Industry Week in Review – July 7, 2017

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Aerospace & Defense Update

Congress is currently discussing the 2018 military budget, which is centered around two main ideas: the human capital component and equipment element.  The human capital portion is comprised of increasing military pay and growing the number of active troops.  Several house members are advocating for a 2.1% pay raise, while others are proposing a 2.9%, which is intended to compensate for years of not keeping par with private-sector wage increases.  Furthermore, the House plans to add nearly 19,000 more troops than President Trump’s original budget request.  From an equipment standpoint, the F-35 Joint Strike Fighter is the headline product with an expected purchase order that ranges from 70 to 94 new aircraft, while the Navy is expected to receive anywhere from 5 to 13 new ships. The various budget proposals in House and Senate are ~$700 billion, which are well above the $549 billion cap mandated by Congress for fiscal 2018.  Congress plans to work towards a solution to either revise or revoke these caps in the coming months.

Last week’s biennial Paris Air Show highlighted the ever-increasing presence of data-analytics to predict aircraft’s maintenance schedules.  Boeing foresees its Boeing Global Services (“BGS”) business to benefit greatly from the trend, predicting sales to reach $50 billion by 2020.  BGS serves defense and commercial customers with over 300 locations and approximately 20,000 employees.  This move toward providing airlines data services is one example of the recent trend of original aircraft manufacturers (“OEM”) insourcing work.  At the show, Boeing launched its operations system AnalytX, which combines the work of hundreds of its analytic experts and data tracking products to help airlines save time and money with a better understanding of when its aircraft are due for the shop.  Currently, BGS has 7% share of the commercial support market and 9% of the defense support market.  BGS hopes to take advantage of its broad customer base to become a leader in providing data-analytic services to both commercial and government customers.

Government Technology Solutions Update

On Monday, NCI, Inc. announced that it had signed a definitive agreement to be acquired by private equity firm H.I.G. Capital.  NCI provides IT and professional services and solutions, to defense, intelligence, healthcare, and civilian government agencies worldwide.  Following this announcement, a tender offer will commence on July 17th to acquire all outstanding shares of NCI’s class A and Class B common stock for $20 per share.  Despite a somewhat turbulent first quarter during which NCI announced that it had launched an investigation into the embezzlement of $19 million by its controller, NCI has since turned in a strong second quarter performance.  Following a handful of new award wins, including a prime position on the Army’s $35 billion Responsive Strategic Sourcing for Services (“RS3”) contract, the company boosted its full-year sales outlook and expects the “first organic sales increase in six years.”  H.I.G. hopes to help NCI accelerate its sales growth, enhance its solutions to its customers, and create new opportunities for employees.

Washington Technology recently released its second quarter Contractor Confidence Index, gauging expectations from the government contracting community in areas such as revenue growth, hiring, and job satisfaction.  With a base value of 100, the index measured at 112.9 in the second quarter, slightly down from the all-time high of 113.3 in the first quarter, but still indicating an overall bullish sentiment. Over 47% of respondents indicate that the government contracting market is headed in a positive direction, and 44.5% of survey respondents expect their firms to increase hiring, while job satisfaction remained high at 67%.   Many in the industry feel that current conditions are still very conducive to growth in the market, and are expecting the Federal government to prioritize spending in key areas such as defense and IT modernization.    56% of survey respondents expect their firm revenue to grow compared to 10% expecting a decline in sales.

Big Movers

Sparton Corporation (up 5%) – Share prices were up this week after the company announced that it agreed to be acquired by Ultra Electronics

Booz Allen Hamilton (up 3.7%) – Share prices were up this week after the company was awarded a $40 million single-award BPA by the Defense Information Systems Agency (“DISA”).

Transactions

Data Systems Analysts, Inc. has acquired Project Performance Company LLC, a provider of knowledge and information management, energy management and environmental sustainability, enterprise systems development and operations, and cyber security and information assurance solutions.  Terms of the deal were not disclosed.

H.I.G. Capital has agreed 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 approximately $290 million.

Mercury Systems, Inc. acquired Richland Technologies, LLC, a provider of safety-critical and high integrity systems, software, and hardware development as well as safety-certification services for mission-critical applications.  Terms of the deal were not disclosed.

National Technologies Associates, Inc. has acquired V1 Analytical Solutions, a provider of intelligence and information solutions, special activity support, and specialized training for defense, intelligence, and other government customers.  Terms of the deal were not disclosed

Odyssey Investment Partners, LLC has agreed to acquire CPI International, Inc., a provider radio frequency, microwave, power, and control products for defense, communications, medical, and scientific purposes.  The deal is worth approximately $800 million.

Smith & Wesson Corp. agreed to acquire Gemini Technologies, a provider of high quality suppressors and accessories for the consumer, law enforcement, and military markets.  Terms of the deal were not disclosed.

StandardAero Holdings, Inc. has agreed to acquire Vector Aerospace Corporation, a provider of aviation maintenance, repair, and overhaul (“MRO”) services.  Terms of deal were not disclosed.

Ultra Electronics Holding Plc has agreed to acquire Sparton Corp., a provider of services for complex electromechanical devices, as well as sophisticated engineered products.  The deal is worth approximately $235 million.

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Industry Week in Review – June 30, 2017

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Aerospace & Defense Update

The Senate Armed Services Committee unveiled a $700 billion defense authorization bill that will set the stage for a showdown with House budget planners and the White House over national defense spending priorities.  The Senate plan calls for a lower wage increase for troops compared to the House version as well as a smaller boost to troop levels.  Instead, the additional funding would procure new equipment, including $3.1 billion for 24 Joint Strike Fighters, $1.2 billion for 12 MC-130J aircraft for the Air Force, and $400 million for two KC-46A tankers.  The Navy would receive an additional $1.7 billion for 10 F/A-18 Super Hornets and six P-8A Poseidon aircraft along with an incremental $5.0 billion in funding for five ships over the president’s plan.  The Army would receive an increase of $2.2 billion for ground combat vehicles and $3.0 billion for helicopter procurement.  With the Senate, House, and White House proposals far exceeding the $549 billion sequestration cap, Republican and Democrat lawmakers will need to negotiate a deal to surpass the established cap.

In panel deliberations for 2018 defense spending legislation, Representative Barbara Lee led an amendment to remove the Authorization for Use of Military Force (“AUMF”) language from the bill.  The AUMF, signed by President George W. Bush in 2001, authorized the president to use “all necessary and appropriate force” against persons who participated in the 9/11 attacks.  Although that bill passed nearly 16 years ago, the executive branch has continued to call upon the AUMF to bypass Congress and authorize troop deployments and other military measures to counter actions of various terrorist and militant groups.  The amendment aimed to end what Lee described as “a blank check” for the president and reestablish Congressional oversight of the president’s war–making powers.  The House Appropriations Committee approved the amendment and will send the bill, without the AUMF, to the House floor.

Government Technology Solutions Update

IBM and the Air Force Research Laboratory (“AFRL”) are uniting efforts and resources to develop a supercomputing system to deliver state-of the-art sensory processing.  IBM’s TrueNorth Neurosynaptic System’s artificial intelligence (“AI”) capabilities provide the ability to convert data such as images, text, and audio into symbols.  AFRL seeks to combine this technology with existing symbol processing systems to create an innovative and cerebral machine capable of deep neural-network learning and information discovery.  Weapons systems are expected to benefit the most from this newly enhanced system. The Air Force hopes that this new system can improve computing capabilities and enable the Air Force and the country as a whole to maintain its technical advantage among world powers.  The technology is expected to be implemented mid-year 2018.

In line with recent government IT trends, the Air Force is implementing several initiatives to help detect and protect its weapons systems against potential cybersecurity threats.  These plans include the engineering of hardware that can patch holes in security walls, implement agile computing automation that can quickly detect threats, and identify potential cybersecurity weaknesses in early stages of weapons development.  In addition, the Air Force has created a new unit specializing in the detection of potential cyber threats called the Cyber Resilience Office for Weapons Systems, (“CROWS”).  Through detailed analysis and research, CROWS works to identify weaknesses in the weapons systems to further mitigate risks of future cyber-attacks.  By operationalizing these efforts, the Air Force hopes to better secure mission planning as well as excel in defending its systems against cyber-attacks in the future.

Big Movers

Vectrus Inc. (up 7.1%) – Share prices were up this week on unusually higher trading volumes.

ManTech International (up 6.5%) – Share prices were up on a positive stock upgrade from Loop Capital.

Transactions

AMS Technologies AG has acquired Elforlight Ltd., a provider of diode pumped solid state lasers and optical parametric oscillators.  Terms of the deal were not disclosed.

Hensoldt Sensors GmbH has agreed to acquire Kelvin Hughes Ltd., a provider of security and maritime radar solutions.  Terms of the deal were not disclosed.

Kellstrom Aerospace has acquired Vortex Aviation, Inc., a provider of on-wing engine maintenance services and quick-turn engine repairs across all major commercial aircraft engine platforms.  Terms of the deal were not disclosed.

Spell Capital Partners, LLC. has acquired Jet Edge, Inc., a provider of ultra-high pressure waterjet technology for the world’s leading airlines, the automotive industry, and industrial manufacturers.  Terms of the deal were not disclosed.

Trelleborg AB has agreed to acquire Automated Dynamics, a provider of composite parts in a wide variety of shapes and sizes, including cylinders, cones, box beams, I-beams, coils, flat laminates, and complex geometries.  Terms of the deal were not disclosed.

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Industry Week in Review – June 23, 2017

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Aerospace & Defense Update

Both Boeing and Airbus outperformed analyst order expectations at the Paris Airshow this past week.  At the end of the week-long show, Boeing and Airbus booked $75 billion and $42 billion in orders, respectively.  As buyers have strayed from buying bigger jets, single-aisle aircraft are driving both companies’ revenues.  Boeing’s new 737 Max garnered 16 new customers and 361 orders at the Paris Airshow while in comparison, Airbus received 286 single-aisle plane orders.  Boeing noted that 214 of the orders for the 737 Max were order conversions from other models, but the company is interpreting these conversions as an effort for customers to more quickly acquire the new plane.

During its second intercept test, the Standard Missile-3 Block IIA (“SM3 Block IIA”) failed to intercept a test missile launched off the coast of Hawaii.  The SM3 Block IIA is a joint effort between Japan and the U.S. designed to intercept short and intermediate range ballistic missiles.  The effort was initiated in light of rising missile threats from North Korea.  Though the USS John Paul Jones destroyer successfully tracked and engaged the test missile using the AN / SPY-1 radar and the latest Aegis Combat System Baseline 9.C2, it failed to intercept.  Program officials will now conduct extensive reviews of the test data to find the cause of failure.

Government Technology Solutions Update

The Trump Administration plans to launch a major upgrade to its antiquated Federal IT platform.  This endeavor is planned to be outsourced to private enterprises, such as Accenture, Amazon, AMD, Apple, IBM, and various other commercial and government services providers.  President Trump and select cabinet members held a conference earlier this week with several tech CEOs to further discuss desired internal IT advancements.  Using part of the estimated $95 billion Federal IT budget in government fiscal year 2018, Trump intends to initiate the process of revamping the Federal government’s IT infrastructure, with the objective of providing higher quality services at lower costs.  Data center consolidation, cloud migration, and modernizing legacy systems are at the forefront of this IT overhaul, which will require leaning heavily on the private sector.  Several government agencies have welcomed this initiative, including VA Secretary David Shulkin, who was acclaimed by the Trump Administration this month for transitioning the outdated Vista electronic health records system to a more effective and cost efficient commercial provider.  This is the first of a series of anticipated modernizations at the Federal level.

After two years of protests and setbacks, Raytheon has finally prevailed with a $1 billion contract to provide cybersecurity services for the Department of Homeland Security (“DHS”).  The project, known as DOMino or Development, Operations and Maintenance, requires Raytheon to protect the information systems of over 100 Federal government departments and agencies.  The contract was first awarded in 2015, however, Northrup Grumman quickly protested, citing a potential conflict of interest surrounding the company’s hiring of a former DHS official.  With the protest now resolved, Raytheon will move forward supporting the National Cybersecurity Protection System, (“NCPS”), also known as EINSTEIN, operationally.  The NCPS, which is part of the Federal government’s initiative to strengthen its cyber capabilities, provides various Federal networks with intrusion prevention and detection, data analytics, and information sharing services.

Big Movers

Triumph Group (down 7.2%) – Share prices were down this week as investors pulled back from the strong upward momentum after their full year results.

Kongsberg Gruppen (up 7.3%) – Share prices were up as the company announced a partnership with Raytheon to offer the Naval Strike Missile for the Littoral combat ship.

Transactions

Safran S.A. has acquired ISEI, a provider of flight data acquisition systems and associated services for helicopters and light airplanes.  Terms of the deal were not disclosed.

Down Range Solutions Group has acquired U.S. Optics, Inc., a provider of rifle scopes for hunting, sporting, military, and law enforcement applications.  Terms of the deal were not disclosed.

HEICO Corp. has acquired Carbon by Design LP, a provider of composite components for unmanned aerial vehicles (“UAV”), rockets, spacecraft, and other specialized applications.  Terms of the deal were not disclosed.

IPG Photonics Corp. has agreed to acquire Innovative Laser Technologies, Inc., a provider of custom laser workstations used to produce high-value, mission-critical components for numerous industries, including defense, energy, and aerospace.  The deal is worth an estimated $135.0 million.

Kaneka Americas Holding, Inc. has agreed to acquire Applied Poleramic Incorporated, a provider of high performance composites to OEMs and their subcontractors.  Terms of the deal were not disclosed.

The MEL Group has acquired Oldbury Engineering Co. Ltd, a provider and repairer of aircraft ground support equipment.  Terms of the deal were not disclosed.

Novaria Group has acquired Space-Lok, Inc., a provider of high quality fasteners and multiple component mechanisms.  Terms of the deal were not disclosed.

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Industry Week in Review – June 16, 2017

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Aerospace & Defense Update

The 52nd biennial International Paris Air Show will take place from June 19th – 25th and will bring together   2,379 exhibitors from 47 countries to showcase the latest technological innovations in the industry.   Notably, the show will include the first showing of the F-35 at the Paris Air Show and additional information regarding Boeing’s New Midsize Airplane (“NMA”).  Although the F-35 has participated in other airshows, the demonstrations at the Paris Air Show will be the first opportunity for the joint strike fighters to showcase their aerodynamic capabilities through “acrobatic and high G-force maneuvers.”  Boeing will also discuss the manufacturing processes and production systems that allow it to achieve a twin-aisle cross-section with single-aisle operating costs in the NMA.  Most industry analysts anticipate new order announcements at the show to be light relative to past years.

During a meeting between U.S. Secretary of Defense Jim Mattis and Qatari Minister of State for Defense Khalid al-Attiyah, the U.S and Qatar signed a $12 billion letter of acceptance to finalize the sale of 36 F-15 fighter jets, spares, logistical support, and munitions.  The sale was cleared by the U.S. State Department in November and was initially an agreement covering up to 72 jets rather than the signed 36.  However, this agreement will still extend the F-15 production line, once at risk for closure, well into the 2020s. The deal comes at a time when U.S Gulf allies are boycotting Qatar, accusing the country of supporting terrorism.

Government Technology Solutions Update

Over the last year, the CIA has transitioned to cloud computing through Amazon Web Service’s (“AWS”) platform, which has had a material impact on the agency’s operations and security posture.  The CIA’s top tech executive, John Edwards, stated, at the AWS Public Sector Summit, that cloud computing has directly led to improved security, enhanced mission quality, and reduced costs associated with the maintenance of legacy systems.  Part of AWS’s success has been attributed to the Commercial Cloud Classified Marketplace, where customers can evaluate several types of software packages, developer tools, and other products to determine which one most adequately suits various needs.  This marketplace contains over 100 different apps and has drastically shortened acquisition cycles, which in turn enhances mission efficiency.  The cloud’s popularity spans a plethora of agencies in the federal government and its implementation has increased more than 200% year over year.

Jon Frank, former controller of NCI Inc., pled guilty on Friday to the charge of federal wire fraud.  The former executive has admitted to stealing approximately $19.3 million over a 10-year period.  Per the Department of Justice (“DOJ”), this was done through the creation of fraudulent documentation which masked the transfer of funds into Mr. Frank’s personal account as reimbursements to the company’s health insurance administrator.  To aid in collecting lost funds, Mr. Frank must forfeit assets as well as fulfill a restitution order, and could now be facing a 20-year prison sentence as well as further civil charges.  NCI is unsure how long the process will take to recover the lost funds.  Despite the turbulence caused by the ongoing investigation, NCI experienced a strong first quarter in 2017, exceeding earnings expectations and raising revenue guidance for the full year, citing margin improvements caused by an increase in the contribution of fixed-price contracts to its revenue mix as well as additional task order awards.  The company’s stock has risen over 50% since nearing a 52-week low in January when news of the embezzlement first broke.

Big Movers

Booz Allen Hamilton (down 17.3%) – Share prices were down this week after the company announced that the Justice Department is investigating the Company’s accounting and the way it charges the government.

Science Applications International Corp (down 7.9%) – Share prices were down after the Company reported revenue below Wall Street targets and lower margins.

Transactions

Compunetix, Inc. has acquired Circuits, LLC, a provider of built-to-spec flexible printed circuit boards for the defense, aerospace, communication, high speed computing, medical, and semiconductor markets.  Terms of the deal were not disclosed.

Epec, LLC has agreed to acquire Putnam RF Filters, Inc., a provider printed circuit board based RF filters, diplexers, and other custom products.  Terms of the deal were not disclosed.

Fincantieri – Cantieri Navali Italiani S.p.A. has acquired Isselnord SRL, logistic support engineering and maintenance activities related to orders in the naval sector.  Terms of the deal were not disclosed.

GE Aviation has acquired OC Robotics Ltd, a provider snake-arm robots and software for confined and hazardous environments.  Terms of the deal were not disclosed.

Liberty Hall Capital Partners has acquired Dunlop Aircraft Tyres Ltd., a provider and re-trader of aircraft tires.  The deal is worth an estimated $135.0 million.

Nammo A/S has acquired Moog, Inc.’s European Space Propulsion Businesses, a provider of liquid rocket engines, thrusters, valves, and components for satellite and in-space propulsion.  Terms of the deal were not disclosed.

Z Systems Corporation has acquired Logistics Support, Incorporated, a provider of a range of management consulting, logistics, supply chain management, and other professional services to Federal and commercial customers.  Terms of the deal were not disclosed.

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Industry Week in Review – June 9, 2017

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Aerospace & Defense Update

Boeing CEO, Dennis Muilenburg announced this past week that Boeing will begin shifting a portion of its manufacturing work to China and other overseas markets.  This move is a part of Boeing’s reshaping effort which hopes to increase the profitability of its core commercial jetliners and increase defense exports, while cutting costs. While cost trimming and increasing automation will come at the expense of jobs, Boeing continues to have strong incentives to boost U.S. employment, as President Trump has pledged tax and regulatory changes in retrun. Additionally, Muilenburg stated that overseas facilities will not directly affect U.S. jobs.  Instead, the new plants are expected to contribute to sales of 6,800 jets in the next 20 years.

The Air Force predicts it will not accept the first KC-46 tanker until late spring of 2018, at least 6 months later than planned, as the program faces new schedule risk due to FAA approval delays.  Without the FAA airworthiness certifications, Boeing risks not completing the flight test programs on schedule.  However, Boeing expects to be more efficient in the second half of testing and doesn’t anticipates the discovery any new technical risk.  Despite this setback Boeing is still expected to deliver 18 tankers and nine refueling pods by October 2018.

Government Technology Solutions Update

The Trump administration plans to separate out air traffic control from the larger Federal Aviation Administration (“FAA”) and outsource it to a private non-profit enterprise, citing years of funding issues and budget cuts. The administration believes that a private organization would be better equipped to update air traffic control to Next Generation Air Transportation System (NextGen”). It is believed that this new GPS-based technology can reduce fuel costs, eradicate flight delays and enhance air travel safety. The two major costs involved in upgrading to NextGen are updating existing planes to make them compatible with the new technology, and adapting the technology so that it can be used in air traffic control towers. These costs will be funded via user fees that the non-profit chargers rather than through taxpayer dollars earmarked for infrastructure spending. Under the proposed timeline, the technology is anticipated to be rolled out over the next three years.

The U.S. Department of Veterans Affairs (“VA”) will adopt the same electronic health vendor as the Department of Defense (“DoD”). The VA’s current legacy healthcare system, VistA, has faced problems in recent years due in part to its age and compatibility issues with other organizations. On Monday, President Trump announced Secretary Shulkin’s decision to select the current DoD electronic health record (“EHR”) vendor, Cerner, to provide the system to the VA. For years, the DoD and VA have been working together to share information across their two different systems. However, the money, time, and effort being spent in doing so was becoming increasingly prohibitive. Various policy changes, as well as necessary maintenance to the aging systems, further complicated the process of sharing information between the two agencies. This new system will not be exactly the same as the one being implemented across the DoD, due to the fact that the VA has different needs; however, the platforms will be similar, allowing for greater interoperability. In addition, the VA will adopt more advanced cybersecurity enhancements similar to those used by the DoD. With the updated system in place, the VA will be able to better track veterans’ information after they leave service.

Big Movers

BBA Aviation (down 5.2%) – Share prices were down this week after chief executive Simon Pryce stepped down after 10 years at the helm of the aviation support services group.

Bombardier (down 6.9%) – Share prices were down this week after the Company announced that it plans to lay off 650 workers in Switzerland.

Transactions

Accenture Federal Services has acquired Phase One Consulting, Inc., a provider of Salesforce-implementation and consulting services in support of modernization and digital transformation projects to the Federal government. Terms of the deal were not disclosed.

Elite Aerospace Group, Inc. has acquired HALO Industries, Inc., a provider of precision machining and engineering services that supports the aerospace, defense, orbital rocket and communication sectors. Terms of the deal were not disclosed.

Emergency Communications Network, a portfolio company of Veritas Capital, has acquired SWN Communications Inc., a provider of enterprise notification solutions. Terms of the deal were not disclosed.

Royal Adhesives & Sealants LLC has acquired Ball Ground, Georgia Business, a provider of use pre-mixed and frozen aircraft sealants and other unique packaging and application kits to aircraft manufacturers and their subcontractors. Terms of the deal were not disclosed.

SoftBank Group Corp. has agreed to acquire subsidiaries of Alphabet Inc., Boston Dynamics, Inc. and Schaft Inc., a provider of dynamic robots and software for human simulation and bipedal robotics research, respectively. Terms of the deal were not disclosed.

Valiant Integrated Services has acquired ABM Government Services LLC, a provider of linguistic and translation services, healthcare facility services, and infrastructure backbone solutions to Federal government customer. The deal is worth an estimated $35.5 million.

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Industry Week in Review – June 2, 2017

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Aerospace & Defense Update

On Wednesday, Pratt & Whitney disclosed that it is proposing an upgrade to F-35 engines that could increase overall thrust by ~10% and decrease fuel consumption by ~6%.  Pratt believes that this upgrade, which is being called the F135 Growth Option 1.0, provides an attractive option for three primary reasons: (i) ease of integration into any of the three F-35 variants; (ii) compliance with partner and foreign partner requirements; and (iii) equal cost to the existing engine, but heightened performance.  Development of the new engine is not currently funded by the F-35 program, however, if adopted, the Pentagon would be responsible for further development and validation costs.

Out of Boeing, Masten Space Systems, and Northrop Grumman, who were awarded contracts to pitch Experimental Spaceplane, or XS-1, concepts, Defense Advanced Research Projects Agency (“DARPA”) has selected Boeing for Phase 2 and 3.  Boeing has been awarded an additional $140 million through 2019, on top of the $4 million Boeing received for Phase 1, to “continue the development of the XS-1 demonstration concept.” The collaboration on this hypersonic aircraft will move forward with the goal of creating “a short-notice, low-cost” means to get to space.  DARPA announced that Phase 2 will include design, construction, and testing, while Phase 3 will include 12 – 15 test flights.  The agency’s ultimate goal is to produce “a fully reusable unmanned vehicle, the size of a business jet” to provide routine access to space.

Government Technology Solutions Update

The Department of Homeland Security (“DHS”) has canceled its $1.5 billion Flexible Agile Support for the Homeland (“FLASH”) small business contract, which was intended to be the department’s main vehicle for the procurement of digital services.  A major reason why the contract was canceled was that there were several mistakes made in the procurement process as well as throughout the evaluation process. Most notably, there was no clear methodology used in determining price evaluation, making it difficult to determine if prices submitted by bidders were reasonable.  Just as importantly, however, a lack of clearly defined evaluation criteria introduced the possibility that bidders did not receive uniform treatment. Additionally, there were inconsistencies in how documents were recorded throughout the process, which led to unacceptable inconsistencies in record-keeping.  Finally, FLASH’s underlying requirements have changed and no longer align with DHS’s needs, as DHS now requires more services than what FLASH would have provided in its current state.  DHS therefore cancelled the 11 awards it has previously made, and determined that the best way forward would be to introduce a completely new solicitation.  A new request for proposals (“RFP”) is expected sometime in 2018.

During a White House press conference on Wednesday, Secretary David Shulkin shared the Department of Veteran Affairs’ (“VA”) plan to request additional money to modernize the agency’s IT system.  Despite the White House’s requested $500 million reduction in IT spending for the agency, the VA is making it a priority in its proposed 2018 budget, citing problems arising from the current outdated system.  A large reduction in IT spending could force the department to reduce the number of veterans served per year by its loan-reporting system by more than two-thirds, as the absence of additional funds could force the VA to return to a paper-based manual loan system.  According to Secretary Shulkin, this retrogression could lead to an increased risk of foreclosures or homelessness for veterans.  Shulkin points out that three-fourths of the VA’s IT budget is used for the maintenance of legacy systems, but the VA is actively taking steps towards modernization.  Mr. Shulkin is expected to decide on the future of the VA’s proprietary VistA electronic health record (“EHR”) system, potentially outsourcing it or switching to a commercial-off-the-shelf (“COTS”) solution. If this, and other similar upgrades are not made, the VA’s current infrastructure may continue to face considerable constraints, leading to increased wait times for veterans and their families.

Big Movers

 

FLIR (up 4.4%) – Share prices were up this week after the Company named James Cannon as CEO, following the retirement of 33-year company head Andy Teich.

ViaSat (up 7.7%) – Share prices were up this week after the Company had a successful launch of its ViaSat-2 satellite.

Transactions

Applied Research Associates, Inc. has acquired BerrieHill Research Corp., a provider of electromagnetic modeling / simulation, design, analysis, and fabrication for the Air Force and intelligence agencies.  Terms of the deal were not disclosed.

EnPro Industries, Inc. has acquired Qualiseal Technology, a provider of custom-engineered mechanical face and circumferential seals for demanding aerospace and industrial applications.  Terms of the deal were not disclosed.

Hexcel Corp. has agreed to acquire Structil S.A., a provider of high-performance composites to the aerospace, defense, and industrial markets.  Terms of the deal were not disclosed.

OSI Systems, Inc. has agreed to acquire Explosive Trace Detection Business from Smiths Group plc, a provider of trace detection used by airports and the military.  The deal is worth an estimated $76 million.

Polish Armaments Group (Polska Grupa Zbrojeniowa – PGZ) has agreed to acquire Naval Shipyard SA – Stocznia Marynarki Wojennej SA, a provider of repairs, conversions, modernizations, and maintenances of naval vessels for the Polish Navy.  The deal is worth an estimated $60 million.

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Industry Week in Review – May 26, 2017

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Aerospace & Defense Update

On Monday, President Donald Trump released his GFY2018 budget proposal which included ~$640 billion for military spending.  This request is more than $50 billion over the current congressional budget caps and only ~$15 billion more than former President Barack Obama budgeted in his forecast for GFY2018.  The proposed budget includes funding for 70 F-35 joint strike fighters, 34 Tomahawk cruise missiles, 1,400 Hellfire missiles, and 12,822 Joint Direct Attack Munitions.  It also includes more money for training, maintenance, and modernization.  ~$65 billion will be included in the overseas contingency operation (“OCO”) which pays for U.S. military operations in Afghanistan, Iraq, and elsewhere.

On Wednesday, French aerospace supplier Safran reduced its bid price for Zodiac Aerospace by ~15% to ~$8.2 billion after Zodiac released a series of profit warnings.  Zodiac issued 10 profit warnings in the past three years and recently had its CEO resign.  Management for both companies have approved the revised version of the deal; however, the deal still needs to be approved by Safran’s shareholders on June 15th.  Ross McInnes, chairman of Safran’s board of directors, expressed great optimism that Safran will be able to turn things around for Zodiac.

Government Technology Solutions Update

According to a recent interview conducted with the Small Business Administration’s (“SBA”) Deputy Chief Information Officer, Guy Cavallo, the agency is no longer seeking to purchase on-site IT systems, such as servers and storage arrays. Instead, the SBA wants to focus more heavily on migrating its IT systems to the cloud as part of its efforts to more heavily rely on infrastructure-as-a-service. The SBA believes that there are several key benefits to utilizing cloud-based infrastructure. For one, cloud vendors can offer more uniformly reliable, round-the-clock services and support to all the small businesses with which the SBA works. In addition, getting rid of on-site IT equipment frees up spending that would otherwise be used for maintenance and upgrades for legacy systems. While the SBA is currently working on the migration of just IT systems to the cloud, the end goal is to more completely leverage the benefits of cloud technology with the additional adoption of platform-as-a-service and software-as-a-service.

Earlier this week, the White House released its full budget proposal for fiscal 2018. Included in this latest budget is $228 million earmarked to be used for an IT modernization fund housed under the General Services Administration (“GSA”). That fund will be used as a long-term mechanism with which the Federal government can upgrade and invest in replacements for aging legacy IT infrastructure. The $228 million figure in President Trump’s budget is roughly in line with the IT modernization funding levels which would be approved under the Modernizing Government Technology (“MGT”) Act. That piece of legislation, which was recently passed in the House of Representatives, is now awaiting further confirmation in the Senate, where a bipartisan group of Senators has been urging immediate action on the bill. While the $228 million in funding is a small part of the $95.7 billion that the government would spend on IT, many insiders view it as a crucial first step towards more expansive, larger-scale IT modernization initiatives.

Big Movers

 Triumph Group (up 44.9%) – Share prices were up this week after the Company settled its lawsuit with Bombardier, allowing liquidity concerns to be alleviated.

CSRA (up 5.9%) – Share prices were up this week after the Company beat earnings estimates and announced its acquisition of NES Associates.

Transactions

CSRA, Inc. has agreed to acquire NES Associates, LLC, a provider of IT infrastructure, network operations, cybersecurity, and data center and application services to the Department of Defense (“DoD”) and other Federal and commercial customers. The deal is worth approximately $105 million.

L3 Technologies, Inc. has acquired Open Water Power, Inc., a provider of safe and high-energy-density undersea power generation technologies used by Unmanned Undersea Vehicles (UUVs) and other maritime platforms.  Terms of the deal were not disclosed

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Industry Week in Review – May 19, 2017

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Aerospace & Defense Update

Boeing faced years of delays before successfully introducing its 787-series aircraft, but made an on-time delivery of its first 737 MAX aircraft to Lion Mentari Airlines this week.  Boeing encountered some problems with 737 MAX engines last week; however, they moved forward with the delivery schedule as not all aircraft were impacted by the issue.  Boeing currently has over 3,700 orders for its MAX variant, which features new LEAP engines built by CFM International (a joint venture between GE Aviation and Safran Aircraft Engines) that allow for a 14% increase in fuel efficiency over its predecessor.  The 737 MAX also has increased range of ~19%, to over 3,500 nautical miles, which will help satisfy the bourgeoning small capacity “point to point” airline market.

The U.S. Air Force is in the middle of a shift in perceiving space as a “benign environment” to a “war-fighting domain.”  To address this issue, House Representative Mike Rogers from Alaska called for the creation of a Space Corps last month, which would focus on training, organizing, and equipping in space.  However, U.S. Air Force Chief of Staff General David Goldfein disagreed during a recent panel and instead believes that the Air Force should merge space missions with current military agencies.  Goldfein argues that the creation of a Space Corps would inhibit introduction times for technological advancement due to the natural preliminary inefficiencies embedded in new organizations.

Government Technology Solutions Update

On Wednesday, the most recent iteration of the Modernizing Government Technology Act (“MGT”) was passed by the House of Representatives.  This come roughly one week after the Congressional Budget Office (“CBO”) assigned a $500 million price tag to the bill, a figure that is substantially lower than the $9 billion cost associated with the previous version of MGT passed by the House in late 2016.  The original version of the bill stalled in the Senate during the lame duck session of Congress, due in part to the large cost associated with its implementation.  The newest draft of the bill would establish a $500 million centralized Federal fund which would be used to support IT modernization initiatives across the government, and would also set up various working capital funds across 24 Federal agencies.  By setting up these funds, the government will be able to be more agile, flexible, and responsive in terms of its ability to upgrade systems in a rapidly evolving technology environment.  Due in part to its lower CBO score, the new MGT had widespread bipartisan support.  While it is unknown how the bill will fare in the Senate, many insiders are eager to have access to better tools with which to ensure that the Federal IT infrastructure is flexible, and able to contend with a rapidly evolving technological landscape.

The U.S. Army recently unveiled awardees on its $34.5 billion Responsive Strategic Sourcing for Services (“RS3”) contract.  Initially, the Army announced that a total of 55 large and small business contractors had won positions on RS3.  The Army’s goal was to award a total of 15 small businesses and 25 large businesses awards.  While the small business criterion was met, with a total of 29 small business awards, only 16 large business awards were originally made.  As a result, the Army will be moving into Phase 2 of its awards process.  In this phase, the Army will accept revisions to original proposals made by unsuccessful bidders, focusing primarily on experience and expertise, past performance, and cost.  RS3 was designed as a 10-year professional services contract aimed at procuring command and control, intelligence, and surveillance solutions.  It is currently unknown how many additional awards will be made following this process, but Phase 2 offers a significant opportunity for large businesses who were not originally given awards to participate in this contract.

Big Movers

 AvonRubber (up 4.9%) – Share prices were up this week after the company beat earnings estimates.

 Triumph Group (up 15.9%) – Share prices were up this week after an equity report raised the price target of shares; the report argued share prices have bottomed after news of a possible bankruptcy for Triumph’s aero structures division.

Transactions

Apax Partners has agreed to acquire The Keystone Peer Review Organization, a provider of customizable healthcare management solutions for Federal and commercial customers.  Terms of the deal were not disclosed.

CTS Corp has acquired Noliac A / S, a provider of tape cast and bulk piezoelectric components, sensors, and transducers.  Terms of the deal were not disclosed.

Boyd Corp. has acquired Aavid Thermalloy, LLC, a provider of a broad range of technologically advanced thermal management solutions for aerospace and defense, telecommunication, LED lighting, server, data center, consumer electronics, transportation, and industrial applications to customers all over the world.  Terms of the deal were not disclosed.

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Industry Week in Review – May 12, 2017

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Aerospace & Defense Update

On Wednesday, Boeing announced it has temporarily paused test flights for the new 737 MAX aircraft after discovering an engine issue.  The announcement came just days before Boeing planned to deliver its first 737 MAX aircraft to Malaysian carrier, Malindo Air.  The Company must now receive re-approval from the U.S. Federal Aviation Administration (“FAA”) before the aircraft can take flight.  It is not clear how long the engine approval process will take; however, Boeing still plans to deliver its first 737 MAX aircraft this month.

According to multiple reports, President Donald Trump’s senior military advisors are pushing for a significant increase to the number of troops in Afghanistan.  Currently, ~8,500 U.S. troops and ~5,000 foreign ally troops are stationed in the area.  The advisors also hope the President will allow the Pentagon to set its own troop numbers, instead of following the traditional White House recommendations.  President Trump is expected to decide on the troop increase before the North Atlantic Treaty Organization (“NATO”) summit on May 25th.  No formal plan has been announced or sent to Congress yet.

Government Technology Solutions Update

On Thursday, President Donald Trump signed into effect an executive order focused on cybersecurity, a document which has been anticipated since the White House’s original draft was pulled back in January.  While the main objective of the new order is the improvement of the nation’s cybersecurity capabilities, it also includes IT modernization as an integral step in creating a more secure, interconnected, and efficient Federal system.  The American Technology Council (“ATC”) will take the lead on exploring the feasibility of potential modernization initiatives.  The ATC has been tasked with reaching out to agency heads in order to determine what the financial and technical requirements would be for moving agencies onto shared IT services.  The White House hopes that, through the creation of a modernized and centralized IT infrastructure, the Federal government will be better prepared to withstand and counter cyber threats.  While there have not been any specific new modernization initiatives announced, the ATC will have the next 90 days to meet with various agencies to determine the best course of action.

According to a recent report released by Deloitte, increased investment and implementation of artificial intelligence (“AI”) technologies can lead to significant cost and time savings for Federal workers.  The report calculated that investment in AI might able to save between 96.7 million and 1.2 billion labor hours per year depending on the level of investment.  That represents between $3.3 billion and $41.1 billion in cost savings annually.  By investing in technologies such as machine learning, speech recognition, robotics, and natural language processing, workers will be able to automate large numbers of tasks such as filling in forms, writing to databases, and extracting data from documents. This would allow the government to sharply cut paperwork burdens and reduce backlogs. Deloitte’s report estimates that, with adequate investments in these technologies, the government workforce could potentially free up 30% of its time within five to seven years after the application of AI technologies to routine, automatable tasks.

Big Movers

Cubic (down 14.4%) – Share prices were down this week after Cubic missed earnings estimates.

AeroVironment (5.0%) – Share prices were up this week after AeroVironment began full rate production and shipment of its Mantis i45 EO/IR Gimbal Sensor Suite.

 

Transactions

Luminator Technology Group, LLC has acquired Apollo Video Technology, LLC, a provider of mobile video surveillance and fleet and information management solutions for law enforcement, military, and government applications.  Terms of the deal were not disclosed.

VISTA Technology Services Inc. has acquired General Scientific Corporation, a provider of strategic planning, systems engineering, program management, network management, and other technical services primarily for Department of Defense (“DoD”) customers.  Terms of the deal were not disclosed.

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Industry Week in Review – May 5, 2017

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Aerospace & Defense Update

After the GFY17 budget cleared the house on Wednesday with a 309 to 118 vote, the U.S. Senate on Thursday voted 79 to 18 on a $1.1 trillion spending bill to fund the government through September; the bill now goes to President Trump’s desk for final approval.  Of the total $1.1 trillion, the measure contains $593 billion for defense spending, an increase of ~$20 billion over GFY16 enacted levels and ~$16 billion more than President Obama’s budget request.  When combined with $5.8 billion in supplemental funding passed in the December Continuing Resolution (“CR”), total defense funding for GFY17 is $598.5 billion.

Large portions of the $593 billion defense bill include ~$223 billion allocated for operations and maintenance (compared to ~$214 billion in GFY16), ~$123 billion for equipment procurement (~$119 billion in GFY16), and ~$74 billion for research and development (~$69 billion in GFY16).  Review of the bill calls for major platform procurements across the DoD, including $21.2 billion for 13 Navy ships (including three Littoral Combat Ships and three guided missile destroyers), $8.2 billion for 74 F-35 aircraft, $2.6 billion for 15 KC-46A tanker aircraft, $1.8 billion for 11 P-8A Poseidon aircraft, $1.3 billion for 17 130J aircraft, and $1.2 billion for 62 UH-60 Blackhawk helicopters.

Government Technology Solutions Update

Mary Davie, assistant commissioner for the Office of Information Technology in the General Services Administration’s (“GSA”) Federal Acquisition Service recently met with Federal IT industry partners to discuss ways in which the GSA might work to streamline the acquisition process.  According to Ms. Davie, her discussions led to the identification of several common acquisition practices that industry leaders felt generated unnecessary friction in the acquisition process.  For example, one common complaint in the industry has been that Federal customers tend to issue prescriptive statements of work rather than statements of objectives.  The former detail exactly how the customer wants the work to be done, which places constraints vendors.  A statement of objective, created in conjunction with customers and industry representatives alike, could lead to more tailored and innovative solutions.  Other points of emphasis in Ms. Davie’s discussions were that of creating a more centralized repository for vendors to access information relevant to new opportunities, increasing the responsiveness and availability of Federal program management personnel, and placing an emphasis on reducing schedule slips and procurement delays.  While it remains to be seen what solutions will be proposed for these issues, Ms. Davie believes that her meeting with the industry gave greater clarity as to where the government could focus its efforts in improving the efficiency of the acquisition process.

On Monday, President Trump issued an executive order creating the American Technology Council, which will focus on the goal of improving and modernizing Federal IT.  Outside of naming which positions in the Federal government would have seats on the council, the order does not mention much in terms of its specific goals.  Former Federal Chief Information Officer (“CIO”) Tony Scott was supportive of the council’s creation, saying that similar organizations under the Obama Administration were an effective way to develop policy.  The creation of the council highlights the continued emphasis on Federal technology modernization under the Trump administration, coming roughly a week after Representative Will Hurd reintroduced his Modernizing Government Technology Act to the House of Representatives, and just over one month after the creation of the Office of American Innovation.  The American Technology Council will first meet in June, where it is expected to invite several prominent tech industry leaders to discuss how technology could be more effectively utilized and implemented throughout the Federal government.

Big Movers

ManTech (up 11.8%) – Share prices were up this week after the company beat earnings estimates. 

Wesco Aircraft (down 24.7%) – Share prices were down this week after the company appointed a new CEO Monday.

Transactions

Applied Research Associates, Inc. has acquired Neya Systems, LLC, a provider of unmanned systems for defense, homeland security, and commercial users.  Terms of the deal were not disclosed.

Atlantic Street Capita has acquired GAT Airline Ground Support, Inc., a provider of outsourced airline services at airports across the United States.  Terms of the deal were not disclosed.

Belden Inc. has agreed to acquire Thinklogical, Inc., a provider of uncompressed, high-bandwidth signal stream and flexible switching options.  The deal is worth an estimated $160 million.

Charlesbank Capital Partners has acquired Tecomet, Inc., a provider of contract manufacturing for orthopedic implants, as well as critical components for the cardiovascular, medical imaging, and aerospace markets.  Terms of the deal were not disclosed.

Digital Power Corp. has acquired Microphase Corp., a provider of standard and customized state-of-the-art RF, microwave, and millimeter-wave components, devices, subsystems and integrated modules. Terms of the deal were not disclosed.

J.F. Lehman & Co. has acquired BEI Precision Systems & Space Co., a provider of precision positioning sensor technologies, including scanners, optical encoders, and accelerometers, for programs of record and enduring platforms across space, defense, and critical infrastructure markets.  KippsDeSanto & Co. acted as exclusive financial advisor to BEI Precision Systems & Space Co.  Terms of the deal were not disclosed.

Harlow Aerostructures, LLC has acquired Aerospace Holdings, a provider of aerospace components and assemblies, servicing military and civilian fixed wing and helicopter markets for over 30 years.  Terms of the deal were not disclosed.

Infinite Electronics, Inc has acquired Smiths Interconnect Microwave Companies Kaelus, PolyPhaser, Transtector Systems, and Radio Waves, Inc.; these companies provide RF and microwave solutions, RF lighting protection, surge suppression solutions, and microwave antennas, respectively.  Terms of the deal were not disclosed.

Point Blank Enterprises, Inc. has acquired Gould & Goodrich, Inc., a provider of leather, ballistic nylon, and synthetic duty belts, holsters, and accessories.  Terms of the deal were not disclosed.

Trescal S.A.  has acquired Acucal, Inc., a provider of calibration services.  Terms of the deal were not disclosed.

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