Industry Week in Review – June 8, 2018

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Aerospace & Defense Update

On Tuesday, Northrop Grumman received U.S. antitrust approval to complete its acquisition of rocket maker Orbital ATK, which will help Northrop expand and compete in the space market.  With the $9.2 billion Orbital deal, Northrop is projecting 2018E revenue of $30.1 billion, a 17% increase over 2017 revenue.  The transaction was approved by the Federal Trade Commission (“FTC”) on the condition that the companies provide solid fuel rocket motors on a nondiscriminatory basis to competitors for missile contracts.  Orbital is currently working on the Air Force’s Ground Base Strategic Deterrent contract for both Boeing and Northrop, and this FTC mandated firewall will help to ensure competitiveness between the two prime contractors.  Post-acquisition, Orbital will operate as Northrop’s fourth business segment named Northrop Grumman Innovation Systems.

Lockheed Martin invested an additional $100 million into its venture capital fund with the purpose of gaining early access to critical technologies in areas such as artificial intelligence and autonomous systems.  Chris Moran, the executive director and general manager of Lockheed Martin Ventures, seeks to expand the fund’s investment portfolio into companies in the UK and Australia and increase the fund’s annual investments from around four deals to six or eight.  The venture fund’s goal is to add new platforms and capabilities to Lockheed while also exploring new technologies that have lacked significant investment.  Lockheed Martin Ventures began around 2007 with $100 million in cash and has since invested in more than 20 companies.

Government Technology Solutions

After winning a protest battle in the U.S. Court of Federal Claims, the General Services Administration (“GSA”) can move forward with its $50 billion Alliant 2 Unrestricted contract for government-wide IT services.  GSA anticipates the effective date to be July 1 with a five-year base period through June 23, 2023 followed by a five-year option period through June 2028.  Alliant 2 was initially awarded to 61 large businesses last November.  Shortly thereafter, five unsuccessful bidders, including four Alliant 1 incumbents, protested but ultimately had their challenges dismissed by the Government Accountability Office (“GAO”) in December after OBXtek took up the issue with the Court of Federal Claims.  The court ruled against CenTech Group, Dynetics, OBXtek, and Octo Consulting, although Octo’s decision has not been officially released.  Alliant 1 incumbents Capgemini and Peraton both withdrew their cases from the court before a ruling.  Alliant 2‘s $15 billion small business contract is also currently being protested, preventing GSA from moving forward with that contract until the Court of Federal Claims issues a decision.

The Senate Armed Services Committee (“SASC”) has laid out guidelines for the Department of Defense’s (“DoD”) Joint Enterprise Defense Infrastructure (“JEDI”) initiative in its version of the 2019 National Defense Authorization Act (“NDAA”).  While the House has threatened funding for JEDI, the Senate’s proposal is much more supportive.  The bill states that if the DoD is committed to JEDI as a means of modernization, then it should be all-in and prepare accordingly.  The Senate’s bill also hints that the SASC would rather the DoD issue more than one award for the procurement rather than issuing it as a single award, as the DoD has proposed.  The House Appropriations Committee on Wednesday also released its preliminary spending bill, which would restrict funding for JEDI until 90 days after Secretary of Defense Jim Mattis proposes a budget accounting system for all funds spent on DoD cloud computing, including the Defense Information Systems Agency’s (“DISA”) $8 billion Defense Enterprise Office Solutions (“DEOS”) contract.  The Pentagon still has not confirmed a final request date for proposals for the JEDI contract, although it could drop any day after it was originally expected in May.

Big Movers

AeroVironment (up 4.3%) – Share prices were up this week after the company announced it will sell German auto parts supplier, Webasto, to become a pure-play maker of unmanned aerial vehicles.

OSI Systems (up 5.4%) – Share prices were up this week after the company received a contract to provide multiple units of its explosive detection system to be installed at European Union airports.

Transactions

ACR Electronics, Inc. has agreed to acquire Flight Data Systems, a provider of flight data recorders, ground support equipment, and electronics manufacturing for the global aviation industry.  Terms of the deal were not disclosed.

Culmen International, LLC has acquired Analytics Strategies (PlanetRisk Federal Services), a provider of enterprise analytics services to the federal government.  Terms of the deal were not disclosed.

Leidos has acquired Aranea Solutions, Inc., a provider of IT products and services to government customers. Terms of the deal were not disclosed.

Patria Oyj has agreed to acquire by Patricomp Oy, a provider of aircraft sheet metal part manufacturing, surface treatments and assemblies.  Terms of the deal were not disclosed.

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Industry Week in Review – June 1, 2018

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Aerospace & Defense Update

On Friday, the Trump administration announced the enactment of tariffs on steel and aluminum imports from Europe, Mexico, and Canada.  Though the American defense industry buys the majority of its steel and aluminum from domestic suppliers, the tariffs are expected to allow those suppliers to raise prices unhindered by foreign competition.  Because of retaliatory tariffs, defense firms may face weaker demand from abroad and rising prices at home.  For products with no European competition, such as heavy-lift helicopters or C-130J cargo aircraft, European customers will still purchase from U.S. suppliers.   Alternatively, other reports speculate that the interdependence of NATO allies will prevail against a trade war since many European countries rely on U.S. suppliers.

The U.S. military has held early talks about implementing a Terminal High Altitude Area Defense (“THAAD”) system in Germany to boost European missile defenses.  European allies and the U.S. are weary of potential adversaries developing ballistic missiles capable of reaching southern Europe.  In particular, the German defense ministry has been looking to bolster its short and medium-range missile defenses.  The U.S. withdrawal from the Iran nuclear accord has accelerated the efforts to install the THAAD system in Europe.  In early June, the Pentagon is expected to further acknowledge the issue in a new missile defense review.  Additionally, Germany plans to review its territorial defense needs later this year, specifically looking at the THAAD system and the Arrow 3 anti-missile system.

Government Technology Solutions

The White House is against the idea of shuttering the Defense Information Systems Agency (“DISA”), as was proposed in the House version of the fiscal 2019 National Defense Authorization Act (“NDAA”).  The proposal would shift Pentagon IT acquisition services from DISA to other Department of Defense (“DoD”) components and eliminate the agency by 2021 in an effort to promote efficiency, reduce redundancy, and streamline bureaucracy across the DoD’s 28 4th Estate support agencies.  The White House responded by pledging its support for keeping DISA as the DoD’s centralized IT acquisition arm.  The Executive Office of the President stated in a memo that closing and transferring DISA’s responsibilities elsewhere would increase the cost of acquiring IT, weaken the DoD’s ability to secure its cyber networks, and inhibit DISA’s mission to provide seamless communication to warfighters and senior leaders.  Under the House proposal, all DISA functions and personnel not transferred elsewhere by 2021 would be eliminated.

As the U.S. and North Korea engage in peace talks, North Korean hackers have continued, or even ramped up, cyberattacks across Asia, Europe, and the U.S., focusing on financial and digital theft.  The Department of Homeland Security (“DHS”) and Federal Bureau of Investigation (“FBI”) released a joint alert Tuesday regarding the spread of a particular malware variant linked to North Korea.  The alert served as a reminder that North Korea remains highly dependent on cybercrime for both financial and geopolitical gain.  For example, in South Korea, hackers have targeted select victims, using phishing lures to glean information relevant to the current peace process.  As peace talks move forward, experts are unsure whether North Korea will reduce its hacking activities due to their decentralized nature.  North Korean and U.S. officials met Wednesday to organize the potential summit between Kim Jong-un and President Donald Trump, although cybersecurity was not discussed.

Big Movers

Bombardier (up 10.8%) – Share prices were up this week after the company announced its plans to build two new private planes in response to growing demand for large-cabin business jets

Booz Allen Hamilton (up 7.3%) – Share prices were up this week after the company reported strong fiscal fourth quarter and fiscal 2018 results.

Transactions

BBA Aviation has agreed to acquire EPIC Aviation, LLC, a provider of fuels and services to FBOs, commercial airlines, airports, ground fueling operators, the U.S. Defense Logistics Agency (DLA) and other government agencies.  Terms of the deal were not disclosed.

Cache Creek Industries, LLC has acquired Mountain Secure Systems, a provider of proprietary, ruggedized and highly engineered electronic solutions to defense contractors.  Terms of the deal were not disclosed.

Madison Dearborn Partners and CoVant Management have jointly acquired LinQuest Corp., a provider of space systems technology solutions to the U.S. defense and intelligence communities.  Terms of the deal were not disclosed.

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Industry Week in Review – May 26, 2018

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Aerospace & Defense Update

On Thursday, the House of Representatives approved the $717 billion defense authorization bill for Government Fiscal Year 2019 following several days of debate.  The bill focuses on restoring military readiness, including authorization for over $39 billion on military aviation upgrades, $18.5 billion to replace aging Army equipment, and $25.5 billion for equipment maintenance and replacement parts.  The House also supported plans for an additional 77 F-35 fighter jets, two additional Virginia-class submarines and littoral combat ships, and upgrades for almost 3,400 Joint Light Tactical Vehicles.  The White House has offered a preliminary list of objections to the House plan with respect to increases to surveillance aircraft and aircraft carriers, reorganization of the current space forces, and the shuttering of the Defense Information Systems Agency.  The White House anticipates that some of these issues will be nullified by the Senate version of the legislation, which is anticipated to be released later this summer.

Citing the growing prominence of drone technology and the potential threats it can manifest, Department of Homeland Security (“DHS”) Secretary, Kirstjen Nielsen, has asked Congress for the authority to “identify, track, and mitigate drones that could pose a danger to the public and to DHS operations.”  Secretary Nielsen would like to have the power to use the wide range of actions outlined in the “Preventing Emerging Threats Act of 2018” to counter these drones.  Currently, the counter-drone market features over 200 commercially available products, which could potentially provide the DHS with a wide range of off-the-shelf counter-drone capabilities.

Government Technology Solutions

The Pentagon is looking to implement a new contract to run continuous bug bounty contests on a full range of its networks.  The winning commercial bug bounty company will partner with the Department of Defense (“DoD”) to conduct crowdsourced vulnerability discovery and disclosure services.  In recent years, the DoD has hosted individual bug bounty programs, lasting several weeks and rewarding cash prizes for hackers reporting security vulnerabilities.  This new contract will transform the former short-term hacking contests into year-long efforts, strengthening the DoD’s security network though continuous monitoring.  Additionally, this program will give hackers access to closed networks and internal systems that were not previously made available during the short-term hacking events.

Big Movers

Engility (up 5.8%) – Share prices were up this week after the company was awarded a $41 million Marine Corps Global Command and Control Systems task order.

Embraer (up 4.4%) – Share prices were up this week after amidst growing optimism over Embraer consummating a deal with Boeing.

Transactions

Fishtech Group has agreed to acquire Haystax Technology, a provider of advanced security analytics and risk management solutions.  Terms of the deal were not disclosed.

New Mountain Partners has agreed to acquire Clairvest Group’s portfolio company, MAG DS Corp., a provider of manned aerial sensing, unmanned aerial sensing, aviation training, and aviation logistics services to federal, global, and commercial customers.  Terms of the deal were not disclosed.

Parsons Corp. has agreed to acquired Polaris Alpha Holdings, LLC, a provider of innovative mission solutions for complex defense, intelligence, and security customers, as well as other U.S. federal government customers.  Terms of the deal were not disclosed.

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Industry Week in Review – May 18, 2018

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Aerospace & Defense Update

President Trump’s decision to withdraw from the Iranian nuclear deal announced on May 8th has significant implications for the commercial aircraft landscape and sales volume.  The U.S. Treasury Department is revoking all formal licenses that Airbus, Boeing, and other original equipment manufacturers (“OEMs”) needed to sell commercial aircraft to Iran.  After the original Iranian nuclear accord was reached in 2015, OEMs eagerly lined up sales to Iranian airlines for hundreds of large civil aircraft in deals that totaled tens of billions of dollars.  While notable for the potential long-term ramifications, the loss of Iranian orders is not expected to have a material, detrimental impact on Boeing and Airbus’s backlog, representing under 2% of the companies’ combined order backlogs.

Remington Outdoor, a U.S. based weapons manufacturer, announced on Thursday that it had emerged from Chapter 11 bankruptcy.  The company now has less debt and more stable financing, which will help it maintain course under a market that has slowed for firearms sales under the current administration, driven in part by major headline risk.  Under the Chapter 11 Reorganization Plan, J.P. Morgan Chase and Franklin Advisors will forgive more than $775 million of debt in exchange for equity ownership stakes in the company.  Seven banks, including Bank of America, have also provided Remington with a $193 million revolving credit facility, which will refinance its prior asset-based loan facility along with a new $55 million last-in, first-out term loan and a new $100 million term loan.

Government Technology Solutions

President Donald Trump signed an executive order on Tuesday that will require agency Chief Information Officers (“CIOs”) to report directly to their agency head and will also make them voting members of the bureau-level IT governance board.  The executive order is designed to empower CIOs by both increasing their enterprise awareness and giving them increased hiring powers.  Senior administration officials said they were compelled to make this move after meeting last June with private sector tech CEOs, who described the empowerment of the CIO as a major difference between the private and public sectors.  Giving CIOs more influence has long been a popular idea, and the 2014 Federal Information Technology Reform Act (“FITARA”) was designed to give CIOs responsibility for agency spending.  However, only half of the agencies subject to FITARA have managed to make this happen, often drawing lawmakers’ frustrations.  Administration officials believe the executive order will ultimately prove more effective and allow agencies to build the capacity to conduct change on an ongoing basis.

The House of Representatives introduced a measure this week that would direct the Department of Homeland Security (“DHS”) to give lawmakers more information on potential cybersecurity threats posed by Chinese telecommunications firm ZTE.  The resolution would ask DHS to provide the House Homeland Security Committee with any documentation that the agency has on cyber risks introduced by the use of ZTE products on federal, state, and local government networks.  U.S. intelligence officials have warned of ZTE’s alleged links to the Chinese government, and the Pentagon earlier this month told vendors on military bases to stop selling devices from ZTE.  The House measure comes as President Trump attempts to reach a U.S.-China trade deal with Chinese President Xi Jinping, potentially complicating the House’s move.  Still, the resolution has the support of many in the intelligence community, including FBI director Christopher Wray, who affirmed his belief on Tuesday that state-linked firms, like ZTE, pose a cyber-espionage threat.

Big Movers

Aerojet Rocketdyne (up 5.0%) – Share prices were up this week after United Launch Alliance announced it will use an Aerojet Rocketdyne engine for the upper stage of its new Vulcan rocket.

AeroVironment (down 6.3%) – Share prices were down this week after the company was accused of trying to conceal that employees transported a drone rigged with explosives on a commercial flight and firing the manager who told the government.

Transactions

Aerostructures Long Island, Inc. has acquired Triumph Structures – Long Island, LLC, a subsidiary of the Triumph Group, Inc., a provider of aircraft structural components and dynamic parts and assemblies for commercial and military aerospace programs.  Terms of the deal were not disclosed.

Spell Capital Partners, LLC has acquired 3P Processing, Inc., a provider of metal finishing, testing, and inspection process services to the aerospace & defense sector, specializing in complex geometric and high-precision parts.  Terms of the deal were not disclosed.

Trive Capital’s portfolio company, Valence Surface Technologies, LLC, has acquired Triumph Structures – Los Angeles, Inc. and Triumph Processing, Inc., providers of manufacturing and assembly of large structural components and non-destructive testing, chemical processing, and paint services to the global aerospace industry, respectively.  Terms of the deal were not disclosed.

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Industry Week in Review – May 11, 2018

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Aerospace & Defense Update

The House Armed Services Committee passed its version of the 2019 National Defense Authorization Act (“NDAA”) early Thursday morning.  In total, the bill includes $716 billion in defense spending, which allocates $617 billion to the base budget, $69 billion to the Overseas Contingency Operations account, and $30 billion to defense-related programs at the Department of Energy and other agencies.  The NDAA authorizes spending of $39 billion for military aviation upgrades, $19 billion to replace outdated Army equipment, and $26 billion for equipment maintenance and replacement parts.  The NDAA will now go to a full House vote within the coming weeks and will be debated by the Senate Armed Services Committee starting on May 21st.

Third Point, a New York-based activist investor firm, is pressuring United Technologies to break up into three focused standalone companies, and has expressed this view with the company’s board.  The idea of breaking up the conglomerate began in September when United Technologies announced its $23 billion acquisition of Rockwell Collins.  United Technologies’ current business portfolio consists of jet engine manufacturer Pratt & Whitney, Otis Elevator, and Carrier climate control systems.  In the proposed break-up plans, Pratt & Whitney and Rockwell Collins would merge with United Technologies’ aviation services business to create a standalone aerospace company.  Third Point previously pushed Honeywell to consider the divestiture of its aerospace business, which ultimately resulted in company spinning off two other units.

Government Technology Solutions

Recent first quarter earnings reports have shown that classified revenue is becoming an increasingly high-profile focus area for publicly-traded government contractors.  Raytheon reported almost half of its first quarter contract bookings in its government services business as classified and Leidos booked $1.3 billion in classified intelligence community awards during the quarter.  Bloomberg Government estimates Department of Defense (“DoD”) classified IT budgets will rise to $10 billion in fiscal 2019 from $8.5 billion in fiscal 2017.  The main drivers behind the growth increased funding for cybersecurity, procurement, and research, development, test and evaluation (“RDT&E”) technologies. The RDT&E funds support development of new systems and expansion of classified fielded systems.  To keep the government networks secure, cybersecurity spend is deemed classified in order to maintain the United States’ technological advantage as commercial hacking tools become more readily available.  Government contractors are increasingly focused on IT modernization efforts and capabilities to keep pace with the federal government’s growing spend on classified IT services.

On Thursday, the White House announced the creation of a Select Committee on Artificial Intelligence (“AI”) during an organized AI summit of industry and academic partners.  The new committee’s mission is to improve the coordination of Federal efforts related to AI to ensure continued U.S. leadership in this area.  The group will operate within the technology committee at the National Science and Technology Council, and will be comprised of senior R&D officials from across the federal government.  The Trump administration’s investment in AI plans to further define AI R&D goals, coordinate agency R&D plans, and encourage agency partnerships. The creation of the Select Committee on AI shows the government’s confidence in this technology and recognition of the potential cost savings available through automated processes.

Big Movers

Kratos Defense & Security Solutions (up 13.9%) – Share prices were up this week after the company beat earnings expectations and reported a 78% increase in revenue for Kratos’ Unmanned Systems business from this period last year.

Jacobs Engineering (up 11.8%) – Share prices were up this week after the company reported adjusted second-quarter earnings ahead of analyst expectations.

Transactions

Axon Enteprise, LLC has acquired Kander & Company’s portfolio company Safariland’s subsidiary, VIEVU, LLC, a provider of wearable video cameras and data management software for law enforcement and private security professionals.  Terms of the deal were not disclosed.

LookingGlass Cyber Solutions, Inc. a portfolio company of NewSpring Capital, has acquired the Sentinel threat intelligence platform of Goldman Sachs Group, Inc.  The Sentinel threat intelligence platform facilitates the ingestion, extraction, and organizational workflow of cyber threat intelligence.  Terms of the deal were not disclosed.

Quality Technology, Inc. has acquired privately held Fusion PPT, LLC, a provider of IT consulting and system integration services.  Areas of focus are cloud computing, big data, cybersecurity, and IT support services.  Terms of the deal were not disclosed.

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Industry Week in Review – May 4, 2018

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Aerospace & Defense Update

On Tuesday, Boeing announced its intention to acquire KLX, Inc., a provider of aerospace fasteners, consumables, and logistics services to customers worldwide for $4.2 billion.  The acquisition will include KLX’s Aerospace Solutions Group, but will not include KLX’s Energy Services Group, which Boeing plans to divest.  KLX Aerospace will be integrated as a subsidiary of Aviall, which manufactures aerospace parts within Boeing’s Global Services business unit.  The Global Services unit was launched last year as part of Boeing’s broader strategy of expanding into the higher-margin aviation aftermarket business by providing maintenance, spare parts, and other services.  Boeing’s CEO, Dennis Muilenberg, has set the goal of tripling the division’s sales to $50 billion over the next decade, which will likely fuel consolidation amongst the current aviation aftermarket providers.

Spirit AeroSystems has agreed to acquire the parent company of aerospace-components maker, Asco Industries, for $650 million.  The Belgian-based company is a supplier of high-lift wing structures, mechanical assemblies, and major functional components to original equipment manufacturers and Tier-1 suppliers within global commercial aerospace and military markets.  The acquisition is in line with Spirit AeroSystems’ strategy of diversifying its main focus away from aerostructures manufacturing.  Asco will help Spirit AeroSystems expand into parts manufacturing for the Airbus A320 and A350, as well as Lockheed Martin’s F-35 fighter jet, and provide greater access to commercial customers to expand its fabrication business.

Government Technology Solutions

The White House’s National Security Council is pushing to rescind the Presidential Policy Directive 20 (“PPD-20”), a memorandum that guides the approval process for government-backed cyberattacks, with a more streamlined channel for military leaders to get their offensive cyber operations greenlit.  The move comes as lawmakers openly question whether the U.S. Cyber Command, the nation’s premier cyber warfare unit, is hamstrung from responding to Russian meddling due to bureaucratic red tape.  Currently, PPD-20 requires government agencies to run approvals for offensive operations through a chain of command that stretches across the Federal Government, even requiring the direct blessing of the President for operations of “significant consequence”.  However, the move faces resistance from the Intelligence Community (“IC”) and several federal agencies, particularly as intelligence officials express concern over whether rescinding the directive will affect their own active missions.  It remains unclear whether giving military leaders more leeway to conduct hacking operations will lead to more effective missions.

As the Department of Homeland Security (“DHS”) prepares a new cybersecurity strategy, lawmakers have called on the DHS to improve its information-sharing program.  DHS has worked to quicken the pace at which it shares information with the private sector, touting its Automated Indicator Sharing program.  However, Rep. Dutch Ruppersberger argued in a report released Monday that U.S. networks can no longer rely solely on such reactive, indicator-based sharing programs.  President Trump’s fiscal 2019 budget includes $1.7 billion for cybersecurity at DHS, which Ruppersberger hopes will be put towards investing in information-sharing.  The report comes as DHS awaits congressional approval of a reorganization that would change the National Protection and Programs Directorate, its bureau for protecting the cyber and physical security of critical infrastructure, into a dedicated cybersecurity bureau renamed the Cybersecurity and Infrastructure Security Agency.  The focus of DHS’ new strategy will be to curb the “systemic” cyber risk of the nation’s infrastructure by using private and public sector collaboration to better connect the dots on threats.

Big Movers 

Fluor (down 24.0%) – Share prices were down this week after the company reported a net loss per share in the first quarter and reduced its full-year EPS guidance range from $3.10 – $3.50 to $2.10 – $2.50 per share.

Spirit AeroSystems (up 4.4%) – Share prices were up this week after the company agreed to acquire Asco Industries for $650 million.

Transactions

American Industrial Partners has agreed to acquire L3 Technologies’ subsidiary, Vertex Aerospace, a provider of sustainment & support and aviation & aerospace technical services for the DoD, government agencies and foreign governments.  The deal is worth an estimated $540 million.

Boeing Co. has agreed to acquire KLX, Inc., a provider of aerospace fasteners, consumables, and logistics services worldwide through its Aerospace Solutions Group.  The deal is worth an estimated $4.2 billion.

Ontario Systems, LLC, a portfolio company of Arlington Capital Partners, has acquired Justice Systems, Inc., a provider of court case management, prosecutor and public defender case management, and electronic payments software for state and municipal court systems.  Terms of the deal were not disclosed.

Pinewell Capital, LLC has acquired Avon Engineered Fabrications, Inc., a provider of military-grade performance inflatable products to various DoD and US military branches, as well as the other commercial clients worldwide.  Terms of the deal were not disclosed.

Spirit AeroSystems Holdings, Inc. has agreed to acquire Asco Industries N.V., a provider of high lift wing structures, mechanical assemblies, and components to OEMs and Tier-1 suppliers.  The deal is worth an estimated $650 million. 

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Industry Week in Review –April 27, 2018

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Aerospace & Defense Update

Numerous aerospace and defense companies have announced positive 1Q18 earnings throughout the past week.  Boeing reported a strong quarter, beating consensus earnings per share (“EPS”) estimates by $1.05 (28.8%) and reported revenue growth of 6.6% year-over-year (“YoY”) to $23.4 billion, driven by a 9% increase in commercial aircraft deliveries and a 13% increase in Defense, Space, & Security segment revenues.  Lockheed Martin also reported a solid quarter, beating EPS estimates by $0.60 (14.9%) and increasing revenue by 3.8% YoY to $11.6 billion.  Lockheed’s highlight of the quarter was the conclusion of the System Design and Development phase of the F-35 program.  Northrop Grumman also had a favorable quarter and beat EPS estimates by $0.57 (13.5%) while increasing revenue by 5.1% YoY to $6.7 billion, driven by higher Manned Aircraft volume at Aerospace Systems and higher Sensors and Processing volume at Mission Systems.  All three companies beat consensus revenue estimates and raised EPS guidance for 2018, citing industry tailwinds from the ramp up in defense spending and a lower tax rate environment.

United Technologies beat EPS estimates by $0.26 (14.7%) and increased revenue by 10.1% YoY to $15.2 billion due to robust military sales and strong aftermarket sales from its large installed base of engines.  General Dynamics beat EPS estimates by $0.17 (6.4%) and raised its revenue by 1.3% YoY to $7.5 billion, citing growth in its defense business revenues, particularly within its Combat Systems segment.  Lastly, Raytheon beat EPS estimates by $0.09 (4.1%) and increased its revenue by 5.0% YoY to $6.3 billion.  Both United Technologies and Raytheon beat consensus revenue estimates and raised 2018 EPS guidance.  While General Dynamics missed quarterly revenue estimates, the company reaffirmed previous 2018 EPS guidance, expecting continued strength in global demand for its integrated air and missile defense systems.

Government Technology Solutions

According to the International Data Corporation (“IDC”), spending on artificial intelligence (“AI”) and machine learning is expected to grow from $12 billion in 2017 to $57.6 billion in 2021.  This growth is attributed to the increased efficiencies and cost-cutting opportunities delivered through AI that government personnel are beginning to realize.  The greatest need for AI is in cybersecurity defense because agencies are currently spending significant resources and manhours to defend against potential cyber threats, while hacker technology is consistently evolving.  AI will be able to improve security measures and protect against malware without requiring people to reprogram layers of code.  While the technology is not currently available for implementation throughout the government, 79% of respondents in a survey conducted by Meritalk believe that AI and machine learning will have a place within the government once the technology is safe and effective.

The Global Cyber Alliance’s (“GCA”) recent survey shows that only one of the fifty largest federal IT contractors have adopted an email security measure to protect against phishing.  Engility is the only firm using the Domain-based Message, Authentication, Reporting, and Conference (“DMARC”) protocol to guard against this type of cyberattack.  DMARC creates a public record for verifying whether an email sender is authorized to send or receive messages within the domain.  The Department of Homeland Security (“DHS”) ordered federal agencies to implement DMARC by January 15th of this year.  While the agencies have complied, hackers will continue to target federal contractors to collect sensitive U.S. government information until their systems are better protected.  For example, a 2014 investigation by the Senate Armed Services Committee found that Chinese hackers had breached contractors to the U.S. Transportation Command approximately twenty times, however the command was only aware of two intrusions.

Big Movers

Safran (up 4.3%) – Share prices were up this week after the company reported strong first quarter revenue growth of 12% and expects to reach the high-end of its 2018 EPS target. 

Raytheon (down 10.3%) – Share prices were down this week as a result of easing tensions within the Korean peninsula.

Transactions

Ducommun, Inc. has acquired Certified Thermoplastics Co., a provider of precision profile extrusions and extruded assemblies of engineered thermoplastic resins, compounds and alloys for aerospace, defense, medical, and industrial applications.  Terms of the deal were not disclosed.

Ian, Evan & Alexander Corp. (IEA), a portfolio company of Enlightenment Capital, acquired RAI Government Services, LLC, a subsidiary of Maxar Technologies Ltd., a provider of intelligence services to clients in the U.S. Intelligence Community, local and federal law enforcement and the Department of Defense.  Terms of the deal were not disclosed

Peraton Corp., a portfolio company of Veritas Capital, has acquired Strategic Resources International, Inc., a provider of highly-adaptable communications infrastructure in anticipation of critical, global communications needs.  Terms of the deal were not disclosed.

QinetiQ Group plc has agreed to acquire E.I.S. Aircraft GmbH, a provider of aerial training services, threat representation, and combat battle simulations.  The deal is worth an estimated $85.5 million.

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Industry Week in Review –April 20, 2018

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Aerospace & Defense Update

In response to evolving threats from Russia and China concerning hypersonic missiles penetrating existing U.S. missile defense systems, the U.S. Air Force has revealed it will spend close to $1 billion to develop its own hypersonic missile. The Air Force awarded a $928 million contract to Lockheed Martin for the design, development, and testing of an air-launched hypersonic strike weapon capable of easily exceeding the speed of sound.  The contract furthers Pentagon efforts to develop state-of-the-art hypersonic technologies (defined as those capable of traveling faster than Mach 5) and would bolster existing missile defense systems which may be ill-equipped to handle such speeds.  This Air Force-led effort through the Hypersonic Conventional Strike Weapon program, along with the Tactical Boost Glide program joint-led by the Air Force and the Defense Advanced Research Projects Agency (“DARPA”), are aimed at protecting the U.S. from the possibility of a nuclear first strike.

The U.S. Federal Aviation Administration (“FAA”) this week ordered the inspection of certain CFM International jet engines following the engine explosion on Southwest Airline flight 1380, the first fatal U.S. airline accident in nearly a decade.  CFM International, a joint venture between Safran and General Electric, produces the approximately 8,000 CFM56-7B engines currently in operation on Boeing 737s, a pillar of the aerospace industry which has logged over 350 million hours of safe travel.  While Southwest and other airlines have vowed to accelerate inspections on similar engines over the next 30 days, the U.S. National Transportation Safety Board (“NTSB”) is launching an investigation into the cause of the accident.  The NTSB, along with French investigators, plans to complete its investigation within 15 months, but early efforts focus on metal fatigue of the fan blade.

Government Technology Solutions

The Internal Revenue Service (“IRS”) announced late Tuesday that it would allow tax payers to submit their returns a day late, through Wednesday, without penalty after technical problems impaired the agency’s ability to process tax returns filed electronically.  The IRS described Tuesday’s glitch as hardware-related, and the agency announced later that day that its systems were back online and able to process returns.  However, the episode raised fresh questions of whether the IRS’ antiquated computer systems are prepared for the massive overhaul mandated by last year’s tax reform.  The IRS has over 60 different IT systems for managing the cases of individual tax payers, most of whom file electronically.  A report submitted to Congress by an internal IRS watchdog noted that many of the IRS’ systems have not been updated in decades, including two of them that are nearly six decades old.  Senior IRS officials stated that replacing the agency’s aging IT infrastructure is a high priority.

A Council of the Inspectors General on Integrity and Efficiency (“CIGIE”) report identified IT security and management as one of the top management and performance challenges faced by federal agencies.  The CIGIE report was produced by compiling information from 61 top management and performance challenges reports written by the offices of various inspector generals at agencies across the federal government.  The report specifically identified data security, ongoing IT modernization, contingency planning, and building a qualified workforce as the primary difficulties faced in the IT realm.  Among examples, the CIGIE report noted existing backup challenges in the Department of the Interior (“DOI”) that could leave the DOI without access to important data should a computer fail or its systems be compromised.  Federal IT management was also on the Government Accountability Office’s (“GAO”) latest high-risk list, released in 2017.

Big Movers

Textron (up 12.0%) – Share prices were up this week after the company beat first quarter earnings estimates and agreed to sell its tool unit to Emerson Electric.

Tyler Technologies (up 5.8%) – Share prices were up this week after the company announced it has signed a definitive agreement to acquire Socrata, Inc.

Transactions

Arsenal Capital Partners has acquired Fralock, a provider of components and subassemblies designed and engineered using specialty materials for the semiconductor, aerospace, satellite, and life sciences industries.  Terms of the deal were not disclosed.

Fastener Distribution Holdings, a portfolio company of Audax Private Equity, has acquired Blue Sky Industries, a provider of c-class parts to aerospace and defense MRO and OEM customers.  Terms of the deal were not disclosed.

HEICO Corporation’s subsidiary Dukane Seacom, Inc. has acquired Instrumar Limited’s Emergency Locator Transmitter Beacon product line, a provider of safety-critical devices such as location and distress beacons for commercial aviation and defense markets.  Terms of the all cash deal were not disclosed.

Polaris Alpha has acquired Fourth Dimension Engineering, LLC, a provider of electronic product development services in multiple engineering disciplines to government and commercial clients.  Terms of the deal were not disclosed.

Tyler Technologies has acquired Socrata Inc., the venture-backed industry leader in open data and data-as-a-service solutions for government, providing cloud-based data integration, visualization, analysis, and reporting solutions.  Terms of the deal were not disclosed.

Valiant Integrated Services has acquired Cubic Global Defense Services, a provider of training, operations, intelligence, maintenance, technical, and other support services to the U.S. government and other nations.  The deal is worth an estimated $138 million.

Vantage Specialty Chemicals Holdings, Inc. a portfolio company of H.I.G. Capital, LLC has acquired B&B Tritech, Inc., a provider of military grade surface treatment solutions engineered for defense and commercial aviation markets.  Terms of the deal were not disclosed.

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Industry Week in Review –April 13, 2018

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Aerospace & Defense Update

A report released earlier this week by Space Angels, a fund that invests in early-stage space companies, found that space ventures have raised close to $1 billion from non-government equity investors during the first quarter of 2018.  Approximately $500 million of this funding came from Fidelity’s investment in SpaceX, which is intended to drive the development of Starlink, SpaceX’s satellite communications network.  Other notable investments include Searchlight Capital’s $150 million investment in Global Eagle, a provider of satellite connectivity, and Spaceflight’s announcement of a $150 million Series C funding round.  Space Angels noted that 2018 is expected to be a strong year for the space sector, citing the emergence of small launch vehicles, in conjunction with the growth of small satellite systems, as key growth areas.

At the Navy League’s Sea-Air-Space conference, several companies pitched possible initial-entry, rotary-wing training helicopters to serve as replacements to the aging TH-57 Sea Ranger fleet.  The TH-57 has been in active service since the 1970s, and the Navy has recently been putting out requests for information for potential replacement options.  Airbus, Bell, and Leonardo each brought an example of a training helicopter to the Navy trade show.  The Navy has announced that it plans to purchase a new training helicopter by GFY2020.

Government Technology Solutions

In his testimony before the Senate Judiciary and Commerce committees on Tuesday, Mark Zuckerberg revealed more details regarding Facebook’s response to the Russian tampering in the 2016 presidential elections.  Zuckerberg stated that Facebook notified the DNC and RNC, telling the parties that the two presidential campaigns were targets of Russian hackers.  Previously, it was reported that Facebook had only notified the FBI of Russia’s tampering in the elections.  Zuckerberg stated that APT28, or Fancy Bear, a hacking group linked to Russia’s Main Intelligence Directorate, had previously attempted to hack Facebook in the past, but Facebook’s security team saw unusual activity in months leading up to the election and notified the DNC and RNC.  In the summer before the election, Facebook’s security team noticed increased activity from Russian hackers when APT28-related accounts created fake personas to funnel stolen information to journalists.  Even though Facebook eventually notified the DNC and RNC, Zuckerberg claimed responsibility and stated that Facebook was too slow in identifying the Russian cyber-attacks.

According to a new Deltek analysis, the federal health IT budget is expected to grow to $8.5 billion in 2022 from $6.1 billion in 2018, driven heavily by the spending at the Department of Veterans Affairs (“VA”) and Department of Defense (“DoD”).  Deltek divides the health IT budget into agencies who protect people from health risks, provide health care services, and pay for health care services.  Agencies that provide health care services, such as the VA and several DOD organizations, will receive the biggest spend, with Deltek estimating it to grow from $3.3 billion in 2018 and $5.4 billion in 2023.  The $2.1 billion in growth is expected to be solely allocated to the VA, as the agency is the biggest prover of health care services and is also performing its own electronic health record (“EHR”) implementation.  Major health IT contracts such as CIOSP3, T4NG, and SEWP V expect to receive a large portion of this increase in funding.

Big Movers

 Elbit Systems (up 4.8%) – Share prices were up this week after the company completed the acquisition of the assets and operations of Universal Avionics Systems for a purchase price of approximately $120 million.

 Analogic (down 12.4%) – Share prices were down this week after the law office of Brodsky & Smith announced it is investigating potential claims against Analogic’s Board of Directors for possible breaches of fiduciary duty in connection with the sale of the company to Altaris Capital Partners.

Transactions

 General Dynamics’ subsidiary Jet Aviation has agreed to acquire Hawker Pacific Pty. Ltd., a provider of a wide range of aviation services, including civil MRO services, government fleet management, FBO services, aircraft sales and parts sales.  The deal is worth an estimated $250 million.

 Luminar Technologies, Inc. has acquired Black Forest Engineering, LLC, a provider of high-performance receivers used in LiDAR systems.  Terms of the deal were not disclosed.

 SOS International has acquired STG Group Holdings, Inc., a provider of mission-critical technology, cyber, and data solutions.  The deal is worth an estimated $83 million.

 UmbraGroup S.p.A. has acquired Meggitt plc’s subsidiary Thomson Aerospace & Defense, a provider of highly engineered ball screws and electromechanical systems to defense and commercial clients.  Terms of the deal were not disclosed.

Woodward, Inc. has acquired Rolls Royce plc’s subsidiary L-Orange GmbH, a provider of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.  The deal is worth an estimated $859 million.

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Industry Week in Review –April 6, 2018

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Aerospace & Defense Update

In response to the recent trade dispute between the U.S. and China, Boeing announced that it will engage in talks to help prevent the dispute from harming the global aerospace industry.  Chinese authorities said that aircraft will be included amongst the products targeted by the tariffs, however the tariffs will only be applied to smaller planes, such as Boeing’s existing single-aisle 737 and the smallest version of the 737 Max, which only have a limited number of Chinese clients.  Overall, the tariffs will impact only 5% of Boeing’s 737 aircraft backlog.  Even if the U.S. and China are unable to reach a trade agreement, deliveries under contract with Chinese customers are still likely to go ahead under the existing terms without having a material impact on Boeing’s short-term financial performance.

Major General David Thompson has been appointed to the newly created position of Vice Command of the Air Force Space Command and will be responsible for promoting military space operations within the Pentagon.  This is the first time that a uniformed leader based in the Pentagon will be solely focused on promoting space operations, demonstrating the increasing prioritization of space within the Air Force.  Major General Thompson will be tasked with increasing the role of the Air Force Space Command, elevating it into a major command.

Government Technology Solutions

In a March 26th letter, the Department of Homeland Security (“DHS”) for the first time acknowledged the existence in Washington, D.C. of rogue devices that foreign spies and criminals could be using to track individual cellphones and intercept calls and messages.  Foreign powers’ use of such cellphone-site simulators, also known as Stingrays, has long been a concern, but intelligence and law enforcement agencies have been silent on the issue until recently.  DHS said it has not determined the type of devices in use or who may be operating them.  The devices work by tricking mobile phones into locking onto them instead of legitimate cell towers, revealing the exact location of a particular cellphone.  Shutting down rogue Stingrays is an expensive endeavor that would require wireless network upgrades for which the industry has been unwilling to pay.  Security-company researchers first located Stingrays in 2014 near the White House, Supreme Court, and Pentagon, among other locations, but there has been little political will to tackle the issue.

The Treasury Department’s Fiscal Service is reporting positive results from its five-month long test project using blockchain for potential fiscal asset management activities.  In September 2017, the Office of Financial Innovation and Transformation began a proof concept aimed at discovering if blockchain could improve oversight and management of physical assets like computers and cellphones.  Despite a significant startup effort, the results indicated that using blockchain resulted in marked improvement in both transparency and efficiency for asset management.  Fiscal asset management is currently a manual, spreadsheet-based process for reconciling physical assets with status descriptions.  Blockchain could streamline the process and enable property custodians to see where assets are in real time, instead of just at a moment in time, as a traditional spreadsheet does.  The next step of the concept is to determine how blockchain will work once it is placed into the actual federal context and whether the added efficiency and effectiveness is worth the upfront investment.

Big Movers

ICF International (up 9.1%) – Share prices were up this week after the company was awarded two contracts to support the U.S. Department of Agriculture’s IT modernization efforts.

GKN (down 8.4%) – Share prices were down this week after the company announced it is facing a credit rating downgrade due to new debt that Melrose, the company’s new owners, is raising to finance the transaction.

 

Transactions

Alvarez & Marsal (“A&M”) Capital Partners has acquired Client Network Services, Inc. (“CNSI”), a provider of IT and business process outsourcing solutions to federal, state, and local government agencies.  Terms of the deal were not disclosed.

Aviation Technical Services has acquired American Cooler Service Inc., a provider of heat exchangers, fuel systems, pneumatics, and electromechanical products.  Terms of the deal were not disclosed.

Day & Zimmermann has acquired M2 Services Corporation, a provider of aviation and vehicle heavy maintenance, modification, painting, component repair, and overhaul services.  Terms of the deal were not disclosed.

GenNx360 Capital Partners has acquired Subsea Global Solutions, a provider of underwater ship maintenance, inspection, repair, and marine construction services.  Terms of the deal were not disclosed.

LDI, Ltd. has acquired Polygon Company, a provider of composite bearing, non-gelcoat composite pneumatic cylinders, and dielectric motor insulation, among others.  Terms of the deal were not disclosed.

Orolia SA has agreed to acquire Talen-X, Inc., a provider of hardware and software development for GPS and Global Navigation Satellite System.  Terms of the deal were not disclosed.

Superion, LLC has acquired Public Safety Corporation, a provider of technology and technology-enabled services focused on state and local government public safety projects and programs.  Terms of the deal were not disclosed.

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