by 2020.

The Department of Homeland Security (“DHS”) awarded a new round of contracts under the Functional Category 1 (“FC1”) component of DHS’ Enterprise Acquisition Gateway for Leading Edge Solutions II (“EAGLE II”) vehicle.  With the new round of awards, 68 companies, including Accenture, Boeing, Booz Allen Hamilton, and General Dynamics, will now compete under the unrestricted FC1 component of the contract.  DHS had previously selected 15 companies to compete under the unrestricted portion of FC1 in September 2013, along with 15 small businesses to compete under the small business portion.  With a seven-year period of performance and $22 billion ceiling value, EAGLE II has remained a highly coveted vehicle among government technology contractors; however, this new round of expanded awardees may also dilute the attractiveness of awardees from an M&A perspective.

Big Movers

Engility Holdings Inc. (Down 12.7%) – Shares were down this week after the Company announced relatively flat fiscal quarter earnings, with quarterly revenue down 6.3% year-over-year, but still beating analyst estimates on an earnings per share basis.

Relevant Transactions

Chemring Group plc acquired 3d-Radar AS, a developer of commercial three-dimensional ground penetrating radar technology for airport runway inspection and railway maintenance.  Chemring paid $3 million for the acquisition.

Dovel Technologies, Inc. acquired RNSolutions, Inc., a provider of enterprise architecture, application development, and grant management solutions to Federal agencies, with a strong presence serving the Department of Health and Human Services.  Terms of the deal were not disclosed.(1)

(1) KippsDesanto & Co. served as the exclusive financial advisor to RNSolutions, Inc.

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Industry Week in Review – May 9, 2014

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The House Armed Services Committee (“HASC”) unanimously approved a measure that would authorize just over $600 billion in defense spending for the 2015 fiscal year.  The HASC’s version of the 2015 National Defense Authorization Act includes the Pentagon’s previously requested $495.8 billion base budget, as well as $79.4 billion for Overseas Contingency Operations (“OCO”).  The bill also authorizes $17.9 billion in Energy Department defense programs and $7.9 billion in mandatory defense spending, both of which could grow larger since the OCO figure is still standing as a placeholder and will likely decrease.  Most notable from the measure is the HASC’s amendment that, if included in the final bill, would ultimately reverse and block the highly controversial plan to retire the Air Force’s fleet of A-10 Warthog aircraft.  The new amendment would prohibit the retirement of the aircraft until the U.S. comptroller general makes a number of certifications and studies to evaluate Air Force platforms used for close-air-support missions.  Another key focus from the HASC’s measure is the protection of weapons programs, which would involve shifting more than $2.5 billion from service contract accounts and other non-weapons accounts towards projects not budgeted in Obama’s 2015 budget request.  The projects include refueling the George Washington aircraft carrier, developing missile defenses with Israel, and purchasing or upgrading certain aircraft and tanks.

The National Institutes of Health (“NIH”) released a request for proposal (“RFP”) for the Chief Information Officer – Commodities and Solutions Contract (“CIO-CS”), which will succeed the NIH’s current Electronic Commodities Store III contract. CIO-CS will be a government-wide acquisition contract and will support the procurement of IT commodities and solutions relating to general IT initiatives, especially for those agencies participating in health care and biological research, such as the NIH and Department of Health and Human Services more broadly. This 10-year, $20 billion contract is expected to have 75 awardees and small businesses will receive 60 percent of the total value of all delivery orders, compared to its predecessor contract which has a $6 billion ceiling value, 66 awardees, and small businesses receive ~42% of the total value of all delivery orders.   The release of this contract vehicle is a testament to the continuation of opportunities within the HIT marketplace for contractors.  The contract’s RFP was released Wednesday, May 7th and the bid deadline is set for June 11th.

Big Movers

B/E Aerospace Inc. (Up 11.6%) – Shares were up this week after the Company announced it is reviewing strategic alternatives for a potential sale or spin-off of the business.

Relevant Transactions

Calian Technologies Ltd. acquired AMTEK Engineering Services Ltd., a provider of engineering and technical services primarily to the Department of National Defence in Canada.  Terms of the deal were not disclosed.

Ultra Electronics Holdings plc acquired ICE Corporation, Inc., a manufacturer of aerospace products including motor control electronics, electrothermal ice protection controllers, and pneumatic valve controls.  Ultra Electronics paid $8.6 million for the acquisition.

FireEye, Inc. to acquire nPulse Technologies Inc., a provider of network forensics, including security flows and packet capture solutions for government agencies and financial institutions.  FireEye will pay approximately $70 million for the acquisition, which is expected to close during 2Q14.

Endgame, Inc. acquired Onyxware Corporation, a provider of mobile security technology used to detect mobile devices that are connecting to unsafe networks or are being accessed by a third party.  Terms of the deal were not disclosed.

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Industry Week in Review – May 2, 2014

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According to a new Deloitte report analyzing the financial performance of the top 20 major U.S. aerospace and defense sector companies, U.S. defense contractors posted a 2.6% revenue decrease in 2013.  The decline is mostly due to the Pentagon’s reduction in funding and outlays during the fiscal year, primarily from budgetary uncertainty and sequestration effects that clouded the spending environment. Additionally, budget reductions were also the result from the drawdown of forces in the Middle East, as well as spending reductions mandated by the Budget Control Act of 2011.  Specifically, 17 of the top 20 U.S. defense contractors had decreases in revenues, representing the widespread impact of budget reductions on the industry.  While revenues were down, however, profitability increased 17.9%, reflecting companies’ efforts to create operational efficiencies through personnel cuts and cost reductions.  Looking forward, while recent clarity with the FY2014 budget and the FY2015 budget request may sustain declining revenues, defense contractors will continue to look to expanding foreign military sales, refining core capabilities, and improving operational efficiencies for future growth.

In an effort to improve patient care, the DoD is looking to bid its Healthcare Management Systems Modernization (“DHMSM”) contract by the end of 2014.  The single-award contract will aim to advance the integration of a commercial electronic health records system to cover the DoD’s nearly 10 million beneficiaries worldwide.  At an estimated total value of approximately $11 billion, DHMSM would be one of the largest IT contracts in the government procurement market, and could present strategic opportunities for government technology contractors seeking access to the Military Health System.

Big Movers

Spirit AeroSystems Holdings, Inc. (Up 11.2%) – Shares were up this week after the Company announced strong fiscal quarter results, with revenue up 20% from the same period last year.

Relevant Transactions

Alliant Techsystems Inc.’s Aerospace and Defense Unit to merge with Orbital Sciences Corporation, a provider of small and medium class rockets and space systems for commercial, military, and civil government customers worldwide.  The deal is worth an estimated $3.9 billion.

Dubin Clark and Company’s Merex Incorporated acquired Kellstrom Defense Aerospace, Inc., a provider of aircraft engine parts and MRO services to commercial and military aircraft.  Terms of the deal were not disclosed.

Ultra Electronics Holdings plc to acquire Forensic Technology WAI, Inc., a provider of automated firearm ballistics identification and forensic analysis systems to law enforcement agencies.  Ultra Electronics paid approximately $85.7 million for the acquisition.

Digital Management, Inc. acquired Pappas Group, LLC, a full-service digital and creative agency focused on mobile product and brand development solutions.  Terms of the deal were not disclosed.

ManTech International Corporation signed a definitive agreement to acquire 7Delta, Inc., a provider of application development, program management, and systems integration solutions to both civilian and defense agencies, with extensive experience serving the Department of Veterans Affairs.  The transaction is expected to close in May 2014.  Terms of the deal were not disclosed.(1)

General Catalyst Partners announced an investment in OGSystems, LLC, a provider of data processing, exploitation, and dissemination solutions to defense and intelligence agencies.  Terms of the investment were not disclosed.

(1) KippsDeSanto & Co. acted as the exclusive financial advisor to 7Delta, Inc.

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Industry Week in Review – April 25, 2014

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Boeing’s first quarter earnings release this week offered generally clear skies, with a strong tailwind from its commercial operations.  The world’s largest aerospace / defense company delivered 161 aircraft in the first three months of 2014, decidedly trumping Airbus’ 141 deliveries in the same period.  Boeing’s deliveries, which were up 18% year-over-year, were primarily made up of 115 deliveries of its re-engined 737 model.  Additionally, 18 787 Dreamliners were delivered in the period.  In comparison to the same period last year, only one 787 Dreamliner had been delivered following its highly-publicized battery problems.  In its fiscal first quarter, Boeing Commercial Airplanes won 235 net orders, which ended with a backlog of more than 5,100 airplanes, valued at approximately $374 billion.  The company’s total backlog rests at $440 billion, which is only a slight decrease from the beginning of the year and includes first quarter net orders of $19 billion.  Boeing still expects to deliver between 715 to 725 jetliners this year, following a record 648 deliveries in 2013.  Results from Boeing’s defense business, like those from its prime contractor competitors who also released earnings this week, were less sanguine.  Revenue at Boeing’s defense business fell nearly 6% year-over-year, with future orders for some key programs, such as the venerable F/A-18, under intense scrutiny.  Overall, the company’s expectations remain high, however, as it raised its 2014 profit outlook this week from a range between $7.00 and $7.20 to a range between $7.15 and $7.35, citing strong aircraft demand and positioning within the global defense, space, and security markets for the persistent optimism.  Along with Boeing, four major aerospace companies – B/E Aerospace, Hexcel, Rockwell Collins, and United Technologies – all released earnings reports this week.  Representative of the positive aerospace market environment, each company beat their consensus analyst earnings estimates.

While the effects of sequestration caused a decline in overall Federal contract spending in GFY13, according to a recent Bloomberg report, seven departments managed to increase contract spending, despite various budgetary headwinds.  The seven departments included the Department of Homeland Security (+2.1% over GFY12), the Department of Health and Human Services (+4.6% over GFY12), the Department of Veterans Affairs (+5.3% over GFY12), the Department of Justice (+7.0% over GFY12), the Department of Housing and Urban Development (+9.5% over GFY12), the Department of the Treasury (+16.4% over GFY12), and the Department of Education (+27.0% over GFY12).  The report’s findings point toward continued opportunities for government technology contractors serving priority markets such as Homeland Security, Health and Human Services, and Veterans Affairs.

Big Movers

Raytheon Co. (Down 5.2%) – Shares were down this week after the company’s 1Q14 earnings release reported quarter over quarter sales down 6.3%, with decreases across all four divisions.  Raytheon reported the largest sales decline of the Defense Primes.

Relevant Transactions

Nexter Systems to acquire Chemring Group plc’s MECAR SA, a provider of weapon systems and ammunitions for LAVs, tanks, and infantry.  Nexter will pay approximately $232 million for the acquisition.

Sumitomo Bakelite Co. Ltd. to acquire H.I.G. Capital’s Vaupell, Inc., a provider of thermoplastic interior solutions to the commercial aerospace industry.  Sumitomo Bakelite will pay $270 million for the acquisition.

Prospect Partners’ Velocity Aerospace Inc. acquired E.D.N. Aviation, Inc., a provider of multi-unit fabrication and engineering / design services for various aircraft panel components.  Terms of the deal were not disclosed.

The Parsons Corporation acquired Secure Mission Solutions, a provider of security consulting solutions to the Department of Defense, Intelligence Community, and civilian agencies.  Terms of the deal were not disclosed.

The SI Organization acquired the U.S. Services Division of QinetiQ, which provides technical services and solutions to customers in the global aerospace, defense, and security markets.  The SI Organization will pay $165 million upfront for the acquisition, and will potentially pay an additional $50 million if certain targets are met over the near-term.

Jacobs Engineering Group acquired Verizon Federal Network Systems, a provider of network solutions to the Department of Defense and civilian agencies.  Terms of the deal were not disclosed.

Flatirons Solutions acquired CORENA, a provider of document management and system integration solutions for the defense, aerospace, marine, and energy industries.  Terms of the deal were not disclosed.

The Blackstone Group acquired a majority stake in Accuvant, a provider of services and solutions to help clients plan, build, and run successful security programs.  Blackstone will pay approximately $230 million for the majority stake.

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Industry Week in Review – April 18, 2014

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According to a new Department of Defense report this week, the price tag for Lockheed Martin’s F-35 Joint Strike Fighter, the Pentagon’s most expensive weapons acquisition program, increased by $7.4 billion in 2013.  Officials have stated the primary reason for the increase is due to the decreased number of jets the Pentagon plans to buy in the coming years as a result of federal spending caps.  Officials have also noted an $89.4 billion decrease in estimated sustainment costs over the life of the program as an indicator of recent improved cost control efforts.  Pratt & Whitney’s F135 engine was the most significant driver behind the price increase, accounting for $4.3 billion of the total.  Two additional factors pushing costs were higher labor rates from prime contractors and their respective subcontractors, as well as delays from purchasers seeking to shift deliveries to the right into later years, leading to lower production and higher per-unit costs per lost scale efficiencies.  Moving forward, Lockheed Martin and the Pentagon will continue to work with the F-35 Joint Program Office to implement further cost saving measures, as officials are confident that as the program continues to grow and mature, costs will continue to decrease.

Director of National Intelligence, James Clapper, announced the Intelligence Community (“IC”) is ready to start deploying the Intelligence Community Information Technology Enterprise (“ICITE”) project, a shared IT system environment meant to consolidate and reduce duplication.  Although ICITE was originally intended as a cost-savings measure, it is also meant to bring other benefits such as increased security and sharing, a continuous evaluation clearance system, and heightened insider threat detection capabilities.  Additionally, the ICITE project is expected to provide new opportunities in cloud computing and encryption / decryption research for IC contractors.  Deployment of the project will be complete within the NGA and DIA by the end of 2014 and will begin at other IC agencies towards the beginning of next year.

Big Movers

TASER International, Inc. (Up 6.8%) – Shares were up this week after the Company announced it has entered into an agreement to provide the London Metropolitan Police Service with 500 units of its AXON on-officer cameras and its video storage service, EVIDENCE.com.

Relevant Transactions

Google Inc. acquired Titan Aerospace, a manufacturer of high-altitude drones and solar-powered atmospheric satellites.  Terms of the deal were not disclosed.

Public Consulting Group to acquire Hubbert Consulting Group, a provider of strategic and operational management consulting services for the U.S. Department of Human Health Services.  Terms of the deal were not disclosed.

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Industry Week in Review – April 11, 2014

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Aviation maintenance, repair, and overhaul (“MRO”) providers convened at MRO Americas, the industry’s marquee conference, in Phoenix this past week.  Analysts speaking at the conference stated their predictions that the overall North American MRO market will face a constrained growth environment over the next decade.  Expectations for revenue growth are in the 1% to 2% range, as North American commercial aircraft tracks to generally the same curve.  On a global scale, MRO revenue is expected to increase at a more robust clip, with growth rates pegged at approximately 3.6% to 4.2%.  One sub-sector expected to outpace overall MRO industry growth is component level MRO, while airframe and engine MRO is predicted to lag.

The Army released additional details this week around its $10.6 billion “wish list” of unfunded priorities request to the 2015 budget proposal.  Of the requests, previously removed aircraft, training and readiness, and technology persist as the top priorities.  The Army requested a $1.3 billion pot that calls for 23 remanufactured Apache helicopters, 28 Black Hawks, two CH-47s, and upgrades for 18 Gray Eagle UAVs.  Additionally, the request asks for an additional $1.2 billion in training and readiness funds and approximately $1.1 billion for Army cyber and network functions, including upgrades to the WIN-T battlefield network.  However, as officials previously stated, most, if not all, of the requests will not be fulfilled as the 2015 budget proposal has reached the spending cap set in place.

The Department of Homeland Security (“DHS”) is seeking guidance on a Next Generation Enterprise Security Operations Center (“NextGen ESOC”) with more advanced technologies for protecting against cyber-attacks.  DHS has asked for industry feedback on integrating intrusion detection analytics into security operations procedures, as well as for information on the necessary capabilities and staffing requirements for such a center.  With responses due by April 19th, DHS’ most recent information request points towards continued demand for advanced integration, modernization, and cybersecurity capabilities.

In its FY2014 earnings release on April 8th, SAIC announced it won several sizable contract opportunities in the first weeks of its FY2015.  Notable awards included a three-year, $836 million task order providing professional and engineering support services to the U.S. Army Aviation and Missile Research Development and Engineering Center Software Engineering Directorate (“AMRDEC SED”) and a three-year, $221 million task order providing lifecycle IT support to the U.S. Army Human Resources Command (“HRC”).

Big Movers

DigitalGlobe Inc. (Down 10.6%) – Shares were down this week after speculation that Google is in early talks to acquire Skybox Imaging, one of DigitalGlobe’s direct competitors, arose.  Google’s Maps and Earth products both depend heavily on DigitalGlobe’s high-resolution imagery services.

Relevant Transactions

Wencor Group LLC to acquire XTRA Aerospace, Inc., a provider of specialized repair services for a wide variety of electrical and mechanical systems across in-production commercial aircraft.  Terms of the deal were not disclosed.

PAI Partners and The Carlyle Group to acquire Schneider Electric SA’s Custom Sensors & Technologies, Inc., a provider of sensor, control, and actuation products for aerospace and defense, transportation, and industrial markets worldwide.  PAI and Carlyle will pay $600 million for the acquisition.

TE Connectivity Ltd. to acquire Seacon Group Limited, a provider of underwater connector technology and systems for military marine and sub-sea sectors, as well as oil and gas, environmental, and oceanographic applications.  TE Connectivity will pay $490 million for the acquisition.

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Industry Week in Review – April 4, 2014

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This week, select U.S. military service groups sent Congress “wish lists”, called unfunded priorities or unfunded requirements, totaling approximately $36 billion in value of priority items that were not included in the Pentagon’s 2015 budget proposal.  Rep. Buck McKeon, R-California, chairman of the House Armed Services Committee, requested the lists and received requests from the Army, Navy, Marine Corps, Air Force, Army National Guard, and Air National Guard.  From the wish lists, notable requests include 22 additional Boeing EA-18 Growler aircraft for the Navy valued at $2.1 billion and 14 F-35 aircraft for the Air Force and Marine Corps valued at $1.4 billion.  The wish lists also include multiple requests for upgrades, maintenance, and construction projects that have been reduced or deferred due to defense budget caps and sequestration cuts.  Of the departments, the Army and Navy requested the largest amounts at $10.6 billion each.  The requests are very similar to the White House’s Opportunity, Growth, and Security Initiative (“OGSI”) fund, which includes $26 billion in additional defense spending not included in the original $496 billion spending request.  However, like the OGSI, officials have stated the actual passage of the proposed wish lists is highly unlikely, since defense spending is capped at $496 billion.

The Department of Veterans Affairs (“VA”) announced that it has cut its backlog of pending disability claims by more than 40%, with backlog now at its lowest point since March 2011.  The VA also announced that veterans are waiting an average of 119 days less for a decision regarding disability benefits than they were a year ago.  The agency cited transformation initiatives and streamlined business processes as key contributors to the reduction in backlog and wait times, and reiterated its goal of eliminating the claims backlog by 2015, which would indicate continued demand within the VA for innovative IT solutions over the near-term.

Big Movers

Babcock International Group PLC (Up 9.2%) – Shares were up this week after the Company announced it will acquire Avincis Mission Critical Service Holdings SLU from Kohlberg Kravis Roberts & Company for approximately $1.5 billion.

Relevant Transactions

Arotech Corporation acquired UEC Electronics, LLC, a provider of electronic components and subsystems for military, aerospace, and industrial customers.  The acquisition allows Arotech to pursue new market opportunities with new customers, as well as strengthen its electronic engineering and manufacturing capabilities.  UEC will be integrated into Arotech’s Battery and Power Systems division.(1)

MB Aerospace acquired Norbert Industries, Inc., a provider of machined components for aerospace, defense, automotive, machine tool, and robotic industries.  Terms of the deal were not disclosed.

Levine Leichtman Capital acquired NOBLES Worldwide, Inc., a provider of weapon systems and ammunition feed systems to various branches of the U.S. military and its allies worldwide.  Terms of the deal were not disclosed.

(1)    KippsDeSanto & Co. acted as the exclusive financial advisor to UEC Electronics, LLC.

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Industry Week in Review – March 28, 2014

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In a decision that has been closely watched following Japan Airlines’ controversial decision to order Airbus A350s replacing its current fleet of Boeing 777 aircraft, Japan’s All Nippon Airways (“ANA”) announced this week it has opted for 20 of Boeing’s 777-9X to replace most of the international components of its current 777 fleet.  In total, ANA ordered 70 aircraft worth $16.6 billion in its biggest order to date, with the 20 777-9X aircraft accounting for almost half of the value.  Regarded as a key contract win for Boeing, the 20 aircraft will replace ANA’s current fleet of 19 777-300ERs used on international routes and will be delivered between 2021 and 2027.  ANA officials stated the order decisions were based on four main factors: aircraft quality, long term benefits, delivery schedules, and previous experience.  Airbus was not completely shut out of the orders, as ANA ordered 30 A320 aircraft for narrowbody replacement needs to be delivered between 2016 and 2023.  Historically, Boeing held more than 80% of Japan’s commercial aviation market; however, recent competition continues to shake up the landscape moving forward.

On Wednesday, the Defense Information Systems Agency authorized Amazon Web Services to provide cloud services to all DoD agencies and components, making it the second commercial cloud service provider after Autonomic Resources to gain approval.   The authorization, under the DoD’s cloud security model for “impact levels” 1 and 2 for data sensitivity, will reduce the time required for DoD agencies to evaluate use of the AWS cloud, and may accelerate adoption of cloud services to address various mission needs.  The announcement follows last week’s rollout of DISA’s “milCloud,” a private cloud infrastructure hosted on the DoD’s core data centers that is tailored to DoD applications.  These developments bring the DoD closer to fulfilling government-wide goals of cloud adoption to drive efficiencies and reduce costs.

Big Movers

Leidos Holdings, Inc. (Down 18.1%) – Shares were down this week after the Company reported fiscal quarter revenue fell 18% compared to the same period last year, as well as the resignation of its chief operating officer.

AAR Corporation (Down 10.6%) – Shares were down this week after the Company announced disappointing fiscal third quarter results with earnings of $0.45 per share, which was below analyst estimates of $0.47 a share.

Relevant Transactions

Digital Management Inc. acquired KnowledgePath Solutions, Inc., a provider of multi-channel mobile commerce solutions.  Digital Management paid $22 million for the acquisition.

Smith & Wesson Holding Corporation to acquire Tri Town Precision Plastics, Inc., a provider of custom injection and contract manufacturing services to defense, aerospace, medical, general industrial, and automotive industries.  Terms of the deal were not disclosed.

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