Industry Week in Review – November 10, 2017

/in /by

Aerospace & Defense Update

On Wednesday, Congressional negotiators from both the House and Senate agreed on a $700 billion defense authorization plan for GFY 2018 with ~$634 billion set aside for base defense funding and ~$66 billion for the overseas contingency operations (“OCO”).  The proposal authorizes 90 new joint strike fighters (“JSF”), a new littoral combat ship, extra funding for Army helicopters, and five more ships than President Trump’s budget proposal.  The bill adds more than 20,000 service members as well as a 2.4% pay raise for troops, the largest increase since 2010.  The plan will need final approval from the full House and Senate, which will need to reconcile the bill’s plan as it currently exceeds the GFY2018 spending caps.

Last week, U.S. and Chinese negotiators signed a pact allowing Chinese-manufactured airplanes and parts to be sold in the U.S. and other countries.  The pact will increase Chinese companies’ opportunities to become key, global suppliers of commercial jetliners, which is a market currently dominated by Boeing and Airbus.  The Chinese-manufactured Comac C919 jetliner is leading China’s efforts to gain a stronger foothold in the global aerospace industry, directly competing with the Boeing 737 and Airbus A320 jets.  The C919 has already secured over 300 orders, which have mainly come from Chinese customers.  For Boeing, this agreement allows the company to deliver its new 737 Max jet to Chinese airlines after previously being warned that the approval would be delayed until 2018.  Boeing is also set to open a new facility near Shanghai in 2018 to work in partnership with Comac to work on 737’s that will be delivered for Chinese airlines.

Government Technology Solutions

The Defense Information Systems Agency (“DISA”) announced 20 awardees for the full and open portion of the $17.5 billion Encore III contract.  While usual suspects, such as Booz Allen Hamilton and CACI International, made the list, several notable incumbents on the predecessor Encore II contract were left out, including SAIC, Raytheon, and BAE Systems, among others.  Encore is one of DISA’s primary vehicles for a wide range of IT services across the Department of Defense (“DoD”), covering capabilities such as enterprise IT policy and planning, business process re-engineering, network support, and cloud professional services.  The contract has a five-year base and five one-year options.  DISA received 72 proposals, meaning the Government Accountability Office is likely to face protests like it did with Encore II, when 26 companies, including five small businesses, were ultimately awarded spots.  Companies will have 10 days after debriefings to file bid protests.

The Department of Housing and Urban Development (“HUD”) fell short of the Digital Accountability and Transparency Act’s (“DATA”) required reporting for the second quarter of fiscal year 2017.  Inspector General (“IG”) officials found that the agency’s chief financial officer (“CFO”) failed to implement standards required by the Office of Management and Budget (“OMB”) and the Department of Treasury, causing HUD to underreport billions of dollars in obligations and outlays to USASpending.gov.  The DATA Act requires federal agencies to submit standardized spending information to improve federal transparency.  However, HUD’s submission consisted of widespread errors, inconsistencies, omissions, and false values, according to the IG report.  Investigators found that HUD did not carry out necessary system upgrades to ensure financial data fit the DATA Act Information Model Schema.  The IG offered new recommendations on how the HUD could achieve DATA Act standards, including designating additional personnel and financial resources towards compliance.

Big Movers

ULE (down 15.5%) – Share prices were down this week after the U.S. Department of Justice delayed its decision regarding Ultra Electronics’ purchase of Sparton Corp.

ESL (down 25.7%) – Share prices were down this week after the company missed fourth quarter consensus earnings and sales estimates.

Transactions

Blue Cross and Blue Shield of South Carolina has acquired JBS International, Inc., a provider of professional services to public and private sector clients.  KippsDeSanto & Co. served as the exclusive advisor to JBS International, Inc. on this transaction.  Terms of the deal were not disclosed.

MAG Aerospace Corp. has acquired Avenge, Inc., a provider of Manned ISR (Intelligence, Surveillance, Reconnaissance) Operations and Training.  KippsDeSanto & Co. served as the exclusive advisor to Avenge, Inc on this transaction.  Terms of the deal were not disclosed.

Booz Allen Hamilton, Inc. has completed its acquisition of Morphick, a provider of managed detection and response (“MDR”) services.  Terms of the deal were not disclosed.

Radiant Power Corp. has acquired Interface Displays & Controls, Inc., a provider of electronic products for aviation, marine, military fighting vehicles, and embedded computing markets.  Terms of the deal were not disclosed.

Speedcast International Ltd. has completed its acquisition of UltiSat, Inc., a provider of remote communications and professional services.  The deal was worth an estimated $100 million.

Structural Monitoring Systems plc has agreed to acquire Anodyne Electronic Manufacturing Corp., a provider of electronic components for the aerospace industry.  The deal is worth an estimated $8 million.

Click here to review comparable company analysis.

Industry Week in Review – November 3, 2017

/in /by

Aerospace & Defense Update

After Pratt & Whitney’s continued production problems with its geared turbofan engines, Bombardier has decreased projected deliveries from 30 – 35 to 20 – 22 aircraft for 2017, causing a strain on the company’s free cash flow due to bloated inventories.  In response, Pratt & Whitney has offered to support excess inventory due to engine issues, stemming from a recent letter of intent (“LOI”) by an unidentified European airline for up to 61 aircraft, by providing Bombardier with supplier advances.  The delay in aircraft deliveries will lower Bombardier’s Commercial Aircraft revenues for 2017, but the company still expects to meet its overall target of 50 regional aircraft deliveries, which includes the C-Series and Q400 aircraft.

The Pentagon is in the process of reviewing the estimated $1.2 trillion cost of modernizing the U.S.’s nuclear arsenal over the next three decades, as the Pentagon begins to build its budgets for government fiscal year (“GFY”) 2019 and beyond.  A Congressional Budget Office review of GFY2017 to GFY2046 estimated the costs of incremental upgrades of nuclear forces at $400 billion and operations and sustainment of the nuclear arsenal at $800 billion.  This $1.2 trillion in estimated costs would also coincide with defense budgets constrained by long-term fiscal pressures.  The proposal for increasing the nuclear arsenal over the next three decades includes expenditures on ballistic missile submarines, intercontinental ballistic missiles, B-21 bombers, and a long-range standoff weapon.

Government Technology Solutions

The Department of Health and Human Services (“HHS”) has announced plans to modernize the agency’s legacy IT systems, which represent roughly 40% of the systems of record at HHS.  Because these systems are becoming increasingly expensive to maintain, the Office of Chief Information Officer aims to transition 30% of them to the cloud over the next few years.  With the largest non-defense IT budget in the government, HHS should have the ability to effectively spend and improve the department’s IT systems through cloud migration and modernization.  Undertaking these efforts will support HHS’s plan to achieve an A-grade on the department’s Federal Information Technology Reform Act (“FITARA”) scorecard by May of next year.  FITARA’s scorecard is influencing decision making at the HHS and creating a great opportunity for IT vendors to earn lucrative modernization contracts.

This past Wednesday, the government outlined 2018 spending for federal contracting when the Professional Services Council (“PSC”) released its 2017 Vision Federal Market Forecast.  In the report, PSC officials commended the progress made on cloud services and IT modernization, but noted the remaining workforce challenges and a lack of appointed officials in key positions.  With 2018 budgets expected to remain at the same level as 2017, agencies will struggle to devote significant resources towards modernization.  However, agencies will look towards shared services to drive savings and allow for more spending.  The PSC claims that initiatives taken this year, such as the Modernizing Government Technology Act, are promising, but are clouded with uncertainty due to the lack of sufficient leadership.  Successful appointments from the Trump administration will provide federal agencies more certainty and direction as they plan to update technology using a stagnant budget.

Big Movers

MANT (up 8.9%) – Share prices were up this week after the company reported positive third quarter earnings and a 28% increase in backlog from 2Q17.

KEYW (down 30.2%) – Share prices were down this week after the company missed third quarter consensus earnings per share estimates and reported a loss of $0.08 per share.

Transactions

AC&A Enterprises, LLC has acquired Applied Composites Engineering, Inc., a provider of advanced composites engineering and manufacturing, providing advanced composites technologies and solutions to many A&D OEMs.  Terms of the deal were not disclosed.

AE Industrial Partners, LLC has acquired FMI, Inc., a provider of a full range of premium forming, machining, engineering, and complex assembly services to global aerospace customers.  Terms of the deal were not disclosed.

L2 Defense, Inc., an SBA 8(a)-certified small business, has acquired Advanced Technical and Educational Consultants, Inc. (ATEC), a woman-owned business.  ATEC is a provider of emergency services training and simulation exercises for the military and federal agencies, as well as state and local emergency services communities.  Terms of the deal were not disclosed.

 Raisbeck Engineering, Inc. has acquired Butterfield Industries, a provider of FAA-approved replacement parts for numerous King Air models.  Terms of the deal were not disclosed.

 TeraThink Corporation and Dominion Consulting announced a definitive merger agreement. Dominion Consulting is a technology and management consulting company.  KippsDeSanto & Co. served as the exclusive advisor to Dominion Consulting on this transaction.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – October 27, 2017

/in /by

Aerospace & Defense Update

Numerous companies announced 3Q17 earnings this past week with mixed results.  Lockheed Martin missed earnings per share (“EPS”) estimates by 0.6% but increased revenue by 5.4% year-over-year (“YoY”) to $12.2 billion.  Despite Lockheed’s slight miss on EPS figures and lower than expected revenue, management increased EPS and revenue guidance for 2017.  Northrop Grumman exhibited strong 3Q17 performance, beating EPS estimates by 26.0% and growing revenue by 6.0% YoY to $6.5 billion.  The revenue increase was driven by sales growth in the Aerospace Systems and Mission Systems segments.  Additionally, Boeing beat EPS estimates by 2.3% and increased its revenue by 1.7% YoY to $24.3 billion.  Boeing set a record with 202 commercial aircraft deliveries in the quarter and raised its earnings and cash flow guidance for the year.

United Technologies beat EPS estimates by 3.0% and increased revenue by 3.6% YoY to $15.4 billion.  This increase was sustained by investments in innovation, resulting in its best quarter of organic growth since 2011 per Chairman and CEO, Greg Hayes.  Hayes also reaffirmed United Technologies’ confidence in its proposed acquisition of Rockwell Collins and the transformational aspect the acquisition will have for United Technologies.  General Dynamics beat EPS estimates by 3.3% but lowered its revenue by 1.0% YoY to $7.6 billion.  However, General Dynamics said its total order backlog was up to $63.9 billion, an increase of 9.2% from the end of 2Q17.  Lastly, Raytheon beat EPS estimates by 3.0% and increased its revenue by 4.5% YoY to $6.3 billion.  This increase was driven by robust growth in its Missile Systems unit.

Government Technology Solutions

Rep. Robin Kelly voiced her support Thursday for the Connected Government Act, a bill that would require federal agencies to maintain mobile-friendly public websites.  The bill was approved by the Oversight and Government Reform Committee in September and by the Senate Homeland Security and Governmental Affairs Committee in early October.  The legislation would codify an existing Office of Management and Budget memorandum that calls for agencies to ensure that their websites perform equally well on non-desktop devices, such as smartphones and tablets.  However, an Information Technology and Innovation Foundation Report from March found that many agencies have not heeded this advice, as 31% of popular federal agencies’ websites failed a mobile friendliness test by a significant margin.  With 77% of Americans owning a smartphone, Kelly called the inability by the government to design mobile friendly websites a “complete failure”.  According to a study, approximately 40% of visits to government websites in the past 90 days were via a mobile device.

Bhupesh Wadhawan, the founder of a small business contracting firm, Link Solutions, has plead guilty to five years in prison for bribing a contracting official to award his company a $50 million contract.  The bribery scheme began almost immediately after the company was founded in 2006 and lasted through 2012.  To grow Link Solutions’ business with the Army Public Health Command at Aberdeen Proving Ground in Maryland, Wadhawan bribed Rainer Ramos, a contracting official at Aberdeen, with gifts that included Wizards basketball tickets, various football team tickets, and access to the company luxury suite at FedEx Field.  In one instance, Wadhawan convinced Ramos to convert full-and-open work into an 8(a) set-aside contract that Link Solutions ultimately won.  While commercial companies can offer potential customers certain incentives to encourage business transactions, government contractors are explicitly forbidden from offering government contracting officials any form of monetary compensation, including gifts that cover entertainment activities.  Wadhawan’s actions resulted in a five-year prison sentence and $2.2 million in restitution.

Big Movers

FLIR (up 8.9%) – Share prices were up this week after the company reported positive third quarter earnings and increased revenue by 15% YoY.

Airbus (up 5.4%) – Share prices were up this week after the company acquired a majority stake in the Bombardier C Series program.

Transactions

Serco, Inc., the wholly-owned U.S. subsidiary of Serco Group plc, has agreed to acquire BTP Systems, LLC, a provider of satellite communications (“SATCOM”), radar modernization, operations and maintenance, and sustainment services that enable customers to extend the lives of existing systems and achieve phased upgrades.  KippsDeSanto & Co. served as the exclusive advisor to BTP Systems, LLC on this transaction.  Terms of the deal were not disclosed. 

Astronics Corp. has agreed to acquire Telefonix, Inc., a provider of advanced in-flight entertainment and connectivity equipment, as well as providing industry leading design consultancy services for the global aerospace industry.  The deal is worth an estimated $104 million.

Booz Allen Hamilton, Inc. has agreed to acquire Morphick, Inc., a provider of managed detection and response (“MDR”) services.  Terms of the deal were not disclosed.

Fuse Engineering, LLC has acquired ZyEdge, a provider of IT managed services for the small and mid-sized business market in the D.C. Metro / Northern Virginia area.  Terms of the deal were not disclosed.

Highpoint Global, LLC has acquired Primescape Solutions, Inc., a provider of enterprise-scale information technology services and solutions to the public sector.  Terms of the deal were not disclosed.

MavenHill Capital has agreed to acquire Connecticut Coining, Inc., a provider of precision deep drawn metal parts for mission-critical applications for aerospace, defense, medical, and power tube industries.  Terms of the deal were not disclosed.

OpenGov, Inc. has acquired Peak Democracy, Inc., a provider of online citizen engagement solutions for the government sector.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – October 20, 2017

/in /by

Aerospace & Defense Update

Airbus has acquired a majority stake in the Bombardier C-Series jetliner, creating an avenue for Bombardier to avoid a potentially damaging trade dispute with Boeing where the U.S. Department of Commerce threatened a 300% tariff on C-Series imports.  The agreement gives Airbus a 50.01% stake in Bombardier’s C-Series Aircraft Limited Partnership and would allow Bombardier to avoid the tariff through performing final assembly of the aircraft at Airbus’ factory in Alabama, making the aircraft a domestic product.  The deal benefits Bombardier by improving the C-Series’ economies of scale and providing access to a broader sales distribution network.  For Airbus, the deal will support the bottom end of its narrowbody aircraft portfolio and help to expand its global network through the potential expansion of further deals in Canada spanning other sectors.

The U.S. Navy may ask Congress to purchase two new aircraft carriers at the same time in order to decrease construction costs for each ship, partially in response to President Trump’s initiatives to lower the costs of the service’s fleet.  After Navy Secretary Richard V. Spencer requested companies develop cost-reduction plans for the warships, many companies responded that buying two aircraft carriers at the same time could improve efficiencies and translate into potential cost savings.  The Navy has set out a plan for a 355-ship fleet, adding more than 50 ships to its current portfolio.  This expansion includes four additional aircraft carriers, which the Pentagon anticipates will cost $43 billion.

Government Technology Solutions

Federal Chief Information Officer Margie Graves announced that the final version of the technology modernization report by the White House’s American Technology Council and Office of American Innovation Technology will be released shortly.  This report lays out the current and envisioned state of Federal IT, while providing recommendations to implement these improvements.   Additionally, The White House is waiting on Congress to implement the Modernizing Government Technology Act (“MGT”), which will change funding structures within agencies to allow for unspent budgets to go towards IT modernization projects.  The Office of Management and Budget (“OMB”) will set up funding structures quickly so agencies can protect their assets immediately.  The OMB and National Institute of Standards and Technology (“NIST”) have formed a joint working group to determine better security protocols for identity verification and other security measures.  Considering the cybersecurity hacks reported in the past few weeks (e.g., Equifax and the Federal Deposit Insurance Corporation), Graves has emphasized the importance of the MGT and different solutions to increase its efficiency.

Due to the growing popularity of blockchain, government agencies are weighing whether to implement this new and rapidly growing technology.  As a decentralized currency, blockchain transactions are visible to all users, potentially making it a more efficient and cheaper alternative to standard currency.  Agencies have cited that blockchain could be used for identity management, alternative payment models, and auditing, among other services.  However, government leaders are worried about privacy issues and do not believe that blockchain would pass regulatory constraints.  The General Services Administration (“GSA”) has been one of the biggest agencies working on blockchain because it realizes hundreds of potential benefits, but is delaying the implementation of any new policies as it further analyzes the potential risks.  Additionally, the State Department is considering blockchain usage in diplomacy to potentially track foreign aid and police illegal mining.  Overall, government agencies realize the potential benefits of blockchain, but are waiting to implement the digital currency in a broader context as it weighs its feasibility in the broader market.

Big Movers

Astronics (up 10.1%) – Share prices were up this week after the company was selected by six major North American airlines to install in-seat power systems on up to 1,400 narrow-body and regional jet aircraft.

GKN (down 5.4%) – Share prices were down again this week after the company gave analysts guidance that profits would be below expectations due to two external claims expected to cost $53 million.

Transactions

AEA Investors LP has agreed to acquire Excelitas Technologies Corp., a provider of photonics technology solutions, with core capabilities in detection, optics, illumination and advanced electronics.  Terms of the deal were not disclosed.

CSRA has agreed to acquire Praxis Engineering Technologies, a provider of software and systems engineering services to agencies in the intelligence community with a particular emphasis on mission application development and engagement.  The deal is worth an estimated $235 million.

Intelligent Decisions, Inc. has acquired privately held Manning Services, Inc., a provider of custom application development and cloud migration services.  Terms of the deal were not disclosed.

Spectris plc has acquired privately held The Omnicon Group, Inc., a provider of engineering solutions for the aerospace, automotive, and defense sectors.  The deal is worth an estimated $29 million.

Click here to review comparable company analysis.

Industry Week in Review – September 1, 2017

/in /by

Aerospace & Defense Update

United Technologies Corp. is in talks with Rockwell Collins about a potential deal valued at more than $20 billion to acquire the industry heavyweight with expectations of closing the deal within a week.  With the consolidation of two key aerospace and defense suppliers, the deal could lead to a wave of mergers and acquisitions (“M&A”) activity amongst other first-tier competitors.  Competitors such as Thales or Harris Corp. could have difficulty competing on contracts with Rockwell Collins with the backing of United Technologies’ resources.  Other large aircraft makers, such as Boeing and Airbus, could also have concerns over increasing costs in their respective supply chains as a result of further consolidation, which could lead to acquisitions of smaller avionics and electronics companies to lessen dependence on first-tier suppliers.  Additionally, Boeing has demonstrated interest in expanding its footprint in the aftermarket through the creation of an internal avionics business unit.  Industry analysts agree the Pentagon and other government agencies are likely to allow the acquisition without objection because neither United Technologies nor Rockwell Collins are competitive in the same space.

The U.S. Army has granted AM General a contract award for $2.2 billion in High Mobility Multipurpose Wheeled Vehicles (“Humvee”) sales to foreign countries, which equates to over 11,500 vehicles.  AM General designs, manufactures, and supplies high-quality specialized vehicles for military and commercial customers globally.  The contract award allows for foreign countries to order the Humvees over the next five years.  Two years ago, AM General lost its bid to build Joint Light Tactical Vehicles (“JLTV”) in the U.S. Army’s Humvee replacement competition to Oshkosh Defense.  However, AM General has managed to successfully expand its Humvee business internationally.  This contract would add to the more than 250,000 AM General Humvees already deployed across 60 countries.

Government Technology Solutions

On Wednesday, the White House’s American Technology Council and Office of American Innovation issued its report on the efforts needed to modernize federal technology.  Required as part of President Trump’s May 11th cybersecurity executive order, the report focuses its main priorities on modernizing and consolidating federal networks and moving to shared services.  For modernization and consolidation, the report calls for maximizing the secure use of cloud computing and modernizing government-hosted applications to protect federal data and cloud-optimized deployments.  For shared services, the report recommends increasing the use of commercial clouds, accelerating the adoption of cloud email and collaboration tools, and improving existing as well as providing additional, security shared services.  The Office of Management and Budget (“OMB”) will help agencies reprioritize funds away from obsolete, legacy Information Technology (“IT”) systems towards modern technologies, using agile development where possible.  The report made no mention of the IT modernization fund, for which the White House has requested $228 million for the next fiscal year.

Due to a shorter budget timeframe for agencies and vacancies in politically-appointed positions, delays on certain major contract awards are becoming commonplace as the end of the federal fiscal year-end looms.  Many large-dollar programs require political guidance and thus have been slowed down with delayed appointee decisions during the transition to a new administration.  All but two of Deltek’s top-20 opportunities for fiscal year 2017 have seen their award date pushed further out, and as a result, many current contracts have been extended through modifications.  However, contract opportunities are still being actively pursued; with a compressed timeframe due to full appropriations only being in place since March, companies expect a very good bookings quarter, especially in relation to military training and readiness.  Agencies have a high volume of business and backlog to clear, so they may default to easily supportable conclusions favoring lower-cost bids in making awards.

Big Movers

ICF International (up 18.0%) – Share prices were up this week due to ICF’s role as the lead consultant for the Department of Housing and Urban Development and the subsequent increased role that ICF will play for recovery efforts in the wake of Hurricane Harvey’s destruction in Texas.

Embraer (up 5.5%) – Share prices were up this week after the Pentagon announced the sale of 12 Super Tucano A-29 planes made by Embraer to Nigeria.

Transactions

Braxton Science & Technology Group has acquired Ingenicomm LLC, a provider of architecture, implementation, and deployment services for satellite ground systems.  Terms of the deal were not disclosed.

Forcepoint, majority owned by Raytheon in a joint venture with Vista Equity Partners has acquired RedOwl Analytics, Inc., a provider of security analytics focused on understanding and managing human risk.  Terms of the deal were not disclosed.

Jacobs Engineering Group, Inc. has acquired Blue Canopy Group, LLC, a provider of cloud, big data analytics, data science, and enterprise information technology (“IT”) consultancy and services for federal government and commercial markets.  Terms of the deal were not disclosed.

Point Blank Enterprises, Inc. has acquired United Shield International, LLC, a provider of personal ballistic and fragmentation equipment.  Terms of the deal were not disclosed.

Strata-G Solutions, Inc. has agreed to acquire WestWind Aerospace, Inc., a provider of rotary wing systems and integration solutions.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – August 25, 2017

/in /by

 

Aerospace & Defense Update

On Monday night, President Trump announced the U.S. will be sending additional troops and aircraft to Afghanistan.  The revised strategy could include as many as 3,900 additional troops that will be deployed “down to a tactical level” to better support the Afghan military.  The increased U.S. military support in Afghanistan will keep pressure on the Taliban to cease the fighting and bring negotiated peace with the Afghan government.  The additional troops will also play a critical role in counterterrorism missions to quell the rise of the Islamic State and Al-Qaeda cells in the region.  The Trump administration does not plan to publicly announce a withdrawal date or disclose any finite numbers on troop deployment levels.

According to top Pentagon budget official David Norquist, the Pentagon is prepared to operate under a short-term continuing resolution (“CR”) at the end of September if Congress is unable to pass a defense budget.  Although Norquist stated he prefers there not to be a CR, the continuing resolution is likely due to the focus on healthcare reform this summer and Congress’ inability to reach a consensus.  Additionally, Congress must work out large items such as the debt ceiling, new infrastructure, and tax legislation once lawmakers return in September.  The last extended government shutdown occurred in October 2013 and delayed military pay and benefits to service members.

Government Technology Solutions

The Social Security Administration (“SSA”) awarded CGI Federal, Leidos, and Northrop Grumman a 10-year, $7.8 billion IT services contract for new hardware and software, as well as associated services.  Leidos will perform this work through the legacy Lockheed Martin Information Systems & Global Solutions business.  The contract includes two base years and eight one-year options with specific bid ceilings for each business.  CGI, Leidos, and Northrop Grumman are eligible for up to $2.4 billion, $2.3 billion, and $3.1 billion in task orders, respectively.  The contractors’ focus on system development lifecycles is expected to help the SSA achieve its goal of increasing the use of automation in IT systems.

CliniComp International, a San Diego-based commercial electronic health record (“EHR”) vendor, has filed a lawsuit against the Department of Veterans Affairs (“VA”) arguing that Secretary David Shulkin broke Federal contracting rules by issuing a sole-source contract to Cerner for updating the VA’s EHR system.  The VA issued the sole-source contract to address its reportedly urgent need for crossover capabilities with the Department of Defense, which is currently utilizing Cerner software for its own EHR overhaul.  CliniComp, who currently holds smaller EHR contracts with both the VA and DoD, argues that it will take Cerner six to eight months to negotiate the terms of the sole-source contract.  They claim that this is plenty of time for the VA to instead compete a contract under accelerated full-and-open competition.  Additionally, CliniComp contends that the overall risky nature of this contract and the work performed could be mitigated by a multiple award contract.  CliniComp’s agency-level protest was already dismissed earlier this month, but it is yet to be determined how this current lawsuit will proceed.

Big Movers

Rockwell Collins (up 3.7%) – Share prices were up this week after merger discussions with United Technologies Corp. advanced, making it more likely a transaction could be reached.

BAE Systems (up 3.0%) – Share prices were up this week after the company unveiled a next-generation hardened single-board computer for space-based use.

Transactions

Arlington Capital Partners has acquired Shoreview Industries portfolio company Tex Tech Industries, Inc., a provider of composite fiber and fabric products used in ballistics protection and fire-retardant thermal acoustic insulation.  Terms of the deal were not disclosed.

Clarus Corp. has acquired Sierra Bullets, LLC, a provider of high-quality bullets for both rifles and pistols used for distributors, law enforcement agencies, and industry original equipment manufacturers.  The deal is worth an estimated $79 million.

Platinum Equity Holdings has agreed to purchase Exponent Private Equity portfolio company Pattonair, a provider of distribution and supply chain management services for aerospace and defense markets worldwide.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – August 18, 2017

/in /by

 

Aerospace & Defense Update

Based on a new report by the General Aviation Manufacturers Association (“GAMA”), shipments of general aviation airplanes totaled $9 billion during the first six months of 2017, representing a 3.4% decrease year-over-year (“YoY”).  However, Original Equipment Manufacturers (“OEMs”) supplied a total of 995 business jets, piston aircraft, and turboprops during this period, representing a 2.7% increase YoY.  Between the OEMs, Textron Aviation achieved the highest number of shipments, including 142 Beechcraft and Cessna aircraft as well as 31 Cessna 172 Skyhawks in 2Q17 alone.  Among business and luxury jet makers, Bombardier delivered 36 business jets during 2Q17, including 15 Global 5000 / 6000s.  Gulfstream supplied 30 total shipments whereas Embraer and Dassault delivered 24 and 17 shipments, respectively.

After months of strategy discussions within the Trump administration about U.S. troop involvement in Afghanistan, President Trump and his national security team, including Defense Secretary James Mattis, Secretary of State Rex Tillerson and National Security Adviser H.R. McMaster, will meet at Camp David on Friday to discuss the best path forward for U.S. troop involvement in the region.  The team is assessing a wide array of options, including large troop increases, large troop decreases, and using additional private military contractors.  Previously, Tillerson, Mattis, and McMaster have backed a proposal to deploy additional troops focused on training the Afghan special forces with the intention of demonstrating U.S. commitment to the region and dissuading counterinsurgency.

Government Technology Solutions

CACI International (“CACI”) posted strong organic growth in the second half of its most recent fiscal year, primarily as the result of its two largest-ever acquisitions – Six3 Systems and L-3 Communication’s National Security Solutions (“NSS”) division.  With two large contract wins with yet-unnamed agencies in its fourth quarter, which ended June 30, CACI recorded its sixth-straight three-month period of at least $1 billion in new awards.  CACI has generated $4.35 billion in FY2017, which exceeded analysts’ expectations and represented 16% year-over-year growth. The company is forecasting 2-4% top-line growth in FY2018.  After lowering its debt to adjusted EBITDA ratio to 3.2 from a high of 4.2, just following the NSS acquisition, CACI now has more “dry powder” for more acquisitions.  CEO, Ken Asbury, said he is particularly interested in adding new machine learning and data analytics capabilities to CACI’s portfolio.  Only 10% of CACI’s contracts are up for recompete in its next 12-months, which is well below the industry average of 15-20%.

Leidos just lost its second chance at a $564.3 million Army Corps of Engineers contract due to the perceived riskiness of the company’s acquisition of Lockheed Martin’s Information Systems and Global Solutions (“IS&GS”) segment.  Lockheed had previously pursued this contract, which was later awarded to SAIC, before the IS&GS divestiture was completed.  In its justification, the Army Corps of Engineers cited Leidos’ press release section titled “Cautionary Statement Regarding Forward Looking Statements”, which noted uncertainties from the merger including business disruption, operational problems, financial loss, and legal liability.  Such warnings, primarily directed towards investors, are commonplace in Securities & Exchange Commission (“SEC”) filings, but the Army Corps of Engineers saw Leidos’ as cause for concern.  This is the second time the U.S. Government Accountability Office (“GAO”) backed the Army’s position on the protest after originally doing so last October.  Similar uncertainties over the IS&GS acquisition also played a role in Leidos not winning a contract to manage the Nevada National Security Site in July.

Big Movers

HEICO (down 3.6%) – Share prices were down this week after the company agreed to purchase AeroAntenna Technology for $316.5 million in cash, plus a $20 million earnout payment if AAT meets earnings targets.

Elbit Systems (up 6.3%) – Share prices were up this week after the company confirmed that a jury found Hughes Network Systems to have infringed an Elbit Systems patent.

Transactions

B&E Group, LLC has acquired Safe Fuel Systems, Inc., a provider of testing, repair, overhaul and modification of fuel systems, hydraulics and accessories for major domestic and international civil transport and military aircraft.  Terms of the deal were not disclosed.

HEICO Corp. has agreed to purchase AeroAntenna Technology, Inc., a provider of high performance active antenna systems for critical defense applications, precision guided munitions, commercial aircraft.  The deal is worth an estimated $316.5 million.

H.I.G. Capital has completed the tender offer to acquire NCI, Inc., a provider of IT and professional services and solutions, primarily big data and data analytics, agile development, and intelligence-to-operations initiatives to defense, intelligence, healthcare, and civilian government agencies worldwide.  The deal is worth $283 million.

HPS Partners, LLC and Tennenbaum Capital Partners, LLC have agreed to acquire EagleTree Capital Portfolio Company Globecomm Systems Inc., a provider of design, integration, and operation of complex communication solutions with capabilities in satellite and wireless.  Terms of the deal were not disclosed.

JW Hill Capital has acquired Bandy Machining, Inc., a provider of complex, close-tolerance hinges that are used on numerous commercial and military aerospace platforms.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – August 11, 2017

/in /by

Aerospace & Defense Update

United Technologies Corp. is in takeover talks with Rockwell Collins, Inc. in what would be one of the largest aerospace deals in history.  In April, Rockwell Collins significantly increased in size as it closed a $6.4 billion acquisition of B/E Aerospace, which is expected to bring $3 billion in additional annual revenue to Rockwell’s existing $5.3 billion in sales.  Reportedly, the takeover price of Rockwell Collins would exceed $20 billion even though United Technologies executives have indicated the Company would focus on smaller deals.  Strategically, the deal makes sense for United Technologies as it would allow the Company to expand its current product offerings to include cockpit displays, communications systems, and other high-technology aviation products with little overlap.  The reported transaction would combine the largest and fourth-largest aircraft parts suppliers, providing the newly combined entity increased bargaining power with large aircraft makers like Boeing and Airbus.  Last week, Boeing announced its creation of an avionics business unit that puts itself in competition with key suppliers.  Rockwell Collins share price has increased as much as 7% since announcements about the potential takeover.

The U.S. Air Force placed a request of $52.5 million to acquire 140 Joint Light Tactical Vehicles (“JLTV”) from the JLTV Program for fiscal year (“FY”) 2018.  The service intends to replace its entire aging inventory of 3,720 Humvees with new JLTVs; however, the fleet management strategy is still being formalized, and there are no procurement plans for FY2019 through FY2022 in its current budget documentation.  Primary concerns over the Humvee inventory include frequent maintenance in the hot temperatures of the Middle East as well as heavy armor additions leading to increased strain on brake pads and limited power and agility.  The Air Force is joining the Army and the Marine Corps, who spearheaded the JLTV Program and expect to procure 49,100 and 5,500 vehicles, respectively.  Oshkosh, the manufacturer of JLTVs, announced that the Company will be able to meet the emerging demands of the Air Force without affecting Army or Marine Corps deliveries.

Government Technology Solutions

On Thursday, Jacobs Engineering Group won an eight-and-a-half-year IDIQ contract worth $4.6 billion to provide research and development and IT services for the Missile Defense Agency (“MDA”).  Northrop Grumman was the previous incumbent on this contract, having originally won the contract in 2005.  Jacobs will be responsible for managing MDA’s enterprise communications and IT environments.  As part of the program, the company will provide products and services to support testing, training, and operations.  Additionally, the contractor will be tasked with supporting MDA’s Missile Defense Integration and Operations Center by handling models and simulations.  Jacobs will complete the majority of this work at MDA’s main center at Schriever Air Force Base in Colorado, as well as in Huntsville, Dahlgren, and Fort Belvoir in Virginia.

The Department of Veterans Affairs (“VA”) revealed additional details this past week regarding its new electronic health records (“EHR”) system through a recently released sources sought notice.  Cerner has been selected to provide the software licenses, product integration, deployment planning, configuration management, testing, and other services in support of the new EHR system.  However, the company is expecting to seek additional partners to assist in the implementation of the system as well as integration with the Department of Defense’s (“DoD”) Genesis EHR system.  The VA opportunity is expected to be larger than the $4.5 billion DoD EHR contract, due in part to the increased scope of the project.  The VA’s EHR system will cover 1,600 care sites, 300,000 employees, and 9,000,000 veterans enrolled in the VA health care system.  The VA anticipates additional contract opportunities as the EHR system rolls out, which would encompass solutions such as network upgrades, communications, and other technical and management activities once the deal with Cerner is finalized.

Big Movers

Astronics Corp. (up 4.2%) – Share prices were up this week after the Company was selected to supply fuel tank access doors for the new family of long-range Boeing 777X and 787 Dreamliner airplanes.

Vectrus, Inc. (down 15.2%) – Share prices were down this week after the Company announced second quarter earnings with earnings and revenue down year-over-year.

Transactions

Arsenal Capital Partners has agreed to acquire Cyalume Technologies Holdings, Inc., a provider of chemiluminescent devices, primarily light sticks, whose applications include training ammunition, training and simulation, and specialty products.  The deal is worth an estimated $45 million.

KeyLogic Systems, Inc. has acquired CrossResolve, LLC, a provider of biometrics, forensics, identity management, and identity intelligence solutions and services to federal and private sector customers.  Terms of the deal were not disclosed.

Lanzen, Inc. has acquired the Petoskey, Mich. manufacturing operations of Demmer Corp., a provider of welded fabrication, light assembly, production machining, precision machining of contoured surfaces, and fixtures for the defense industry.  Terms of the deal were not disclosed.

PRC Composites, LLC has acquired Globe Plastics, Inc., a provider of compression, transfer, and injection molding as well as custom mold, insert, and tool making services for aerospace and other industries.  Terms of the deal were not disclosed.

Sierra Peaks Corp. has acquired Mechtronic Solutions, a portfolio company of Cornerstone Capital Holdings, LLC, a provider of custom, automated test systems and payload pods for the aerospace and defense industries.  Terms of the deal were not disclosed.

Solix Group AB has acquired Dynasafe International AB, a portfolio company of the Perusa Partners Fund 1, a provider of specialized services in unexploded ordnance clearance and weapons disposal solutions.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – August 4, 2017

/in /by

Aerospace & Defense Update

BAE System, Bombardier, and Huntington Ingalls all reported 2Q17 earnings this past week with strong results.  BAE reported earnings higher than consensus expectations with earnings per share (“EPS”) and revenue up ~17% and ~10% year-over-year (“YoY”), respectively.  BAE’s new CEO, Charles Woodburn, credited this growth to the increasing defense budgets worldwide.  Bombardier beat consensus Earnings Before Interest & Tax (“EBIT”) expectations and saw its shares increase as much as ~6%, while Huntington Ingalls beat consensus earnings expectations by ~23% with revenue up ~9% YoY.  Huntington Ingalls’ strong performance was primarily attributable to higher revenues from assault ships and the Legend-class National Security Cutter program.

Per a Boeing internal memo released on Monday, the company is launching a new business unit, Boeing Avionics, that will make aircraft controls and electronics.  The avionics technology will serve military, civil, and space vehicles that the company plans to bring into service over the next decade.  The unit will allow Boeing to vertically integrate its manufacturing process and cut costs.  However, through insourcing key technology, Boeing places itself in direct competition with key suppliers such as Rockwell Collins, Honeywell, and United Technologies.  Boeing Avionics will be led by Allan Brown, a senior defense executive and will grow its current workforce of 120 employees into 600 by 2019.

Government Technology Solutions

On Wednesday, Jacobs Engineering Group announced its intent to acquire CH2M Hill Companies, LTD for $3.3 billion in cash and stock to strengthen its reach in the government services and infrastructure sectors.  The deal comes at a time when U.S. engineering firms, like Jacobs, are likely to benefit from President Donald Trump’s proposed $1 trillion infrastructure spending plan.  Jacobs targeted CH2M for growth in water, transportation, environmental and nuclear capabilities.  The deal is expected to more than double Jacobs’ revenue from its buildings and infrastructure divisions and possibly reduce costs by up to $150 million by the end of the second year following a transaction.   Jacobs believes that the two firms’ complimentary capabilities, culture, and relationships will result in an enhanced platform for sustainable and profitable growth.  Post close CH2M stockholders will own 15% of Jacobs’ shares, which rose by 2.4% upon the announcement of the acquisition.

The Defense Information Systems Agency (“DISA”) announced Thursday its plans to upgrade its telecommunications operations in the Pacific Rim next year.  To modernize the network, the new Pacific Enterprise Services – Hawaii (“PES-HI”) program will shift existing analog communications for the Department of Defense (“DoD”) to an upgraded Internet Protocol (“IP”) technology base in order to integrate modern features, including voice over internet protocols and web conferencing.  Such telecom solutions had previously been provided by AT&T under the Joint Hawaii Information Transfer System (“JHITS”), which was first awarded in 2006.  That contract currently provides more than 45,000 Defense Switched Network telephone lines for U.S. personnel in addition to 3,100 point-to-point intra-Hawaii dedicated transmission circuits for the DoD.  DISA requested information on how to upgrade the system in 2012, and with JHITS set to expire in June 2018, officials plan on shifting legacy services onto the PES-HI platform until IP services are fully implemented.

Big Movers

Spirit AeroSystems Holdings (up 17.2%) – Share prices were up this week after the company reached a tentative agreement with Boeing on pricing terms related to parts its supplies for aircraft.

Leidos Holdings (up 4.8%) – Share prices were up this week after the company beat earnings with stronger revenue and backlog figures than analysts expected.

Transactions

Measure has acquired Pilatus Unmanned, a provider of drone customization for commercial customers.  Terms of the deal were not disclosed.

Bertin Technologies has acquired Exensor Technology AB, a provider of network unattended ground sensor systems for Homeland Security and military applications.  Terms of the deal were not disclosed.

Ricardo plc has agreed to acquire Control Point Corp., a provider of engineering and technology solutions for a range of sectors and industries, including defense, transportation, aerospace, logistics, and energy.  The deal is worth an estimated $10.2 million.

Jacobs Engineering Group has agreed to acquire CH2M Hill Companies, LTD, a provider of design, engineering, and program management to key infrastructure and government service sectors.  The deal is worth an estimated $3.3 billion.

AGC Aerospace & Defense, a portfolio company of Acorn Growth Companies, has acquired Telecommunication Support Services, Inc. (“TSS”), a provider of technical services around the world for all segments of the telecommunication and broadband industries, with an emphasis on DoD programs.  Terms of the deal were not disclosed.

Constellis Group, Inc., a portfolio company of Apollo Global Management, LLC, has agreed to acquire OMNIPLEX World Services Corp., a portfolio company of Altamont Capital Partners, a provider of government security and background investigation services.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.

Industry Week in Review – July 14, 2017

/in /by

Aerospace & Defense Update

Earlier this week, the Terminal High Altitude Area Defense (“THAAD”) system, which was previously designed for short-range defense, had its first test against an intermediate-range ballistic missile (“IRBM”), a weaponry system mirroring North Korea’s.  The results of the test were promising as the system seamlessly defended against the incoming threat.  The success adds credibility to the U.S. military’s missile defense program, which has come under intense scrutiny in recent years, due to various delays.  Recently, THAAD has been implemented in Guam and South Korea, which has drawn resistance from China and Moscow, who believe the implementation expands U.S military infrastructure in Asia and risks upsetting the military dynamic in the region.  However, the U.S contends the program is vital to regional stability and global safety.  The Missile Defense Agency plans to deliver 52 more THAAD systems to the U.S. military by the end of 2018, totaling 210 deliveries since 2011.

The U.S. Navy recently announced its search for a multi-mission guided-missile frigate that is both agile and lethal.  The competition calls for private companies to update any existing frigate designs to create a ship capable of joining a full carrier strike group and withstanding war-zone environments.  By drawing from already existing designs, the Navy hopes to speed up the process and deploy the ship with the fleet as soon as possible.  In addition to speed, durability, and fighting capabilities, the Navy anticipates the frigate will contain sensors connected to the rest of the fleet, expanding the mission viewpoint.  The new frigate program will be called FFG(X). The Navy expects to award this contract in 2020 and is planning to buy one ship per year beginning in 2020.

Government Technology Solutions Update

Despite overwhelming support from the House of Representatives and the White House, the Modernizing Government Technology Act has stalled in the Senate.  The IT modernization bill passed the House in May, three weeks after its introduction; however, the Senate Homeland Security and Government Affairs Committee (“HSGAC”) has yet to schedule a committee markup. Concerns over funding mechanisms have arisen as a result of the General Services Administration’s (“GSA”) reorganization, which rolled the Technology Transformation Service (“TTS”) up into the Federal Acquisition Service.  The House’s legislation, naming TTS as the home of the central fund for the bill, creates an obstacle as the fund will now need to move to the GSA’s administrative level.  Regardless, the bill will most likely have to go through the House again to accommodate the changes to the GSA’s structure.

The National Oceanic and Atmospheric Administration (“NOAA”) has awarded positions to 23 firms for the ProTech-Satellite Domain IDIQ opportunity.  The award consists of five full-and-open awardees and 18 small business awards.  The vehicle will be used for professional, technical, scientific, and engineering services under the Satellite Domain.  This opportunity is a $3 billion indefinite delivery / indefinite quantity (“IDIQ”) contract vehicle supporting of five Domains: Satellite, Ocean, Fisheries, Weather, and Enterprise Operations.  There are four task areas under the Satellite Domain consisting of: Studies, Analyses and Reports, Applied Research and Consulting, Data Collection and Surveys, and Program and Project Management.  

Big Movers

FLIR Systems, Inc. (up 8.8%) – Share prices were up this week following a strong financial performance after the appointment of a new CEO in late May and a stock rating upgrade from Raymond James this week

Rockwell Collins (up 3.9%) – Share prices were up this week following the announcement of the company supplying tactical radios for the US, Coalition Forces as part of a joint venture with BAE Systems

Transactions

Consolidated Machine & Tool Holdings, LLC has acquired Astro-Tek Industries, Inc., a provider of specialized equipment used by Tier 1 aerospace and defense companies. Terms of the deal were not disclosed.

Ensign-Bickford, Inc. has acquired Honeybee Robotics, Ltd., a provider of advanced robotic and electromechanical systems. Terms of the deal were not disclosed.

Agile Six Applications, Inc. has acquired The Informatics Applications Group, Inc., a provider of leading mission critical program initiatives in support of those who serve in the military and civilian sectors of our government.  Terms of the deal were not disclosed.

Convergint Technologies, LLC has acquired SigNet Technologies, Inc., a provider of integrated physical security management systems.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.