Industry Week in Review – August 17, 2018

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Industry Week in Review – August 17, 2018

Aerospace & Defense Update

Lockheed Martin was awarded a $2.9 billion contract to produce three next-generation geosynchronous nuclear missile-warning satellites.  This follows Northrop Grumman win of a contract for two polar-orbiting satellites.  Together, the two sole-sourced contracts mark the first major development for the construction of the Air Force’s Next-Generation Overhead Persistent Infrared (“OPIR”) constellation, which is set to supplant the existing Space-based Infrared Satellite System (“SBIRS”) beginning in 2023.  The OPIR constellation system boasts improved missile warning capabilities that more adequately suited to combat the world’s evolving threats.  The Air Force is now targeting a 2029 completion date, four years ahead of the original timeline.

The global space industry has continued its rapid growth, expanding to $384 billion in 2017, and nearly doubling in value over the last decade.  The industry is expected to reach $1 trillion in value by 2030.  The private sector is driving much of this growth, with companies such as Blue Origin and SpaceX investing millions of dollars to gain market share in the growing and largely untapped space industry.  The growth and high expectations have rendered an uptick in commercial spacecraft launches from U.S based spaceports over the past few years.  In the U.S.’s most active states (California, Florida, and Texas), launches have increased from 4 in 2012 to 21 in 2017 and are on target for 25 launches in 2018.  Existing spaceports are undergoing massive expansion to accommodate this increasing launch cadence, with plans for new launch site locations on the horizon.

Government Technology Solutions

On Thursday, CACI closed its $84 million acquisition of CSRA’s Systems Engineering and Acquisition Support Services Business Unit (“SEABU”) from General Dynamics (“GD”), who was forced to divest the contracts due to a conflict of interest with its US Navy (“USN”) ship operations.  The business that CACI acquired provides complementary engineering services for the USN to its legacy USN work.  The acquisition comes in the aftermath of a bidding war between GD and CACI for CSRA earlier this year, which GD ultimately won.  CACI expects the acquisition to add $150 million in revenue to its 2019 fiscal year, increasing estimated annual revenue to approximately $4.8 billion.  Additionally, CACI intends to grow its engineering work and expand its solutions and services offerings with the USN through SEABU.  Notably, the deal will position CACI to capture part of the USN’s accelerated shipbuilding timeline, a result of the growing importance of reconnaissance, maritime border security, and nuclear deterrents amidst Chinese and Russian developments in undersea technology and fleet capacity.

With legacy customer relationship management (“CRM”) systems becoming outdated and cumbersome, federal agencies increased attention to improving back office functions and overhauling the overall customer experience.  Similarly, higher GFY18 appropriations, coupled with pressure to respond more quickly to proposals, have incentivized agencies to allocate funding towards modernizing their CRM systems.  A 2018 Deltek study on the state of the Government IT market indicates that 26% of surveyed contractors are investing in their CRM capabilities, in order to be able to deliver solutions to federal agencies in need.  This emphasis on modernizing CRM tools in the hopes to be more agile in the bidding process should pave the way for agencies to both deliver a better customer experience and allocate more time and resources to their mission performance.

Big Movers

Triumph Group, Inc. (down 9.1%) – Share prices were down this week due to first quarter fiscal year 2019 earnings coming in at 34 cents per share, missing the Zacks Consensus Estimate of 36 cents by 5.6%.

ICF (up 6.2%) – Share prices were up this week due to an announcement that ICF’s CRM division was awarded multiple new and incremental retainer funding during the first half of 2018 to provide loyalty marketing and CRM services.

Transactions

Boeing has agreed to acquired Millennium Space Systems, Inc., provides agile, flight-proven small-satellite solutions. Terms of the deal were not announced.

CACI International, Inc. has acquired the Systems Engineering & Acquisition Services Business Unit (“SE&A BU”) of CSRA LLC, a provider of comprehensive engineering services to the U.S. Navy.  The deal is worth an estimated $84 million.

Lentech, Inc. acquired Edge Space Systems, Inc., provides aerospace thermal engineering solutions for space and launch systems, high altitude balloon missions, and terrestrial instruments. Terms of the deal were not announced.

Zen Technologies Ltd. has agreed to acquired Unistring Tech Solutions Pvt. Ltd., develops electronic warfare (EW) solutions, advanced communication systems for defense, telemetry systems and simulators for radar and EW system evaluation. Terms of the deal were not announced.

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Industry Week in Review – August 10, 2018

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Industry Week in Review – August 10, 2018

Aerospace & Defense Update

The British Defense Security Organization reported that British defense companies secured exports valued at £9.0 billion ($11.6 billion) in 2017, recording a 53% increase over 2016 exports.  This is the nation’s second largest export success in the last decade and moved the UK to the third largest defense exporter in the world.  In line with positive trends, the United States achieved its highest market-share ever, estimated at 53% of global defense exports, with Russia following behind at 16% and the UK at 12% in 2017.  This increase in the global defense export market reflects uncertainties regarding on-going strategic threats, driving demand and rising prices in the sector.  The British air sector drove defense exports with notable equipment sales related to the F-35 strike jet program, Rolls-Royce engine sales to Germany, and work with Turkey on a possible next-generation fighter jet.

The Pentagon has sent Congress a report proposing a four-pronged approach for the U.S. military’s future in space that includes the creation of a Space Force as a sixth branch of the armed forces.  As Russia and China emerge as potential U.S. adversaries in space, the formation of a Space Force has increased in prominence.  The report’s first phase is the Department of Defense (“DoD”) would establish a Space Development Agency to develop and field space capabilities.  Next, the Pentagon would develop a Space Operations Force to support combatant commanders.  The third prong is the DoD would create the governance, services, and support functions of the Space Force to be approved by Congress.  And finally, the Pentagon would create the U.S. Space Command, led by a four-star general.  The DoD recommends that the president revise the plan to create the new U.S. Space Command by the end of 2018 and evaluate the need for any additional personnel and budget elements by then.

Government Technology Solutions

The Joint Enterprise Defense Infrastructure (“JEDI”) contract continues to be a hot topic of discussion within the government contracting space, given that the contract – which has a $10 billion ceiling value over 10 years – is expected to be single award.  As a result, many industry groups have not shied away from criticism of the Department of Defense (“DoD”).  Of particular note, Oracle filed a pre-award protest with the General Accountability Office (“GAO”) on Monday.  The nature of Oracle’s protest revolves around whether the DoD is acting reasonably and in accordance with procurement laws by looking to make a single award, given the size and nature of the JEDI contract.  With the GAO’s 100-day window to review the protest, this latest development could impact JEDI’s expected September bid due date.

In the latest development of the U.S.-China trade war, China announced it would place a 25% retaliatory tariff on approximately $16 billion worth of U.S. imports.  The announcement follows a recent announcement by the U.S. listing approximately $16 billion of Chinese goods that will be tariffed.  This latest development brings the total amount of Chinese goods that face tariffs in the U.S. to $50 billion, in the wake of U.S. President Donald Trump’s instruction to the U.S. Trade Representative Office to consider tariffing up to $200 billion in Chinese products.  China’s most recent tariff announcement targets U.S. passenger cars, motorcycles, medical instruments, materials, and waste products, among others, in a move meant “to defend the nation’s dignity”, per a Chinese state media report.  These updated tariffs have already had severe impacts on the U.S. and Chinese markets as the Chinese Yuan fell 6% to the U.S. dollar and Qualcomm lost a merger opportunity due to Chinese disapproval.  Experts say China’s retaliatory measures may be just the beginning of a much larger trade war as tensions continue to mount.

 Big Movers

Maxar Technologies (down 14.3%) – Share prices were down this week due to a short attack launched as a result of “brazen intangible asset accounting,” despite a big quarterly earnings beat in the second quarter.

 Vectrus (up 15.2%) – Share prices were up this week after revenue increased 24% year-over-year, with 12% growth coming from the Vectrus base business and the remainder coming from the SENTEL acquisition.

Transactions

American Systems Corporation has acquired DDL OMNI Engineering, LLC., a provider of alteration design and installation services; environmental services; materials and structures engineering; program and strategic management; sensor and electronics development; software, web and systems development; Technical Documentation; and Training and Simulation to the Federal Government and commercial customers.  The terms of the deal were not disclosed.

 Avenu Insights & Analytics, a portfolio company of Mill Point Capital, has agreed to acquire the assets and operations of the Local and Municipal Constituent Government Software Solutions business of Conduent Incorporated, a provider of solutions used by jurisdictions to manage service delivery across multiple agencies.  The terms of the deal were not disclosed.

Element Materials Technology Group, a portfolio company of Bridgeport Capital Ltd., has acquired Orbit Industries, Inc., a provider of specialization in ultrasonic, liquid penetrant, magnetic particle and chemical processing for raw materials, semi-finished and finished products, including landing gear components, airfoils and, aluminum wheels.  The terms of the deal were not disclosed.

 Shipbuilder Fincantieri S.p.A. and MERMEC, a portfolio company of the Angel group of Vito Pertosa, has agreed to acquire Vitrociset S.p.A, a provider of training and support in the information and communications technology (ICT) field in the defense and security market, as well as in logistics, transport and space sectors.  The terms of the deal were not disclosed.

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Industry Week in Review – August 03, 2018

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Industry Week in Review – August 3, 2018

Aerospace & Defense Update

One week after the House of Representatives approved the conference report of the National Defense Authorization Act (“NDAA”) for fiscal year 2019, the Senate decisively passed the bill on Wednesday in an 87-10 vote.  President Trump is expected to sign the 2019 NDAA into law later this month.  The bill provides authorization for up to $717 billion in total national defense spending which includes a 2.6% military pay raise; adds 15,600 more troops across the Army, Navy, Air Force, and Marine Corps; and increases aircraft and ship purchases above the President’s initial budget request.  This is the earliest Congress has approved the NDAA since 1978; Congress will now begin preparing legislation for a final defense policy bill, with the goal for it to become law before the beginning of the next fiscal year on October 1st.

The Israeli Air Force is prioritizing the expansion of its Boeing F-15 fleet as part of an effort to better position itself against evolving threats from its two most immediate adversaries – Syria and Iran. Despite its planned acquisition of the Lockheed Martin F-35, Israel is negotiating the purchase of 20-25 F-15s with the U.S Department of Defense.  The Israeli Government views the F-15 as the center of the country’s attacking capabilities and prefers it to the F-35 due to the F-15’s greater flexibility with respect to its ability to be upgraded with advanced, Israeli-developed systems.  Details regarding the specific configuration these F-15s have not been announced, but it is believed that the order may focus on capabilities such as additional missile capacity and special communications pods designed to securely send and receive data from other aircraft.  If the order is eventually placed, it could keep the F-15 production line in operation through 2025.

Government Technology Solutions

This past week the Department of Defense (“DoD”) awarded Booz Allen Hamilton (“BAH”) an $885 million task order to deliver Artificial Intelligence (“AI”) and machine learning capabilities across multiple systems and agencies. This award is indicative of a larger shift in focus by federal agencies towards emerging technologies, as current systems become obsolete and AI in particular provides a vastly accelerated platform to analyze data. The 32% increase in AI, cloud computing, and big data spend by the DoD over the past five years also highlights the federal governments shift towards emerging technologies.  BAH’s CEO, Horacio Rozanski, recently remarked that, “it’s clear that artificial intelligence is an area of focus and an area of investment [for the DoD]”.  Given this shift, buyers in the government services marketplace have increased their focus on acquiring companies that provide emerging technology capabilities and past performance.   A recent example of this is Alion Science and Technology’s recent agreement to acquire MacAulay-Brown, Inc.  Steve Schorer, president and CEO of Alion, stated in a press release announcing the pending transaction that the acquisition provides “inroads into emerging technologies…in electronic warfare, artificial intelligence, cybersecurity, and cloud solutions” for the company.

The Transportation Security Administration (“TSA”) is considering removing the extensive passenger screening process—put in place following the terror attacks of September 11th—currently implemented at smaller airports. The proposal indicates luggage traveling from these airports to major cities for connecting flights should be screened upon arrival to the larger airports that have greater capacities for extensive bag checks. The move is expected to cut costs by over $100 million, with minimal impact to safety risks. The TSA faced heavy criticism following the announcement, however, as some expressed concerns of vulnerability at not only these smaller airports, but also at larger hubs, which often allow passengers to board other flights without re-clearing security. The news comes shortly after an announcement of the TSA’s intention to implement computed tomography (“CT”) scanners—which should allow the TSA to more effectively detect threats within carry-on bags—in 15 major airports. This is good news for passengers, who may not be required to remove their liquids or laptops from carry-on if these changes are implemented. The decision by TSA reveals a preference towards further securing the country’s larger airports, funded in part by the savings generated from reduced security screening procedures at smaller airports.

Big Movers

Mercury Systems (up 17%) – Share prices were up this week after the company’s earnings surpassed Wall Street estimates, in addition to its announcement that it had acquired Germane Systems.

Harris Corporation (up 5.5%) – Share prices were up this week after the company announced that it beat earnings per share estimates for the quarter. Revenue for the quarter increased 8% year over year driven by strong growth in communication systems and electronic systems.

Transactions

Alion Science and Technology Corporation, a portfolio company of Veritas Capital, has agreed to acquire MacAulay-Brown, Inc., a provider of advanced engineering and technology solutions to the Department of Defense, Intelligence Community, Special Operations Forces, and the Department of Homeland Security. KippsDesanto & Co. was the sell-side advisor on the deal. The terms of the deal were not disclosed.

CAE, Inc. has acquired Alpha-Omega Change Engineering, a provider of operational test and evaluation, aircrew training, and engineering support services for U.S. intelligence agencies and the Defense Department through several contracts. The terms of the deal were not disclosed.

ICF International, Inc. has agreed to acquire DMS Disaster Consultants, a provider of pro-active approaches to pre-disaster planning, responding, identifying, and pursuing all eligible projects, using funds from FEMA and the Department of Housing and Urban Development for federal, state, and local agencies. The terms of the deal were not disclosed.

Integrity Applications Incorporated, a portfolio company of Arlington Capital Partners, has acquired Dependable Global Solutions, a provider of cybersecurity and counterintelligence solutions to intelligence and defense customers in the federal government. Terms of the deal of the deal were not disclosed

First Israel Mezzanine Investors, has acquired Aitech Rugged Group, Inc., a provider of embedded computing subsystems and modules for defense, aerospace, and space electronics markets. KippsDeSanto & Co. was the sell-side advisor on the deal. Terms of the deal were not disclosed.

Mercury Systems, Inc. has acquired Germane Systems LC, a provider of rugged servers, computers and storage systems for command, control and information applications. KippsDeSanto & Co. was the sell-side advisor on the deal. The deal is worth an estimate $45 million.

GenNX360 Capital Partners has acquired Precision Aviation Group, a provider of maintenance, repair and overhaul (MRO) and supply chain solutions for fixed and rotary-wing aircrafts serving diverse end markets. KippsDeSanto & Co. was the buy-side advisor on the deal. Terms of the deal were not disclosed.

Vance Street Capital Partners has acquired Jet Parts Engineering, Inc., a provider of proprietary aftermarket replacement components and complementary proprietary component repair services for commercial airline and MRO customers. Terms of the deal were not disclosed.

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Industry Week in Review – July 27, 2018

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Industry Week in Review – July 27, 2018

Aerospace & Defense Update

Numerous aerospace and defense companies announced positive 2Q18 earnings this past week.  Boeing beat EPS estimates by $0.06 (1.8%) and increased revenue 5% year-over year (“YoY”) to $24.3 billion, reflecting a higher volume of commercial deliveries and defense contract volume.  General Dynamics (“GD”) beat EPS estimates by $0.13 (5.2%), while increasing its revenue 19.7% YoY to $9.2 billion.  GD’s strong quarter was driven by a lower tax rate and increased aerospace margins despite the non-recurring costs related to the CSRA transaction.  Lockheed Martin also beat EPS estimates by $0.13 (3.2%) and increased its revenue by 6.6% YoY to $13.4 billion.  Lockheed’s strong revenue and earnings growth was led by its Missile & Fire Control business unit.  Raytheon’s earnings also beat EPS estimates by $0.43 (18.3%) and grew revenue 0.6% YoY to $6.6 billion, reflecting strong growth in domestic bookings.

The House passed its final version of the $716 billion John S. McCain National Defense Authorization Act (“NDAA”) in a 395-to-54 vote on Thursday, sending the bill to the Senate floor for final congressional approval on Tuesday, July 31st.  Earlier drafts of the bill mentioned the shuttering of the Department of Information Systems Agency (“DISA”) and other “fourth estate” agencies, although these agencies were spared in the final version passed by the House.  Lawmakers backed plans for 77 F-35s and authorized $40.8 billion to purchase and repair worn out military aviation equipment. The bill also delayed the delivery of F-35s to Turkey and pushed off President Trump’s plans to create a Space Force as a sixth standalone branch in the military.

Government Technology Solutions

As the Government fiscal year draws to a close, federal agencies have only two months to spend billions of funding dollars allocated under the 2018 spending bill.  While spending pushes are common at the end of every government fiscal year, agencies have even more unspent dollars this year as the budget bill was passed several months late and included significant increases.   Most federal agencies received a budget increase in GFY18 and collectively defense and civilian agencies received $80 billion and $63 billion of net increases, respectively.   Despite being the recipients of greater funding increases, defense agencies are better positioned to spend their end-of-the-year money as they were anticipating such increases and were spending accordingly even before the budget was finalized in March.  Civilian agencies, on the other hand, spent more conservatively before the budget was finalized, as they were expecting budget cuts, which were initially proposed for GFY18.  As a result, contracting obligations at the end of the third quarter revealed that civilian agencies had spent 6% less year-to-date in GFY18 than over the same time period in GFY17, despite receiving a 12% increase in funding.  These dynamics should result in a flurry of contract award activity over the next two months.

On Thursday, the Department of Defense (“DoD”) released the final solicitation for its Joint Enterprise Defense Infrastructure (“JEDI”) contract without changing its award structure.  The $10 billion IDIQ cloud contract will be awarded to a single contractor, with an initial two-year period of performance and option periods extending it to as many as ten years.  The single source nature of the contract was a point of contention throughout the industry; in their April 30th letter to Congress, the IT Alliance for Public Sector (“ITAPS”), comprised of several large technology companies, expressed concern that a single award would ultimately hurt the quality of performance on the contract.  Nevertheless, the DoD is proceeding with the JEDI contract as a single award, with questions regarding the proposal now due on August 16th and bids due on September 17th.  Many observers view ITAPS member, Amazon Web Services (“AWS”), as the favorite to win the award, seeing the JEDI program as a logical fit for the cloud provider’s capabilities.  Fellow ITAPS members, Microsoft (through their Azure platform) and Google (with its Google Cloud platform), are also expected to compete for the contract.

Big Movers

Leidos Holdings (up 6.4%) – Share prices were up this week after the company announced that it beat earnings per share estimates for the quarter.

Cobham (down 6.3%) – Share prices were down this week after the company announced that Boeing was withholding payments for its work on the KC-46 aerial refueling program.

Transactions

Hitachi Vantara, a subsidiary of Hitachi, Ltd., has agreed to acquire REAN Cloud LLC, a provider of global cloud systems integration, managed services, and developed solutions of cloud-native applications. Terms of the deal were not disclosed.

ISR, Inc., a subsidiary of Cubic Corporation, has acquired Shield Aviation, Inc., a provider of autonomous aircraft systems for intelligence, surveillance, and reconnaissance services. Terms of the deal were not disclosed.

Staple Street Capital and the Senior Management Team of Dominion Voting Systems has acquired Dominion Voting Systems, a provider of election tabulation solutions to government customers. Terms of the deal were not disclosed.

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Industry Week in Review – July 20, 2018

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Industry Week in Review – July 20, 2018

Aerospace & Defense Update

This week’s Farnborough Airshow saw a great deal of order activity as Boeing and Airbus combined to sell around 900 planes worth $139 billion in total.  More specifically, Boeing won 528 orders worth $87 billion while Airbus won 431 orders worth $57 billion.  Notably, however, over 400 of the planes ordered did not have buyer’s names released.  Airbus blamed ongoing trade tension for the secrecy saying that many firms did not want to appear to take a side in the trade wars.   In the 250 – 300 seat segment, AirAsia provided the struggling Airbus A330neo program a much-needed boost with 100 total jets ordered, while Boeing secured an order for at least 10 787s from Hawaiian Airlines.  In the highly competitive large single-aisle market, Airbus received an order for 50 A321neo jets from Vietnam’s VietJet, a day after the carrier placed an order for 100 737 MAX aircraft from Boeing.  In the smaller single-aisle jet market, an area in which Airbus and Boeing have recently expanded into with their Bombardier and Embraer joint ventures, Airbus sold 60 A220s, and Embraer sold 300 jets, worth about $5.5 billion and $15 billion, respectively at list prices.

America has already surpassed its defense trade total from all of 2017.  Lt. Gen. Charles Hooper said earlier this week that the U.S. has already signed $46.9 billion in weapon sales to foreign allies, already eclipsing 2017’s $41.9 billion.  Hooper specifically pointed to the Trump administration’s Conventional Arms Transfer policy, an initiative to help private U.S. defense firms directly sell certain weapon types to allies without going through the U.S. government.  However, defense sales can be highly volatile as a single order for many planes can significantly balloon any given year’s total.  In the three years prior to 2017, defense sales were $33.6 billion, $47 billion, and $34.2 billion.  Additionally, the recent tariffs placed on traditional European allies could further impact defense sales, although Hooper said that he had not encountered the issue yet.

Government Technology Solutions 

DynCorp International is exploring M&A opportunities to supplement organic growth for the first time in eight years­, rallying from a prolonged earnings drought caused by previously lackluster defense spending.  While other government service contractors were also affected by the reduced defense spending in the early 2000s, DynCorp’s business was acutely impacted by both the Budget Control Act of 2011 and the drawdown of U.S. troops in Afghanistan in 2012, resulting in a 50% decline in revenue over four years.  DynCorp was able to pivot this past year with earnings increasing from $101 million to $153 million, along with top-line growth of 9%.  Driven by the recent improvement in its financial position, DynCorp now plans to invest in growth through acquisitions, looking to expand service offerings and further develop its existing IT and intelligence business lines (the company’s fastest growing subdivisions, according to CEO George Kirvo).  DynCorp’s focus on next-generation IT (“NGIT”) acquisition targets is in line with other dealmakers in the Government Services sector, many of whom cited Cybersecurity and IT Modernization as M&A focus areas in KippsDeSanto’s recent M&A survey.

The Department of Defense (“DoD”) continues to build upon its cloud modernization initiative with its most recent request for information (“RFI”).  On Monday, the Defense Information Systems Agency (“DISA”) released a small business RFI to transition its cybersecurity Acropolis program to a secure cloud environment.  In order to upgrade these virtual cloud capabilities, the DoD is seeking a contractor who can provide cloud infrastructure-as-a-service.  This particular request outlines the department’s overarching goal to integrate the DoD’s current system with next-gen infrastructure provided through a cloud service provider.  This cloud initiative highlights the ongoing trend within the DoD to move legacy systems to the cloud now rather than waiting on the upcoming enterprise-wide Joint Enterprise Defense Infrastructure (“JEDI”) contract, which was recently put on hold this past week to undergo a full program review.  While a final request for proposal for JEDI was originally expected in May, DoD CIO Dana Deasy has been clear that he will not expedite the request process until all details are thoroughly reviewed.  While Deasy has been clear that his goal is to consolidate the department’s cloud capabilities under a consistent infrastructure, DoD departments appear to be moving forward with their cloud implementation projects, reinforcing the critical need for immediate cloud migration and integration throughout the DoD and the rest of the Federal Government.

Big Movers

Esterline Technologies Corp. (up 10.4%) – Share prices were up this week after reports that the aerospace parts maker is exploring a potential sale.

Saab AB (up 9.2%) – Share prices were up this week after the CEO announced discussions to join “Team Tempest”, a UK-led fighter program unveiled this week at the Farnborough Airshow.

Transactions

Acorn Growth Companies has acquired Berry Aviation, Inc., a provider of specialized airlift solutions and other aviation services including intelligence, surveillance, and reconnaissance. Terms of the deal were not disclosed. 

Alleghency Technologies, Inc. has acquired Addaeo Manufacturing, LLC, a provider of metal alloy-based additive manufacturing services for the aerospace and defense industries. Terms of the deal were not disclosed. 

GCR, Inc., a portfolio company of HKW Capital Partners, has acquired MB3 Technologies, Inc., a provider of software development focused on emergency grants management.  Terms of the deal were not disclosed.

KLX, Inc. has acquired John Hassall, LLC, a provider of precision aircraft engine fasteners, consumables, and logistics services to the aerospace industry. Terms of the deal were not disclosed.

Maxar Technologies Ltd. has acquired Neptec Design Group Ltd., a provider of vision solutions for space, industrial, and military applications. Terms of the deal were not disclosed.

Thalheimer Brothers, Inc., a portfolio company of Audax Group, has acquired Mega Metals, Inc., a provider of titanium scrap metal recycling, inspection, and testing services. Terms of the deal were not disclosed.

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Industry Week in Review – July 13, 2018

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Industry Week in Review – July 13, 2018

Aerospace & Defense Update

Uncertainty regarding Brexit’s impact on the U.K. aerospace industry continues to rise as there have been no withdrawal agreements put in place between the U.K. and the EU.  Amidst the concerns, President Trump visited the U.K. this week to discuss a potential trade deal with Prime Minister Theresa May and put pressure on Brexit negotiations, which will have ramifications for the U.S. aerospace industry as well.  The lack of clarity around a Brexit agreement has been worrisome for some U.S. and U.K. aerospace companies, which could face potential delays in shipments of British-manufactured aircraft components if no regulation and customs arrangements are in place when the U.K. officially exits the EU.  At the Farnborough Airshow this week, the aerospace industry will be looking to the UK government for clarity regarding its vision for the post-Brexit British aerospace industry.

Boeing has won a $1.6B contract with the Royal New Zealand Air Force to supply four P-8 Poseidon patrol planes to replace its Orion aircraft.  New Zealand seeks to strengthen its surveillance capabilities following a defense policy statement last week warning that China’s rising influence in the South Pacific could undermine regional stability.  New Zealand has lost sway over small island nations to China in the South Pacific, where they are responsible for patrol and rescue missions in an area of the Pacific Ocean bigger than Europe.  Last month, South Korea agreed to buy the Poseidon to strengthen anti-submarine capabilities, and Australia will replace its Orion aircraft next year with 15 Poseidon planes.

Government Technology Solutions 

L3 Technologies continues to augment high-end capabilities through M&A, acquiring two information security firms this past week as part of the Company’s ongoing initiative to bolster its defense technology profile.  L3 announced on Wednesday that it would acquire Azimuth Security and Linchpin Labs for approximately $200 million in a move to strengthen C6ISR capabilities and access to classified operations.  The announcement comes just a week after the Company announced its acquisition of Applied Defense Solutions, a supporter of critical space and satellite operations.  Over the past two and a half years, L3 has made 15 acquisitions worth approximately $800 million as part of its ongoing M&A strategy.  L3’s recent acquisitions highlight an industry-wide trend of contractors attempting to expand next-generation IT (“NGIT”) capabilities across DoD, Intel, and space customers via M&A.  In May, Parsons made a similar move when the company acquired national security IT services contractor Polaris Alpha.  For Parsons, this addition was in line with a broader strategy to enhance its offerings with NGIT capabilities in the national security market.  Given strong market conditions and a favorable budgetary environment, this trend is likely to continue.

On Tuesday, CACI International opened the Dr. J.P. (Jack) London Shared Services Center in Oklahoma City in an effort to lower costs and seek out more available talent.  This development is part of a growing trend seen among D.C. area-based contractors, which have been opening long-term operational centers (rather than just contract-specific offices) in less populated metropolitan areas across the country in a strategy known as onshoring.  Other companies that have recently started large operational centers in less traditional areas of the country include Leidos, CGI Federal, CSRA, SAIC, and DXC Technology.  The moves attempt to take advantage of talent pools in parts of the country where the competition for quality labor is less expensive and less intense to lower costs while gaining access to quality talent, either graduating from local universities (such as Leidos’ software development center in West Virginia University’s Morgantown, WV) or currently working in the commercial sector.

Big Movers 

Engility (up 12.1%) – Share prices were up this week after reports that the company is exploring a sale and has attracted interest from companies that include CACI International and Science Applications International Corp (“SAIC”).

Airbus (up 8.2%) – Share prices were up this week after JetBlue Airways replaced Embraer’s E190 fleet with the Airbus A220 fleet.

Transactions

Aptiv PLC has agreed to acquire Snow Phipps Group’s portfolio company Winchester Interconnect, a provider of custom engineered interconnect solutions to the military, aerospace, and other diversified end markets.  The deal is worth an estimated $650 million.

AssetWorks, LLC has acquired E-Innovative Services Group, LLC (E-ISG), a provider of software-as-a-service enterprise asset management software.  Terms of the deal were not disclosed.

Aviation Technical Services, Inc., has acquired Ranger Air Aviation, a provider of inventory management and aircraft components to a variety of commercial airframes and engine platforms.  Terms of the deal were not disclosed.

Cadence Aerospace, a portfolio company of Arlington Capital Partners, has agreed to acquire Perfekta, Inc., a provider of large monolithic structures, and machined components and assemblies to the aerospace, defense, and space markets.  Terms of the deal were not disclosed.

Excelitas Technologies, a portfolio company of AEA Investors, has acquired Research Electro Optics, a provider of high-precision optical components, optical thin film coatings, and optical subassemblies.  Terms of the deal were not disclosed.

L3 Technologies, Inc. has agreed to acquire Azimuth Security and Linchpin Labs.  Azimuth Security is a provider of information security consultation on in-depth analysis of software systems, including threat modelling and design, configuration, and source code review.  Linchpin Labs is a provider of computer network operations, cross-platform and low-level systems development, and IT security services.  The two companies were acquired for around $200 million in total.

Prototek Sheetmetal Fabrication, a portfolio company of CORE Industrial Partners, has acquired Hayes Manufacturing Services, Inc., a provider of rapid prototyping and low-volume precision machining services to the medical, aerospace, robotics, and electronics industries.  Terms of the deal were not disclosed.

TransDigm Group Incorporated has acquired Graycliff Partners’ portfolio company Skandia, Inc., a provider of highly-seating foam, foam fabrication, flammability testing, and acoustic solutions to the business jet market. The deal is worth an estimated $84 million.

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Industry Week in Review – July 6, 2018

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Industry Week in Review – July 6, 2018

Aerospace & Defense Update

On Thursday, Boeing and Embraer announced their agreement to create a joint venture (“JV”) comprising Embraer’s commercial aircraft and services business.  Boeing has agreed to pay $3.8 billion for an 80 percent stake, valuing Embraer’s commercial division at $4.8 billion, but the transaction is ultimately dependent on approval from the Brazilian government.  While many believe current president Michel Temer will likely approve the deal, he is not running for re-election in October.  However, the agreement has been reviewed by the government, and is expected to be approved if the companies also create a military JV independent from the commercial JV.  The deal will allow Boeing to better position itself in the market for smaller regional aircraft, particularly important following Airbus’ acquisition of Canada’s C Series program.  Following the agreement, Boeing’s commercial aircraft line will range from 70 to 450 seats.  The transaction is expected to close in 12 – 18 months, and upon closing, Brazilian management will lead the joint venture.

Japan has chosen Lockheed Martin’s advanced radar for its multibillion dollar missile defense system, according to a defense ministry official.  Lockheed Martin’s Long-Range Discrimination Radar was ultimately selected because of its search capabilities and lower lifecycle costs, per the official.  In the deal, Japan will buy two Aegis Ashore batteries to be deployed in 2023 as an upgrade to its current missile defense systems designed to counter threats from North Korea and China.  While North Korean leader Kim Jong Un has reiterated his vow to denuclearize the Korean peninsula, Japan still sees North Korea as an immediate threat, and China as a long-term threat due to its growing military power.  The two Aegis Ashore sites will likely end up costing over twice as much as Japan’s original estimate of $2.0 billion, according to industry sources.    The deal will help Japan balance its trade surplus with the U.S., which President Trump has previously urged the country to do through the purchase of U.S. military equipment.

Government Technology Solutions 

The Department of Homeland Security (“DHS”) is currently developing a successor contract to its Security Enterprise Acquisition Gateway for Leading-Edge Solutions II (“EAGLE II”) contract, which expires in 2020.  The new IT services contract will build upon certain elements from the $1.5 billion Flexible Agile Support for the Homeland (“FLASH”) contract.  DHS seeks to include federal category management and “best-in-class” contracting activities in “Flashy Eagle,” the working name for the EAGLE II replacement.  Although FLASH was cancelled last year, the vehicle was effective in its agile approach with short offering papers from vendors, technical demonstrations, and selection processes.  While FLASH ultimately failed due to its documentation approach reverting to conventional waterfall-contracting methods, supporters were eager to retain the more successful components in a future contract, now coming to fruition under Flashy Eagle.

Deltek recently released its annual Federal IT Market Outlook study, which includes expected trends in the “Addressable IT Market” for government contractors.  Deltek is forecasting contractor IT spend to exceed $100.0 billion for the first time in GFY2018 and steadily increase to $116.0 billion by GFY2023.  By contrast, last year’s report forecasted more modest growth, with IT spending expected to hit $100 billion in GFY2019 and grow to $105.0 billion by GFY2022.  The GFY2018 IT budget of $104.2 billion allocated $51.6 billion, or 50%, to the Department of Defense, $42.8 billion, or 41%, to civilian agencies, and $9.8 billion, or 9%, to the Intelligence Community.  Data analytics, cybersecurity, modernization, cloud computing, and IT for veteran care are key drivers of growth in the GFY2018 budget.

Big Movers

KeyW (up 11.1%) – Share prices were up this week after the company announced that it would serve as a subcontractor to Lockheed Martin on a potential $3.53 billion Army contract.

Meggitt (up 10.6%) – Share prices were up this week after the company revised revenue growth guidance upwards.

Transactions

Boeing Co. has agreed to acquire an 80% stake in Embraer’s Commercial Aircraft and Services Division, a provider of innovative regional jets generally with between 70 and 130 seats.  Boeing’s 80% stake is worth an estimated $3.8 billion.

Consolidated Precision Products, a portfolio company of Warburg Pincus, LLC, has agreed to acquire Blue Point Capital Partners’ portfolio company Selmet, Inc., a provider of complex titanium castings and machined components to the aerospace industry.  Terms of the deal were not disclosed.

Derichebourg Atis Aerospace has agreed to acquire Ausgael Aviation Services, Inc., a provider of inspection services to airline and leasing companies.  Terms of the deal were not disclosed.

Kongsberg Gruppen ASA has agreed to acquire Rolls-Royce Holdings’ Commercial Marine Division, a provider of ship design, deck machinery, propulsion, automation, and control.  The deal is worth an estimated $661 million.

L3 Technologies, Inc. has acquired Applied Defense Solutions, a provider of critical support for space exploration for satellite operations, protection, and resiliency.  The deal is worth an estimated $50 million.

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Industry Week in Review – June 29, 2018

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Aerospace & Defense Update

The Pentagon and Lockheed Martin are closing in on a deal for the 11th lot of F-35s, which includes more than 130 jets.  The deal was initially planned to close by the end of 2017, but negotiations between the two parties stalled delaying finalization.  Negotiations for the F-35’s Lot 9 reached an impasse in November 2016 until the government ultimately forced Lockheed into a $6.1 billion deal by imposing a unilateral contract agreement.  All three F-35 variants for Lot 11 are expected to be cheaper than previous procurements.

On Thursday, the House passed its version of the annual defense appropriations bill, which budgets $675 billion to the Defense Department.  The bill plans for the dual purchase of two aircraft carriers, CVN-80 and CVN-81, but does not include the purchase of additional submarines.  Compared to the Senate Appropriations Committee, the House approved four more F-35 fighter jets, one more littoral combat ship, and the Advanced Battle Management System to replace the JSTARS recapitalization plan.  The dual purchase of the aircraft carriers is expected to save up to $2.5 billion in construction costs.  Despite the savings, each carrier is anticipated to cost $10 billion, which could create problems with budget caps.  These concerns ultimately led to the exclusion of three Virginia-class submarines per year starting in 2022.  The Senate Appropriations Committee advanced its version of the bill on Thursday as well, but it is still unclear as to when the full Senate will vote on it.

Government Technology Solutions

With the 2020 Census quickly approaching, officials have noted concerns around protecting its inherent data, given growing fears about the lack of cyberattack preparedness among many federal agencies.  A recent report by the Office of the Management and Budget (“OMB”) points out 71 of the 96 federal agencies reviewed were “at risk” or “at high risk” of a cyberattack.  Department of Commerce Chief Information Officer (“CIO”) Rod Turk said Tuesday that he hopes that the intelligence community (“IC”) will help monitor potential cyberattacks, particularly given that the 2020 census plans to utilize more technology systems than any previous decennial census.  Turk mentioned that protecting the census’ networks will be critical, as the census is not only used to collect information, but also to help determine federal funding levels for a variety of infrastructure systems.  The 2020 Census will utilize more than 40 IT systems, including new online response and mobile assist functions, increasing the vulnerabilities of the survey and opportunities for a cyberattack.  Turk suggested that the IC could use artificial intelligence and machine learning to identify threats and added that the Commerce Department has already sought out “private sector intelligence gathering services” to help it track threat indicators on the dark web.

The strategy of integrating a federal agency’s engineering and operations (“DevOps”) to perform large-scale cloud migration might soon be replaced by a new strategy, No Operations (“NoOps”).  The concept of NoOps centers around expanding the role of cloud companies to provide infrastructure management services normally overseen by an agency’s IT department.  This shift in federal cloud migration management comes as cloud companies are increasingly providing cloud services where they not only code and update, but also manage the IT infrastructure in the background.  Although NoOps would increase an agency’s dependence on outside cloud providers, it would provide cost savings and allow customer’s engineering teams to focus their efforts on developing mission critical systems.

Big Movers

Safran (up 4.7%) – Share prices were up this week after the company announced a planned collaboration with Bell Helicopter to develop an electric air taxi.

American Outdoor Brands (down 5.0%) – Stock prices continued to slide this week after blaming social activists for its poor performance.

Transactions

Imenco AS has acquired Kongsberg Maritime AS’s Camera Division, a provider of subsea cameras and harsh environments CCTV systems. Terms of the deal were not disclosed.

Zivaro, Inc. (formerly Global Technology Resources, Inc. (GTRI)) has agreed to acquired Network Professionals Group, LLC (NPG), a provider of value-managed service offerings supporting hybrid information technology systems. Terms of the deal were not disclosed.

Goshawk Aviation Limited has agreed to acquire SKY Aviation Leasing International, a provider of full-service leases for premier aircraft. Terms of the deal were not disclosed.

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Industry Week in Review – June 22, 2018

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Aerospace & Defense Update

On Monday, President Trump ordered the Pentagon to create a new Space Force with the signing of an executive order during a meeting of the National Space Council.  The decision would realign the U.S. military by pulling various space functions into the additional sixth military branch.  The U.S. space operations are currently carried out by the Air Force, Navy, and other branches.  A new military service branch would need authorization from Congress, where the Space Force currently lacks substantial support.  A congressionally-mandated report on the addition of a Space Force is expected in August, where the issue will likely be debated.  In the interim, Pentagon officials will begin the process of the laying the groundwork for the future service branch.

Canadian plane-maker Bombardier believes its upgraded CRJ 900 regional jet should gain substantial market share in its competition with Brazil-based Embraer.  Bombardier’s Commercial Aircraft President, Fred Cromer, is aiming to take control of at least half of the 76-seater market, of which Embraer’s E175 accounts for 80% of U.S. orders over the last five years.  Bombardier has employed a new modernization and cost-reduction plan for its regional jets after Airbus bought a majority stake in Bombardier’s flagship CSeries jetliner program.  The CRJ program was launched in the early 1990s and has a 30% share of the U.S. market over the last two years.  However, Bombardier’s global market share has increased to 42% over the same time frame, and the Company recently secured a $1.0 billion order from Delta Air Lines for 20 CRJ 900s.

Government Technology Solutions

The Defense Information Systems Agency (“DISA”) on Monday awarded 14 companies a position on its $7.5 billion Systems Engineering, Technology, and Innovation (“SETI”) contract vehicle.  SETI is an indefinite delivery, indefinite quantity (“IDIQ”) contract that aims to streamline the Department of Defense’s (“DoD”) process for ordering various IT engineering services.  The contract has a five-year base period with a single five-year option.  SETI is designed to provide the DoD with a more flexible alternative to the Encore III commodity IT services vehicle.  SETI is split into two pools, an unrestricted competition pool and a small business pool.  The 14 unrestricted awardees were selected from 35 proposals.  The small business pool has not been awarded yet.  While soliciting proposals, DISA released two statements describing the type of work to be done for those in the unrestricted pool.  The first describes the creation of an internal personnel management system capable of managing aspects of the DoD’s Hire-to-Retire program.  The second focused on improving the architecture of DISA’s mobile ecosystem.

New research by Symantec revealed that at least two different U.S.-based satellite companies, a contractor for the Department of Defense (“DoD”), and a private company selling geospatial imaging technology were targeted by a Chinese-linked hacking group in late 2017.  The origin of the hacking operation coincides with the initial talks of the U.S.-China trade war.  Symantec has said that they alerted the U.S. government about the attacks approximately four months ago, noting that they decided to notify the government because the hackers attempted to gain access that would allow them to physically control the satellites.  The same hackers were also active prior to 2015, but had ceased activities following an agreement between former President Barack Obama and Chinese President Xi Jinping.  While that agreement outlawed economic espionage, it left more conventional targets, such as defense contractors and federal agencies, unprotected.  Symantec said that while they have monitored the group since 2013, this attack was more targeted and aggressive than in the past.

Big Movers

Bombardier (up 6.9%) – Share prices were up this week after the company secured a $1.0 billion order from Delta Air Lines for 20 CRJ 900s amid optimistic outlooks for future competition against rival Embraer.

Boeing (down 5.3%) – Share prices were down this week as a result of possible retaliation from foreign governments over international trade disputes.

Transactions

MAG Aerospace Corporation has acquired North American Surveillance Systems, Inc., a provider of integration of ISR systems onto fixed- and rotary-wing platforms and undertakes other aircraft modification and upgrades.

Cerberus Capital Management has agreed to acquire Worldwide Flight Services, a provider of aviation and aircraft ground support services such as cargo handling, technical contracting, and ramp and passenger services.

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Industry Week in Review – June 15, 2018

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Aerospace & Defense Update

Embraer’s stock saw its largest increase in two months after its joint venture with Boeing received a major endorsement this past week.  Brazilian President Michel Temer endorsed the partnership, which is essential given the government’s “golden share” in Embraer, which gives it veto power over strategic decisions around its military programs and any change in control.  The commercial joint venture between Embraer and Boeing would combine their marketing, manufacturing, and engineering capabilities.  Boeing would control the joint venture, but Embraer’s defense unit would remain a separate entity.  Embraer provides Boeing with the necessary resources and a lower-cost manufacturing center outside the U.S. as Boeing begins plans for a new mid-range airliner.

Raytheon won a major contract with Lockheed Martin’s F-35 joint strike fighter to provide a new distributed aperture system (“DAS”), which is one of its signature capabilities.  Northrop Grumman previously supplied the DAS but chose not to compete for the new contract.  The DAS allows fighter pilots to see through the bottom of the aircraft onto the ground below with advanced sensory technology.  Northrop decided the DAS production was no longer a successful business venture, which led to its decision to drop the project.  However, Northrop will remain a part of the F-35 program through production of the APG-81 radar and sustaining the legacy DAS.  Raytheon’s system was an attractive fit for the F-35 due to its affordability, as cost reductions continue to be a key focus of the F-35 program.

Government Technology Solutions

Looking to automate its mobile device management, the Defense Information Systems Agency (“DISA”) has issued a request for information (“RFI”) for an automated provisioning tool to support classified mobile access for devices used in the Department of Defense Mobility Classified Capability (“DMCC”) program.  The antiquated infrastructure currently used to access the Secret Internet Protocol Router Network (“SIPRNet”) poses a substantial risk to mission readiness and creates gaps in mobile security and communication with its rigid, manual processes. The RFI outlines DISA’s search for an existing commercial tool that can automate the installation and management of user certificates for key infrastructure and set up.  The new automated provisioning tool will mitigate security risks by using a virtual private network and setting device passwords.  The Senate version of the 2019 National Defense Authorization Act (“NDAA”) criticized the department’s failure to have infrastructure in place with automated device management capabilities.  In order to comply with the NDAA’s request, DISA intends to move quickly with this acquisition, anticipating a period of performance beginning in July 2018.

The Department of Veterans Affairs (“VA”) is seeking industry input on new technology solutions to support its operations centered around network security and efficiency.  The VA’s RFI issued last Thursday seeks industry input on how blockchain ledger technology can be leveraged to bring efficiency to contract closeouts, including retroactively applying them to all pending contract closeouts.  Blockchain solutions will be able to streamline the repetitive contract closeout processes and eliminate almost all labor involved in government contract close-out procedures.  The second RFI, issued Tuesday, calls for a cloud-based endpoint protection system to centralize the VA’s anti-virus capabilities and protect its network of approximately 575,000 workstations and 32,000 servers.  The VA calls for a solution that will be able to isolate ransomware and detect advanced threats before they infect the system, utilizing machine-learning to create an automated process.

Big Movers

Rolls Royce (up 12.8%) – Share prices were up this week after the company announced that it was “well-placed” to reach its target 1 billion pounds in free cashflow by 2020.

NIC (up 4.5%) – Share prices were up this week after the company announced a partnership with Grand Canyon National Park to offer electronic entrance passes.

Transactions

Viasat, Inc. has acquired Horsebridge Defence and Security, a provider of design, system integration, and support of deployable secure networks. Terms of the deal were not disclosed.

TGP Investments II, LLC has agreed to acquire Mid-America Precision Products, LLC,  a provider of highly-engineered, precision-machined components for missiles, aerospace, and maritime products. Terms of the deal were not disclosed.

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