Industry Week in Review – March 30, 2018

/in /by

Aerospace & Defense Update

On Thursday, shareholders of GKN plc, a British manufacturer of aerospace and auto parts, narrowly voted to accept an acquisition offer from turnaround specialist, Melrose Industries plc.  Melrose had previously submitted a hostile takeover bid of ~$9.5 billion in January, which was initially rejected.  In response to Melrose’s hostile approach, GKN announced a plan to split its aerospace and automotive businesses into separate companies through the sale of its automotive business to Dana Corp. for ~$6.1 billion; however, this sale is no longer expected to occur.  Since its initial hostile bid, Melrose has sweetened its offer to an estimated value of ~$11.1 billion.  As part of the purchase agreement, Melrose has guaranteed that it will not sell GKN Aerospace for the next five years and that GKN will maintain its UK listing and headquarters.

The National Aeronautics and Space Administration (“NASA”) is undergoing final preparations for its Transiting Exoplanet Survey Satellite (“TESS”), which will launch from Space Launch Complex 40 at Cape Canaveral Air Force Station in Florida on April 16th.  TESS will be launched and encapsulated within the payload fairing of a SpaceX Falcon 9 rocket.  Sixty days after launch, and following a series of instrumentation tests, the satellite will begin a two-year survey mission during which it will monitor more than 200,000 stars for the presence of exoplanets.  The survey is the first-ever all-sky transit survey, and will seek to identify planets that range from Earth-sized to gas giants.

Government Technology Solutions

Anticipation for the Navy’s $3.4 billion Next Generation Enterprise Network-Recompete is hitting a boiling point, as the solicitation is expected to drop any day now.  The three companies fighting for the services track of the contract are DXC Technology (the incumbent), Leidos, and CSRA.  While the winner of this contract will certainly earn a massive pay day, the real value in this victory lays in how the Navy envisions this contract to fit into its larger network modernization effort.  The winner will gain a major foothold in IT modernization, an area of priority for the Trump administration, and set themselves up for more opportunities based on the Navy’s strategy to upgrade a global network that supports 700,000 Navy and Marine Corps users at 2,500 sites.  DXC looks to be the front-runner to win the contract based on almost two-decades of incumbency and a strong continuing partnership with AT&T.  Leidos and CSRA, however, are not sitting idly by; Leidos is partnering with IBM, Unisys, and Verizon, while CSRA plans to include team members once its acquisition with General Dynamics matures.

West Virginia is set to become the first state to allow Internet voting by blockchain in a Federal election when the state holds its primary elections on May 8th.  Deployed and overseas military service members and their families in two counties will be part of the pilot test.  West Virginia is using Voatz, a Boston startup, and anticipates a few dozen voters to participate in the pilot test.  Voatz’s technology works by recording all votes on a blockchain, where each vote is ultimately verified by a third-party participant.  This technology will be able to accurately count all votes and allow voters to participate from anywhere in the world, a feature particularly beneficial for members of the military.  While some critics cite that cyberattacks could be an issue, any manipulation to the data would be easy to spot since blockchain is publicly accessible. Though there are no plans to expand the voting technology to the general public yet, West Virginia’s innovation may lead to other states quickly following suit.

Big Movers

Maxar Technologies (up 6.0%) – Share prices were up this week after the company was chosen to build Spacecom’s AMOS-8 advanced communications satellite.

AAR (up 5.2%) – Share prices were up this week after the company beat earnings per share estimates for the quarter.

Transactions

Melrose Industries plc has agreed to acquire GKN plc, a provider of design, development and manufacturing of aerospace and defense products as well as automotive and agrotechnical components.  The deal is worth an estimated $11.1 billion.

White Wolf Capital’s portfolio company Consolidated Machine & Tool Holdings, LLC has acquired LCP Machine, Inc., a provider of CNC precision machining serving a number of industries, including aerospace, defense, energy and industrial.  Terms of the deal were not disclosed.

Click here to review our comparable company analysis.

Industry Week in Review – March 23, 2018

/in /by

Aerospace & Defense Update

On Friday morning, Congress passed a $1.3 trillion budget deal, which prevents another government shutdown and gives Federal agencies the full government fiscal year spending allotment.  The defense bill is touted as the largest increase in defense spending in over 15 years and will increase the budget to $700 billion.  The increase is anticipated to add additional funding for ships, aircraft, and missile defense in addition to boosting military readiness and modernization efforts.  President Trump raised the possibility of vetoing the spending bill Friday afternoon, but ultimately signed the legislation, referencing that the defense funding within the bill made it too important to veto.

As mandated by the GFY2018 spending bill, the U.S. Army will conduct a competition to procure its Ground Mobility Vehicle (“GMV”), which serves as an ultra-light variant of the Joint Light Tactical Vehicle (“JLTV”).  Currently, General Dynamics’s Flyer 72 is serving as the interim GMV and has been purchased for five airborne infantry brigade combat teams.  However, a large pool of GMV manufacturers exist, including industry players General Dynamics, Boeing, Polaris, Hendrick Dynamics, Vyper Adamas, and Lockheed Martin.  The manufacturers will be competing to provide a total of 1,700 GMVs for this phase of the Army’s procurement process.

Government Technology Solutions

Roughly a month after General Dynamics (“GD”) agreed to acquire CSRA for $40.75 per share in cash, GD sweetened its offer this week to $41.25 per share following a counter bid by CACI.  On Sunday, CACI surpassed GD’s original $6.8 billion offer with a $7.2 billion bid of their own, offering $44 per share in cash and stock.  However, despite CACI’s increase in valuation, CSRA’s board has accepted the new GD offer, just as they did before the original February 12th announcement when CSRA reportedly also held bids from CACI and SAIC.  GD’s valuation represents a $9.7 billion enterprise value as the company will also assume $2.8 billion of CSRA’s debt.  GD ultimately prevailed in the bidding war in large part due to their all-cash offer while CACI offered both cash and shares, which closed down 7% Monday after their counter-bid was made public.  CACI’s offer was worth just $42.20 per share when the market closed Friday.  GD and CSRA received clearance from federal anti-trust officials last week, and the deal is still expected to close in the first half of this year.

The White House released its 2018 President’s Management Agenda on March 20th, highlighting IT modernization, reshaping the federal workforce, and a reorganization of the government.  The report highlights 14 priority areas for cross-agency transformation, including improving federal customer experience, category management, transparency for IT spending, acquisition management, and security clearance reform.  The three main drivers of this transformation will be IT modernization, data and transparency, and reforms to the federal workforce.  Using a combination of executive orders, legislation, and the newly-created central modernization fund established by the Modernizing Government Technology (“MGT”) Act, the agenda emphasizes IT modernization through security improvements, modernizing citizen-facing services, and cost-effective tech infrastructure.  Additionally, the agenda takes aim at the federal personnel system, outlining plans to partner with Congress to overhaul the civil service system’s statutory and regulatory rules.  Other focus areas for reform include human capital management, cutting unnecessary political positions, and expanding the use of shared services.

Big Movers

CACI International (down 6.8%) – Share prices were down this week after the company made a $7.2 billion bid for CSRA that was ultimately rejected in favor of GD’s all-cash offer.

Smith’s Group (down 6.2%) – Share prices were down this week after the company announced weaker than expected earnings, with revenue falling 4.3% and pretax profit falling 12% for the six months ending January 31.

Transactions

CPI Aerostructures, Inc. has agreed to acquire Air Industries Group’s subsidiary Welding Metallurgy, Inc., a provider of specialty welded products and assemblies, large diameter tube bending and integrated electronic assemblies, among other capabilities, to defense and aerospace markets.  The deal is worth an estimated $9 million.

Elbit Systems, Ltd. has agreed to acquire Universal Avionics Systems Corp., a provider of integrated flight management systems and navigation management systems, navigation sensors, flight recorders, and cabin display systems.

Hanover Partners has acquired Blast Deflectors, Inc., a provider of jet blast deflectors, ground run-up enclosures, and end-around taxiway screens for aviation infrastructure applications.

Phoenix East Aviation (Renovus Capital) has acquired Superior Flight School, Inc., a provider of highly engineered aerospace elastomers commercial transport airframes as well as defense aerospace applications.  Terms of the deal were not disclosed.

TransDigm Group, Inc. has agreed to acquire Extant Aerospace, a provider of proprietary, aftermarket products as well as repair and overhaul services for aerospace and defense markets.  The deal is worth an estimated $525 million.

Click here to review our comparable company analysis.

Industry Week in Review – March 16, 2018

/in /by

Aerospace & Defense Update

The SpeedNews 2018 conference was held this week in Beverly Hills, CA.  The conference brings together members of the aviation industry, which include commercial, defense, business and general aviation, aerospace manufacturing, raw materials, and M&A stakeholders.  Overall, the conference demonstrated strong tailwinds for the commercial aviation industry, highlighted by record backlog levels and rising delivery schedules.  The conference also posed questions around Boeing and its New Midmarket Airplane (“NMA”) strategy and its potential launch in 2018.  Other key topics included Airbus and Boeing’s strategy of growing into the aftermarket and how this strategy will impact both acquisitions made by original equipment manufacturers (“OEMs”) in the sector as well as supplier relationships with OEMs.

On Wednesday, the Air Force announced its plans to split $641 million in contract awards for satellite launch operations between SpaceX and United Launch Alliance (“ULA”), a joint venture between Boeing and Lockheed Martin.  Of the $641 million, SpaceX was awarded $290 million in a fixed price contract to launch three GPS satellites into orbit on its Falcon 9 rocket by the end of 2020.  ULA was awarded the remaining $351 million for two launches of Air Force spacecraft on its Atlas V rockets. The Pentagon expressed that the awards were parts of its continuous efforts to reduce costs as well as maintain access to space through multiple launch providers that are able to compete over the long-term for national security payloads.

Government Technology Solutions

On Thursday, the Trump administration announced sanctions against Russian entities for a multitude of actions, including meddling in the 2016 presidential election, the NotPetya attack, and persistent attempts to break into the U.S. energy grid.  The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned five entities along with 19 individuals with ties to the Kremlin.  Treasury Secretary Steven Mnuchin described the targeted sanctions as part of a broader effort to address ongoing “nefarious” acts from Russia.  Many of those sanctioned were responsible for attempts to breach industry control systems tied to the U.S. energy grid, where the Kremlin conducted a multi-stage campaign to penetrate power company IT networks through spearphishing and watering-hole domains. Additional sanctions were passed against a list of people linked to the Internet Research Agency for spreading election-related propaganda on social media during the 2016 presidential election.

Although paper ballots may seem like an antiquated voting practice, hacking fears are now pushing an increasing number of states toward a return to the basics.  Heeding warnings from Washington regarding potential cyber threats, including the Kremlin, that may target electronic voting systems in the 2018 midterm elections, state legislatures are taking action to strengthen election cybersecurity measures.  The primary focus has been doing away with direct-recording electronic voting machines (“DREs”) that do not produce a paper, auditable ballot to systems that do.  Voting systems vary state-by-state, as five exclusively use DREs, a select few use only paper-based voting systems, and the majority use a combination of the two.  Kentucky moved last month to require that all future voting equipment provide a paper record, while Virginia decertified all of its paperless systems in December 2017.  President Trump recently endorsed the notion of transitioning to paper-based ballots and Congress has recently introduced two such bills, although neither have seen much progress.

Big Movers 

Kongsberg Gruppen (up 4.8%) – Share prices were up this week after the company announced it has signed a letter of intent to supply equipment for military vehicles to Qatar worth up to $1.9 billion.

Kratos Defense & Security Solutions (down 18.5%) – Share prices were down this week after the release of a highly-critical research report this week by a third-party investment manager.

 

Transactions

Elbit Systems, Ltd. has agreed to acquire Israel Military Industries, Ltd., a provider of arms, ammunition, explosives and propellants, military support systems and equipment, and aircraft accessories as well as develops remote-control mobile robots.  The deal is worth an estimated $540 million.

Odyssey Investment Partners portfolio company CPI International Inc. has agreed to acquire Viasat’s Large-Diameter GEO Satcom Antenna Product Line, which includes limited motion antennas, all designed for multi-band operation at various frequency bands.  Terms of the deal were not disclosed.

StereoVision Imaging, Inc. has acquired Digital Signal Corp., a provider of facial intelligence sensors, software, systems, and services.  Terms of the deal were not disclosed.

 TransDigm Group, Inc. has agreed to acquire Esterline Corporation’s subsidiary Kirkhill Elastomers, a provider of highly engineered aerospace elastomers commercial transport airframes as well as defense aerospace applications.  The deal is worth an estimated $50 million.

Click here to review our comparable company analysis.

Industry Week in Review – March 9, 2018

/in /by

Aerospace & Defense Update

On Monday, British-based defense electronics manufacturer, Ultra Electronics plc, announced it had terminated its $235 million acquisition of Sparton Corp.  Back in 2014, Ultra and Sparton formed a joint venture, ERAPSCO, which designs and manufactures sonobuoys used by the U.S. Navy to track and detect submarines.  ERAPSCO was awarded an indefinite delivery indefinite quantity (“IDIQ”) contract in 2014, which will run into 2019, and received $664 million in purchase orders during the contract’s first four years.  Through acquiring Sparton, Ultra would have transitioned into the U.S. Navy’s sole-provider of sonobuoys.  However, anti-trust concerns were raised by the Department of Justice and supported by the Navy, leading Ultra to terminate the deal.

Estimates from the Pentagon were released this week projecting costs of F-35 joint strike fighter fleet modernization at $16 billion.  Pentagon officials will use these estimates to weigh the decision of commencing a bulk buy of the F-35’s from Lockheed Martin or modernizing the current fleet instead.  Overall, the modernization efforts are anticipated to cost at least $10 billion over the next seven years, and the U.S. will have a 70% share of the development costs.  The detailed Pentagon plan for F-35 bulk procurement is set to be released later this month.

Government Technology Solutions

While a high theme within the government services market is mega-mergers and consolidation, highlighted by the recent GDIT acquisition of CSRA among others, several large publicly traded companies in the sector are instead turning towards M&A for smaller and more focused strategic tuck-ins.  Specifically, Booz Allen and CACI International recently stated that they do not feel the need to increase size in order to keep pace with competition.  For instance, Booz Allen’s recent acquisitions of SPARC and Aquilent augmented its organic growth strategy by increasing emerging technology and higher-end engineering capabilities, two focus growth areas.  Similarly, CACI’s CEO Ken Asbury recently stated that his company’s size, which is currently fourth in total annual revenue, has not hindered their market positioning.  While CACI does not feel the need to make a scale-driven acquisition in the near future, the company’s number one priority for cash is M&A.  Both Booz Allen and CACI will continue to strategically use acquisitions to steadily improve capabilities without disrupting corporate dynamics.

A recent report from the Brennan Center for Justice has found that the government has made minimal progress fortifying U.S. voting machines against cyberattacks.  The report states that 41 states have voting systems that are at least a decade old and approximately 43 states and Washington D.C. plan to use machines that are no longer manufactured for the 2018 midterm elections, the same number used in 2015.  With recent cyberattacks making headlines around the world, the government’s legacy systems could be at serious risk during this election season.  In addition to being more vulnerable to cyberattacks, legacy systems pose an increased risk because vendors may no longer be able to write security patches for them.  While it is nearly impossible to improve voting systems before the midterm elections, the report calls on the federal government to grant states appropriate funding to replace equipment for voter security ahead of the 2020 presidential election.

Big Movers

Rolls Royce (up 14.0%) – Share prices were up this week after the company announced it is on track to meet 2020 goals and will introduce a new cost-cutting program.

Comtech Telecommunications (up 32.2%) – Share prices were up this week after the company reported a strong order backlog and raised its fiscal 2018 forecast for earnings per share.

Transactions

The Acacia Group, who acquired privately held Intelligent Decisions, Inc. (ID) in May of 2017, has split the firm into two standalone companies, Applied Insight, LLC and ID Technologies, LLC.

Compagnie de Saint-Gobain S.A.’s Performance Plastic business has acquired SMS Group’s subsidiary HyComp, LLC, a provider of advanced proprietary components for the aerospace and industrial markets.

Click here to review our comparable company analysis.

Industry Week in Review – March 2, 2018

/in /by

Aerospace & Defense Update

President Trump has announced a plan to impose tariffs on steel and aluminum imports of 25% and 10%, respectively.  The tariffs are designed to address a supposed trade imbalance with other countries and referenced national security concerns as a driver behind the tariffs as well.  Although defense manufacturers rely on imports for some of their steel and aluminum needs, the DoD expressed that the new tariffs shouldn’t have a substantive impact on the industrial base for military equipment.  However, aerospace industry executives have argued that new tariffs will result in higher costs and possible reciprocal measures that could disrupt the global supply chain and weaken the $86 billion U.S. aerospace and defense trade surplus.

Per the 2017 Defense Authorization Act, the F-35 joint strike fighter is mandated to undergo comparison tests in the form of a much-anticipated flyoff versus the A-10 Warthog.  Before the F-35 jet enters the operational testing phase, it will be evaluated to determine if it is capable of replacing the close-air support and reconnaissance capabilities currently performed by the A-10.  The head of the F-35 program announced on Wednesday that the testing is set to begin in April.  After the assessment has concluded, the results will be formally reviewed by the Director of Operational Test and Evaluation before moving to the operational test phase in the fall.

Government Technology Solutions

On Tuesday, the White House’s Office of Management and Budget (“OMB”) released Memorandum M-18-12, which outlines the first steps for implementing the Modernizing Government Technology (“MGT”) Act.  The memo stated that a seven-person Technology Modernization Fund (“TMF”) board will be established on March 12th with the purpose of deciding which agency projects will ultimately receive funding from the TMF.  However, agencies can begin to submit initial project proposals for consideration now.  When established, the TMF will look to give funding to projects with both strong ties to an agency mission and common solutions that have the potential to serve in various capacities across multiple agencies.  Agencies have until March 27 to alert the OMB if they intend to set up an IT Working Capital Fund (“WCF”) for fiscal year 2018.  Such IT WCFs will fund the majority of large-scale modernization efforts as the MGT Act only sets aside $500 million in appropriations for the TMF from 2018 – 2019.

The Office of the National Coordinator for Health IT (“ONC”) chief Don Rucker criticized regulatory accumulation in the health care sector on Tuesday for impacting how his office embraces technology moving forward.  Rucker stated that ONC’s mission in promoting the adoption of interoperable electronic health records also calls for a restructuring of regulations governing the amount of documentation physicians must provide.  Rucker’s comments coincided with a report by the Bipartisan Policy Center (“BPC”) calling for a scale back of ONC certifications that were originally designed to promote electronic health record (“EHR”) adoption.  However, with EHR use increasing from 48% in 2009 to 87% in 2015, BPC argued that the regulations promoting incentives for EHR adoption are no longer necessary and hindering health IT advancement.  The report also offers recommendations on how to reshape the role government plays in health IT, with a focus on encouraging core consumer protections and promoting private sector consensus standards.

Big Movers 

Vectrus (up 30.1%) – Share prices were up this week after the company released fourth quarter and full-year 2017 operating results, including fourth quarter revenue growth of 2.6% year-over-year (“YoY”), and projected 11% revenue growth for 2018.

Safran (down 5.9%) – Share prices were down this week after Dassault said it was in in talks with Safran over claims for compensation over a three-year engine delay that caused Dassault to cancel its Falcon 5X jet in December.

Transactions

AE Industrial Partners portfolio company Applied Composites Holdings, LLC has acquired San Diego Composites, a provider of composite hardware and systems for the aerospace, space, and defense industries.  Terms of the deal were not disclosed.

Aeromet International Ltd. has agreed to acquire Langham Industries, Ltd.’s subsidiary Stone Foundries Ltd., a provider of parts for helicopters, commercial and military aircraft, jet engines, and general engineering applications.  Terms of the deal were not disclosed.

By Light Professional IT Services, LLC, a portfolio company of Sagewind Capital, LLC, has agreed to acquire Axom Technologies, Inc., a provider of IT services to defense, intelligence, and homeland security agencies.  Terms of the deal were not disclosed.

Carpenter Technology Corp. has acquired MB CalRAM, LLC, a provider of powder-bed fusion additive manufacturing metal printing services for aerospace, defense, and power generation industries.  Terms of the deal were not disclosed.

Heroux-Devtek, Inc. to has agreed to acquire Beaver Aerospace & Defense Inc., a provider of custom aerospace components that includes ball screws as well as electromechanical actuators.  The deal is worth an estimated $24 million.

Securitas AB subsidiary Securitas Electronic Security, Inc. has agreed to acquire Kratos Defense & Security Solutions, Inc.’s Public Safety & Security Division, a provider of independent integrated solutions for advanced homeland security, public safety, critical infrastructure, and security and surveillance systems for government and commercial applications.  The deal is worth an estimated $69 million.

Shorehill Private Equity portfolio company Tribus Aerospace, LLC has acquired Precision Aerospace Corp. and Precision Micro Mill, LLC, providers of complex parts and assemblies for commercial aerospace and defense applications.  Terms of the deal were not disclosed.

Click here to review our comparable company analysis.

Industry Week in Review – February 23, 2018

/in /by

Aerospace & Defense Update

The UK is exploring the option of blocking Melrose Industries’ hostile takeover bid of roughly $9.5 billion for GKN plc, a British manufacturer of aerospace and auto parts.  If successful in its takeover attempt, Melrose plans to split up the aerospace and auto manufacturing businesses into separate companies.  However, the UK’s defense secretary, Gavin Williamson has expressed serious concerns over the takeover regarding GKN’s defense business as it is a key supplier of components for the Typhoon fast jet and A400M military transport aircraft.  There is also the possibility that the defense secretary could block the takeover himself based on national security grounds.  On March 6th, management teams from GKN and Melrose are scheduled to appear before the UK’s business committee to discuss the takeover.

Two of SpaceX’s prototype communications satellites were launched into orbit on Thursday, by a Falcon 9 rocket, marking the first time that SpaceX had launched its own satellites.  The company’s long-term goal is to launch a constellation of thousands of satellites to beam down internet with the goal of limited service commencing in 2021.  SpaceX will also use the launch as an opportunity to test the satellites’ antennas and other systems.  The National Space Council held a meeting this week at the Kennedy Space Center and stressed the importance of civil and private industry collaboration to maintain the country’s technological advantage.  The council also discussed rolling back some of the antiquated space-related regulations, which could provide a direct boost to private space sector companies such as SpaceX.

Government Technology Solutions

A recent report by BitSight has revealed that a significant number of government contractors have suffered cybersecurity breaches since 2016.  Specifically, 4.3% of technology contractors reported at least one breach in this period, ranking in the bottom half of the six contractor industries evaluated for cybersecurity defense.  To protect against data breaches, experts suggest implementing more advanced user credentials and patching internal software, as approximately 90% of cyberattacks could be prevented through basic cyber hygiene.  As a proactive measure to the growing threat of cyberattacks, government agencies are updating their policies regarding data breach notifications for contractors.  The General Services Administration and the Department of Defense have both recently updated their vendor policies to require a tighter timeline for reporting security incidents.  Updating defensive cybersecurity technology, along with streamlining reactive protocols, are key areas of focus for the federal government in 2018.

The General Dynamics and CSRA blockbuster $9.6 billion deal showcases the market’s optimism towards future funding and the perceived competitive advantage of scale in government IT services.  General Dynamics’ purchase of CSRA will make it the second largest player in the government IT market with a combined $9.9 billion in annual revenue, trailing only Leidos at $10.0 billion.  The Trump administration has increased defense funding and prioritized cybersecurity and IT modernization, both core focus areas of CSRA.  Since acquiring SRA International and becoming an independent public company in 2015, CSRA’s emphasis in these areas – organically and inorganically – was evident by its acquisition of NES and Praxis in 2017.  This transaction reflects the ongoing consolidation in the GovCon space and substantially sized transaction activity, especially amongst the publicly traded companies.  This mega deal follows Lockheed’s divestiture of its services business to Leidos and subsequent acquisition of Sikorsky in 2015, and Northrop’s more recent announcement to acquire Orbital ATK.  After the CSRA acquisition closes, General Dynamics plans to separate its IT services business into a standalone segment, which will represent approximately 25% of total sales for 2018.

Big Movers

ManTech (up 10.0%) – Share prices were up this week after the company beat consensus earnings per share (“EPS”) estimates and grew revenue by 17% year-over-year.

KBR (down 16.4%) – Share prices were down this week after the company missing consensus EPS estimates and reported a 21% revenue decline year-over-year and also announced plans to acquire SGT.

Transactions

Behrman Capital has acquired Corfin Industries, LLC, a provider of microelectronics component preparation services for defense, commercial aerospace, space, and healthcare industries.  Terms of the deal were not disclosed.

Cubic Corp. has acquired MotionDSP, Inc., a provider of advanced image processing software for public safety, security and government applications.  Terms of the deal were not disclosed.

Curtiss-Wright Corp. has agreed to acquire the Dresser-Rand Government Business of Siemens Government Technologies, a provider of mission-critical, high-speed equipment solutions for naval platforms and programs.  The deal is worth an estimated $213 million.

KBR, Inc. has agreed to acquire Stinger Ghaffarian Technologies, Inc. (SGT), a provider of technology solutions, engineering services, mission operations, and IT software solutions.  The deal is worth an estimated $355 million.

Patriot Defense Group has acquired Innovative Logistics, LLC, a provider of expeditionary logistic services to elements of the U.S. Special Operations Command.  Terms of the deal were not disclosed.

TT Electronics plc has agreed to acquire Stadium Group plc, a provider of electronic, interface, and power solutions for the military and commercial sectors, with applications in land vehicles, ship infrastructure, and aviation controls.  The deal is worth an estimated $64 million.

Click here to review our comparable company analysis.

Industry Week in Review – February 16, 2018

/in /by

Aerospace & Defense Update

On Monday, President Trump released his GFY2019 fiscal budget, which included $686 billion for the base defense budget, $69 billion for overseas contingency operations, as well as additional funding for the Department of Energy’s nuclear weapons programs.  Overall, the budget included a total of $716 billion for national security spending, which represents a $74 billion increase in DoD funding relative to the current amount set by the continuing resolution levels with the goal of increasing troop levels, the number of combat aircraft, and rebuilding the Navy’s fleet.  The budget request also lays out key initiatives such as the modernization of nuclear capabilities and increasing research and development efforts for cyber, electronic warfare, artificial intelligence, and space.

The Chairman of the Federal Communications Commission (“FCC”) recommended the approval of SpaceX’s plan to provide wireless broadband internet service through large arrays of satellites in low Earth orbit.  FCC approval is an important milestone for SpaceX’s project, which has ultimate plans of launching roughly 5,000 satellites by 2025 in order to create a constellation of satellites capable of beaming internet service to approximately 50 million subscribers.  The satellites are expected to be deployed by SpaceX’s Falcon Heavy rocket, which was successfully launched in its first test flight last week.

Government Technology Solutions

On Monday, President Trump unveiled his government fiscal 2019 budget, which seeks $45.8 billion for civilian IT funding, which includes $210 million for the Technology Modernization Fund (“TMF”).  The TMF will be a central fund for all agency IT upgrades, managed by the General Services Administration (“GSA”).  While the $210 million budget request is down from the $228 million requested in government fiscal 2018, the TMF is expected to be self-sustaining well beyond its initial cash infusion.  Agencies will be required to repay the TMF for any amounts transferred out, ensuring the TMF can continue to fund priority modernization projects.  An estimated $167 million is expected to go toward equipment procurement, with the rest of the funding going toward advisory services and acquiring other federal services.  The Trump administration plans for the TMF to not only help make agencies more secure, but also save money.

The Pyeongchang 2018 Winter Olympic Games were off to a chilly start, as Olympic officials recently confirmed a cyberattack infiltrated their systems.  Hackers armed with destructive malware compromised Atos, the main IT service provider for the Winter Olympics Games, several months ago and used this data to penetrate the Winter Olympics’ computers during the opening ceremony.  The official Winter Olympics website went down for several hours, causing disruption to online ticket sales and downloads.  Known as the Olympic Destroyer, the malware was programmed to act like a computer worm, scanning for and stealing user credentials to dive deeper into the infected machines.  The Olympic Destroyer used employee credentials previously taken from Atos to destroy files within the Olympics’ computers.  If the Olympic Destroyer had not been stopped sooner, there could have been significant disruptions to the games.

Big Movers

CSRA (up 31.6%) – Share prices were up this week after General Dynamics said it plans to acquire CSRA in a deal valued at $9.6 billion.

Bombardier (up 19.9%) – Share prices were up this week after the International Trade Commission voted against imposing duties on sales of Bombardier’s new jetliner.

Transactions

General Dynamics Corp. has entered into a definitive agreement to acquire CSRA, Inc, a provider of a wide variety of services to the federal government.  The deal is worth an estimated $9.6 billion.

Veritas Capital has signed a definitive agreement to acquire the U.S. public sector business of PricewaterhouseCoopers LLP, a provider of a professional services to the federal government.  Terms of the deal were not disclosed.

Arlington Capital Partners has invested in Integrity Applications Inc. (IAI), a provider of systems engineering, integrated solutions, technical analysis, and subject matter expertise to customers in the intelligence and defense communities.  Arlington Capital Partners plans to combine IAI with fellow federal market portfolio company Xebec.  Terms of the deal were not disclosed.

Clavis Capital Partners’ portfolio company Solair Group, LLC has acquired JetMac, a provider of ground support equipment products, services, and solutions.  Terms of the deal were not disclosed.

General Dynamics Corp. has acquired GPS Source, Inc., a provider of precise timing distribution, GPS, and GNSS solutions for both commercial and military markets.  The deal is worth an estimated $35 million.

Granicus Inc. has acquired Vision Internet, a provider of website development services.  Terms of the deal were not disclosed.

Magal Security Systems, Ltd. has agreed to acquire a 55% controlling interest in ESC BAZ Ltd., a provider of military-grade smart security video observation and surveillance systems.  Terms of the deal were not disclosed.

SemiConductor Devices, owned by Rafael Advanced Defense Systems and Elbit Systems, has acquired Quantum Imaging, Inc., a provider of camera solutions for high-performance imaging applications for a range of military, industrial, and scientific industries.  Terms of the deal were not disclosed

Click here to review our comparable company analysis.

Industry Week in Review – February 9, 2018

/in /by

Aerospace & Defense Update

On Friday, President Trump signed a budget deal passed by both Houses of Congress, placing a quick end to an overnight government shutdown.  The new budget deal sets defense spending levels at $700 billion for GFY2018 and $716 billion for GFY2019, representing a roughly 17% and 20% increase over 2017 levels, respectively.  However, the budget is still unclear on how the new defense spending will be allocated between the base defense budget and overseas contingency operations (“OCO”).  With budget caps still in place, restrictions could be applied to the base budget, but OCO funding is exempt from budget caps.  This ramp-up in defense spending is seen as a key step to increasing operational readiness, maintenance backlog, and manpower for the military.

Government Technology Solutions

In a letter to the chairman of the House Foreign Affairs Committee, Secretary of State Rex Tillerson detailed his plan to create a new “cyber bureau” within the State Department.  The bureau would focus on creating coordinated international cybersecurity priorities.  When Tillerson took office, he removed the Obama administration’s Office of the Cyber Security Coordinator, which had an independent staff and structure, and instead wrapped the State Department’s cyber diplomacy mission into the Bureau of Economic Affairs’ Office of International Communications and Information Policy.  Tillerson’s proposal would combine elements of both the old and new systems to introduce a new “Bureau for Cyberspace and the Digital Economy” and would require the selection and congressional confirmation of a new position titled “Assistant Secretary for Cyberspace and the Digital Economy”.  The plan would ultimately result in a dedicated and singular effort to engage with foreign governments on topics including international norms for cyberspace and the export and import of cyberweapons.

A series of two separate analyses revealed that the Department of Veterans Affairs (“VA”) wasted nearly $2 billion on three attempts to modernize its electronic health records system.  A recent audit by the Government Accountability Office (“GAO”) identified $1.1 billion in wasted spending on two separate projects from 2011 – 2016.  Nextgov also identified an additional $600 million in wasted spending that the VA spent on a third project, the HealtheVet initiative, that began in 2001 and was later deemed a “failed” project and canceled in 2010.  The spending trail on failed IT projects is important as the VA embarks on its fourth attempt to modernize its health IT and records system, this time through a $10 billion sole-source contract to Cerner Corp.  Cerner is also partnering with Leidos to build the Department of Defense’s next-gen health records system, which will be interoperable with the VA’s system upon completion.

Big Movers

United Technologies (down 7.1%) – Share prices were down this week after Airbus warned of new problems with the Pratt & Whitney engines on its A320neo planes, leading European officials to issue emergency restrictions that will ground certain Airbus planes.

Viasat (down 10.9%) – Share prices were down this week after increased expenses with the company’s new high-speed satellite caused a fiscal third-quarter loss of 4 cents per share after reporting earnings of 29 cents in the same period last year.

Transactions

CopaSAT, LLC has acquired Eclipse Composite Engineering, LLC, a provider of lightweight military-grade SATCOM antenna technology.  Terms of the deal were not disclosed.

Domaille Engineering, LLC and Thompson Street Capital Partners’ portfolio company Onward Capital has acquired Tech Manufacturing, LLC, a provider of complex five-axis structural aerospace parts and specializes in CNC precision machining.  Terms of the deal were not disclosed.

First Israel Mezzanine Investors (FIMI) has agreed to acquire Aitech Rugged Group, Inc., a provider of embedded computing subsystems and modules for defense, aerospace, and space electronic markets.  KippsDeSanto acted as the exclusive financial advisor to Aitech on this transaction.  The deal is worth an estimated $30 million.

Fulcrum IT Services, LLC, a portfolio company of Boyne Capital and Grindstone Partners, has acquired The PTR Group, Inc., a provider of engineering services specializing in embedded, real-time, and distributed system technologies.  Terms of the deal were not disclosed.

Holder Family Investments, LLC has acquired Air Transport Components, LLC, a provider of repair and overhaul services for components and accessories for commercial and military air transport aircraft.  Terms of the deal were not disclosed.

Click here to review our comparable company analysis.

 

Industry Week in Review – February 2, 2018

/in /by

Aerospace & Defense Update

Large U.S. defense primes, such as Lockheed Martin, Northrop Grumman, and Raytheon, have all specified that they view the windfall from the new tax reform as a mechanism to stimulate investment in R&D and technology.  On Lockheed Martin’s 4Q17 earnings call, the company announced it expects its tax rate to fall by roughly one-third to below 18%. With this tax windfall, the company plans to increase its investments in new weapons and training and increase spending allocation to its venture capital arm.  Raytheon announced plans to increase its capital expenditures by 50% in 2018, and Northrop plans to increase capital spending to $1 billion, an 11% increase over 2017 levels.  As a result of the tax reform, defense primes have signaled that they will use the increased funds to maintain technological advantages over possible adversaries, such as China and Russia.

On Thursday, Brazilian news media reported that Boeing and Embraer have formed a partnership that will create a new company focused on commercial aviation.  The newly formed partnership will not include Embraer’s defense business, which the Brazilian government has expressed firm objections to relinquishing control over.  With the formation of the new partnership, both Boeing and Airbus will have entered into the single-aisle jet market.  Airbus entered into the single-aisle market through acquiring a majority stake in the Bombardier C-Series jet, which received a huge victory in late January when the U.S. International Trade Commission voted against tariffs on C-Series imports.  However, Boeing’s new partnership with Embraer, the third largest planemaker in the world, will give Boeing the leading share of the single-aisle market.

Government Technology Solutions

The Department of Homeland Security (“DHS”) is partnering with private technology companies to identify and reduce the web content that terrorist organizations publish to recruit attackers.  Due to free speech protections, the DHS has limited powers to eliminate on-line terrorist publications, which typically occur on social media platforms, but by partnering with commercial companies, the agency is hoping that it will be able to increase its awareness of such content.  The challenge is further complicated by the sheer amount of content that is uploaded daily.  For instance, global internet users upload more than 400 hours of video content each minute, meaning social media companies are limited in how quickly they can filter content through automation alone.  As a result, technology companies and the DHS are partnering to create better monitoring techniques and increase threat sharing to help reduce the number of channels that terrorists use to attract followers.  While in-process solutions include tools that automatically detect and flag terrorist content as well as the creation of public-private information-sharing networks to track terrorist propaganda efforts, DHS is committed to finding new ways to combat this growing problem.

The Government Accountability Office (“GAO”) is adding the government’s process of conducting background checks and issuing security clearances to a congressional watchdog’s list of high-risk programs in need of major reform.  The GAO came to this conclusion because agencies have done little to improve upon the time in which it takes to process security clearances.  As of September 2017, there was an investigation backlog of 709,000 pending clearances.  IT security also played a role in the GAO’s decision, particularly as the National Background Investigations Bureau (“NBIB”), the division of the Office of Personal Management (“OPM”) that conducts most security clearance investigations, is saddled with antiquated IT systems.  The addition of the clearance process to the high-risk list follows two GAO reports in November and December 2017, which found that the NBIB did not have adequate plans in place to improve its investigation process.  The high-risk list was updated in 2017 and typically receives updates every two years. However, the GAO director thought it was important to highlight this issue in an off-cycle year to minimize unauthorized disclosures of classified information.

Big Movers

Elbit Systems (up 7.1%) – Share prices were up this week after the U.S. Customs and Border Protection certified its in-fill radar system and tower for operational use.

Bombardier (down 7.1%) – Share prices were down this week after it was announced that Boeing and Embraer are likely to formalize a commercial aerospace partnership, posing a threat to Bombardier’s current market position.

Transactions

AMETEK, Inc. has acquired FMH Aerospace Corp., a provider of complex, highly-engineered solutions for the aerospace, defense and space industries.  The deal is worth an estimated $235 million.

Charlesbank Capital Partners has acquired CI Capital Partners’ portfolio company Galls, LLC, a provider of uniforms and equipment to law enforcement and military markets.  Terms of the deal were not disclosed.

Kaneka Aerospace has acquired Henkel Corporation’s Composites Portfolio, a provider of high performance benzoxazine-based composites for aerospace applications.  Terms of the deal were not disclosed.

Mercury Systems has acquired Themis Computer, a provider of commercial, Size, Weight, and Power-optimized rugged servers, computers and storage systems for U.S. and international defense programs.  The deal is worth an estimated $180 million.  KippsDeSanto & Co. served as the exclusive advisor to Themis Computer on this transaction.

On Assignment, Inc. has agreed to acquire ECS Federal, Inc., a provider of technology services and solutions to U.S. federal agencies.  The deal is worth an estimated $775 million.

USfalcon, Inc. has acquired RGS Associates, a provider of management consulting services for the U.S. Federal Government.  Terms of the deal were not disclosed.  KippsDeSanto & Co. served as the exclusive advisor to RGS on this transaction.

PAE, Inc. has acquired MacFadden & Associates, Inc., a provider of international disaster response operational support services.  Terms of the deal were not disclosed.

Viavi Solutions, Inc. has agreed to acquire Cobham’s Test and Measurement Business, a provider of land-mobile radio and avionics test solutions for military, public safety, and aviation markets.  The deal is worth an estimated $455 million.

Click here to review our comparable company analysis.

Industry Week in Review – January 26, 2018

/in /by

Aerospace & Defense Update

After a three-day government shutdown, Congress finalized a new budget extension and passed a continuing resolution (“CR”), reopening the government on Tuesday. The new CR will fund the federal government through February 8th, giving Congress more time to settle a long-term spending deal for the remainder of GFY2018. The government has been under a CR since the beginning of GFY2018, forcing the Pentagon to operate at the previous year’s spending levels. However, the ending of the three-day shutdown is seen as a crucial step towards increasing the Pentagon’s budget as Congress becomes closer to passing a GFY2018 federal budget.

Numerous companies announced 4Q17 earnings this past week with strong results overall. Northrop Grumman exhibited strong performance in 4Q17, beating its earnings per share (“EPS”) estimates by 2.9% and revenue estimates by 4.2% after increasing its revenue by 5.3% year-over-year (“YoY”). The company also forecasted strong 2018 revenue and earnings growth as the company begins the integration of Orbital ATK. Raytheon beat consensus EPS estimates by $0.01 and reported revenue growth of 8.0% in 4Q17, and 5.1% YoY. The company also reported a strong book-to-bill ratio of 1.26 in 4Q17 and 1.09 for full-year 2017, increasing its total backlog by $1.5 billion YoY. General Dynamics beat consensus EPS estimates by 5.0% and reported an 8.2% growth in 4Q17 revenue. The company reported strong growth out of its Gulfstream business with net orders up over 20% YoY and net large cabin orders up by ~30%.

On Tuesday, Boeing announced the formation of a joint venture (“JV”) with Adient, the auto parts business divested by Johnson Controls in 2016.  The JV will create seats for commercial aircraft, providing an alternative to the traditional commercial aircraft supply chain players such as Rockwell Collins and Safran.  Per Boeing, the JV is in response to delays in aircraft seat production as well as restraints on capacity for its key suppliers.  Boeing has been making efforts to vertically integrate its business and develop in-house capabilities such as aviation electronics, specialty manufacturing, and engine components, making the company less dependent on those historical key suppliers.  The commercial aircraft supply chain has undergone large-scale changes such as Boeing and Airbus breaking into the higher-margin aftermarket services business, and continued industry consolidation through transformational deals including the acquisitions of Orbital ATK and Rockwell Collins.

Emirates Airlines has purchased 36 Airbus A380 superjumbos, providing a key lifeline to the fledgling program that was at risk of shutting down production.  The 36 double decker jets were purchased for an estimated $16 billion in a deal that was originally going to be signed at the Dubai Air Show until Emirates Airlines walked away from the deal over concerns about Airbus’ commitment to the program.  This agreement will ensure that Airbus continues production of the A380 for the next 10 years per Airbus’ Chief Sales Officer, John Leahy.  Overall, this brings Emirates Airlines’ total A380 commitment to 178 planes, of which 101 are currently in operation.

Government Technology Solutions

The government’s struggle to pass a 2018 budget is now expected to have an impact on current and future government IT operations. As it relates to the central IT fund, which was established by the Modernizing Government Technology Act, government agencies will not be able to allocate the funding. Until Congress reaches an agreement on the budget, government agencies must shift their focus to managing daily operations and delay future planning for IT systems. Moreover, agencies will be reluctant to establish working capital funds, further delaying agencies’ investments into modernizing government technology. As such, agencies have diverted attention to protecting existing strategic plans and implementation timelines against another government shutdown when the continuing resolution ends on February 8th.

At some point this summer, the Government Accountability Office will launch an investigation into the high number of fraudulent identities used to create and broadcast fictional public comments on proposed federal regulations and other government activities. The issue of fake comments in the federal rulemaking process first came to light last year during the Federal Communications Commission’s (“FCC”) vote to repeal net neutrality rules that were put in place during the Obama administration. Surveys show that 57% of comments submitted to the FCC used temporary or duplicate email addresses, and therefore could likely be fictitious. Additionally, the Wall Street Journal reported approximately 7,800 individuals told reporters that comments posted in their names were fake. These comments were posted in response to net neutrality along with other regulations by different agencies, such as the Consumer Financial Protection Bureau and the Department of Labor. As a result, it became difficult to decipher which comments were authentic and which were false, making it impossible for agencies to accurately perceive public opinion.

Big Movers

Bombardier (up 14.3%) – Share prices were up this week after the U.S. International Trade Commission (“ITC”) dismissed a complaint by Boeing of alleged dumping in the case of 75 C Series jets sold to Delta, allowing Bombardier to avoid punitive import tariffs while pursuing other orders in the U.S.

Honeywell (up 4.0%) – Share prices were up this week after the company beat earnings estimates and grew quarterly revenue by 9% YoY, largely driven by a 6% sales growth from the previous quarter in its aerospace unit.

Transactions

Amazon Web Services has acquired Sqrrl, a provider of advanced cybersecurity threat detection services.  Terms of the deal were not disclosed.

 Celestica, Inc. has agreed to acquire Atrenne Integrated Solutions, a provider of ruggedized electromechanical solutions serving military and commercial aerospace applications.  The deal is worth an estimated $139.0 million.

GTCR, LLC has agreed to acquire EaglePicher Technologies, a provider of specialized batteries and advanced power management systems power solutions for customers in the defense, aerospace, and medical end markets.  Terms of the deal were not disclosed.

Vectrus, Inc. has acquired SENTEL Corp., a mission-focused business with expertise in logistics and supply chain management, engineering and advanced technology solutions, and intelligence mission support.  The deal is worth an estimated $36 million.

Click here to review our comparable company analysis.