Industry Week in Review – January 19, 2018

/in /by

Aerospace & Defense Update

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 Office of Financial Innovation and Transformation (“FIT”) at Treasury’s Fiscal Service, led by John Hill, FIT assistant commissioner, is working on a pilot program using blockchain technology to track agency-owned physical assets, such as computers and phones.  Hill is hoping that the pilot will familiarize his office with the transformational blockchain technology and how it could improve their operations.  Currently, FIT’s asset management process involves manual, via spreadsheet or even pen-and-paper, reconciliation of physical asset inventory.  Throughout the government, there are upwards of thousands of employees that are tasked with reconciling inventory lists with physical assets each quarter, so incorporating technology enhancements would provide significant efficiencies, savings, and improved accuracy.  The pilot program is testing whether blockchain technology can make the process more efficient, transparent, and provide real-time assessments of critical assets.  The project began in September 2017 and is scheduled to run through February 2018, when Hill will examine the efficiency of blockchain technology in replacing manual efforts and its associated costs.

On Thursday, the Senate voted 65-34 to approve a six-year extension of Section 702 of the Foreign Intelligence Surveillance Act (“FISA”).  The Intelligence Community (“IC”) considers Section 702 to be its key national security surveillance tool as it allows the National Security Agency (“NSA”) to collect emails, phone records, and other communications of foreign targets located outside of the U.S. without a warrant.  With the program’s statutory authority set to expire on January 19, the extension faced resistance from several senators who argued Section 702 allows U.S. agencies to incidentally monitor U.S. citizens through their communications with non-U.S. citizens outside of the country.  The House also passed the bill last week with a 256-164 vote and President Trump signed the measure into law Friday.

Big Movers

Rolls Royce (up 4.9%) – Share prices were up this week after the company announced it is considering the sale of its commercial marine business.

Fluor (up 5.9%) – Share prices were up this week after the company signed a contract with Royal Dutch Shell plc for the engineering, procurement, and fabrication of Shell’s Penguins floating production storage and offloading vessel in the North Sea.

Transactions

APCT Holdings has acquired Cartel Electronics, Inc., a provider of prototype and quick turn rigid printed circuit boards for commercial and military applications.  Terms of the deal were not disclosed.

George Industries, LLC has acquired Numerical Precision, a provider of close-tolerance, high reliability components for satellites, aircraft and other aerospace and defense programs.  Terms of the deal were not disclosed.

Goff Capital, Inc. has acquired Omega Research, Inc., a provider of engineering and testing serving the metal finishing and processing for aircraft and aerospace related plating processes.  Terms of the deal were not disclosed.

Click here to review our comparable company analysis.

Industry Week in Review – January 12, 2018

/in /by

Aerospace & Defense Update

On Friday, GKN Plc, a British manufacturer of aerospace and auto parts, announced its intentions to split its aerospace and automotive businesses after rejecting a takeover bid from Melrose Industries.  Melrose, a turnaround specialist firm, made an unsolicited offer of £4.05 ($5.47) per share, giving GKN a total valuation of $9.5 billion, a figure which GKN said fundamentally undervalued the company.  GKN’s aerospace business is a key supplier to Airbus and Boeing, providing airframe and engine structures.  The company has expanded its aerospace business through acquiring Volvo’s aircraft engine group in 2012 and Fokker Technologies Group in 2015, making it the second largest aerostructures supplier behind Spirit AeroSystems.  The Company is currently evaluating several alternatives, including a possible sale, related to splitting the business, noting that an attractive purchase offer may accelerate the planned separation.

Boeing has unveiled the first details of a new, reusable Mach-5 plus demonstrator vehicle that could be critical to the development of future high-speed strike and reconnaissance aircraft.  The Boeing design will compete with Lockheed Martin’s SR-72 concept as a hypersonic successor to the SR-71 Blackbird reconnaissance aircraft originally built by Lockheed.  Development of Boeing’s hypersonic vehicle concept is occurring through Defense Advanced Research Projects Agency’s (“DARPA”) Advanced Full Range Engine initiative run by the U.S. Air Force Research Laboratory.  Hypersonic research and development has been identified as part of the “third offset” by the Pentagon, placing it in a category of technologies that the U.S. military sees as imperative to maintaining its edge over potential adversaries.

Government Technology Solutions

The General Services Administration (“GSA”) is working towards implementing a provision from the 2018 National Defense Authorization Act (“NDAA”) that provides government buyers the autonomy to purchase items from commercial e-commerce companies.  The law calls for online portals, such as Amazon, Wal-Mart, and Staples, to be available for acquisitions that are below $250,000.  On January 9th, the GSA held a town hall-style meeting with industry leaders and stakeholders to help shape the new program ahead of its ninety day deadline.  Speakers at the meeting focused most of the discussion on regulatory oversight of buyers and sellers.  The objection is to create a portal that promotes a competitive marketplace that is easy to navigate for commercial sellers, but at the same time remains compliant with federal laws and regulations.  Although disagreements arose around the level of regulation that should be enforced, all parties agreed on the potential efficiencies from a well-designed portal.

The government continues to favor, and increase its reliance on, large government wide acquisition contracts (“GWACs”) that grant a limited universe of players with the ability to perform a greater piece of the overall $95 billion federal contracting market.  In 2012, the federal government procured $6 billion on IT products and services through GWACs, as compared to more than $13 billion in 2017.  As a result, this has enabled selected companies, that are able to obtain highly-coveted spots on GWACs, such as Alliant, OASIS, and Encore, to grow at rates that often exceed companies that rely on smaller and more traditional contract vehicles.  In addition, this trend has supported small businesses as set-aside spending through GWACs has increased by approximately 137% since 2012.  GWACs are becoming popular acquisition strategies for government agencies as they ensure limited competition while providing greatly simplified acquisition processes for follow-on tasking.

Big Movers

 Boeing (up 8.9%) – Share prices were up this week as investors view the potential acquisition of Embraer with a higher probability of occurring.

KeyW (up 7.2%) – Share prices were up this week after the company was awarded an IDIQ contract to provide tagging, tracking, and locating electronic equipment and support services to support joint commands within the DoD.

Transactions

BlueCross BlueShield of South Carolina, Inc. has acquired Karna LLC, a provider of a broad range of health-related services primarily to the federal government.  Terms of the deal were not disclosed.

Celero Strategies, LLC has acquired CGR Associates, Inc., a provider of market research, strategic planning, acquisition search, and program and budget analysis.  Terms of the deal were not disclosed.

Cyxtera Technologies has agreed to acquire Immunity, Inc, a provider of offense-oriented systems vulnerability research, exploit development and penetration testing services.  Terms of the deal were not disclosed.

HKW Capital Partners has acquired GCR, Inc., a provider of professional services and software products to public sector clients.  Terms of the deal were not disclosed.

Leading Edge Aviation Services, Inc. has acquired Pro Air Services, Inc., a provider of fixed-base operator, maintenance, avionics and flight school services.  Terms of the deal were not disclosed.

ZRODelta has acquired Critical Capabilities, a provider of original equipment manufacturer supply-chain management solutions for firearm parts.  Terms of the deal were not disclosed.

Click here to review the comparable company analysis.

 

Industry Week in Review – January 5, 2018

/in /by

Aerospace & Defense Update

In 2018, the Pentagon is hoping to increase the speed of its foreign military sales process.  To decrease procurement times, the Pentagon’s top acquisition official, Ellen Lord, has launched six Procurement Action Lead Time pilot programs designed to cut the time from requests for proposal to procurement.  These time-saving measures are expected to increase 2018 foreign weapon sales from $42.0 billion in 2017, a 20% increase over 2016 levels.  2018 foreign weapon sales will be further bolstered by Defense James Mattis’ initiative to scale up defense capabilities of U.S. allies and the Trump administration, which sees foreign weapon sales as a key to growing U.S. jobs.

The Head of the U.S. Strategic Command, General John Hyten, is calling for the Department of Defense (“DoD”) to transform its satellite development process through the adoption of a more commercially-oriented procurement methodology.  Commercial manufacturers have been able to successfully deliver complex satellites at fixed prices and within a 30 – 36 month window, commercial providers may also be less burdened by the stringent procurement requirements and program delays that often plague current DoD satellite production processes.  The DoD’s current acquisition strategy currently siloes three key elements of the satellite system (space, ground, and terminal), but Gen. Hyten hopes to streamline the process through one intertwined acquisition strategy.  Through streamlining the methodology, the DoD expects to increase technological readiness and agility, allowing it to deploy smaller, lower-cost satellites.

Government Technology Solutions

Similar to 2017, IT modernization remains the primary focal point of the federal IT community in 2018.  However, three key emerging trends will drive technology solutions and adoption in the government sector.  First, federal agencies, including the DHS, FBI, and DOD, are increasing their use of biometric authentication systems.  Specifically, iris recognition technology and facial scanning that enable agencies to implement deeper and more accurate security measures.  As such, the biometric authentication systems market is expected to grow at a rate of ~14% through 2020.  Second, the industry is expected to increase its use of federal contractors in 2018 to allow for greater project agility and efficiency.  Lastly, the federal IT community is expected to adopt automation technology to more effectively utilize current resources, with examples potentially including automated budget processing to replace traditional Excel spreadsheets.

The Government Accountability Office (“GAO”) publicly released a report on December 21, 2017 detailing a two-and-a-half-year exercise during which undercover GAO agents purchased firearms, to include an AR-15 rifle and an Uzi submachine gun, on the dark web.  The GAO described the exercise as an attempt to assess the extent to which the Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”) enforces existing laws in prohibiting firearm sales to people not allowed or eligible to possess a firearm.  On the surface web, federal regulations held up well as the GAO was unsuccessful in 72 unique attempts to purchase a firearm.  However, the GAO managed to purchase two firearms, as part of an investigation that included seven purchasing attempts, on the dark web.  The report offered no recommendations but illustrates the current shortcomings of online federal law enforcement.

Big Movers

Kratos Defense & Security Solutions (up 10.8%) – Share prices were up this week after the company received a $93 million award for unmanned aerial drone systems and a $20 million award for electronic warfare systems.

Bombardier (down 5.5%) – Share prices were down this week after the company delivered 17 C Series jets in 2017, short of its target of 20-22 jets.

Transactions

Chenega Corp. has completed its acquisition of privately held ADG Creative, a provider of strategic communications and digital transformation solutions.  KippsDeSanto & Co. served as the exclusive advisor to ADG on this transaction.  Terms of the deal were not disclosed.

Coolisys Technologies, Inc. has agreed to acquire Enertec Systems 2001 Ltd., a provider of missiles, UAVs, tanks, combat aircraft, missile boats and submarines, mobile trailers, and satellites.  The deal is worth an estimated $9.2 million.

Edmund Optics, Inc. has acquired ITOS GmbH, a provider of optical components, including filters and polarizers.  Terms of the deal were not disclosed.

UST-Aldetec has acquired Pioneers Magnetics, Inc., a provider of state-of-the-art switching power suppliers for defense and telecommunications platforms.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – December 29, 2017

/in /by

Aerospace & Defense Update

On Thursday, Deputy Secretary of Defense Patrick Shanahan told reporters that the Pentagon expects the GFY2019 budget request to be delivered to Congress on schedule, but the budget request will likely not contain an anticipated large-scale military buildup.  While there will be a defense spending increase in the 2019 budget request, the GFY2020 budget is the one expected to contain a major increase for defense spending.  With the release of the National Defense Strategy, Ballistic Missile Defense Review, and Nuclear Posture Review scheduled for 2018, there simply will not be enough time to incorporate the strategic decisions into the GFY2019 budget, per Shanahan.

The Pentagon is set to overhaul its acquisition structure in February by dividing the role of Undersecretary of Defense for Acquisition, Technology, and Logistics (“AT&L”) into two independent roles of Undersecretary of Defense for Research and Engineering (“USDR&E”) and Undersecretary of Defense for Acquisition and Sustainment (“USDA&S”).   The rationale for devolving the AT&L role is to better focus the efforts of each role to ensure that the DoD will be able to better drive innovation and increase warfighter readiness.  The USDR&E will help increase modernization efforts within the DoD.  The USDA&S role will help ensure that the U.S. does not lose ground in its advanced warfighting capability relative to other nations.  The current undersecretary of the AT&L, Ellen Lord, will become the new USDA&S.

Government Technology Solutions

The GOP tax bill, set to take effect starting January 1st, 2018, will have a meaningful impact on federal contractors, especially large, publicly traded government IT and professional service firms.  The most important change for federal contractors is the reduction in the corporate tax rate from 35% to 21%.  Nearly all government services companies with annual revenue above $1 billion pay the highest tax rates at 37.5% as most of their revenue comes from sales to U.S. federal agencies.  Comparatively, most large defense primes derive substantial portions of their revenue from overseas operations, bringing down their effective tax rates.  For example, Lockheed Martin had an effective tax rate of 23.2% last year and General Dynamics reported 27.6%.  While the cash savings may fall directly to the bottom line, companies will have the opportunity to explore more investments, including mergers and acquisitions, given their new financial flexibility.

Several protesters have brought law suits to court in hopes to win a spot on the General Service Administration’s (“GSA”) $50 billion Alliant 2 IT product and services contract.  Five protests were filed with the Government Accountability Office (“GAO”) in late November after the GSA awarded 61 positions on the vehicle.  The GAO subsequently dismissed all outstanding protests against Alliant 2 on December 20th.   Centech and OBXTek have taken their objections to the U.S. Court of Federal Claims, filing their lawsuits on December 26th and November 29th, respectively.  OBXTek and Centech have different objections but their cases will be decided together.  The GSA is scheduled to make its filing for the case by January 19th, 2018.

Big Movers

Vectrus, Inc. (down 5.1%) – Share prices were down this week after analysts reported the company is expected to miss sales estimates for the current fiscal quarter.

Bombardier (up 2.0%) – Share prices were up this week as the company received an order worth over $300 million from the French state railway.

Click here to review comparable company analysis.

Industry Week in Review – December 22, 2017

/in /by

Aerospace & Defense Update

Boeing confirmed it is in talks to acquire Brazil-based Embraer SA, a maker of small jetliners, business jets, and military aircraft.  The potential acquisition would give Boeing access to jetliners that are smaller than its traditional product range and position.  Initial estimates place the cost of the Embraer acquisition around ~$9 billion, inclusive of debt.  The deal would position Boeing to compete directly with Airbus in the small commercial aircraft market after Airbus’ expansion into the 100 to 150 seat jet market through its joint venture with Bombardier.  The acquisition could also prevent fast-growing Chinese aerospace companies from gaining a stronger global foothold in the regional and single-aisle passenger jet market.  In order for the acquisition to occur, it must be agreed upon by the Brazilian government, which has a “golden share” in Embraer, giving it veto power over any potential sale or joint venture.

On Thursday, Congress avoided a pre-Christmas government shutdown by passing a continuing resolution (“CR”) through January 19th to extend budget funding through January 19th.  The CR will allow the government to continue operations at GFY2017 funding levels.  Included in the CR is a measure granting an additional $4.7 billion in supplemental military funding to increase ballistic missile defense systems and repair damaged warships.  This marks the third CR passed this year by Congress and further postpones negotiations of key issues such as a full-year appropriations bill for the Department of Defense (“DoD”).

Government Technology Solutions

The Department of Defense has not yet finalized a decision on how to approach the contracting process for a planned multi-billion dollar cloud infrastructure project.  The DoD ideally wants to move as much of its IT infrastructure to the cloud as possible as it believes that enterprise-wide cloud adoption would provide considerable scale, enabling more advanced data analytics, increased application of machine learning, and the ability to more quickly share mission-critical information with warfighters.  The DoD initially planned on using a single vendor for the cloud infrastructure. However, according to industry insiders, there has been considerable backlash against this approach.  Some believe that a “one-size fits all” approach is not sufficient given numerous and various missions that would be relying on uniform infrastructure.  In addition, others worry that using a single supplier increases the risks and subsequent consequences of any sort of system failure, and that using multiple vendors provides a way to mitigate that risk.  The DoD has not yet committed to any one acquisition strategy, but is planning on holding an industry day and issuing a draft request for proposal (“RFP”) in early 2018.

Kaspersky Lab, the Russian multi-national cybersecurity firm and anti-virus provider, has filed a lawsuit against the United States following the Federal Government’s decision to ban Kaspersky software from use by all federal civilian agencies.  The Department of Homeland Security (“DHS”) originally issued an order to remove Kaspersky software from federal networks in September, but the decision was signed into law last week as part of the 2018 National Defense Authorization Act.  U.S. officials believe, that as a result of alleged ties between Kaspersky and the Russian government, the software could potentially compromise national security.  Eugene Kaspersky, the CEO and founder of Kaspersky Lab, has denied any such improper connection with Moscow.  He claims that the U.S. government did not follow due process in its decision to ban his company’s software, and that there was not sufficient evidence to substantiate any of its claims.  Mr. Kaspersky has said, that while direct sales to the Federal Government historically accounted for a small portion of the company’s overall revenue, the ban has damaged the company’s reputation and subsequently adversely affected its commercial business.

Big Movers

Embraer (up 23.5%) – Share prices were up this week after the company announced it was in talks with Boeing regarding a potential acquisition.

AAR (down 5.7%) – Share prices were down this week as the company reported second quarter earnings below consensus estimates.

Transactions

DC Capital Partners has acquired Janus Global Operations, LLC, a provider of integrated stability operations support services, including risk management, logistics, and munitions and environment services to government and commercial customers.  Terms of the deal were not disclosed.

Element Materials Technology Group has agreed to acquire Metals Testing Co Inc., a provider of non-destructive testing services to the aerospace industry.  Terms of the deal were not disclosed.

Mercury Systems, Inc. has agreed to acquire Themis Computer, Inc., a provider commercial, Size, Weight, and Power (“SWaP”)-optimized rugged servers, computers and storage systems for U.S. and international defense programs.  KippsDeSanto served as the exclusive advisor to Themis Computer on this transaction.  The deal is worth an estimated $180 million.

Molex, LLC has acquired Triton Manufacturing Company, Inc., a provider of flexible power cable assemblies and custom bus bars used in a wide range of current and heat transfer applications.  Terms of the deal were not disclosed.

Perusa Partners has agreed to acquire SCHROTH Safety Products GmbH, a provider of a wide range of restraint systems used on commercial airplanes, including traditional two-point lapbelts and three-point shoulder belts.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – December 15, 2017

/in /by

Aerospace & Defense Update

On Tuesday, President Trump signed a $700 billion defense bill into law, surpassing President Trump’s previous request by $32 billion.  The defense bill authorizes $634 billion for the base budget and $66 billion for overseas contingency operations.  However, the bill is also subject to Congress rolling back the 2011 Budget Control Act, which sets strict limits on federal spending and would only allow for $549 billion of defense spending.  Congress is expected to eliminate the cap on defense spending, and lawmakers have until December 22nd to send the White House a broader government funding bill.  The 2018 defense bill includes $12.3 billion for the Pentagon’s Missile Defense Agency to counter growing threats from the Korean peninsula and includes additional jet fighters and ships, which are designed to boost military readiness.

Lockheed Martin is in discussions to create a joint venture with Aerion Corp. to develop a new supersonic business jet, the Aerion AS2, which would begin operations in 2025.  The proposed project marks a return for Lockheed to the supersonic jet business after a two-decade gap.  Lockheed is not alone as competitors Boom Technology, Inc. and Spike Aerospace, Inc. have been touting proposals for supersonic passenger jets as well.  If Lockheed proceeds with the proposal, the company is equipped to build the jets at its existing facility in Greenville, S.C. where it produces F-16 combat jets and military cargo aircraft.  Aerion executives are estimating the total development cost of the jet at $4.0 billion.  The AS2 jet would be able to travel at up to 1.5 times the speed of sound and would have a range of 4,750 nautical miles.  Aerion is forecasting demand of 300 jets over the next decade and has already secured an order for 20 jets from FlexJet, LLC.

Government Technology Solutions

The day after President Trump signed the National Defense Authorization Act into law, the White House revealed its plan for modernizing the Federal Government’s IT infrastructure.  The IT Modernization Report outlines fifty action plans to help modernize and consolidate the current IT infrastructure with an emphasis on increased cybersecurity and shared services.  The report encourages shifting the government’s IT infrastructure to a service model and leveraging cloud technologies that are available through government technology contractors.  In order to effectively implement cloud technologies across government agencies, the report emphasizes the importance of migrating towards cloud email solutions.  White House officials have indicated that agencies will begin to adopt these suggested improvements as early as January of next year.

This past week, House and Senate Republicans have been working to reconcile their tax reform bills to arrive at a joint proposal.  With only a 52-48 majority and several Republican Senators not voicing public approval for the bill, Republicans do not have room for any error.  The Republican’s loss in Alabama has put even more pressure on the G.O.P. to finalize tax reform before Doug Jones officially takes his position in January.  While details are still being discussed, final votes are expected to take place next week with the hope of the President signing a proposal into law before Christmas.  The current tax reform plan, which would take effect in 2018, features a 21% corporate tax rate and a top individual tax rate of 37%.  Additionally, the bill will allow homeowners to deduct mortgage interest on loans up to $750,000 and will likely allow for a state and local or property tax deduction of up to $10,000.  While lowering tax rates for businesses and individuals, the deductions and tax breaks are expected to add $1 trillion or more to federal budget deficits over the next decade.

Big Movers

Boeing (up 2.8%) – Share prices were up this week after the company announced that it will raise its quarterly dividend by 20%.

Bombardier (down 3.4%) – Share prices were down this week as the company is entering a critical phase of its trade dispute with Boeing and the U.S. International Trade Commission.

Transactions

Advanced Core Concepts announced the acquisition of ACTA, a provider of engineering and technical services firm.  Terms of the deal were not disclosed.

Belcan, LLC has acquired CDI Corp.’s Aerospace and Industrial Equipment Business Unit, a provider of engineering and recruitment solutions for a broad range of aerospace platforms.  Terms of the deal were not disclosed.

Chenega Corp. has signed a definitive agreement to acquire privately held ADG Creative, a provider of strategic communications and digital transformation solutions.  KippsDeSanto & Co. served as the exclusive advisor to ADG on this transaction.  Terms of the deal were not disclosed.

Xator Corp. has acquired the professional services business of privately held Merlin International, Inc., a provider of cyber security, infrastructure/network operations, and enterprise applications business supporting the Federal sector.  Terms of the deal were not disclosed.

 

Click here to review comparable company analysis.

Industry Week in Review – December 8, 2017

/in /by

Aerospace & Defense Update

Per various reports, the Canadian government will cancel its planned purchase of 18 F/A-18E/F Super Hornet Jets from Boeing worth an estimated $5.2 billion.  The intended purchase was designed to bridge the interim between Canada’s aging CF-18 Hornet fleet and a new fighter.  However, the Canadian government cancelled the order after Boeing lodged a legal complaint against Bombardier, a Canadian company, accusing it of using Canadian government subsidies to undercut its competition in the U.S. commercial aircraft market.  In lieu of the new Boeing F-18 purchase, Canada plans to buy used F/A-18 Hornets from Australia.  The Canadian government will likely have to invest in extending the lives of the Hornet airframes, which could benefit L3 Technologies as it has worked on the CF-18 previously.  Additionally, the cancelled purchase could provide an opportunity for Lockheed’s F-35, the Eurofighter Typhoon, Saab Gripen E, or Dassualt Rafale to win Canada’s upcoming fighter jet competition.

On Thursday night, Congress passed a two-week Continuing Resolution (“CR”) to avert a government shutdown and keep the government funded through December 22nd while lawmakers attempt to pass a yearlong budget.  Under the CR, funding remains at the GFY2017 levels and the military does not have any flexibility on how it can allocate its funding.  In order to pass a budget, Democrats and Republicans must overcome stalled negotiations over spending caps, immigration issues, and increases in defense funding.  President Trump met with Congressional leadership from the Senate and House on Thursday afternoon to restart negotiations for a budget deal.  Reports from the meeting detailed that the leadership from both parties agreed on the need to eliminate the defense sequester to ensure the military has full support to deal with national security threats.

Government Technology Solutions

Military services are further emphasizing mobile projects, ranging from continuing education to logistics aimed at enhancing readiness.  Implementation priorities of such mobile technologies vary by agency.  For example, the Army is looking to establish wireless capabilities in the classroom to expand web-based training into the field.  In the Marine Corps, the focus is on making logistics more mobile friendly by using wireless devices to update supply transactions, thus eliminating the need to log onto a desktop computer.  The Air Force has detailed the grandest plans within the military, specifically targeting logistics investment, by emphasizing the need to refit its IT architecture and move applications into the commercial cloud.  Additionally, six different Air Force groups, the mobile solutions company, Monkton, and Apple are collaborating to build a mobile app that connects with an integrated maintenance data system to track ongoing work instead of inputting work manually at the end of the workday.

Defense secretary Jim Mattis has nominated Rear Admiral Nancy Norton to be the next leader of the Defense Information Systems Agency (“DISA”) when current Director Lt. General Alan Lynn leaves his post.  Norton will receive a promotion to Vice Admiral with the appointment and will also take over as commander of the Joint Forces Headquarters-Department of Defense Information Network at Fort Meade in Maryland.  However, Norton’s appointment does not have a specified timeline.  Her directorship will require Senate confirmation, and the Pentagon has yet to specify an end date to Lynn’s current term, which is expected to extend into 2018.  A 30-year Navy veteran, Norton joined DISA in August as Vice Director and previously served as Director of both the Warfare Integration for Information Warfare and the Command, Control, Communications, and Cyber Directorate of the U.S. Pacific Command.  DISA manages an $11 billion budget overseeing IT operations for the Department of Defense.

Big Movers

Boeing (up 5.4%) – Share prices were up this week after the company delivered two widebody jets to Middle Eastern airlines and won a 747 order.

AeroVironment (up 24.5%) – Share prices were up this week after the company beat earnings and reported 47% year-over-year revenue growth.

Transactions

Kordsa, Inc. has agreed to acquire Textile Products, Inc. and Fabric Development, Inc., providers of textile manufacturing of specialty fabrics for aerospace, industrial, and marine industries.  The combined deals are worth an estimated $100 million.

System One has acquired GAP Solutions, Inc., a provider of operations enhancing programs and consulting services to defense, homeland security, and civilian government agencies in the U.S.  Terms of the deal were not disclosed.

TTM Technologies has agreed to acquire Anaren, Inc., a provider of high-frequency RF and microwave microelectronics, components, and assemblies for the space, defense, and telecommunications sectors.  The deal is worth an estimated $775 million.

Click here to review comparable company analysis.

Industry Week in Review – December 1, 2017

/in /by

Aerospace & Defense Update

On Tuesday, Director of the U.S. Air Force’s Rapid Capabilities Office (“RCO”), Randall Waldren, discussed the progress of the B-21 Raider, a stealth bomber developed by Northrop Grumman. The B-21 is designed to be nuclear-capable and able to fly manned and unmanned missions.  The B-21 program work began in February of 2016 and has garnered $13.5 billion in funding through 2022, making it the Air Force’s largest development program.  Per Director Waldren, the Air Force plans to deliver the heavy bomber on cost, requiring minimal schedule delays with a production target of 100 bombers that will enter service in the mid-2020s.  The B-21 program will enter the critical design review phase in 2018 with the eventual goal of replacing the Boeing B-1, B-52, and Northrop B-2 fleets.

The National Aeronautics and Space Administration (“NASA”) and international partners are planning to release an international space exploration document in early-2018, detailing updated plans for human missions to the moon and Mars.  The document has a roadmap laying out a three-phase plan for the exploration efforts and emphasizes the role of NASA’s Deep Space Gateway.  Phase 0 will entail ongoing research and testing on the International Space Station, and Phase 1 will occur in the 2020s with plans for international agencies to explore the lunar vicinity.  During Phase 1, NASA would work with various partners to construct the Deep Space Gateway from which robotic missions would be deployed to explore the lunar surface and prepare for human lunar missions.  In preparation, NASA has already awarded contracts to Boeing, Lockheed Martin, Orbital ATK, Sierra Nevada Space Systems, and Space Systems Loral to develop a module to power the Deep Space Gateway throughout its lunar orbit.  Ultimately, Phase 2 plans for agencies to send exploration missions to orbit Mars in the 2030s.

Government Technology Solutions

Less than two weeks after the General Services Administration (“GSA”) awarded 61 companies positions on its $50 billion Alliant 2 contract, five companies filed protests against the government’s decision.  Two of the protestors, Harris IT Service Corp. and Kratos Technology and Training solutions, were incumbents on Alliant 1.  The other protestors are Compuline International, the Centech Group, and Capgemini Government Solutions.  Given the size and importance of Alliant 2, as well as the history of protests associated with the first iteration of the contract back in 2007, it was expected that the government would receive numerous protests regarding this contract award.  The original Alliant contract experienced delays of more than a year as a result of various protest activities.  The Government Accountability Office has until March of 2018 to make a determination on the protests.

The growing popularity of blockchain has encouraged government agencies to explore practical applications for implementing this innovative technology.  Analysts expect blockchain to be introduced into mainstream government processes similarly to how cloud computing was introduced.  However, government agencies are moving much more quickly and independently towards adopting blockchain as compared to cloud computing many years ago.  Due to the government’s reliance on legacy systems, blockchain will be used to support and augment such systems with the goal of improving overall functionality, as opposed to replacing legacy systems.  In the near-term, the government aims to incorporate private blockchains to improve privacy and operating efficiency.

Big Movers

Honeywell (up 3.2%) – Share prices were up this week after reports stated the company is looking to acquire Arconic Inc.

L3 Technologies (up 2.9%) – Share prices were up this week after the company appointed several key executives to start in the beginning of next year.

Transactions

ABSS Solutions, Inc. has acquired 1st American Systems and Services, LLC, a provider of technical and professional services, supporting the design, integration, and management of program solutions related to business operations, advanced learning, information technology, health care IT, and engineering services.  Terms of the deal were not disclosed.

AE Industrial Partners, LLC has agreed to acquire EnCore Composites Holdings, Inc., a provider interior cabin and composite and other lightweight products for the aviation industry.  Terms of the deal were not disclosed. 

CapitalWorks, LLC has acquired GEMCITY Engineering, a provider of advanced automated equipment, complex assemblies, robotics, and high precision machining.  Terms of the deal were not disclosed.

Hartzell Engine Technologies, LLC has acquired Meggitt’s South Wind Aircraft Heater Business, a provider of combustion heating solutions for South Wind Aircraft.  Terms of the deal were not disclosed.

Microsemi Corp. has acquired the High Performance Timing Business of Vectron International, a provider of frequency control, sensor and hybrid solutions using both bulk acoustic wave and surface acoustic wave-based designs.  The deal is worth an estimated $130 million.

Thales S.A. has acquired Aveillant, a provider of  holographic radar technology ideal for drone surveillance.  Terms of the deal were not disclosed.

Tinicum L.P. has acquired Astrodyne TDI, a provider of specialized power solutions for demanding applications in the advanced military, aerospace, medical, and industrial markets worldwide.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – November 24, 2017

/in /by

Aerospace & Defense Update

This past week, Boeing and Avolon finalized an order for 75 737 MAX airplanes, which includes 55 MAX 8s and 20 MAX 10s with an option for an additional 20 MAX 8s.  The MAX 10 was launched at the Paris Air Show this year and is expected to have the lowest seat-mile cost of any single-aisle aircraft.  The deal is valued at nearly $11 billion for the 75 aircraft as well as the 20 additional aircraft.  Per Avolon’s CEO, Domhnal Slattery, the deal will strengthen Avolon’s portfolio to meet growing customer demand within the narrow-body market segment.  Avolon, a Dublin-based aircraft lessor, already has a fleet of 915 aircraft and is expected to reach 990 aircraft with this new purchase.  Additionally, Boeing’s 737 MAX has exceeded 4,000 orders from 92 customers, making it the fastest selling aircraft in Boeing’s history.

Northrop Grumman is developing a next-generation flank array for the U.S. Navy through an internal development project named Advanced Flank Array.  The flank array is a sonar system mounted on both sides of a submarine’s hull and will be evaluated by the Naval Underwater Warfare Center.  Northrop has been the sole manufacturer of flank arrays for Virginia Class submarines and has over fifty years of experience developing underwater acoustic systems.  Production of the next-generation flank array is predominately focused on improving the affordability and reliability of flank array manufacturing while still maintaining the Navy’s strict performance requirements for array technology.  The project is designed to minimize lifecycle system performance risk and position Northrop to be a low-risk prime contractor in support of next-generation flank arrays.

Government Technology Solutions

The Government Services Administration (“GSA”) announced that 61 companies were awarded F&O positions on the 10-year, $50 billion Alliant 2 contract for IT and professional services.  Major customers include the Department of State, the Department of the Army, and the Department of Homeland Security.  As the successor to Alliant 1, which expires April 30, 2019, the Alliant 2 unrestricted contract contains a five-year base period and a five-year option.  The GSA said awards for the small business portion of the contract will be announced separately in the near future.  The agency is anticipating 80 awards on the small business portion with a ceiling value of $15 billion.  The announcement comes more than a year after the GSA released the Alliant 2 request for proposals (“RFPs”) in June 2016.  Of the 61 awardees, 25 did not hold positions on Alliant 1 or Alliant Small Business.  A total of 18 companies on Alliant 1 were not listed as winners of Alliant 2, although it is unclear whether those companies bid and lost or did not bid at all.

The military’s IT budget is poised to benefit from anticipated increases in defense spending in government fiscal year 2018 as the service branches push to incorporate more emerging technologies.  Over the past five years, civilian IT spending has far outpaced defense IT, which has averaged approximately 1% growth, annually, over that time.  The National Defense Authorization Act (“NDAA”), which the Senate passed on Monday, will allocate $33.2 billion to the Department of Defense (“DoD”) to unclassified IT funds.  If signed into law, the NDAA would increase the department-wide IT budget from $10 billion in government fiscal year 2017 to $11 billion in fiscal 2018.  The Navy-Marine Corps would also see their defense IT budget increase by approximately $1 billion, from $7 billion to $8 billion.  Spending will be focused on similar IT areas as government fiscal year 2017, including automation, cloud computing, cybersecurity, and the convergence of all three to build self-healing network capabilities that require less manpower to operate.

Big Movers

Embraer (up 3.2%) – Share prices were up this week after the company conducted flight trials of its KC-390 multi-mission military transport and tanker jet in the U.S.

L3 Technologies (up 3.1%) – Share prices were up this week after the company announced the award of multiple contracts relating to the development of Free Space Optics capabilities for the DoD and space customers.

Transactions

Broadcom Limited has completed its acquisition of Brocade Communications Systems, Inc., a provider of networking hardware, software, and services, including Storage Area Networking (“SAN”) solutions and Internet Protocol (“IP”) Networking solutions.  The close of the transaction concurred with the close of Hitachi Vantara Federal Corp.’s acquisition of the cleared assets and support services of Brocade Communications Systems, Inc., which was announced on June 27, 2017.  The deal is worth an estimated $5.5 billion.

Deltek, Inc. has closed its acquisition of Onvia, Inc., a provider of market intelligence platforms that offer clients contracting leads in the federal, state, and local government arenas.  The deal is worth an estimated $70 million.

Hitachi Vantara Federal Corp., a subsidiary of Hitachi, Ltd., has completed its acquisition of the cleared assets and support services of Brocade Communications Systems, Inc., a provider of networking hardware, software, and services, including Storage Area Networking (“SAN”) solutions and Internet Protocol (“IP”) Networking solutions.  Terms of the deal were not disclosed.

Novume Solutions Inc. has acquired NeoSystems Corp., a provider of strategic back office services for government contractors, small companies or nonprofit organizations, and medium-sized organizations.  The deal was worth an estimated $21 million.

Washington Equity Partners announced its majority recapitalization of Arc Drilling, a provider of electrical discharge machining for aerospace engines and industrial gas turbines.  Terms of the recapitalization were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – November 17, 2017

/in /by

Aerospace & Defense Update

At the Dubai Air Show this week, Airbus secured the largest commercial plane transaction in its history, a nearly $50 billion order for single-aisle aircraft, which overshadowed Boeing’s own large-scale $20 billion deal for 175 737 Max planes, the A320’s primary competitor.  Airbus’ mega-deal will provide Indigo Partners with 273 A320neo narrow-body aircraft and 157 of its larger variant, the A321neo, both of which will be distributed amongst four low-cost carriers in Indigo’s investment portfolio, including Frontier Airlines, Volaris, Wizz Air Holdings, and JetSmart.  The deal with Indigo is expected to double Airbus’ previous order book for the year and increases the company’s backlog to more than 7,000 jets, reversing previous expectations that orders in 2017 will trail deliveries.

Last Sunday, Orbital ATK successfully launched a civilian cargo capsule into orbit, propelling a Cygnus spacecraft to supply the International Space Station with food, experiments, and supplies.  This is the second successful launch for the redesigned Antares rocket and increases Orbital ATK’s chances of being selected to develop a more powerful booster for Department of Defense (“DoD”) missions.  In 2018, the Air Force is anticipated to pick three contractors to provide prototype rockets designed to fulfill the military’s requirements for the next three decades.  Orbital ATK will be competing with SpaceX, Blue Origin, and United Launch Alliance (“ULA”), a joint venture between Boeing and Lockheed Martin, for the opportunity to transport the Pentagon’s future national security satellites into high-altitude orbits.  Currently, ULA is the primary heavy-lift launch provider for the U.S. military, however a strong-performing Antares rocket could help secure future DoD business for Orbital ATK and Northrop Grumman, which recently agreed to acquire the company.  While commercial use of the Antares rocket has thus far been prohibited by expense and launch frequency, Orbital ATK emphasized the next-generation rocket will be less expensive and more flexible, positioning it to compete with SpaceX’s Falcon 9 rocket.

Government Technology Solutions

The House Oversight and Government Reform Committee released its fifth Federal IT Acquisition Reform Act (“FITARA”) scorecard this week.  The scorecard shows moderate adherence to the 2014 law and some associated data center optimization and governmentwide software license usage initiatives, however, agencies across the board are receiving lower scores than what the government deems acceptable.  While three out of twenty-four agencies improved compliance with FITARA, six agencies received lower scores.   Specifically, seventeen agencies received an “F” for compliance with the MEGABYTE Act for software licensing.  Overall, most agencies, including the Departments of Homeland Security, Housing and Urban Development, Justice, and the Environmental Protection Agency received “C” grades.  In response to the subpar results, the House Subcommittee on Government Operations and Subcommittee on IT called a joint hearing this week to discuss the lack of progress on the scorecards and ways to improve agency compliance.

On Thursday, November 16th the Senate passed the 2018 National Defense Authorization Act (“NDAA”), which authorizes the level of defense spending and sets policies controlling how the money is spent. In an effort to reduce costs associated with new contract protests, the NDAA implemented a provision whereby protesters are required to reimburse the Department of Defense (“DoD”) for all government costs associated with the protest if the decision is not subsequently overturned.  To protect small businesses from high reimbursement costs, only companies with more than $100 million in revenue would be subject to this provision.  In order for the DoD to qualify for protest reimbursement, the Government Accountability Office (“GAO”) would also have to deny all elements of the protest, however, this ambiguous language around the requirement may lead to an increase in litigation as protestors challenge the basis for expense reimbursement.  Although the new provision aims to minimize the number of protests, the GAO will have increased responsibility related to tracking expenses by individual protests and may face additional litigation costs following request for reimbursement.

Big Movers

Ultra Electronics (down 22.7%) – Share prices were down this week after the company issued a profit warning and announced its CEO was stepping down.

ViaSat (up 7.9%) – Share prices were up this week after the company announced it has extended its relationship with JetBlue as the airline’s direct in-flight internet service provider.

Transactions

An affiliate of global private equity investment firm H.I.G. Capital, LLC has acquired Whitney, Bradley & Brown, Inc. (WBB), a portfolio company of Lake Capital.  WBB is a management consulting firm focused on business transformation, organizational realignment, and process improvement.  KippsDeSanto & Co. served as the exclusive advisor to WBB on this transaction.  Terms of the deal were not disclosed.

Arlington Capital Partners has acquired Cadence Aerospace, a provider of highly complex aerospace components and assemblies.  Terms of the deal were not disclosed.

General Atomics has acquired Surrey Satellite Technology, a provider of small satellite technologies, systems, and services.  Terms of the deal were not disclosed.

Intelligent Waves, LLC has acquired virtual mobile security technology and associated intellectual property of privately held Hypori, Inc., a provider of certified mobile virtualization technology.  Terms of the deal were not disclosed.

OMERS Private Equity division has agreed to acquire Ardian Holding’s portfolio company Trescal S.A., a provider of calibration services for defense, aerospace, telecommunications, transportation, and other sectors.  The deal is worth an estimated $789 million.

Click here to review comparable company analysis.